Offering documents for structured certificates of deposit make clear that the dealers selling the CDs will not make a market in the CDs. In Gary Plastic Packaging Corporation v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230 (2d Cir. 1985), the CDs in question were determined to be investment contracts due to the fact that their value largely depended upon the efforts of others (i.e., the court considered that the dealer in Gary Plastic promised to, and did, maintain a secondary market in the CDs).1

In addition to avoiding market-making in CDs, banks should clearly disclose that depositors should always receive back at least the principal amount of their structured CDs, including upon an early redemption. There is authority that, if the term of the CD does not provide that it pays at least principal at maturity, the FDIC may take the view that it is not a deposit. The general view is that the depositor should not lose any principal with a deposit, so therefore the CD must be a security if the depositor could lose principal. Consequently, any type of fee charged against the depositor upon an early redemption should be characterized as a penalty instead of a reduction in principal amount. The disclosure should be fashioned such that, in this early redemption example, investors would receive back their principal amount, but will be charged a fee for the early redemption. Although the end result is the same as the depositor receiving a reduced principal amount, banks should not imply, in their offering documents, that investors will receive anything less than their full principal amount.

Footnote

1. The Commission recently took the view that certain structured CDs would be treated as securities due to, it seems, excessive churning. See REVERSEinquiries, Volume 1, Issue 4 (July 13, 2018), available at: goo.gl/oAYzBP.


Originally published in REVERSEinquiries: Volume 1, Issue 5.
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Originally published 14 August 2018

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