Securities-Based Lending, Alt Funds Catch FINRA's Eye in 2015

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Investors borrowing against the value of their portfolios—also known as securities lending—caught FINRA's attention in its annual Regulatory and Examinations Priorities Letter for 2015.

FINRA is particularly concerned with how brokerages and banks are marketing securities-backed credit lines to their customers and whether these firms are taking the proper steps to disclose and account for increased risk posed by this sort of leverage.

FINRA chair Richard Ketchum summarized FINRA's stance on banks pushing their clients to take out more loans against their own growing portfolios rather than selling securities to raise cash: "That's exactly the risk we are focused on."

The regulator worries about the significant credit and call risk posed by securities-based lending, and what this can mean for investors.

Meanwhile, several big-name brokerages from Bank of America's Merrill Lynch to Wells Fargo Advisors and UBS have incentivized employees and advisers to offer securities-based loans to their clients.

Morgan Stanley, for instance, reported $48 billion in client liabilities, which includes debt products such as securities-based loans, in 2014's third quarter, which is an increase of 33% over the same period in 2013.

In Puerto Rico, UBS received a $5.2 million fine and was ordered to pay restitution over sales practices which included securities-based loans and bond funds that UBS eventually called, which echoes Ketchum's concern of the significant call risk posed by securities-based lending.

Ketchum likewise expressed concern at alternative mutual funds, saying, "this is a bit of an accident waiting to happen" while identifying alt funds as "complex" since fund managers enjoy high levels of discretion while customers face substantial fees.

He stated that alternative funds are not always as transparent as FINRA would like, while saying the risk of over-concentration also drew FINRA's attention since some brokers and advisers treat alt funds as a general investment category rather than sitting down with customers to discuss each fund's individual strategies.

If you have invested with any firm, broker or financial adviser whose opaque or impersonal use of securities-based lending or alternative mutual funds has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

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