E*TRADE from Morgan Stanley Brokered Certificate of Deposit Disclosure Statement
The information contained in this Disclosure Statement may not be modified by any oral representation made prior or subsequent to the purchase of your Certificate of Deposit (“CD”).
CERTIFICATE OF DEPOSIT
The CDs described below are made available through Morgan Stanley Smith Barney LLC (the “Company”). Each CD is a deposit obligation of a depository institution domiciled in the United States or one of its territories (an “Issuer”), the deposits and accounts of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”) within the limits described below. CDs may be purchased both upon issuance (the “primary market”) and in the secondary market.
Prior to your purchase of a CD, the Company will advise you of the names of Issuers currently making CDs available. You may obtain financial information concerning the Issuer of a CD from the FDIC’s website at fdic.gov. The Company does not guarantee in any way the financial condition of any Issuer or the accuracy of any financial information provided by the Issuer.
The extent of and limitations on federal deposit insurance are discussed below in the section titled “Deposit Insurance.”
CDs are insured to at least $250,000 by the FDIC. Any amount in CDs, including accrued interest, in excess of $250,000 is not covered by federal deposit insurance.
CDs offered by certain Issuers require a minimum deposit of $100,000. CDs offered by some Issuers may not be transferred in aggregate principal amounts of less than $100,000, nor may you transfer such CDs if the transfer will result in your holding CDs in aggregate principal amounts of less than $100,000. CDs offered by some Issuers may not be held through another broker-dealer.
Terms of CDs
The maturities, rates of interest, and interest payment terms of CDs available through the Company will vary. Both interest-bearing and zero-coupon CDs may be available. CDs purchased through a brokerage firm often have longer terms to maturity and other terms and features that are different from those usually found in retail CDs sold at a bank’s offices. You should carefully review the trade information and any supplement to this Disclosure Statement for a description of the terms of the CD.
The CDs will mature on the date indicated on the trade confirmation. The CDs will not be automatically renewed or rolled over, and interest on the CDs will not continue to accrue or (in the case of zero-coupon CDs) accrete after maturity. At maturity the CD balances will be remitted by the Issuer to the Company and credited to your account with the Company. If the maturity date is not a business day, the CD balances will be paid on the next succeeding business day. A “business day” shall be a day on which the Company and the banks in both the Issuer’s domicile and the State of New York are open for business.
Interest-bearing CDs. Interest-bearing CDs pay interest at either a fixed rate or a variable rate. A fixed-rate CD will bear the same interest rate throughout the life of the CD. The interest rate on variable-rate CDs may increase or decrease from the initial rate of predetermined time periods (“step rates”) or may be reset at specified times based on a change in a specific index or indexes (“floating rates”). The dates on which the rates on step-rate CDs will change the rates on floating rate CDs will reset, as well as a description of the basis on which the rate will be reset, will be set forth on the trade confirmation or in a supplement to this Disclosure Statement.
Interest-bearing CDs are offered in a wide range of maturities and are typically made available in minimum denominations and increments of $1,000. Some Issuers require a minimum deposit of $100,000.
Interest earned on interest-bearing CDs with original maturities of one year or less may be paid quarterly or at maturity of such CDs, and interest earned on interest-bearing CDs with original maturities of more than one year may be paid monthly, quarterly, semiannually, or annually and at maturity. Interest on variable-rate CDs will be reset periodically, and interest will be paid monthly, quarterly, semiannually, or annually and at maturity as specified on the trade confirmation or in any supplement to this Disclosure Statement.
Interest payments on interest-bearing CDs are automatically credited to your account with the Company, although in some cases final interest payments are not received from the Issuer of the CD until shortly after the maturity date. Interest will accrue up to but not including the interest payment date, the maturity date, or any call date. If an interest payment date falls on a day that is not a business day, interest will be paid on the first business day following the interest payment date. For specific rate information for any interest period, please contact the Company.
