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Structured CDs under scrutiny

By Sheyna Steiner · Bankrate.com
Wednesday, February 8, 2012
Posted: 12 pm ET

On Tuesday, Bloomberg.com reported that the Financial Industry Regulatory Authority, or FINRA, has turned the spotlight on derivative-linked CD products.

With no substantial yields to be found in conventional CDs and savings products, savers have looked high and low for safe investments with better returns. Unfortunately, there are no easy answers these days.

Enter the structured CD, a certificate of deposit with returns linked to the stock market, currency, Treasury futures, commodities -- nearly anything.

Recently Claes Bell reported on the increase in popularity of structured CDs. Now the story on Bloomberg.com, "FINRA examines CDs tied to derivatives as sales surge to record," shows the consequence of the upswing, increased regulatory scrutiny.

The industry-backed regulator wants to make sure the so- called structured CDs, where principal is protected by the Federal Deposit Insurance Corp., are properly understood by investors given their increasing complexity and lengthening maturities, said Maria Rabinovich, a lawyer in Finra’s risk division.

According to the story, 1,271 of the investments were sold domestically in 2011. That number comes from StructuredRetailProducts.com.

Some of the drawbacks to structured CDs can include illiquidity, barring death you may not be able to get your money out early and if you can there may be a steep penalty. While investors may be guaranteed to get their principal back from these investments, there is no guarantee that any structured CD will earn more than a conventional CD and, in fact, could earn less.

Figuring out how the payouts and taxes work can be complicated in some cases as well.

Bankrate's Dr. Don covered that in an amusingly-titled column, "Structured CDs: Hedge of no return."

The yield paid on the structured CD is taxable in the year earned, but yields typically aren't paid out annually. Instead, the investor receives the interest income when the CD matures. The income is also taxable as ordinary income versus capital gains.

That means savers can be on the hook for taxes on income they haven't yet received, an important point to know.

Before biting on promises of higher yields, savers must do their homework.

What has your experience been with structured CDs?

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