RCA - November 1996 - Ask The Analyst - CDs

Q. May I compare a growth mutual fund to a certificate of deposit (CD) in communications with the public? If so, what disclosures must I include?

A: The Rules permit comparisons in communications with the public, provided that you clearly explain the relevant differences between the products and state the purpose of the comparison.

Any comparison between investment securities (including mutual funds, stocks, or bonds) and CDs must disclose, at minimum, that, unlike CDs, which are insured by the FDIC and offer a fixed rate of return, the principal value and investment return of securities will fluctuate with changes in market conditions. Depending on the emphasis given to the comparison, you may need to include this information in the main body of the text rather than a footnote.

Depending on the subjects of the comparison, further material differences between the products may need to be explained. For example, if you compare a stock mutual fund to six-month M. it should be clear that a stock mutual fund is generally considered a long-term investment, whereas a six-month CD is designed for short-term savings needs. Similarly, when comparing a bond mutual fund to a CD, it is important to explain that should interest rates rise, the value of the bond mutual fund will fall, whereas the value of the CD will remain fixed until maturity. Please see Notices to Members 93-87 and 91-74 for more information regarding the offer of mutual funds to replace maturing certificates of deposit.