Q: If I buy a certificate of deposit through a broker, do I get the same FDIC protection as if I individually purchased it?
- L.M. Carmichael, Calif.
A: It depends on how the brokerage purchases the CD, according to David Barr, a spokesman for the Federal Deposit Insurance Corp.
Brokered CDs, he says, are sometimes arranged by a broker directly for a single client, but it's more common that they're bought in the name of the brokerage as agent for many clients.
If a brokerage buys a CD for someone, and the bank communicates directly with that person, the FDIC would make payment to that individual should the bank fail, Mr. Barr says.
When a broker buys CDs as an agent for many clients, all bank information passes through the brokerage. Each client is protected only if the broker meets FDIC record-keeping requirements, Barr says. Those requirements include titling the account so it's clear that the funds are being held in a fiduciary capacity. In addition, the identities of the clients and their ownership interest must be ascertainable either from the bank's records or, more usually, the broker.
If the institution that issued the CD fails, the FDIC would make payment to the brokerage since the only name on the account records would be the broker's. Whether the brokerage transfers this payment to its clients or simply reinvests the funds in another CD would be set forth in the CD contract.
Before placing money with a CD broker, make sure you're dealing with a legitimate business that's properly licensed, Barr says. The FDIC will insure your investment only if it's actually on deposit at an FDIC-insured institution and record-keeping requirements are met.