The North American Securities Administrators Association (NASAA), an organization comprised of State securities regulators, recently issued an Investor Alert regarding self-directed IRAs and the third-party custodians who service those accounts. In fact, the term “custodian” may be a misnomer, because generally the third-party custodian does not custody any property, and only reports information to the IRS, or from an issuer to an investor.
According to the Securities and Exchange Commission’s Self-Directed IRAs Investor Alert, close to $100 billion was held in self-directed IRAs, making them possible targets for fraud. According to the SEC, self-directed IRAs are tax-deferred Individual Retirement Accounts that carry a financial penalty for premature withdrawals before the requisite age.
Investors certainly need to be wary of self-directed IRAs holding investments recommended by their financial advisor or registered representative. Increasingly, the attorneys at Malecki Law are seeing self-directed IRAs used as a means to fraudulently take money from investors. While they can be used for legitimate purposes, Malecki Law has seen self-directed IRAs used to funnel money out of legitimate investments into other investments that may be fraudulent.
Investors often believe that because they receive a monthly summary or statement of their investments from a third-party custodian, their investments are “safe” or that the third-party custodian owes them a high duty as a fiduciary. In fact, the opposite may be true: the custodian is not a fiduciary and may not even hold the assets.
As outlined by NASAA in its Investor Alert, third-party custodians:
- Do not research or perform any due diligence regarding recommendations made to investors by brokers or issuers;
- Are passive companies that merely serve as an intermediary between the investor and the issuer of an investment;
- The third-party custodian’s only obligation is to report information to the IRS and from the issuer to the investor; and
- The third-party custodian bills the investor for its record keeping services, but does not hold the investments.
William Beatty, the NASAA President and Washington securities director, was reported by Thinkadvisor.com as saying “Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses.”
Unfortunately, public investors can lose money as a result of recommendations to make investments through self-directed IRAs. As noted by NASAA and the SEC, there is an increased risk in fraudulent conduct through these accounts, and third-party custodians are under no obligation to perform due diligence to ensure investments made through self-directed IRAs are legitimate. If you believe you may have suffered monetary losses as a result of investments held in a self-directed IRA, please contact the attorneys at Malecki Law to determine if you have a claim for damages.