Securities-Backed Lines of Credit Lawsuits

What are SBLOCs?

Securities-backed lines of credit are loans that investors can take out against their investment portfolios without having to liquidate the assets in their portfolios. These loans are often marketed as an easy way to use your securities (such as stocks, bonds, and mutual funds) as collateral, while still being able to trade them in your account. Investors are often able to use the funds from their SBLOC loan in whichever way they want, except to buy and trade securities.

Some securities firms have reportedly sold SBLOCs as low-cost alternative investments, and even downplayed the risks associated with these investments.

Why are SBLOCs Particularly Risky?

Many investors may not be aware that SBLOCs can be extremely volatile and risky. This is because the securities and assets used as collateral for the loan are often still subject to market fluctuations. Therefore, if the value of the securities plummets below a certain threshold, the investor may be asked to increase the collateral or else pay back the loan immediately. If the investor can’t pay back in a timely manner, the loan may be liquidated, causing investors to sell their securities at a lower price and incur significant losses as well as tax exposure.

In addition to being subject to market volatility and liquidation, SBLOCs are risky for a number of other reasons. Here are a few other risks investors should be aware of when deciding if a SBLOC is right for them:

• Demand Loan Structure: SBLOCs are structured as demand loans. This means that the loan may be called at any time by the brokerage firm that issued it.
• Leverage: SBLOCs allow investors to borrow against securities, which creates leverage using risky collateral. The SBLOC’s leverage can actually multiply investment losses and their impact on investors’ portfolios.
• Interest: Investors often have to make monthly interest payments on their loan, and should keep in mind that the loan is typically outstanding until paid back in full.
• Broker Compensation: Many brokers may receive extra compensation for selling SBLOCs. This gives brokers incentive to sell, while placing almost all of the risk on the investor. Investors should make sure that the SBLOC investment is right for them, and not just for their broker.

If you believe your stockbroker or financial advisor misrepresented the risks associated with SBLOCs, you may be able to recover your losses. Speak with a securities lawyer to learn more about your options.

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have issued alerts warning investors of the risks involved with SBLOCs. According to the FINRA Investor Alert on securities-backed lines of credit,

SBLOCs may seem like an attractive way to access extra capital when markets are producing positive returns, but market volatility can magnify your potential losses, placing your financial future at greater risk.

Further, according to the SEC’s investor alert,

Be aware that marketing materials touting the advantages of SBLOCs may suggest benefits that you may not achieve given the risks. For instance, if the value of the securities you pledge as collateral decreases, you may need to come up with extra money fast, or your positions could be liquidated.

While these risks are known to many, financial advisors often downplay the risks involved in SBLOCs to investors. Victims of financial advisor negligence or advisor misconduct may have a claim.

Scott Silver

Scott focuses his law practice on securities arbitration and litigation and plaintiff-side class action litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others.

Eileen Epstein Carney

Eileen is involved in the firm’s securities practice and has over a decade of experience in the legal world. She received her law degree from American University in 2005.

Dave Stein

David’s advocacy has generated major recoveries for consumers impacted by financial fraud. He was named to the Top 40 Under 40 by Daily Journal and a “Rising Star in Class Actions” by Law360.

Amanda Karl

Amanda is spearheading a securities lawsuit against NantHealth concerning fraudulent statements to investors about the success of its key product.