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Elderly consumers unknowingly snared by 20-year CD trap

Some investors are snapping up certificates of deposit that have enticingly high interest rates -- only to find they may not live long enough to cash the CD at maturity.

The Securities and Exchange Commission is investigating reports that elderly investors are being misled into buying long-term CDs.

The agency says these seniors are being led to believe the CDs mature in one year when, in some cases, they don't mature for 20. The SEC is trying to determine whether some CD brokers are complying with full disclosure rules when selling the certificates.

The "callable" con is on
The CDs in question often say "one-year callable" or "one-year non-callable" in large type and consumers think it means it's a one-year CD. Some long-term, high-yield CDs have "call" features, meaning that the issuing bank may choose to terminate -- that is, "call" -- the CD after a year or some other period. Only the issuing bank may call a CD, not the investor.

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Consumers are used to buying a CD and "cashing it in after one year," says Susan Wyderko, director of the SEC's Office of Consumer Education. "They don't understand the 'call' feature -- it means the issuing bank can redeem the CD after one year."

Most of the complaints are coming from people who bought CDs through brokers. These CDs are issued by banks but sold in bulk to brokerage houses that resell them to consumers. Because brokers buy CDs in large quantities, they're often able to sell them to consumers at a slightly higher interest rate -- sometimes 1 percent better than a bank CD.

According to Wyderko, the complaints are against big name brokerage houses as well as small local outfits. She won't name names, but says the SEC is "looking at their sales practices and what they say to clients." The SEC also says some of the complaints are from people who bought the CDs at retirement seminars.

The SEC isn't saying yet that consumers are being deliberately misled, but other officials are taking a stronger stance.

Bradley Skolnik, president of the North American Securities Administrators Association -- an umbrella organization of state securities regulators -- says state securities chiefs across the country are hearing more and more complaints.

"I feel this is occurring with too great a regularity to be accidental. We have to assess on a case-by-case basis, whether it's because brokers aren't doing their job and advising clients or whether there is deliberate fraud."

Wyderko says problems with CDs may be on the rise because CDs are changing.

"They're not the safe, solid, predictable investment they once were. There are a lot more options. Options are good for investors but we're concerned people aren't understanding them."

Bradley Skolnik says there's also been a big increase in the number of firms selling CDs.

Cutting loose costs big
"Many investors, especially senior citizens, are reluctant to incur the risks of the stock market but are frustrated by the low terms on CDs, so they're lured into buying longer-term CDs because they purport to bear higher interest rates."

Skolnik says some investors have been forced to sell their brokered CDs before maturity -- and that's resulted in significant losses.

If you opt for early withdrawal on a bank CD, there's a standard penalty. Cashing out before maturity on a brokered CD can cost more than the standard penalties. The CD has to be sold on the secondary market and that means if interest rates have risen since you bought your CD, yours may have to be sold at a discount.

The complaints about CDs come at a time when the once-simple investment has become more complicated. Once, CDs simply paid a fixed interest rate until they reached maturity. But today's CDs may have variable rates, odd maturity periods or special redemption features in the event the owner dies. The new complexities mean that consumers need to be more aware -- and that professionals in the industry have a greater burden to explain the products they're selling.

Richard Wyler, a spokesman for the Association for Investment Management and Research, says professionals should always work in the best interests of their clients.

"Any activity that's of questionable honesty, integrity or competence is a concern to the entire profession. It risks the credibility and trust investors should have and hurts our ability to self-regulate as a profession and increases the likelihood the government will step in because of the actions of a few irresponsible minorities."

-- Posted: Sept. 18, 2000


See Also
Savings glossary
More savings stories

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