Frequently Asked Questions (FAQ):

Answers to Common Questions About Securities-based Lending

[ What kinds of securities-based loans programs are there? ]

Three kinds: Standard Institutional loans; Custom Institutional Loans; and Transfer of Title Loans. The first two do not require that you transfer the title to your securities, and securities are not sold to fund the loan; the latter requires that you transfer and extinguish ownership in your securities until the loan is repaid, and some degree of sale of your securities is assumed. .

[ Can you explain in a simple way how a custom, institutionally managed loan program works? ]

[ Is there any advantage to a larger portfolio of securities as opposed to a smaller one? ]

[ Do people have to qualify with credit scores (for example, FICO) for this financing? ]

[ Are Transfer of Title loans risky? ]

[ What about the use of loan proceeds. Are there any restrictions? ]

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[ What is the typical eligibility criteria for custom institutionally managed financing? ]

[ What sort of clients use a custom institutional line of credit? ]

[ Do my stocks or other securities have to be in electronic (DTC) format?]

[How long until borrower typically receives his loan cash?]

[ What happens to a stock's dividends while the lender holds the shares? ]

[ Can I vote my shares with a custom institutionally managed line of credit/loan? ]

[ What is the role of interest in an institutionally managed securities-based line of credit? ]

[ Are there any hidden costs or fees? ]

[ I am a foreign resident. Is there any I should be aware of in the application process? ] .

[ Are these loan facilities available to corporate affiliates ("insiders")? ]

For the most part, yes, as long as there is no corporate resolution specifically prohibiting them. Affiliates or "insiders" (directors, CEO's, owners of 10% or more of outstanding shares of the collateral stock to be used) will operate under SEC "DRIP" limits - that is, limits on the total number of shares they can place into any securities loan in a given 90-day period. This number is set at the greater of either the prior average four week (trailing) trading volume, or one percent of the total outstanding shares. (See www.sec.gov for further descriptions and details).

[ How can I be sure my stocks will be returned upon repayment? ]

With a custom (or standard) institution securities loan or line of credit, your shares never leave your account at the lender, a top-tier U.S. brokerage so the issue would only come up for transfer of title loans, where shares may be sold wholly or in part to support the funding of the loan.

So there is no need for any "return" with custom institutional lending. Your shares in these programs remain in your account and title, and should be accessible and visible to you at all times as with any brokerage account because they are not sold or traded to fund your loan. Even though there will be restrictions on what you can do with them until your loan is repaid, them until your loan obligation is repaid, they remain yours both in name and in fact. A simple lien secures the collateral for the lender.

With a custom institutional loan program, online access usually means that your collateral shares are always visible through the online access system of your institutional lender. If you so choose, you may also opt to receive monthly, quarterly or semiannual statements, depending on the policy of the lender, in the conventional manner.

Repayment is equally simple with custom institutional securities loans and credit lines. When you repay your loan, the lien is simply removed on the shares in your account, and you can once again move or sell them without restriction just as before. Should you wish to shut down the account entirely, you will be free to do that as well. So the short answer therefore is that "return" of your shares is as simple as the removal of the bank/brokerage's lien on them when you repay your loan. In reality, they never left your account or title.

Not so with Transfer-of-Title loans. Here you are giving up the ownership of your securities until your loan is repaid, and in most cases your Transfer-of-Title lender will sell some or all of them to fund your loan, employing various hedging strategies to offset risk. Part of that process requires them to go back into the market to buy any shares when they do not have enough. If your shares have done very well during the life of your loan -- if the prices has risen greatly, then chances are good that your Transfer-of-Title lender will be required to pay a very large amount out-of-pocket to buy the shares needed to deliver to you upon repayment of your loan. If they do not have the resources to buy those shares, they - and you - will be at risk of being unable to return the client's shares, e.g, going into lender default or bankruptcy.

That risk is not present with institutional (custom or standard) lines of credit or stock loans. The shares do no change title, so there is no issue of purchasing shares in the open market. They remain in your account, working for you as always.

[ Can I prepay - that is, pay off - my stock loan or securities financing early? ]

Yes, custom institutionally managed loans will almost always allow you to repay when you wish without penalty. The line of credit facilities do not typically com with fixed principal repayment schedules, allowing you to "refill" the line of credit and reuse it at any time. Fixed rate securities loans typically do have a small prepayment penalty if you choose one of these.

[ Do I get regular account statements? ]

Custom institutionally managed securities loans provide regular account statements, often monthly. But because institutional lending provides the familiar "online banking" access common to all financial transactions these days, you can simply log in and print your account information when you want to. Most institutional lenders will be happy to generate custom data as well. Discuss your preferences directly with your account advisor to learn of the exact procedures.

[ What are my exit options at loan maturity? ]

As noted, you can always pay off your line of credit loan at any time. You may also renew your loan, or ask lender to sell sufficient shares to pay off the loan leaving any remainder in your account. If necessary, you may also exercise your right to default, that is, to walk away from your loan repayment, and if you have executed the limited-recourse function, your liability for repayment in default is likely to be limited to surrender of the underlying shares, regardless of dramatic drops in price.

There are many custom exist options that you are free to discuss with your licensed account advisor as soon as you've decided to take these steps.

[ Whom do I contact if I have questions during the loan term? ]

If you are borrower/clients, you will have the normal phone/email access to a licensed account representative at your lending institution.

[ Does the lender ever sell any of my stocks to fund my loan in at any time? ]

Not with a custom institutional loan or line of credit. With these institutional loan facilities the lender cannot sell your stocks to fund the loan and cannot remove your title to the shares unless you walk away and default on your loan obligation entirely, at which time -- like an collateral -- they become the property of the lending institution (You will have plenty of time and warnings of default before this step occurs, however). Your shares remain in your account where you can view them at any time, 24/7. If you should default on your loan and surrender your shares, then and only then will the shares become the property of the lender.

[ Is there any way to get a better offer? ]

One of the good things about custom institutional lending is that offers are often flexible. You are always welcome to discuss your loan requirements with your lender, and possibly later or trade off terms (e.g., fixed interest three year term for a lower interest over a two year term). Larger portfolios (over $2 million in initial value) can typically be assured of better terms and rates, though these can also be available to smaller portfolios with diverse holdings and quality securities because a portfolio with many good shares is in some ways preferable to a portfolio of just one. Provided that you accept other aspects of the offer, such as fees or term, you may find some room for compromise if one or another elements becomes significant