Regulators are expecting an onslaught of complaints about the suitability of margin account borrowing from investors as calls for collateral and forced portfolio sellouts accelerate to support both margin and nonpurpose securities-backed loans amid the coronavirus crash.
Margin accounts are, of course, legal, but both regulators and plaintiffs’ attorneys are scrutinizing the leveraging to see if they meet the investment profiles of borrowers.
“In the coming weeks, I expect that we will see a significant increase in complaints related to suitability, specifically use of margin in retail accounts,” said Christopher Gerold, president of the North American Securities Administrators Association. “I expect many will have been unsuitable and will require investigations by regulators.”
Gerold, who heads New Jersey’s Bureau of Securities, raised the issue at a meeting on the impact of the Covid-19 pandemic to retail investors held Thursday by the Securities and Exchange Commission’s Investment Advisory Committee.
Panelists also spotlighted concerns about systems outages at broker-dealers that delay trading executions, slow responses to service calls amid high volumes and an expected explosion of bogus investment opportunities that typically accompany market downturns.
It’s still “early days” to be hearing product-specific complaints, but the Financial Industry Regulatory Authority has been fielding calls from investors “subject to margin-related sellouts,” said Gerri Walsh, head of Finra’s Investor Education department.
Brokers coping with down markets and the vicissitudes of working remotely are, of course, loathe to have their margin departments pressuring customers to pay up or be sold out of positions. But they concede that calls are being made and that firms are steeling them for more.
“Overall, teams have been very responsive to putting in plans to resolve calls quickly,” a regional J.P. Morgan Securities compliance official wrote in a memo to advisors last week about the “good number of margin calls” the broker-dealer has been making on securities-backed loans.
“Don’t hold for market appreciation,” the official warned, “because it might not happen, and if calls age past day three our credit team has the right to take further action.”
Regulators at the SEC meeting cautioned that the processing of margin calls and other systems issues, including contending with customer service calls, is a pressing issue as firms operate with skeleton office crews.
“Processes, procedures, and staff must be in place so that investors can reach their financial professional to ask questions, raise concerns, and discuss investment options,” Gerrold said, mentioning delays in fund transfers, including ACATs, as well as in trade executions. “We’ve heard–and these have been very public–about trading delays and crashes of electronic systems at some of the largest broker-dealers in the last couple weeks.”
Firms ranging from giants like Morgan Stanley and J.P. Morgan Chase to disruptors such as online free-trading app Robinhood Markets experienced outages last month as market volume and volatility exploded. Gerold did not mention specific incidents, but warned that the virus disruption is likely to be prolonged and create continued market volatility.
Finra’s Walsh said most investors have been raising operational issues, such as difficulty reaching advisors by phone or accessing websites. “In only a few instances to date have investors complained about recommendations that their investment professionals made,” she said.
Regulators also are bracing for “opportunistic scam artists who will undoubtedly prey on the fears and concerns of retail investors in the midst of a crisis,” Gerold said.
Texas Securities Commissioner Travis J. Iles on Friday took what he said was the first action against a stock promoter using Covid-19 as a tactic to lure investors. The state issued an emergency cease-and-desist order to stop James F. “Stormy” Walsh from soliciting Texas residents to invest in a foreign currency trading program that he claimed will return up to 11% a month “basically risk free.
Walsh, described as a Florida resident, has been marketing the program online, describing it as a “safe haven” and source of supplemental income “at a time when investors cannot go out of [their] house[s] and take care of [their] famil[ies],” according to the Texas regulator.
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