Investment Basics - Certificates

Our office occasionally sees relief associations that have invested in investment certificates. It can be difficult to determine whether investment certificates are authorized investments for a relief association because they are very similar to other types of investments and because they are known by various names. 

Investment Certificates

Investment certificates are issued by investment or brokerage firms. Investment certificates are often structured similar to certificates of deposit (CDs) issued by banks, but have some important differences. 

An investment certificate is an investment product and therefore is not insured by the Federal Deposit Insurance Corporation (FDIC). An investor could lose the principal. In contrast, CDs are FDIC-insured because they are issued by banks or savings and loan institutions. 

Investment certificates offer guaranteed interest rates for a predetermined amount of time, and are sold based on the amount of time they will be held until their maturation date. The interest that the investment certificate offers is usually tied to some investment vehicle, like the Standard and Poor’s 500 Index or the current savings account rate. Some investment certificates can be tax deferred, meaning taxes are not paid until the certificate matures. Penalties may be incurred for withdrawing funds before the maturation date.

Investment Authority

Relief associations must invest under either a “limited” list or an “expanded” list of authorized investment securities, depending upon the association’s asset value and whether the association uses the services of an investment advisor or the State Board of Investment. 

Certificates of deposit, issued by banks, are specifically authorized investments on both the limited and expanded list of investments. In contrast, investment certificates are not specifically authorized on either list. Arguably, investment certificates could qualify as “corporate obligations” which are authorized on both lists. To qualify on the expanded list, investment certificates would have to:

  • Be issued or guaranteed by a U.S. or Canadian corporation;
  • Be payable in dollars; and
  • Be rated in one of the top four categories by a nationally recognized rating agency.

To qualify on the limited list, the issuing corporation would have to meet the earnings and debt requirements set forth in the statute, and investment certificates themselves would have to be rated in the top three categories by Moody’s or Standard and Poors.

Information about authorized relief association investments and a summary of the “limited” list and “expanded” list can be found in a Statement of Position on this topic.

Published last in the July 2010 Pension Newsletter