Interest on brokered CDs of Issuers not affiliated with the Company is not compounded. In some cases, interest on brokered CDs issued by Issuers affiliated with the Company may be compounded. Interest on CDs in the primary market is calculated on the basis of the actual number of days elapsed over a 365-day year. The amount of interest on CDs that are purchased in the secondary market, however, may be based on other interest rate calculations. Please contact the Company with questions concerning the interest rate calculation on a secondary market CD.
Zero-coupon CDs. Zero-coupon CDs do not bear interest but rather are issued at a substantial discount from the face or par amount, the minimum amount of which is $1,000. Interest on the CD will accrete at an established rate, and the holder will be paid the par amount at maturity.
Some interest-bearing CDs may be subject to redemption on a specified date(s) at the discretion of the Issuer (a “call”). If the CD is called, you will be paid all principal and interest accrued up to but not including the call date. The dates on which the CD may be called will be specified on the trade confirmation or in any supplement to this Disclosure Statement.
A call by the Issuer is more likely to occur at a time when interest rates available on alternative investments are lower than the rate you are paid on the CD. If you choose to reinvest the proceeds paid to you when the CD is called, you might be required to invest in lower-yielding investments, based on the current market rates at that time. Conversely, a call by the Issuer is less likely to occur at a time when interest rates available on alternative investments are higher than the rate you are being paid on the CD. Accordingly, you will probably not be able to reinvest the proceeds paid to you when the CD is called at interest rates equal to the interest rate paid on the CD that was called. Callable CDs may also be called at a price that is less than the price you paid for the CD if you purchased the CD in the secondary market at a premium over the par amount (or accreted value in the case of zero-coupon CDs). The secondary market price of a callable CD usually will not exceed the call price.
Because the Issuer and only the Issuer has the right to call a CD and because the Issuer may not exercise its right to call the CD, you should not rely on the call feature for gaining access to your funds prior to maturity.
Evidence of CDs
Brokered CDs are book-entry instruments. You will not receive a passbook, certificate, or other evidence of ownership of the CD from the Issuer. The CDs are evidenced by one or more master certificates issued by the Issuer, each representing a number of individual CDs. These master certificates are held either by The Depository Trust Company (“DTC”), a sub-custodian that is in the business of performing such custodial services, or by the Company. The Company, as custodian, keeps records of the ownership of each CD and will provide you with a written confirmation of your purchase. You will also be provided with a periodic account statement from the Company that will reflect your CD ownership. You should retain the trade confirmation and your account statement(s) for your records. The purchase of a brokered CD is not recommended for persons who wish to take actual possession of a certificate.
The Company makes available CDs of its affiliated depository institutions, as well as CDs of depository institutions that are not affiliated with the Company. Regardless of what institution is the Issuer, each CD constitutes a direct obligation of the Issuer and is not, either directly or indirectly, an obligation of the Company. You will have the ability to enforce your rights in a CD against the Issuer. No deposit relationship shall be deemed to exist prior to the receipt and acceptance of your funds by the Issuer.
If you choose to remove the Company as your agent with respect to your CD and DTC is holding the master certificate as sub-custodian, you may (a) transfer your CD to another agent, provided that the agent is a member of DTC (most major brokerage firms are members; many banks and savings institutions are not); or (b) request that your ownership of the CD be evidenced directly on the books of the Issuer, subject to applicable law and the Issuer’s terms and conditions, including those related to the manner of evidencing CD ownership.
If you choose to remove the Company as your agent with respect to your CD and the Company is holding the master certificates as custodian, you may have the ownership of your CD evidenced directly on the books of the Issuer. In this instance, because the Company is holding the master certificate, you may not hold your CD through another broker-dealer. Evidence of your ownership of the CD on the Issuer’s books will be subject to applicable law and the Issuer’s terms and conditions, including those related to the manner of evidencing CD ownership.
If you choose to remove the Company as your agent, the Company will have no further responsibility to receive payments on your behalf with respect to your CD. A CD established directly on the books of the Issuer may not be readily negotiable.
