Brokered Certificate Of Deposit

Brokered Certificate Of Deposit
Brokered Certificate Of Deposit
What is the dictionary definition of Brokered Certificate Of Deposit?
Dictionary Definition of Brokered Certificate Of Deposit

A brokered certificate of deposit (CD) is a financial product that is sold by a brokerage firm on behalf of various banks. It is a type of time deposit where the investor agrees to keep their funds with the bank for a specified period of time, typically ranging from a few months to several years. In return, the investor receives a fixed interest rate that is higher than what is typically offered on regular savings accounts.

The brokerage firm acts as an intermediary between the investor and the bank, facilitating the purchase and sale of the CD. They may also provide additional services such as research and advice on which CDs to invest in.

Brokered CDs are considered to be relatively safe investments as they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. However, they do carry some risks, such as the possibility of early withdrawal penalties if the investor needs to access their funds before the maturity date.

It is important for investors to carefully review the terms and conditions of the brokered CD before making a purchase, including the interest rate, maturity date, and any associated fees or penalties. Additionally, investors should consider their own financial goals and risk tolerance before investing in brokered CDs.

Full Definition Of Brokered Certificate Of Deposit

A Brokered Certificate of Deposit (CD) is a form of time deposit offered by banks but sold through brokerage firms and financial intermediaries. These CDs are distinct from traditional CDs purchased directly from banks, offering unique advantages and potential risks. This legal overview provides a comprehensive examination of brokered CDs, discussing their structure, regulatory framework, benefits, risks, and legal considerations for investors and issuers.

Structure of Brokered Certificates of Deposit

Definition and Characteristics

A brokered CD is a bank-issued CD that a broker buys in bulk and resells to individual investors. These financial instruments typically feature fixed interest rates and predetermined maturity dates, ranging from a few months to several years. The key characteristics of brokered CDs include:

  1. Intermediation: Brokered CDs involve intermediaries, unlike traditional CDs purchased directly from banks.
  2. Liquidity: They often have a secondary market, allowing investors to sell them before maturity.
  3. Higher Yields: Due to competitive pricing and bulk purchases by brokers, these CDs may offer higher yields compared to traditional CDs.
  4. Insurance: Brokered CDs are insured by the Federal Deposit Insurance Corporation (FDIC) in the United States, up to the applicable limits, if issued by an FDIC-insured bank. In the UK, the Financial Services Compensation Scheme (FSCS) may provide similar protection.

Issuance Process

The issuance process involves the following steps:

  1. Bank Issuance: Banks issue large blocks of CDs.
  2. Broker Purchase: Brokers purchase these CDs and divide them into smaller denominations.
  3. Resale: Brokers then resell these smaller denominations to individual investors.
  4. Custodial Accounts: Investors typically hold these CDs in custodial accounts with the broker.

Regulatory Framework

United States

In the United States, brokered CDs are regulated primarily by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Key regulatory aspects include:

  1. Securities Laws: Brokered CDs must comply with federal securities laws, including registration and disclosure requirements.
  2. FINRA Rules: Brokers must adhere to FINRA rules, including suitability and best execution standards.
  3. FDIC Insurance: Brokered CDs issued by FDIC-insured banks are covered by FDIC insurance up to the standard limits, which is $250,000 per depositor, per insured bank, for each account ownership category.

United Kingdom

In the UK, brokered CDs fall under the purview of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Relevant regulatory aspects include:

  1. FSCS Protection: The FSCS protects deposits up to £85,000 per depositor, per institution.
  2. FCA Regulations: Brokers and financial intermediaries must comply with FCA regulations regarding the sale and marketing of financial products.
  3. Disclosure Requirements: Adequate disclosure about the risks, terms, and conditions of the CDs must be provided to investors.

Benefits of Brokered Certificates of Deposit

Higher Yields

One of the primary benefits of brokered CDs is the potential for higher yields compared to traditional CDs. Brokers can negotiate better rates due to bulk purchases, passing on these benefits to individual investors.


Brokered CDs allow investors to diversify their holdings across multiple banks and maturities, enhancing portfolio diversification and risk management.


Investors can purchase brokered CDs through their brokerage accounts, streamlining the investment process and providing a single point of contact for managing various investments.


The secondary market for brokered CDs provides liquidity, enabling investors to sell their CDs before maturity if needed. This flexibility is particularly advantageous during changing market conditions or personal financial needs.

Risks and Legal Considerations

Interest Rate Risk

Brokered CDs are subject to interest rate risk. If interest rates rise, the value of existing CDs with lower rates may decline, potentially resulting in a loss if sold before maturity.

Market Risk

While the secondary market provides liquidity, the market price of a brokered CD may fluctuate based on demand and supply dynamics, potentially leading to losses upon sale.

Credit Risk

Although brokered CDs issued by FDIC or FSCS-insured banks are protected up to certain limits, there remains a credit risk if the issuing bank fails and deposits exceed the insured amounts.

Call Risk

Some brokered CDs have call provisions, allowing the issuing bank to redeem the CD before maturity. This can lead to reinvestment risk, where investors may have to reinvest the principal at lower prevailing interest rates.

