of Deposit: Tips for Investors
for relatively low-risk investments that can easily be converted
into cash often turn to certificates of deposit (CDs). A CD is
a special type of deposit account with a bank or thrift institution
that typically offers a higher rate of interest than a regular
savings account. Unlike other investments, CDs feature federal
deposit insurance up to $100,000.
Here’s how CDs
work: When you purchase a CD, you invest a fixed sum of money
for fixed period of time – six months, one year, five years, or
more – and, in exchange, the issuing bank pays you interest, typically
at regular intervals. When you cash in or redeem your CD, you
receive the money you originally invested plus any accrued interest.
But if you redeem your CD before it matures, you may have to pay
an "early withdrawal" penalty or forfeit a portion of the interest
Although most investors
have traditionally purchased CDs through local banks, many brokerage
firms and independent salespeople now offer CDs. These individuals
and entities – known as "deposit brokers" – can sometimes negotiate
a higher rate of interest for a CD by promising to bring a certain
amount of deposits to the institution. The deposit broker can
then offer these "brokered CDs" to their customers.
At one time, most
CDs paid a fixed interest rate until they reached maturity. But,
like many other products in today’s markets, CDs have become more
complicated. Investors may now choose among variable rate CDs,
long-term CDs, and CDs with other special features.
high-yield CDs have "call" features, meaning that the issuing
bank may choose to terminate – or call – the CD after only one
year or some other fixed period of time. Only the issuing bank
may call a CD, not the investor. For example, a bank might decide
to call its high-yield CDs if interest rates fall. But if you’ve
invested in a long-term CD and interest rates subsequently rise,
you’ll be locked in at the lower rate.
Before you consider
purchasing a CD from your bank or brokerage firm, make sure you
fully understand all of its terms. Carefully read the disclosure
statements, including any fine print. And don’t be dazzled by
high yields. Ask questions – and demand answers – before
you invest. These tips can help you assess what features make
sense for you:
When the CD Matures – As simple as this sounds, many investors
fail to confirm the maturity dates for their CDs and are later
shocked to learn that they’ve tied up their money for five,
ten, or even twenty years. Before you purchase a CD, ask to
see the maturity date in writing.
Any Call Features – Callable CDs give the issuing bank
the right to terminate-or "call"-the CD after a set period
of time. But they do not give you that same right. If interest
rates fall, the issuing bank might call the CD. In that case,
you should receive the full amount of your original deposit
plus any unpaid accrued interest. But you'll have to shop
for a new one with a lower rate of return. Unlike the bank,
you can never "call" the CD and get your principal back. So
if interest rates rise, you'll be stuck in a long-term CD
paying below-market rates. In that case, if you want to cash
out, you will lose some of your principal. That's because
your broker will have to sell your CD at a discount to attract
a buyer. Few buyers would be willing to pay full price for
a CD with a below-market interest rate.
the Difference Between Call Features and Maturity – Don’t
assume that a "federally insured one-year non-callable" CD
matures in one year. It doesn't. These words mean the bank
cannot redeem the CD during the first year, but they have
nothing to do with the CD's maturity date. A "one-year non-callable"
CD may still have a maturity date 15 or 20 years in the future.
If you have any doubt, ask the sales representative at your
bank or brokerage firm to explain the CD’s call features and
to confirm when it matures.
CDs, Identify the Issuer – Because federal deposit insurance
is limited to a total aggregate amount of $100,000 for each
depositor in each bank or thrift institution, it is very important
that you know which bank or thrift issued your CD. Your broker
may plan to put your money in a bank or thrift where you already
have other CDs or deposits. You risk not being fully insured
if the brokered CD would push your total deposits at the institution
over the $100,000 insurance limit. (If you think that might
happen, contact the institution to explore potential options
for remaining fully insured, or call the FDIC.) For more information
about federal deposit insurance, visit the Federal Deposit
Insurance Corporation’s web
site and read its publication Your
Insured Deposit or call the FDIC's Consumer Information
Center at 1-877-275-3342. The phone numbers for the hearing
impaired are 1-800-925-4618 or (202) 942-3147
How the CD Is Held – Unlike traditional bank CDs, brokered
CDs are sometimes held by a group of unrelated investors.
