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About CDs

CD Basics

CDs are time deposits – you agree to place your funds on deposit with the bank issuer for a stated period of time. During the term of the CD, your funds earn interest at a stated interest rate or based upon an agreed method of calculating the rate, such as with market-linked or structured CDs.

Because you agree with the bank to keep your funds on deposit for a fixed period of time, CDs may offer you a higher rate of interest than deposit accounts that allow you immediate access to your funds, such as checking and savings accounts. Generally, the longer you agree to lock up your funds in a CD, the higher the interest rate you will receive in return on your investment. Investors should remember that there is interest rate risk and potential early withdrawal penalties associated with CDs.

Brokered CDs

Most investors are familiar with the type of CDs that can be purchased at a local bank branch. However, many banks are highly motivated to gain depositors beyond local walk-in customers so they utilize the nationwide brokerage community for distribution of CDs. CDs obtained in this manner are referred to as Brokered CDs. Like CDs purchased at a bank, or any other bank deposit, Brokered CDs are backed by the Federal Deposit Insurance Corporation (FDIC) Insurance up to applicable limits.

Brokered CDs are CDs issued by banks that are made available to customers through a brokerage firm or bank. Other broker-dealers are subject to regulation by different regulatory bodies or may not be subject to any regulation. This description of brokered CDs is based upon standard practices in the securities industry. You should compare these practices to the practices of any deposit broker offering you a CD.

Brokered CDs are obligations of the bank, not the broker. Brokered CDs generally have the features of CDs available directly from banks and are eligible for the same deposit insurance as CDs purchased directly from banks.

Generally, the CD is sold to you without a sales charge because the broker receives its compensation from the bank, as fees may be built into the product. You have a right to know the amount of the fee paid to the broker by the bank, as fees may be built into the product.

Broker Services

Brokers may provide certain services to you that would normally be provided by the bank. The broker may hold your CD as your custodian and keep a record of your holdings. The broker may include your CD holdings in the periodic account statements you receive concerning the assets you have with the broker. Tax information concerning the amount of interest you should include in your income for tax purposes is typically provided by the broker.

Unlike banks, securities brokers are required to provide you with an estimated market value of your CD on your periodic account statement. This is an estimate of the amount you might receive if you were able to sell your CD prior to its maturity. However, you may not be able to sell your CD for the amount listed on the statement. Also, the amount on the statement does not affect your deposit insurance, which is based on the outstanding principal amount of your CD, not the estimated market value.

When you hold your CD through a broker you have certain rights, including the right to dismiss the broker as your agent and move the CD to an account at another broker or establish the CD directly with the bank. Once you establish the CD directly with the bank your broker has no further obligation with respect to the CD.

Within a few days of your CD purchase, a securities broker may provide you with a trade confirmation that sets forth the terms of your CD. In addition, the broker will send you a CD disclosure document describing the terms of the CDs and your rights with respect to the CD, the availability of deposit insurance coverage and other important considerations. The disclosure document will usually be sent with the trade confirmation, but is also available upon request. You should review these documents carefully and ask your broker if you do not understand the terms and conditions of your CD or if the terms and conditions are different than you were told when you placed your order.

Though not obligated to do so, some securities brokers may be willing to purchase, or arrange for the purchase of, your CD prior to maturity. The broker may refer to this activity as a secondary market. This is not early withdrawal. The price you receive for your CD may reflect a number of factors, including then-prevailing interest rates, the time remaining until the CD matures, the features of the CD and compensation to the broker for arranging the sale of the CD. Depending on market liquidity and conditions, you may receive more or less than you paid for your CD. The broker is free to discontinue offering you this service at any time.

What to Do Before Buying a CD

When selecting a CD you should carefully review its terms and conditions. The Federal Truth in Savings Act requires all FDIC-insured depository institutions and deposit brokers to disclose certain information to you when advertising the rate on a CD. The information must include the "Annual Percentage Yield" or "APY" (the rate that reflects the amount of interest you may earn on your deposit), the maturity, the minimum required deposit and whether there is a penalty for early withdrawal. Other significant features, such as the right of the institution to redeem or "call" the CD, must also be disclosed.

Ask the following questions:

  • Does the CD meet your investment objectives?
  • What are its terms, i.e., APY, maturity, early withdrawal, call features, etc.?
  • What are the terms offered on other available CDs?
  • Is the interest paid to you periodically throughout the term of the CD, or at maturity?
  • Will you need your funds before the CD matures?
  • Are your total deposits at the bank within the FDIC’s $250,000 limit?
  • If the CD is callable, what is the first date the bank can call it and how frequently after that can it be called?
  • Do you understand the tax consequences associated with the CD?
  • If purchasing a CD from a broker, are you familiar with the broker’s reputation and comfortable with your salesperson’s advice?
  • Have you asked for copies of the disclosure materials available from the bank or the broker?