FINRA Cautions Investors on the Risks of High Yield CDs

FINRA recently issued an Investor Alert, “High Yield CDs: Red Flags That Signal a Scam” warning investors about promotions of certificates of deposit (CDs) promising interest rates substantially higher than current averages. In the Alert, FINRA described instances of suspected fraud, and offered investors tips to recognize red flags and confirm the legitimacy of offers. FINRA also advised investors what initial steps to take if they suspected that they had been the victims of fraud.

In the alert, FINRA described two instances of suspected fraud involving high yield CDs. In one instance of suspected fraud, an email pitch appeared to come from a large U.S. bank, which promoted a CD allegedly offered by an international banking partner. While most U.S. banks were offering At a time just over one percent for a comparable term, the email pitch touted a 15 percent yield, and included instructions on how to wire funds. In a second instance of suspected fraud, a caller posed as a representative from a legitimate brokerage firm and claimed to offer information about CDs that were well above the best rates in the market. In so doing, the caller attempted to gather personal financial information.

In issuing the alert, FINRA recognized that the current low interest rate environment might tempt investors to chase higher yields, and cautioned that higher returns come with a cost. FINRA further reiterated that while financial institutions may occasionally offer slightly higher than normal rates on CDs, these offers tend to be for (and may be limited to) customers who open a new account. FINRA also reminded investors that although a “market-linked” or “structured” CD legitimately might provide potentially higher yields, its performance depends on the performance of a market index or some other benchmark. Thus, such CD is not only risky and complex, but also differs significantly from traditional CDs.

FINRA reminded investors to never provide personal information or authorize any transfer of funds to an unknown person who emails or calls or to any institution which an investor has not vetted. FINRA further advised investors that when in doubt about the legitimacy of a communication, the investor should contact the customer service center or compliance office of the U.S. financial institution for whom the emailer or caller allegedly work. Such contact information is available on the institution’s website or publicly available telephone directory.

To avoid scams, the FINRA Alert identified several red flags that indicate a CD offer may be fraudulent:

• Interest rates that are significantly higher than average.

• Emails with addresses that are not originated and sent by the financial institution that is cited in the promotion.

• Emails that contain misspellings or grammatical errors.

• Promotions that claim to be from a U.S. financial institution that has aligned with an international bank.

• Promotions that claim to be for a “limited time only.”

• Promotions that claim to be directed at “best customers” and that require extremely high minimum investments (for example, $100,000 U.S. Dollars).

FINRA advised investors who suspected they might be a victim of an investment scam to “act quickly.” Investors should immediately contact their financial institution to report a loss or theft of funds through an electronic funds transfer. With regard to stolen identity, FINRA advised investors to follow the Federal Trade Commission’s Identity Theft action plan. FINRA also encouraged investors to file a complaint with FINRA’s online Complaint Center or contact FINRA’s Office of the Whistleblower.

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