Important Purchase Considerations
CDs are most suitable for purchasing and holding to maturity. If you wish to dispose of your CD prior to maturity, you should read with special care the section titled “Additions or Withdrawals” and “Secondary Market.” If you purchase CDs through an Issuer with a required minimum deposit amount of $100,000, you may not transfer the CDs in aggregate principal amounts of less than $100,000, nor may you transfer CDs if the transfer will result in your holding CDs in aggregate principal amounts of less than $100,000. You should be aware that these CDs may be less liquid than other types of CDs, such as those with no transfer restrictions.
You should compare the rates of return and other features of the CDs to other available products before deciding to purchase a CD. The rates paid with respect to the CDs may be higher or lower than the rates on deposits or other instruments available directly from the Issuer or through the Company.
Variable-rate CDs present different investment considerations than fixed-rate CDs and may not be appropriate for every investor. Depending on the type of variable-rate CD (step-rate or floating rate) and the interest rate environment, the CD may pay substantially more or substantially less interest over the term of the CD than would be paid on a fixed-rate CD of the same maturity. Furthermore, if a variable-rate CD is subject to a call by the Issuer, you may not receive the benefits of any anticipated increase in rates paid on the CD. You should carefully review any supplement to this Disclosure Statement that describes the step rate or the basis for resetting a floating rate and, if the CD is subject to a call by the Issuer, the time periods at which the Issuer may call the CD.
Step-rate risks. As mentioned above, the CDs may contain variable rates, or step rates. The rate of interest paid by the Issuer on step-rate CDs will vary upward (step-ups) or downward (step-downs) from the initial stated rate of interest on the CD. Step-rate CDs also typically are callable by the Issuer at one or more dates prior to maturity and therefore contain the call risks described above. If the Issuer does not call the CD, the interest rate will step up or step down in accordance with the schedule established by the Issuer. The schedule of step interest rates and call will affect the secondary market value of the CD.
With step-up CDs, you should not expect to earn the last and highest scheduled rate of interest. With step-down CDs, you should expect to earn the step-down rate of interest income after the first schedule step-down date. Typically, the rate of interest paid at the first step-down rate is lower than non-step-rate callable CDs with an equivalent time to maturity of call.
When determining whether to invest in a step-rate CD, you should not focus on the highest stated interest rate, which is usually the initial or final step rate of interest. You should instead focus on the weighted average annual percentage rate of interest to maturity or call as compared with other equivalent investment alternatives or, if you need current income, on the lowest stated interest rate.
Issuer insolvency. In the event the Issuer approaches insolvency or becomes insolvent, the Issuer may be placed in regulatory conservatorship, with the FDIC typically appointed the conservator. As with any deposits of a depository institution placed in conservatorship, the CDs of Issuers for which a conservator has been appointed may be paid off prior to maturity or transferred to another depository institution. If the CDs are transferred to another institution, the new institution may offer you a choice of retaining the CD at a lower interest rate or having the CD paid off. See the section titled “Payments Under Adverse Circumstances.”
If your CD is paid off prior to maturity as a result of the Issuer’s insolvency, exercise by the Issuer of any right to call the CD, or a voluntary early withdrawal (see “Additions or Withdrawals”), you may be unable to reinvest your funds at the same rate as the original CD. The Company is not responsible to you for any losses you may incur as a result of a decreased interest rate on an investment replacing your CD.
Eligibility for Death Redemption
In the event of death of an individual owning a CD, early withdrawal of the entire CD will generally be permitted without penalty. This allows for greater flexibility when coordinating investment and estate-planning needs.
Your CDs are insured by the FDIC, an independent agency of the US government, to a Standard Maximum Deposit Insurance Amount (as defined in Part 330 of the FDIC’s rules), which for most types of accounts is $250,000 (including principal and accrued interest) for all deposits held in the same capacity per Issuer.
Individual retirement accounts (“IRAs”); certain eligible deferred compensation plans described in Section 457 of the Internal Revenue Code, as amended (the “IRC”); self-directed individual account plans under Section 3(34) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); and self-directed plans under Section 401(d) of the IRC (so-called Keogh plans or HR-10 plans) are also insured up to a maximum of $250,000 per participant in the aggregate. For certain types of pension accounts with more than one participant, the FDIC insurance limit potentially is determined separately under FDIC rules at 12 C.F.R. § 330 330.14, on a “pass through” basis for each vested participant, allowing more deposit insurance coverage than would be available if the deposit insurance limit were set for the plan as a single owner.
