Certificate of Deposits, or CDs, are typically issued by banks directly to a customer and have a fixed interest rate and date of withdrawal, known as the maturity date.
They also are insured by the Federal Deposit Insurance Corporation (FDIC) which covers up to $250,000 of your money in traditional types of bank deposit accounts – including checking and savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs).
As such, CDs are generally considered to be simple, conservative products that carry few risks.
But what if you buy a certificate of deposit through a broker, do you get the same FDIC protection as if you individually bought it?
The reality is that it depends on a number of factors. Some brokered CDs may actually be securities and, if they are, they won’t qualify for FDIC insurance at all.
what is a brokered cd?
Brokered CDs are CDs issued by banks to brokers, which in turn sell interests in the CD to individual investors.
Brokered CDs are sometimes arranged by a broker directly for a single client, but it’s more common that they’re bought in the name of the brokerage firm and sold to many clients.
In general, brokered CDs have longer maturity dates (in some cases, 20 years from the date of issuance), than traditional CDs. The interest rate terms of brokered CDs can also differ significantly from the simple interest rate terms usually used by traditional CDs.
For example, some brokered CDs have their interest rates tied to a market index, such as the S&P 500. Brokered CDs also may have special features that allow the issuing bank to terminate the CD after a specified period of time if interest rates drop.
To compensate for these additional features, brokered CDs frequently pay a higher interest rate than traditional CDs.
Although brokered CDs may have certain features that traditional CDs do not have, as long as a banking institution issues the brokered CDs and sets all of their features, brokered CDs are generally considered bank products — not securities — and FDIC insurance applies to them.
When does a Brokered CD become a Security?
However, there are several circumstances under which a brokered CD may be considered a security.
For example, if a broker materially alters the terms and features of a brokered CD (e.g., offering a different interest rate than the interest rate set by the issuing depository institution), the brokered CD is arguably a different investment vehicle that could be considered a security.
Additionally, some brokers maintain a limited secondary market for customers who have bought brokered CDs. If a broker, as an incentive to purchase brokered CDs, offers and/or maintains a secondary market for customers to rely upon to provide additional liquidity to their brokered CDs, this may make brokered CDs securities.
Something else to keep in mind is when a broker buys CDs as an agent for many clients, all bank information passes through the brokerage. Each client is protected only if the broker meets FDIC record-keeping requirements.
Those requirements include titling the account so it’s clear that the funds are being held in a fiduciary capacity. In other words, if it’s actually owned by the investment broker, and not you personally, the FDIC insurance may not apply.
If the institution that issued the CD fails, the FDIC would make payment to the brokerage since the only name on the account records would be the broker’s. Whether the brokerage transfers this payment to you or not is up to them.
Make sure all of your deposit will be fully insured.
To protect your brokered CD from loss if the bank fails, follow these steps to confirm that your money is placed in a properly titled deposit account at an FDIC-insured bank and that all of it is within the deposit insurance limits.
First, get the name of the bank where your money is to be deposited and verify that it is FDIC-insured by calling the FDIC toll-free at 1-877-275-3342 or searching BankFind, the FDIC’s database of insured institutions at http://research.fdic.gov/bankfind.
Second, ask your broker to confirm that the deposit account records for its brokered CDs reflect the broker’s role as an agent for its clients (for instance, by titling the account “XYZ Brokerage, as Custodian for Clients”). This will ensure that your portion of the CD qualifies for full FDIC coverage.
You’ll also need to be aware of how much money you have at one particular bank. Your brokered CDs are added to any traditional CDs that you have at the same bank when calculating FDIC coverage. So, if your combined brokered and traditional deposits at a single bank exceed $250,000, you won’t have protection on the amount above the $250,000 limit.
Keep in mind that brokerages are also required to insure the assets in your account which they hold on their balance sheets (cash, bonds, stocks, and mutual funds). This is provided by SIPC, the equivalent of FDIC in the brokerage world.
So even if your brokered CD is considered a security, you’re still insured against the risk that the brokerage firm goes bankrupt.