Fort Lauderdale, FL (Law Firm Newswire) May 9, 2019 – A margin loan refers to money that an investor borrows from a brokerage firm. The margin loan is collateralized by the assets held in the customer’s investment account (i.e., securities). Customers are generally free to use the margin loan to buy additional securities or to withdraw the funds from the account to meet personal expenses.
Brokerage firms will issue a margin call if the value of the collateral assets supporting the margin loan falls below the maintenance requirement. Put another way, if the collateral declines, the brokerage firm expects that the customer will deposit additional assets so that the margin loan is secured. If the customer fails to deposit additional collateral, the brokerage firm will generally liquidate securities in the account in order to reduce or eliminate the margin balance.
Receiving an unexpected margin call from a brokerage firm can spark many questions regarding the risks of using margin, how the brokerage firm calculates the margin requirements and whether there has been impropriety by the brokerage firm in approving accounts for margin in the first instance. Contact an attorney specializing in matters involving securities litigation, if any of these circumstances are present.
There are some important facts that every investor should be aware of before using margin:
· Margin is a speculative investment technique. While it carries the potential to enhance investment returns, it also carries the potential to magnify losses. The use of margin is only suitable for customers with a more aggressive risk profile.
· The brokerage firms make money when customers use margin. Brokerage firms charge margin loan interest and also make money when customers use borrowed funds to purchase additional securities.
· Financial advisors make money when customers use margin. Most brokerage firms compensate financial advisors for securing lines of credit and margin loans in client accounts. Moreover, when the client uses margin to purchase additional securities, the financial advisor also stands to make more money.
· The margin agreements between customers and brokerage firms often permit brokerage firms to liquidate assets held in the brokerage account on demand and without notice to the customer.
There are several examples of financial advisors and brokerage firms engaging in misconduct with respect to margin loans and lines of credit. Some of the common forms of misconduct include:
● If the broker failed to adequately explain how margin loans work — the investing client did not realize the securities in their investing account were collateral for the margin loan and that if the account declined in value, they would have to either deposit more money or risk liquidation of their securities at a loss.
● If the broker failed to adequately explain the risks — the broker told the investing client the account would never experience a margin call and, therefore, they believed securities based lending was low risk.
● The brokerage firm violated its own policies and procedures when lending money to a client. For example, if an account is marked “conservative” or even “moderate” it should not be approved for margin given the amount of risk that is involved in margin trading.
● The brokerage firm liquidates assets held in the client’s account but does not do it in an orderly way or based on past course of conduct.
Securities fraud lawyer Matt Wolper stated, “Sometimes the misconduct is more subtle and occurs when a financial advisor discloses some of the risks but represents to the client that those risks will never come to fruition. This type of misconduct is designed to lull clients into a false sense of security.”
If a financial advisor or brokerage firm has inappropriately recommended the use of a margin loan or line of credit, call the Wolper Law Firm for a free consultation and case evaluation. Call (954)-406-1231 to schedule a free, no-obligation consultation with one of our attorneys.
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