A loan consent is a specific type of agreement used in the brokerage industry.
Understanding the Loan Consent Agreement
Based on the provided reference, a loan consent is an agreement signed by a brokerage customer that permits a broker-dealer to lend the securities in that customer's margin account.
Essentially, by signing this agreement, a customer gives their brokerage firm permission to borrow shares they hold in their margin account.
Why Do Broker-Dealers Want to Borrow Securities?
Broker-dealers typically borrow securities for various reasons, most commonly to facilitate short selling.
- Short Selling: When an investor wants to short sell a stock, they borrow shares from a broker-dealer, sell them on the open market, and hope to buy them back later at a lower price to return to the lender. The loan consent agreement provides the pool of shares that broker-dealers can use for these transactions.
What it Means for the Customer
Signing a loan consent has implications for the customer:
- Potential Earnings: In some cases, the customer might receive a small fee or rebate from the broker-dealer for allowing their shares to be lent out. This is not always the case and depends on the specific agreement and the securities being lent.
- Loss of Ownership Rights (Temporarily): While the shares are lent out, the customer temporarily gives up certain rights, such as the right to vote on corporate matters related to those shares.
- Risk Considerations: Although the broker-dealer is responsible for returning equivalent shares, there are theoretical risks involved, primarily related to the broker-dealer's solvency, though this is highly regulated. The Securities Investor Protection Corporation (SIPC) provides some protection, but it's essential for customers to understand the terms.
- Mandatory vs. Optional: A loan consent is typically an optional agreement. Customers are usually not required to sign it to open or maintain a margin account, although some firms might encourage it.
It's important for customers to review the terms of any loan consent agreement carefully before signing.