Any accounts or deposits that you may maintain directly with a particular Issuer, or through any other intermediary in the same capacity in which the CDs are maintained, would be aggregated with the CDs and any accrued interest for purposes of the Standard Maximum Deposit Insurance Amount. In the event an Issuer fails, interest-bearing CDs are insured, up to the Standard Maximum Deposit Insurance Amount, for principal and interest accrued to the date the Issuer is closed. Zero-coupon CDs are insured to the extent of the original offering price plus interest at the rate quoted to the depositor on the original offering, accreted to the date of the closing of the Issuer. Interest is determined for insurance purposes in accordance with federal law and regulations. The original offering price of a zero-coupon CD plus accreted interest is hereafter called the “accreted value.”
Under certain circumstances, if you become the owner of CDs or other deposits at an Issuer because another depositor dies, beginning six months after the death of the depositor the FDIC will aggregate those deposits for purposes of the Standard Maximum Deposit Insurance Amount with any other CDs or deposits that you own in the same capacity at the Issuer. Examples of accounts that may be subject to this FDIC policy include joint accounts, “payable on death” accounts, and certain trust accounts. The FDIC provides the six-month grace period to permit you to restructure your deposits to obtain the maximum amount of deposit insurance for which you are eligible.
You are responsible for monitoring the total amount of deposits that you hold with one Issuer to determine the extent of deposit insurance coverage available to you on your deposits, including the CDs. The Company is not responsible for any insured or uninsured portion of the CDs or any other deposits.
AMOUNTS IN EXCESS OF THE STANDARD MAXIMUM DEPOSIT INSURANCE AMOUNT (EACH DEPOSITOR INSURED TO AT LEAST $250,000 BY THE FDIC), INCLUDING ANY ACCRUED INTEREST ON THE CDs, WILL NOT BE COVERED BY FDIC INSURANCE, EXCEPT TO THE EXTENT THAT YOU MAY BE ENTITLED TO ADDITIONAL INSURANCE COVERAGE IN ACCORDANCE WITH LAW AND FDIC RULES AND REGULATIONS. PLEASE CAREFULLY CONSIDER THE DEPOSIT INSURANCE LIMITS BEFORE YOU PURCHASE THE CDs.
If your CDs or other deposits at the Issuer are assumed by another depository institution pursuant to a merger or consolidation, such CDs or deposits will continue to be separately insured from the deposits that you might have established with the acquirer until (a) the maturity date of the CDs or other time deposits that were assumed or (b) with respect to deposits that are not time deposits, the expiration of a six-month period from the date of the acquisition. Thereafter, any assumed deposits will be aggregated with your existing deposits with the acquirer held in the same capacity for purposes of federal deposit insurance. Any deposit opened at the Issuer after the acquisition will be aggregated with deposits established with the acquirer for purposes of federal deposit insurance.
In the event that a CD is purchased in the secondary market at a premium over the par amount (or accreted value in the case of a zero-coupon CD), that premium is not insured. Therefore, if deposit insurance payments become necessary for the Issuer, the CD holder can lose the premium paid for the CD. See the section titled “Secondary Market.”
Questions About FDIC Deposit Insurance Coverage
You may wish to seek advice from your own attorney concerning FDIC insurance coverage of deposits held in more than one capacity. You may also obtain information by visiting the FDIC website at fdic.gov or by contacting the FDIC Office of Consumer Affairs by letter (550 17th Street, NW, Washington, DC 20429), by phone (800-934-3342 or 202-942-3100), or by e-mail (firstname.lastname@example.org).
Payments Under Adverse Circumstances
As with all deposits, if it becomes necessary for federal deposit insurance payments to be made on the CDs, there is no specific time period during which the FDIC must make insurance payments available. Accordingly, you should be prepared for the possibility of an indeterminate delay in obtaining insurance payments.
