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The Risks of Securities Backed Lines of Credit

By Robert Linkin | January 21, 2016

Complex Litigation, Securities Litigation

An increasing number of securities firms are marketing and offering securities-backed lines of credit, or SBLOCs, to investors. SBLOCs can be a key revenue source for securities firms, especially in times of solid market returns and growing investment portfolios, when investors may feel more comfortable leveraging their assets. Firms market SBLOCs as a type of financing and liquidity strategy that can unlock the value of your investment portfolio. Between 2012 and 2014, one large brokerage firm that offers these programs reported a 70 percent increase in its securities-based lending business, while another firm reported an over 50 percent increase. However, in a volatile or declining market, SBLOCs can add an unnecessary and dangerous element of risk to your investment account.

What Are SBLOCs?

SBLOCs are loans are frequently marketed to investors as an easy and inexpensive way to access extra cash by borrowing against the assets in your investment portfolio without having to liquidate these securities. Just as frequently, your broker may fail to advise you of the number of risks posed by SBLOCs, among them potential unintended tax consequences and the possibility that you may, in fact, have to sell your holdings, which could have a significant impact on your long-term investment goals.

Set up as a revolving line of credit, an SBLOC allows you to borrow money using securities held in your investment accounts as collateral. You can continue to trade and buy and sell securities in your pledged accounts. An SBLOC requires you to make monthly interest-only payments, and the loan remains outstanding until you repay it. You can repay some (or all) of the outstanding principal at any time, then borrow again later. SBLOCs are reminiscent of home equity lines of credit, except of course that, among other things, they involve the use of your securities (i.e., your savings) rather than your home as collateral.

How Do SBLOCs Work?

Many firms might offer you the opportunity to pursue an SBLOC, including your brokerage or advisory firm, a clearing firm (a firm that maintains custody of your securities and other assets, such as cash in your account), or a third-party lender like a bank. To set one up, you and the lender execute an SBLOC contract. The contract specifies the maximum amount you may borrow, and you agree to use your investment account assets as collateral. If the value of your securities declines to an amount where it is no longer sufficient to support your line of credit, you will receive a “maintenance call” notifying you that you must post additional collateral or repay the loan within a specified period (typically two or three days). If you are unable to add additional collateral to your account or repay the loan with readily available cash, the firm will often liquidate your securities and keep the cash to satisfy the maintenance call. In a declining or volatile market, the impact on an investor can be devestating.

SBLOCs are non-purpose loans, which means you may not use the proceeds to purchase or trade securities. Money from an SBLOC can be used to finance consumer expenses, from home renovations and real estate purchases, to personal.

What About Credit Limits?

A typical SBLOC agreement permits you to borrow from 50 to 95 percent of the value of the assets in your investment account, depending on the value of your overall holdings and the types of assets in the account. To qualify for an SBLOC, firms often require that both the market value of your portfolio assets and your initial withdrawal on an SBLOC meet certain minimum requirements. It’s not uncommon for a firm to require that your assets have a market value of $100,000 or more to qualify for an SBLOC.

In general, securities that are eligible to serve as collateral for an SBLOC include stocks, bonds and mutual funds held in fully paid-for, cash accounts. The maximum credit limit for an SBLOC typically is based on the quantity and type of underlying collateral in your account, and is determined by assigning an advance rate to your eligible securities. Advance rates vary by institution, depending on the firm’s underwriting criteria. Typical advance rates range from 50-65 percent for equities, 65-80 percent for corporate bonds and 95 percent for U.S. Treasuries. For example, if your account contains a mix of equity securities and mutual fund shares with a total market value of $500,000, you could be eligible to borrow from $250,000 to $325,000 for an SBLOC.

SBLOCs generally allow you to borrow as little as $100,000 and up to $5 million, depending on the value of your investments. Once approved, you can access your SBLOC funds using checks provided by the firm, a federal funds wire, electronic funds transfer, or ACH payments. SBLOC funds may be available to you within a week from the date you sign your SBLOC contract.

Interest Rates and Repayment

The interest rates for SBLOCs often are lower than those you would be able to qualify for with a personal loan or line of credit from your bank or by using a credit card to fund purchases. In fact, some SBLOC lenders might not run a credit check or conduct an analysis of your liabilities before setting and extending the credit line, and may determine your maximum limit solely based on the value of your portfolio. SBLOC interest rates typically follow broker-call, prime or LIBOR rates plus some stated percentage or “spread”—and you will be responsible for interest payments on an on-going basis. Although interest is calculated daily, and the interest rate on your loan can change every day, it is usually charged monthly and will appear on your monthly account statement. Some firms offer the option of a fixed rate SBLOC.

Potential Risks

As with virtually every financial product, SBLOCs have risks and downsides. Be aware that marketing materials touting the advantages of SBLOCs may suggest benefits that you may not achieve given the risks. For instance, if the value of the securities you pledge as collateral decreases, you may need to come up with extra money fast, or your positions could be liquidated. In a volatile market, this could result in the liquidation of otherwise valuable and important securities in your portfolio

Rob Linkin is a partner at Duggins Wren Mann & Romero, LLP, a full-service law firm located in Austin, Texas. Rob represents investors and victims of investment fraud nationwide. If you believe you have suffered losses as a result of your broker dealer improperly recommending you open an SBLOC, or believe you are the victim of any other form of broker misconduct, please contact Rob Linkin at (512) 744-9300 or via email at


Duggins Wren Mann & Romero, LLP, is located in Austin, Texas. If you would like to learn more about our Firm, our professionals, or our ability to serve you, please contact us.

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