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
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
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.
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
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
The SEC isn't saying yet that
consumers are being deliberately misled, but other officials are
taking a stronger stance.
Bradley Skolnik, president of
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
Bradley Skolnik says there's also
been a big increase in the number of firms selling CDs.
"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
-- Posted: Sept. 18, 2000