July 17, 2008
This comment requests that additional disclosures be implemented for consumer brokerage agreements. Specifically, additional disclosure is needed regarding margin accounts, and the use of stocks in that account for short trading.
In the current debate over shorts and naked shorts, it occurred to me that the stock in my broker account might be loaned by the broker to a short trader. In discussions with customer service representatives, it turns out this can indeed be the case. If it is a margin account, a hypothecation clause in the agreement allows the broker to use my stock to lend to a short trader.
This situation is very troubling to me. The broker could be using my stock in actions that are against my best interests. I purchased the stock in anticipation that it would increase in value. It turns out that my stock can be used in transactions that are designed to decrease it's value.
I believe this situation is not well understood by the public, and that additional disclosures are necessary. Specifically, the consumer should be made aware that by entering into a margin agreement, the broker can participate in actions that are not in the consumer's interests, and may actually cause the value of his investment to decrease.
I apologize if this is not the correct forum for this comment. Please forward this comment to the appropriate agency if so.