As explained above, the Standard Maximum Deposit Insurance Amount (each depositor insured to at least $250,000 by the FDIC) applies to the principal and accrued interest on all CDs and other deposit accounts maintained by you at the Issuer in the same capacity. The records maintained by the Issuer and the Company regarding ownership of CDs would be used to establish your eligibility for federal deposit insurance payments.
In addition, you may be required to provide certain documentation to the FDIC and to the Company before insurance payments are released to you. For example, if you hold CDs as trustee for the benefit of trust participants, you may also be required to furnish an affidavit to that effect. You may be required to furnish other affidavits and provide indemnities regarding an insurance payment.
In the event that deposit insurance payments become necessary for your CDs, the FDIC is required to pay the original par amount plus accrued interest (or the accreted value in the case of zero-coupon CDs) to the date of the closing of the relevant Issuer, as prescribed by law, and subject to the $250,000 limitation. No interest or accreted value is earned on deposits from the time an Issuer is closed until insurance payments are received.
As an alternative to a direct deposit insurance payment from the FDIC, the FDIC may transfer the insured deposits of an insolvent institution to a healthy institution. Subject to insurance verification requirements and the limits on deposit insurance coverage, the healthy institution may assume the CDs under the original terms or offer you a choice between paying off the CD and maintaining the deposit at a different rate. The Company will advise you of your options in the event of a deposit transfer.
The Company will not be obligated to you for amounts not covered by deposit insurance, and the Company will not be obligated to make any payments to you in satisfaction of a loss you might incur as a result of (a) a delay in insurance payouts applicable to your CD, (b) your receipt of a decreased interest rate on an investment replacing your CD as a result of the payment of the principal and accrued interest or the accreted value of the CD prior to its scheduled maturity, or (c) payment in cash of the principal and accrued interest or the accreted value of your CD prior to maturity in connection with the liquidation of an Issuer or the assumption of all or a portion of its deposit liabilities. In connection with the latter, the amount of a payment on a CD that had been purchased at a premium in the secondary market is based on the original par amount (or, in the case of a zero-coupon CD, its accreted value) and not on any premium amount. Therefore you can lose up to the full amount of the premium as a result of such a payment. Also, the Company will not be obligated to credit your account with funds in advance of payments received from the FDIC.
Additions or Withdrawals
No additions are permitted to be made to any CD after purchase. When you purchase a CD, you agree with the Issuer to keep your funds on deposit for the term of the CD. Accordingly, except as set forth below, no early withdrawals of interest-bearing CDs will be available. The early-withdrawal provisions, if any, applicable to your CD may be more or less advantageous than the provisions applicable to other deposits available from the Issuer.
In the event of death of the owner of a CD, early withdrawal of the entire CD will generally be permitted without penalty. Withdrawal of a portion of the owner’s interest will not be permitted. Written verification acceptable to the Issuer will generally be required to permit early withdrawal under these circumstances.
Pursuant to the IRC, the beneficiary of a traditional IRA (but not a Roth IRA) must begin making withdrawals from the IRA after age 70½. CDs held in an IRA are not eligible for early withdrawal simply because the beneficiary must begin making mandatory withdrawals from the IRA. IRA beneficiaries should purchase CDs with maturities that correspond to the mandatory withdrawal requirements or look to the secondary market for liquidity. See the section titled “Secondary Market.”
In the event that a customer wishes to make an early withdrawal and such withdrawal is permitted, the Company endeavors to obtain funds for the customer as soon as possible. The Company will not, however, advance funds in connection with early withdrawals and can give no assurances that payment pursuant to early withdrawals will be made by a specified date.
The Company may, though is not obligated to do so, maintain a secondary market in the CDs. The Company cannot provide assurance that you will be able to sell your CD prior to maturity. In addition, a secondary market for the CDs may be discontinued at any time without notice. You may not be able to resell your CD promptly prior to maturity or at a price close to what you paid for it. Therefore you should not rely on any such ability to sell your CD for any benefits, including achieving trading profits, limiting trading or other losses, realizing income prior to maturity, or having access to proceeds prior to maturity.
