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4000 - Advisory Opinions

Whether a "Bonus" Added to a Deposit by a Financial Services Company Would Qualify for Deposit Insurance

October 30, 2000


Christopher L. Hencke, Counsel

The enclosed advertisement indicates that your company is a "deposit broker" as defined in the Federal Deposit Insurance Act at 12 U.S.C. § 1831f. The advertisement promotes a "12 month bank CD" with an annual percentage yield (APY) of 7.75%. In addition, the advertisement describes these CDs as follows: "Bank CDs opened through Financial Svc Company are rock solid. They're Federally insured to $100,000 and we have several federally insured banks to choose from."

We are concerned about your description of these CDs as "Federally insured." According to the advertisement, the APY of 7.75% is derived by adding a "bonus" when the account is opened. The advertisement does not state whether the bonus is added by the FDIC-insured depository institution or whether the bonus is added by Financial Service Company (Company). If the bonus is added by Company, then the advertisement is misleading in suggesting that an instrument with an APY of 7.75% is "Federally insured." Nothing is "Federally insured" except the deposit liability of the FDIC-insured depository institution. Any liability of Company for a "bonus" is uninsured.

In your advertisements, you should clarify whether any "bonus" represents a liability of Company as opposed to a liability of the insured depository institution. If the "bonus" or advertised interest rate represents a liability of Company (in whole or in part), then your advertisement should not describe the instrument as "Federally insured." Thank you for your cooperation.


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