LPL Financial Holdings (LPLA) brokers and investment advisers will now be able to offer their clients securities lending services through Goldman Sachs (GS). Under the new arrangement, LPL clients can borrow anywhere from $75,000 to $25 million against the securities held in their accounts. In a press release, Goldman Sachs spoke about how through its Goldman Sachs Private Bank Select, LPL clients would be able to borrow these funds for “life events,” including travel or education, without having to sell their investments. However, the money borrowed cannot be used to purchase more investments. Goldman noted that its “high-tech platform” would be able to reduce wait time for a non-purpose securities- based loan from weeks to days, with no fees charged.
Over 15,000 LPL financial advisors will now be able to offer clients access to Goldman’s securities lending capabilities. The independent investment advisory firm joins 40 other such firms and broker-dealers on Goldman’s GS Select platform.
Securities Lending Comes with Significant Risks
The ability to borrow against securities is often touted as a benefit to investors. However, securities lending may not be the best choice in the long run for many investors. While such loans allow clients to borrow against what is in their accounts, certain risks come with this advantage, including forced liquidation of accounts during bad market moves.
According to Shepherd Smith Edwards and Kantas Partner and Attorney Sam Edwards, “Securities-backed loans are often sold to investors as a way for the investors to obtain a low interest loan while being allowed to hold onto their investments. These loans are touted as being better than a bank loan, often without a full explanation of the risks. When the market inevitably crashes, these loans get called since the value of the collateral his decreased. This often results in forced liquidations and bad prices that are very detrimental to investors.”
This is what happened in Puerto Rico, where brokers were encouraged to push their customers to use such non-purpose loans against Puerto Rico Closed-End Bond Funds. UBS Puerto Rico (UBS-PR), in particular, has come under fire for such practices. The firm is now the subject of thousands of lawsuits by investors who claim that UBS brokers advised them to leverage their brokerage accounts as collateral (sometimes so that they could buy even more UBS closed-end bond funds, which is not allowed) without really explaining the risks of such leverage to investors. Tens of thousands of investors are still waiting to recoup their investment losses. Meantime, Puerto Rico, which filed for bankruptcy-like protection last May, remains mired in over $70 Billion of debt. Many creditors remain unpaid.
Just as with what is being alleged against UBS Puerto Rico, there is growing concern in the U.S. that encouraging customers to take part in securities lending could lead to inappropriate sales tactics. A year ago, Massachusetts Secretary of the Commonwealth William Galvin filed charges against Morgan Stanley (MS) after finding that the firm held sales contests so advisers would cross-sell services to clients. Brokers were given the opportunity to make thousands of dollars for securities-based loan sales. The state regulator concluded that by doing so Morgan Stanley violated its fiduciary duty to clients, as well as the firm’s own policies. In the wake of the sales contests, loan origination at the firm reportedly tripled and included an additional $24 million from new loan balances.
Also, there are now companies offering securities lending involving BlockChain technologies and cryptocurrencies, both areas that come with their own risks. JDSupra reports that ING Groep NV and a big international bank have completed the first live securities lending transaction involving the use of distributed ledger technology. Also, the new platform LendingBlock uses cryptocurrency to provide cross-chain securities lending services. This strategy is highly risky given the volatility and uncertainty in the cryptocurrency market and the technology of BlockChain, which is very new.
At Shepherd Smith Edwards and Kantas, LTD LLP, our investment fraud lawyers are here to represent investors that have sustained losses caused by broker fraud, breach of fiduciary duty, inappropriate sales recommendations, inappropriate sales practices, and other grounds for an investor fraud claim. Contact us today for a free, no obligation consultation. All inquiries are kept strictly confidential.
Goldman Sachs Private Bank Provides Online Lending Capabilities to LPL Financial Advisors, Goldman Sachs, March 20, 2018
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