CDs purchased with a minimum deposit requirement of $100,000 may not be transferred in aggregate principal amounts of less than $100,000, nor may they be transferred if the transfer would result in the CD holder’s holding CDs in aggregate principal amounts of less than $100,000. This shall not preclude the Company from offering such CDs at a discount from their face value.
In the event that a buyer is available at a time you attempt to sell your CD prior to its maturity, the price at which your CD is sold may result in a return to you that may differ from the yield that the CD would have earned had it been held to maturity because the selling price for a CD in such circumstances will likely be based on a number of factors, such as the denomination of the CD, interest rate movements, time remaining until maturity, and other market conditions.
Also, the price you may pay for any CD purchased in the secondary market may include a markup established by the Company. Similarly, the price at which a CD may be sold if a secondary market is available may reflect a markdown retained by the Company. In the event that you choose to sell a CD in the secondary market, you may receive less in the sale proceeds than the original principal (par) amount of the CD and less than you paid for the CD. This will be particularly true if interest rates have risen since the time of the original sale.
In the event that a CD is purchased in the secondary market at a premium over the par amount (or the accreted value in the case of a zero-coupon CD), the premium is not insured. Therefore, if deposit insurance payments become necessary for the Issuer, the owner of a CD purchased in the secondary market can incur a loss up to the amount of the premium paid for the CD. (Also see the section titled “Deposit Insurance.”)
The uninsured premium being paid for an interest-bearing CD can be determined from the price set forth on your trade confirmation. Prices on CDs are expressed in relation to par (100.00). Any amount over 100.00 represents the premium. For example, if your trade confirmation states that the price for a CD purchased in the secondary market is 100.25, there is a premium that will not be insured by the FDIC. A price of 99.75 would not include a premium. The trade confirmation will also inform you if the CD has accrued interest, which will be insured so long as the aggregate par amount of CDs and all other deposits held by you in one capacity at the Issuer plus the accrued interest does not exceed $250,000.
In the case of a zero-coupon CD purchased in the secondary market, the uninsured premium can initially be calculated by subtracting the accreted value from the “gross amount” paid. This uninsured premium does, however, decline over time. The accreted value of a zero-coupon CD, which is based on the original issue yield and price, can be obtained at the time of purchase from the Company.
Under the arrangements established by the Company with the Issuer, the Company will receive a fee from the Issuer in connection with your purchase of a CD. The Company may act as a principal in connection with your purchase or sale of CDs. When acting as a principal, we may add a markup to any purchase and subtract a markdown from any sale. In addition, there may also be a transaction fee based on the size of the trade. This markup or markdown and any transaction fee will be included in the price quoted to you.
Federal Income Tax Consequences
The following is a summary of the principal US federal income tax consequences of the ownership of the CDs. The discussion below does not purport to deal with all the federal income tax consequences applicable to all potential CD holders and does not deal with holders of CDs other than original purchasers. Persons considering the purchase of the CDs should consult their own tax advisors and federal, state, local, and any other income and estate tax laws relevant to their particular situations, as well as any other taxing jurisdictions. The Company will, if applicable, provide you with an annual statement containing certain information relevant to the determination of the amount of interest or discount income with respect to your CDs for which you will be taxed for the preceding year.
As used herein, the term “United States Holder” means a beneficial owner of a CD that is (a) a citizen or resident of the United States; (b) a corporation, partnership, or other entity created or organized in or under the laws of the United States or any political subdivision thereof; (c) an estate the income of which is subject to US federal income taxation regardless of its source; (d) a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and (2) one or more US persons have the authority to control substantial decisions of the trust; or (e) a person otherwise subject to US federal income taxation on a net basis with respect to such holder’s ownership of a CD.
The tax discussions contained in this Disclosure Statement were not intended or written to be used, and cannot be used, for the purpose of avoiding US federal tax penalties. These discussions were written to support the promotion or marketing of the transactions or matters addressed in this Disclosure Statement. You should seek advice from an independent tax advisor based on your circumstances.
UNITED STATES HOLDERS
Zero-coupon CDs will be treated as having been issued with original issue discount (“OID”). You may be required to include OID in income as it accrues, which may be before you receive cash attributable to such income.
