Securities-based Loans (SBLs): What are they and what is the risk

SBLs are loans that use stocks and bonds for collateral.  It offers borrowers cheap and fast money without having to sell their underlying securities. It is a risky form of debt marketed to wealthy investors who typically use it to buy large assets.  It is a great option for the borrower when the Dow is growing.

If the market takes a nose dive, brokers can sell the collateral holdings at discounted prices and go after the asset purchased with the loan.

As interest rates and stocks rise, individuals with a high net-worth are using SBLs to borrow against stocks and bonds in their portfolios.  It is not clear how much debt has been taken out in the form of SBLs.  FINRA and the Securities and Exchange Commission doesn’t track SBLs but both have warned investors about the risks.

There are some restrictions on the loans, including clients aren’t supposed to use them to buy other stocks or pay off outstanding margin. But, since the FINRA and SEC do not regulate or track these types of loans there are no immediate repercussions for disobeying the rules.

Unlike most other loans borrowers are not required to chip away at their debt.  SBLs typically have no term limits and don’t require monthly payments, even as interest compounds.

SBLs have been promoted as a win-win on Wall Street. Brokers like them because they collect fees on them, unlike when they extend margin on stocks. Borrowers, meanwhile, can get money at rates as low as 3.5 percent, depending on their financial stability.

SBLs are a huge money-maker for brokerage firms and are sold by Morgan Stanley, UBS, Bank of America, Wells Fargo, Raymond James, and Stifel Nicolaus.

Morgan Stanley was the center of a conflict-of-interest dispute, which settled a lawsuit with Massachusetts over questionable sales contests that pushed the debt.  Morgan Stanley disclosed that they sold $36 billion in SBLs, as of Dec. 31, 2016 a 26-percent increase from the year before.

If you feel you have been misled regarding SBLs and wish to discuss legal action, please contact Darren Blum at 1-877-786-2552 (Stock Law), www.stockattorneys.com for a free consultation