Legal Documentation and Disclosure

Investors should thoroughly review the legal documentation associated with brokered CDs. Key documents include:

  1. Prospectus: This document provides detailed information about the CD, including terms, conditions, and risks.
  2. Deposit Agreement: The deposit agreement outlines the relationship between the investor and the issuing bank, detailing the terms of the CD.
  3. Broker Agreement: This agreement governs the relationship between the investor and the broker, including fees, commissions, and other relevant terms.

Compliance with Securities Laws

In the United States, brokered CDs must comply with federal securities laws. Brokers are required to provide adequate disclosures and ensure that the sale of these CDs aligns with the investor’s risk tolerance and investment objectives.

Suitability and Best Interests

Brokers must adhere to suitability and best interest standards when recommending brokered CDs to clients. This involves assessing the investor’s financial situation, investment goals, and risk tolerance to ensure that the investment is appropriate.

Case Law and Legal Precedents

United States

Several legal precedents and regulatory actions have shaped the landscape of brokered CDs in the United States:

  1. SEC vs. Broker-Dealers: The SEC has taken action against broker-dealers for inadequate disclosures and misleading sales practices related to brokered CDs.
  2. FINRA Enforcement: FINRA has issued fines and sanctions against brokers who fail to adhere to suitability and best execution standards.

United Kingdom

In the UK, the FCA has issued guidelines and taken enforcement actions to ensure the proper conduct of brokers selling financial products, including brokered CDs.

  1. FCA Guidelines: The FCA provides detailed guidelines on the sale and marketing of financial products, including disclosure requirements and suitability assessments.
  2. Enforcement Actions: The FCA has imposed penalties on brokers for misselling financial products, highlighting the importance of compliance with regulatory standards.

Tax Considerations

United States

In the United States, interest earned on brokered CDs is generally subject to federal and state income taxes. Key tax considerations include:

  1. 1099-INT Reporting: Banks and brokers report interest income to the IRS and the investor via Form 1099-INT.
  2. Tax-Advantaged Accounts: Holding brokered CDs in tax-advantaged accounts such as IRAs can defer or eliminate tax liabilities on interest income.

United Kingdom

In the UK, interest earned on brokered CDs is subject to income tax. Key tax considerations include:

  1. Personal Savings Allowance: Basic-rate taxpayers have a £1,000 allowance for interest income, while higher-rate taxpayers have a £500 allowance.
  2. Tax-Advantaged Accounts: Holding brokered CDs in Individual Savings Accounts (ISAs) can provide tax-free interest income.


Brokered Certificates of Deposit offer a compelling investment option for individuals seeking higher yields and diversification opportunities. However, these benefits come with associated risks and legal considerations that investors must carefully evaluate. Understanding the regulatory framework, potential risks, and legal documentation is essential for making informed investment decisions.

Regulatory authorities in both the United States and the United Kingdom have established stringent guidelines to protect investors and ensure market integrity. Compliance with these regulations is crucial for brokers and financial intermediaries to maintain trust and credibility in the financial markets.

Investors should conduct thorough due diligence, seek professional financial advice, and ensure that brokered CDs align with their overall investment strategy and risk tolerance. By navigating the legal landscape effectively, investors can harness the benefits of brokered CDs while mitigating potential risks.

Brokered Certificate Of Deposit FAQ'S

A brokered CD is a type of certificate of deposit that is purchased through a brokerage firm or financial intermediary, rather than directly from a bank.

When you invest in a brokered CD, the brokerage firm acts as an intermediary between you and the issuing bank. The firm pools together funds from multiple investors and purchases a large CD from the bank on behalf of its clients. Each investor then owns a portion of the CD based on their investment amount.

Brokered CDs are generally considered safe investments because they are FDIC-insured up to the maximum limit allowed by law. This means that if the issuing bank fails, the FDIC will reimburse investors for their principal and any accrued interest.

Yes, you can typically sell your brokered CD before its maturity date. However, the price you receive may be higher or lower than the initial investment amount, depending on prevailing interest rates and market conditions.

Yes, brokerage firms may charge fees for purchasing or selling brokered CDs. These fees can vary depending on the firm and the specific CD being traded. It is important to review the fee structure before investing.

Yes, brokered CDs can be held in an IRA. They can provide a low-risk investment option within an IRA portfolio.

If the issuing bank fails, the FDIC will step in and reimburse investors for their principal and any accrued interest up to the maximum limit allowed by law. It is important to note that the FDIC insurance coverage is per depositor, per bank, and per account ownership category.

Not all brokerage firms offer brokered CDs. You will need to check with your specific brokerage firm to see if they provide this investment option.

Brokered CDs may be suitable for conservative investors seeking a low-risk investment with a fixed interest rate. However, they may not be appropriate for investors seeking higher returns or those with a shorter investment horizon.

The interest rates on brokered CDs are typically influenced by prevailing market conditions, including changes in interest rates set by the Federal Reserve. The rates can vary depending on the term length and the issuing bank’s creditworthiness.

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This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th June 2024.

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