ALABAMA
SECURITIES COMMISSION
770 WASHINGTON
AVE, SUITE 570
MONTGOMERY,
ALABAMA 36130-4700
TELEPHONE (334)
242-2984
1-800-222-1253
FAX (334)
242-0240
E-MAIL asc@asc.state.al.us
FOR IMMEDIATE
RELEASE
INVESTOR
EDUCATION ALERT
Montgomery, Alabama (August 30,
2001) - While the volatile stock market can make certificates of deposit
appealing to investors, some CDs aren't what they seem. That's the message
behind a handy checklist now available from the Alabama Securities
Commission.
With many elderly investors
complaining they've been misled into buying "callable" CDs with 10- to 30 -year
maturities, state securities regulators hope investors will use the checklist to
avoid getting stuck with something they don't want.
"Not all CDs are created equal, so
investors need to ask questions and understand exactly what they're buying,"
cautioned Joseph P. Borg, Director, Alabama Securities Commission. "Callable CDs
often have higher yields than traditional bank-issued CDs because they require a
10-, 20- or even 30-year commitment. Investors should be careful and ask the
questions on the checklist to make sure they know what they're getting into and
whether it meets their investment objectives," said Borg.
The fill-in-the-blank checklist
consists of 13 questions designed to help investors distinguish between
traditional bank-issued CDs and callable CDs. While usually offering higher
returns, there are substantial penalties for cashing callable CDs before their
maturity date.
- more -
According to Borg, many investors
don't realize that with callable CDs only the issuer, not the investor, can "call" or redeem
the CD. Investors who want their money before a callable CD matures risk a
substantial loss - as high as 30 percent - regulators
warn.
Callable CDs are being marketed via
newspaper ads, high-pressure telephone solicitations and direct mail, according
to Borg. In many print ads,
regulators note, the CD's interest rate is trumpeted in large print while its
maturity date is buried in small type and technical
jargon.
Before purchasing any CD, the
checklist prompts investors to learn its maturity date, where the money will be
deposited, the penalties for early withdrawal, any costs associated with selling
before maturity and whether the interest rate is fixed or
variable.
The Director of the Alabama
Securities Commission (ASC) cautions potential investors to thoroughly check out
any investment opportunity. Contact
ASC for inquiries regarding securities broker-dealers, agents, investment
advisors, and investment advisor representatives, the registration status of securities, to report suspected
fraud, or obtain consumer information:
Call:
1-800-222-1253
Fax:
1-334-242-0240.
Email: asc@asc.state.al.us.
Write:
Alabama
Securities Commission,
770 Washington
Ave., Suite 570,
Montgomery,
Alabama 36130-4700
-
more -
Callable
CD Checklist
Investors
often turn to federally insured certificates of deposit, sold by banks or
brokers, when stock markets are volatile. Rising interest rates and stock market
drops have made CDs more attractive, especially to older investors. But what many investors don’t realize –
and some stockbrokers apparently aren’t adequately disclosing – is that, unlike traditional CDs, with
“callable” CDs only the issuer, and not the investor, can redeem the CD without
a substantial penalty. Callable CDs
are being marketed via newspaper ads, telephone solicitations and direct mail.
Before
choosing any investment, it is important to determine how it will fit with your
financial goals and your tolerance for risk and will make sense given your
income and living expenses.
If
you’re considering purchasing a “callable” or “brokered” CD, become familiar
with the following terms. Also, ask
the questions on the worksheet when you discuss CDs that are being offered by a
broker.
Glossary of
terms:
1.
CD or Certificate of
Deposit: A
type of deposit account that may offer a higher rate of interest than a regular
savings account.
2.
FDIC or Federal Deposit
Insurance Corporation: In the event of a bank failure, federal deposit insurance
protects deposits up to $100,000 per depositor that are payable in the United
States. You can verify that the
bank is FDIC-insured by calling the FDIC hotline, (800)
934-3342.
3.
Call
Feature:
The issuing bank or brokerage firm, not the investor, may choose to terminate or
“call” the CD after a fixed period of time and pay back any principal with
interest. For example, a “one-year
callable CD” may be “called” by the bank or firm after a year if interest rates
fall.
4.
Maturity
Date: Ask
to see the maturity date in writing.
CDs can have maturity dates of up to 15 or
20-years.
5.
Issuer: It is important to know which bank or
thrift issued your CD because FDIC coverage is limited to $100,000 per
depositor. If you have existing
deposits at an institution and add a brokered CD, it may push your total
deposited funds over the $100,000 limit.
6.
Deposit
Broker:
Typically CDs are sold in banks but brokerage firms, because they bring a large
amount of deposits to a bank, can also offer CDs by negotiating a higher rate of
interest. The brokerage firm can
then divide the CD into smaller amounts and offer a fractional interest of the
CD as a “brokered CD” to customers.
7.
Interest Rate:
Interest
rates may be fixed or variable and are paid on a timetable--monthly,
semiannually, or annually. Payments are made by check or an electronic transfer
of funds. Variable interest rates
can be tied to an index, such as the stock market, and could go down or
disappear altogether. When
comparing interest rates, make sure to look at the annual percentage yield
(APY).
8.
Step-Up or –Down CDs:
CDs with a
“step-up or –down” feature have a fixed interest rate for a period of time,
usually one year. “Step-up” CDs
have a higher rate in subsequent years while “step-down” CDs have a lower rate
in subsequent years.
9.
Penalties for Early
Withdrawal:
If you want to cash in your CD prior to the maturity date, you may have to pay a
penalty to withdraw your CD and lose part of your principal. The brokerage firm that sold the CD sets
the liquidation price. The firm has no obligation to buy the CD back at its face
value so cashing the CD in prior to the maturity date can often result in a
significant loss of the original investment.
10. CRD: The Central Registration
Depository is a database containing employment and disciplinary information for
stockbrokers and firms. Call your
state securities regulator to request a CRD report and determine if the person
selling you an investment is registered to do business in your
state.
