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New Brunswick Securities Commission Alerts Investors to Risks of Borrowing Money to Invest

The New Brunswick Securities Commission (“NBSC”) has issued an Investor Alert “…warning investors about the potential for serious long-term financial hardship when borrowing money to invest”.  The NBSC points out that there are substantial risks and states that “Investors should fully understand the risks and be extremely cautious if considering borrowing beyond their financial means”. The alert stresses that “[t]he biggest drawback to using a leveraging strategy is what happens if the investment drops in value. The returns won’t be enough to pay the interest, additional collateral is required to secure the loan and you are still left with a large loan to pay off.”

Before making a decision to invest, the NBSC has outlined a series of questions that investors should answer before making a decision whether to borrow to invest.

  • Are you dealing with a reputable and registered investment adviser and firm?
  • Has your adviser reviewed the suitability criteria? Do you understand them and do you meet them?
  • What are your investment objectives? Is leveraging the only strategy that will help you achieve them?
  • What is your risk tolerance? How much money can you afford to lose?
  • What are the fees for setting up the loan? Are there on-going fees or fees for early withdrawal from the investment or the loan?
  • Do you fully understand the leveraging strategy and how you will make (or lose) money?

FAIR Canada is of the view that leveraged investing is not suitable for most investors and that there should be a presumption of unsuitability.  FAIR Canada urges CSA members to focus on the systemic issues which encourage registrants to  push investors to borrow to invest.  While attempting to caution investors is a laudable effort, FAIR Canada calls on regulators to issue notices to registrants cautioning them: (1) on the use of leverage and the need for proper supervision of leveraged investments; and (2) that any advertising and marketing must be fair and balanced, and fully disclose the risks, including the statement that leveraged investing in mutual funds and similar products is only suitable for investors with a high risk tolerance.

Please see our letter to the CSA for further details on our recommendations.

February 27, 2012