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91-74 Replacement of Certificates of Deposit by Bond Mutual Funds

SUGGESTED ROUTING:*

Senior Management
Legal & Compliance
Mutual Fund
Training
*These are suggested departments only. Others may be appropriate for your firm.

At the present time, many certificates of deposit held by individuals are expiring. There has been an intensive marketing effort by some mutual funds and many NASD members to persuade such individuals to invest in bond mutual funds, because of the higher yields that may be realized, rather than renew their certificates of deposit.

There is nothing inherently wrong with persuading a customer to exchange one investment vehicle for another provided that there is full and fair disclosure of the differences between the products.

One specific feature of such an exchange that must be disclosed to the customer is the greater degree of risk to capital that the customer may experience. The fact that higher yields may be realized from the bond fund must be balanced by disclosure that the customer's capital is exposed to a risk not present in ownership of a certificate of deposit.

Currently, with interest rates at their lowest level in 20 years, there is a distinct possibility that when interest rates rise, as they are likely to based on past patterns, at some time in the future the capital value of bonds purchased today will fall.

This must be explained to customers when they are solicited to make such an exchange. Failure to do so may violate NASD Rules of Fair Practice as well as expose members and their salespersons in the future to the complaints of disgruntled customers, who may claim that they were never told that their invested capital could fluctuate in value.


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