The Financial Industry Regulatory Authority issued an alert to investors to look carefully into the potential risks of nonrecourse stock-based loan programs before participating in them.

The warning, issued Thursday, came after recent enforcement actions by FINRA involving stock-based loan programs. Investors should watch for risks tied to stock-based loans, particularly as some of them involve unregistered and unregulated third-party lenders, FINRA said, and can have tax consequences for investors.

The stock-based loans work by allowing investors to pledge stock they have fully paid for in order to obtain a cash loan. That cash can be as much as 90% of the value of the stock. The loan is usually for a set period of time — two to three years — with interest of 10% or more. At the end of that time period, investors can choose to extend the loan or get the stock back.

But investors should make sure they are aware of the risks and potential tax fees tied to those investments, FINRA said. Often the loans involve third-party lenders that are unregistered and unregulated. The investor might also have to pay taxes on a transfer of the stock, which could also require them to pay capital gains taxes with the loan or sale of the stock.

"Investors who want to tap into the value of their portfolio through a stock loan program should realize that these programs involve significant risk and cost, and may result in unintended tax consequences," said John Gannon, FINRA's senior vice president of investor education.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.