CD buyers, beware brokers `registered' with FDIC

Staying Ahead

Dollars & Sense

January 28, 2001|By JANE BRYANT QUINN

There's a bad business going around. People who advertise themselves as "registered CD brokers" are mis-selling certificates of deposit to trusting savers.

The CD is insured by the Federal Deposit Insurance Corp., so you assume that your money is safe. The brokers advertise it at a higher interest rate than you'd get from banks.

You think you're getting a super and safe investment. In fact, you might lose major money or have your savings tied up for many years.

Higher-rate CDs can be legitimate, as long as all their angles are disclosed. But the bad CD deals are devastating the hopes of careful savers who didn't intend to put their money at risk.

This story has two parts, the so-called "registered" brokers and how Congress accidentally abetted them (a problem that's being fixed); and the way insured CDs can be deceptively sold.

1. The registration problem. Many brokers have been advertising that they're "registered with the FDIC." That makes it sound as if they're government-approved. In fact, registration doesn't mean a thing.

In 1991, Congress passed a law requiring brokers who sell insured CDs to notify the FDIC. The idea was to help the FDIC find all the account holders when a bank failed.

The brokers merely sent in their names. The FDIC didn't check them, license them, regulate them, insure them, endorse them, curb them or approve their ads.

For deceptive brokers, this law was a golden gift. They could advertise, truly, that they were on an FDIC list. The public had no idea that the list was entirely hollow. It sounded as if the brokers were government-approved.

Finally, the FDIC asked Congress to repeal the law. Congress did so at year's end.

Starting this month, the CD-broker list no longer exists, says Alice Goodman, director of the FDIC's Office of Legislative Affairs. The number of registered brokers had reached 1,388. The FDIC will write to them about the change.

Anyone presenting himself or herself as a registered broker is no longer speaking true. You can complain to the FDIC on its new consumer line, 877-ASK-FDIC.

2. The deceptive sales problem. Brokerage firms can negotiate with banks to get giant-size insured CDs. The brokers break the CDs into smaller bits, for sale to individuals.

The banks allow the brokers a higher interest rate because they deliver money in wholesale lots. Even after commissions, the brokers can pass a higher rate along to you.

Some brokers have been selling "one-year callable" CDs. Naturally, you think you can retrieve your money a year from now. One year later, however, you learn that you've actually bought a 20-year or 30-year CD.

The bank can decide to redeem the CD after one year. But if the bank doesn't, you cannot get your principal back. Some of these CDs reduce your interest rate the longer you hold them.

Other brokers are selling "discount" or "zero" CDs. You buy a CD for less than its face value. Each year, your interest accumulates within the CD. At maturity, you're paid your interest and principal all at once.

But deceptive brokers may take huge commissions out of your investment without telling you. Your true interest rate is much lower than you thought.

Here again, some investors think they're buying one-year or two-year discount CDs. Instead, they've been signed up for 15 or 20 years.

If you're interested in a CD sold by a broker rather than a bank, know that there are extra risks.

You should get a written contract - one you can take away and read before you sign. The contract should give you a specific "maturity date" (don't accept other language). And beware ads for "registered" brokers.

For more information, go to the FDIC's Consumer News Web at

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