Quote:
Originally Posted by Brook2
When I buy a brokered CD from Vanguard, my understanding is that a bank sold Vanguard a bunch of their CDs as a package, and VG is distributing them out for us to buy.
But once VG sells us an individual CD from a bank, why isn’t our primary relationship with the bank, and not Vanguard ?
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Vanguard has a decent explanation on their website:
https://personal.vanguard.com/us/con...tOVContent.jsp
The brokered CDs are created specifically for the brokerages and have different rules than the ones sold directly to the public by the bank. One difference seems to be that your interest payments go into your cash sweep account and do not increase your interest-earning balance in the CD. This alone makes the product a "captive" product of the brokerage.
The FDIC apparently has decided to cover brokered CDs on similar terms to other CDs, so as far as I can tell it is still up to you to make sure all your balances at any given bank (including your brokered CDs as well as your regular CDs, savings accounts, etc.) don't exceed the FDIC limits.
The SIPC considers brokered CDs to be "securities" so they are subject to the $500k limit rather than the $250k limit that applies to cash.
It makes sense that brokered CDs would be covered by both FDIC and SIPC because they come with risks associated with both the issuing bank and the managing/operating brokerage firm. If your money goes poof because the bank fails, then FDIC steps in. If your money goes poof because Vanguard fails (or absconds with your money), then SIPC has to step in.