Securities Lending - Term in Private Securities-collateralized Lending

Term in Private Securities-collateralized Lending

The term "securities lending" is sometimes used erroneously in the same context as a "stock loan" or individual "securities-collateralized loan". The former refers to the actual lending typically of banks or brokerages to other institutions to cover short sales or for other temporary purposes. The latter is used in private or institutional securities-backed loan arrangements across a wide spectrum of securities. In recent years, FINRA has cautioned all consumer to avoid nonrecourse transfer-of-title stock loans, but they enjoyed a brief popularity before the SEC and IRS came to shut almost all such providers down between 2007-2011, reclassifying nonrecourse transfer-of-title title stock loans as fully taxable sales at inception. Today, it is widely accepted that the only legally valid consumer lending programs involving stocks or other securities are those in which the stocks remain in the client's title and account without sale through a fully licensed and regulated institution with membership in the SIPC, FIDC and other mainline regulatory organizations.

Other alternatives include working with a reputable provider of securities loans willing to provide references, track record of successful transactions completed, and process of funding the loans and returning the collateral. In 2011, the Financial Industry Regulatory Authority (FINRA) issued an investor alert on stock-based loan programs. In the alert, FINRA recommend investors ask questions, including: 1)What happens to my stock once I pledge it as collateral? 2) What benefit does the promoter receive for recommending the program? And 3) Does the lender have audited financials?

The Equities First Holdings (EFH) Executive Lending Survey conducted in June 2012 found that 57% of the 400 respondents said they would recommend a securities-based loan to a close friend for personal or professional use. In that same survey, 47% of those polled said that low interest rates are an important feature of securities-based loans.

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