RIA Compliance Blog
In an effort to inform investors about common fraudulent activities involving individual retirement accounts (“IRAs”), the North American Securities Administrators Association (“NASAA”) has issued an Advisory on third-party custodians of self-directed IRAs and other qualified plans. The advisory was issued to describe the roles and responsibilities a third-party custodian of a self-directed IRA has and to hopefully dispel some of the common misconceptions investors have about third-party custodians. In particular, NASAA warns investors that IRA custodians’ duties are limited to report information to the IRS, and such custodians do not provide any assurance that the IRA owner’s investments are protected against loss.
When creating an IRA, an investor must find an IRS-approved custodian for the account. Custodians are typically banks or brokerage firms. Once the account is opened, investors can deposit funds into the account and invest in opportunities available through the custodian. With a self-directed IRA, the investor has full control over what the funds in the account are invested in, unlike mutual funds or other types of savings accounts.
However, investors may be convinced by a promoter to move all or some funds from the IRA to a third-party custodian in order to invest in new or different investment opportunities not provided by their current custodian. From there, the third-party custodian will keep track of the IRA and complete any required paperwork which needs to be submitted to the IRS to keep the tax-deferred status of the account. Although the funds are now with the third-party custodian, they do not owe a fiduciary duty to the investor. The third-party custodian does not hold the investment funds or assets or perform research or diligence regarding the investments. Even the account statements provided by third-party custodians are not verified for accuracy, nor is the information provided by the issuer regarding the investment. Its sole obligation is to track and report to the IRS the contributions to and distributions from the account.
Promoters who fraudulently misrepresent their investments will often suggest that a third-party custodian takes steps in order to make sure the investments are safe and protected. That is not the case. The third-party custodian is simply an intermediary between the investor and the issuer of an investment and provides no security or safety. Indeed, every year, many of the investment products offered this way turn out to be illegitimate Ponzi Schemes and other frauds.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules. Please visit our website for more information.