Zero-coupon CDs with a maturity of one year or less. In general, an individual or other holder that uses the cash method of accounting is not required to accrue OID on a zero-coupon CD with a maturity of one year or less unless the holder elects to do so. If you do not make such an election, any gain you realize upon the sale, maturity, or other disposition of the zero-coupon CD will be treated as ordinary income to the extent of your share of the OID accrued on such CD, calculated on a straight-line basis (or, if you elect, under a constant yield method based on daily compounding). If you use the accrual method of accounting, you must accrue OID on a straight-line basis unless you elect to accrue the OID under a constant yield method based on daily compounding.
Zero-coupon CDs with a maturity of more than one year. If you hold a zero-coupon CD with a maturity of more than one year, you must include OID on the CD as interest income during each taxable year that you own the CD, regardless of whether you use the cash or accrual method of accounting. You will realize gain or loss on the sale, early withdrawal, maturity, or other disposition of such CD equal to the difference between (a) the amount you receive on the disposition of the CD and (b) the amount you paid to acquire the CD increased by the amount of OID you previously included in income with respect to the CD.
Fixed-Rate Interest-Bearing CDs
Interest paid on a fixed-rate interest-bearing CD is generally taxable to you each year as ordinary income in accordance with your method of accounting. You will realize a gain or loss on the sale, early withdrawal, maturity, or other disposition of such a CD equal to the difference between (a) the amount you receive on the disposition of the CD and (b) the amount you paid to acquire the CD. For this purpose, the amount received does not include any amount attributable to accrued and unpaid interest on the CD, which is treated as interest income. Gain or loss generally will be long-term capital gain or loss if you held the CD for more than one year.
Variable-rate CDs may be treated as issued with OID. Accordingly, you may be required to include OID on a variable-rate CD as interest income during each taxable year that you own the CD, regardless of whether you use the cash or accrual method of accounting and whether the current receipt of cash from the CD equals the OID you include in income for such year. Prospective holders of variable-rate CDs will be provided with a supplemental disclosure statement describing the tax rules that apply to such CDs.
Certain non-corporate holders of the CDs may be subject to backup withholding on payments of principal and interest on, and the proceeds of disposition of, the CDs. Backup withholding will apply only if (a) under certain circumstances, you fail to certify (on an Internal Revenue Service Form W-9 or substantially similar form), under penalty of perjury, that you have furnished a correct Taxpayer Identification Number (“TIN”) and you have not been notified by the Internal Revenue Service that you are subject to backup withholding for failure to report dividend or interest payments; (b) you have been notified by the Internal Revenue Service that you have failed to properly report payments of dividends and interest; (c) you fail to furnish a TIN; or (d) you furnish an incorrect TIN. Any amounts withheld from a payment under the backup withholding rules will be allowed as a credit against your US federal income tax liability and may entitle you to a refund.
NON–UNITED STATES HOLDERS
Interest or discount income, as the case may be, paid on CDs beneficially owned by a non-resident alien or foreign corporation is not subject to any US federal income or withholding tax, provided that this income is not effectively connected with the conduct by such foreign purchaser of a CD of a trade or business within the United States. Such interest or discount income will also be exempt from any US information reporting or backup withholding requirements if the foreign purchaser provides the Company (either directly or indirectly through a financial institution holding a CD as nominee for the foreign purchaser) with a Form W-8BEN (or a substitute statement in a form substantially similar to Form W-8BEN) in which the foreign purchaser states their name, address, and TIN, if any, and certifies, under penalty of perjury, that they are the beneficial owner of the CD and not an individual citizen or resident of the United States or an entity formed in the United States, as the case may be.
Any gain or income realized by a non-resident alien or foreign corporation upon the sale, early withdrawal, maturity, or other disposition of a CD will not be subject to US federal income or withholding tax if (a) such gain or income is not effectively connected with a trade or business of the foreign purchaser in the United States and (b) in the case of a foreign purchaser who is a non-resident alien, the non-resident alien is not present in the United States for 183 days or more in the taxable year of the disposition.