FINRA Issues 2018 Regulatory Guidance on Securities Backed Lines of Credit

On January 8, 2018, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“2018 Letter”). The purpose of this letter is to highlight certain issues of importance to FINRA in the upcoming year, and serves as a useful guidepost for industry professionals and investors, alike. Included among the areas of concern addressed in the 2018 Letter is the increased prevalence of so-called securities backed lines of credit, or SBLOCs.

Given the current bull market that is currently approaching nine (9) years in age, it should come as no surprise that many brokerage firms and their registered representatives have heavily marketed SBLOCs to their clientele. The sales pitch in a rising market such as this is relatively simple: you may tap into the value of your investment portfolio in order to readily access cash in the form of an SBLOC, without the need to sell out of any investment holdings, thereby ensuring continued upside appreciation in the value of your investment portfolio. Such a marketing pitch, while logical, often downplays the risks associated with a SBLOC and its use of leverage against collateral that can rapidly deteriorate in value.

Put simply, SBLOCs are non-purpose in nature, meaning that such loans are not used to purchase more securities, and are thus distinguishable from traditional margin loans. Despite the fact that SBLOCs are non-purpose — and may be utilized for any number of ends, including for example creating liquidity for the purchase of a home, paying tuition, or financing the purchase of a car — FINRA has recently expressed concern over the risks associated with SBLOCs.

Specifically, through its 2018 Letter, FINRA has cautioned that “The use of SBLOCs has increased significantly in the past years, and FINRA will review firms’ compliance with sales practice and operational obligations that apply to SBLOCs.” In addition, “FINRA will assess the adequacy of disclosures firms provide customers regarding the potential risks associated with SBLOCs, including the potential impact of a market downturn….”

When recommending a SBLOC, a financial advisor is under a duty pursuant to FINRA Rule 2111 to ensure that the investment strategy is in keeping with the investor’s profile, including among other factors, his or her age, financial situation and needs, and stated investment objectives. Moreover, a financial advisor, and by extension his or her firm, must seek to ensure when marketing a SBLOC that there exists a “… reasonable basis to believe that the customer has the financial ability to meet such a commitment.”

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in recovering funds on behalf of investors who have suffered losses due to a range of misconduct, including the unsuitable recommendation by a broker to engage in certain investment strategies. Investors may be able to recover their losses in FINRA arbitration. Investors may contact a securities arbitration attorney at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.