Instead of owning the entire CD, each investor owns a piece.
Confirm with your broker how your CD is held, and be sure
to ask for a copy of the exact title of the CD. If several
investors own the CD, the deposit broker will probably not
list each person's name in the title. But you should make
sure that the account records reflect that the broker is merely
acting as an agent for you and the other owners (for example,
"XYZ Brokerage as Custodian for Customers"). This will ensure
that your portion of the CD qualifies for up to $100,000 of
Any Penalties for Early Withdrawal – Deposit brokers often
tout the fact that their CDs have no penalty for early withdrawal.
While technically true, these claims can be misleading. Be
sure to find out how much you'll have to pay if you cash in
your CD before maturity and whether you risk losing any portion
of your principal. If you are the sole owner of a brokered
CD, you may be able to pay an early withdrawal penalty to
the bank that issued the CD to get your money back. But if
you share the CD with other customers, your broker will have
to find a buyer for your portion. If interest rates have fallen
since you purchased your CD and the bank hasn't called it,
your broker may be able to sell your portion for a profit.
But if interest rates have risen, there may be less demand
for your lower-yielding CD. That means you would have to sell
the CD at a discount and lose some of your original deposit
–despite no "penalty" for early withdrawal.
Check Out the Broker – Deposit brokers do not have to
go through any licensing or certification procedures, and
no state or federal agency licenses, examines, or approves
them. Since anyone can claim to be a deposit broker, you should
always check whether your broker or the company he or she
works for has a history of complaints or fraud. You can do
this by calling your state securities regulator or by checking
with the National Association of Securities Dealers' "Central
Registration Depository" at 1-800-289-9999.
the Interest Rate You’ll Receive and How You’ll Be Paid
– You should receive a disclosure document that tells you
the interest rate on your CD and whether the rate is fixed
or variable. Be sure to ask how often the bank pays interest
– for example, monthly or semi-annually. And confirm how you’ll
be paid – for example, by check or by an electronic transfer
the Interest Rate Ever Changes – If you’re considering
investing in a variable-rate CD, make sure you understand
when and how the rate can change. Some variable-rate CDs feature
a "multi-step" or "bonus rate" structure in which interest
rates increase or decrease over time according to a pre-set
schedule. Other variable-rate CDs pay interest rates that
track the performance of a specified market index, such as
the S&P 500 or the Dow Jones Industrial Average.
question you should always ask yourself is: Does this investment
make sense for me? A high-yield, long-term CD with a maturity
date of 15 to 20 years may make sense for many younger investors
who want to diversify their financial holdings. But it might not
make sense for elderly investors.
Don't be embarrassed
if you invested in a long-term, brokered CD in the mistaken belief
that it was a shorter-term instrument-you are not alone. Instead,
you should complain promptly to the broker who sold you the CD.
By complaining early you may improve your chances of getting your
money back. Here are the steps you should take:
- Talk to the
broker who sold you the CD, and explain the problem fully, especially
if you misunderstood any of the CD's terms. Tell your broker
how you want the problem resolved.
- If your broker
can't resolve your problem, then talk to his or her branch manager.
- If that doesn't
work, then write a letter to the compliance department at the
firm's main office. The branch manager should be able to provide
with contact information for that department. Explain your problem
clearly, and tell the firm how you want it resolved. Ask the
compliance office to respond to you in writing within 30 days.
- If you're still
not satisfied, then send us your complaint using our online
complaint form. Be sure to attach copies of any letters
you've sent already to the firm. If you don't have access to
the Internet, please write to us at the address below:
of Investor Education and Advocacy
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-0213
We will forward
your complaint to the firm's compliance department and ask that
they look into the problem and respond to you in writing.
Please note that
sometimes a complaint can be successfully resolved. But in many
cases, the firm denies wrongdoing, and it comes down to one person's
word against another's. In that case, we cannot do anything more
to help resolve the complaint. We cannot act as a judge or an
arbitrator to establish wrongdoing and force the firm to satisfy
your claim. And we cannot act as your lawyer.
You should also
contact the banking regulator that oversees the bank that issued