If your broker or advisor recommended margin or that you take a loan secured by your securities, commonly known as a securities backed line of credit or “SLOC,” you may have legal recourse. Such recommendations may be inappropriate. Please call 303-300-5022 for a free and confidential consultation with an attorney,
The 2025 market correction unexpected and painful for most investors. The correction was most painful for those investing on margin or using the value of their holdings to secure loans. The sharp drops of April 2025 triggered maintenance calls and liquidation orders. This left investors with substantial realized losses as the investments were involuntarily sold at their low points.
The primary motivation of advisors/brokers recommending these things is financial. While periods of low interest rates and relatively strong stock growth since 2009 gave some incentive for brokers to recommend margin or loans to investors secured by account holdings, greater incentive came from the fees brokers collected for the loans. The interest is a considerable source of profit for these financial firms.
Regulators require that any strategy utilizing margin be consistent with objectives and risk tolerance of the investor rather than lining the pockets of the advisor. Investors utilizing margin can lose their life savings through as the result of market fluctuation. Fluctuation triggers an authorization to sell the portfolio at its low-point for margin maintenance. This impacts not only portfolios, but investments in portfolios utilizing margin, such as leveraged ETFs and hedge funds.
With an SLOC loans, similar risks exist. In addition to potential liquidation of a portfolio at its low-point, fluctuations in markets can lead to attempts to foreclose on the note.
These loans are now in jeopardy due to sharp drops in the U.S. stock market. Just as sharp drops in the housing market led to mass foreclosures in 2008 the sharp drops in the securities market are leading to liquidations of the saving of many of these borrowers of brokerage loans.
Borrowers, however, have rights and many of these loans have been made improperly. Brokers have duties to only recommend strategies that are consistent with an investor’s financial sophistication and tolerance for risk. Risking the life savings for a loan is a highly aggressive strategy and suitable for only the most sophisticated investors. Investors who were looking for moderate or safe strategies should not have been recommended such loans.
The brokerage lenders also have duties of good faith and fair dealings. Other safeguards exist under federal and FINRA, the Financial Industry Regulatory Authority, margin loan requirements.
The perils of such recommendations have always been known by financial professionals. In 2015, the Securities and Exchange Commission, the SEC, issued a warning about the rapid increase in lines of credit backed by securities. The SEC reported that one large brokerage firm increased the sale of such loans by 70% in just two years.
In 2014, Fortune magazine called securities-based loans the “rich man’s subprime” in reference to the 2008 collapse of subprime loans. Unfortunately, brokerages expanded the market for securities-based lending beyond the rich in the years since 2014. The article described how such lending, often referred to as non-purpose lending, was exploding. The commissions were so great, Wells Fargo advisors referred to the commissions as the “13th month.”
Such lending was not limited to Wells Fargo. Firms known to have actively pushed such loans because of the extensive profits include Merrill Lynch, UBS, JP Morgan, Citi, and UBS. Fortune, in 2014, stated that Wall Street likes to push a “trend like this way past the bounds of logic and reason.”
Jeffrey Pederson has been representing investors, including margin and other securities backed loan investors, since 2002. Please call to discuss your options and potential legal recourse.
Recent Comments