Brokered CDs

What are Brokered CDs?

Brokered CDs are CDs issued by banks that are made available to the customers of a deposit broker. Most, though not all, deposit brokers are securities brokers registered with the Securities and Exchange Commission. Other deposit brokers are subject to regulation by different regulatory bodies or may not be subject to regulation at all. 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 fee because the broker receives its compensation from the bank. You have a right to know the amount of the fee paid to the broker by the bank.

Brokers may provide certain services to you that would normally be provided by the bank. The broker will hold your CD as your custodian and keep a record of your holdings. The broker will 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 will also be 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. 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 will 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 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.

Liquidity

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 will 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 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.

Early Withdrawal

Banks usually limit early withdrawal of CDs offered through brokers. You may not be permitted to withdraw your funds even if you are willing to pay a penalty. Banks generally permit early withdrawal of brokered CDs without penalty upon the death or adjudication of incompetence of the depositor.

Information About Your Broker

You can find out if your broker is a registered or licensed securities broker by contacting your state securities regulator or the Public Disclosure Program of the National Association of Securities Dealers. Call 800-289-9999 or log on to www.nasdr.com and click on "Know Your Broker" to verify a broker's license or registration and obtain a background report on the broker detailing any existing legal or regulatory problems.

What Questions Should I Ask Before Buying a CD?

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 $100,000 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?