Lawsuits over margin calls made by wirehouses amid the volatile markets caused by coronavirus are likely to increase in the coming months. A common complaint among potential plaintiffs seems to be that they feel they were solid out of their margin positions, despite their advisors having told them they had to pay overdue loans without selling shares as the market bottomed out.
One major issue seems to stem from firms who may have told their clients that they had time to gather the money necessary to meet a margin call, but then the brokerage firms went ahead and sold before the completion of the time given.
Financial Industry Regulatory Authority (Finra) rules dictate that clients’ equity in accounts must be at least 25 percent or more of the market value of their shares. When they fall below that 25 percent market, clients have to deposit cash or more securities to make them reach the 25 percent level again.
Federal Reserve Board Regulation T allows broker-dealers to loan clients up to 50 percent of the total purchase price of margin securities for new share purchases.
According to Finra, investor purchases of securities on margin averaged over $592 billion during the first 10 months of last year. The self-regulatory organization has been “concerned” that investors have been underestimating the “risks of trading on margin.” And warned investors in November 2019 that there was the potential for significant losses. Finra also warned investors that a broker-dealer has no obligation to give investors advanced warning when they force a securities sale to meet a margin call or ask which shares to sell.
Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo all reported increases in their client loan balances last year.