The North American Securities Administrators Association (NASAA) is warning people with self-directed IRAs to be wary of trusting some third-party custodians. The NASAA says some third-party custodians who go beyond their typical duties could actually be fraudsters.
If your third-part custodian is performing any of the following activities, they could be a fraudster. From Dallas News:
Here are important things regulators want you to know about third-party custodians:
A third-party custodian doesn’t research or perform due diligence reviews or recommend investments to clients.
Third-party custodians don’t have a fiduciary duty to clients. It’s a passive company that simply serves as an intermediary between the investor and the issuer of an investment.
A third-party custodian doesn’t verify the accuracy of the information on the investor’s statement, including the value of the investment.
“Fraud promoters often state or suggest that self-directed IRA custodians investigate and validate any investment in a self-directed IRA,” the NASAA said. “Self-directed IRA custodians are responsible only for holding and administering the assets in a self-directed IRA. They generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.”
More on self-directed IRAs and the role of third-party custodians, from a NASAA press release:
Since the mid-1970s, investors have taken advantage of a provision in the tax code allowing them to contribute money on a tax-deferred basis to an individual retirement account, popularly referred to as an IRA.
To open an IRA account, the investor must find an Internal Revenue Service (IRS)-approved company to act as the account’s custodian. Investors open and deposit funds into the account and may invest in opportunities available through the company. A self-directed IRA allows investors to have complete decision-making power regarding the investments in their IRA.
Occasionally, an investor is approached by a promoter offering an investment opportunity not available through the company that holds the investor’s IRA. The promoter may direct the investor to transfer funds from the original IRA to a new third-party custodian to facilitate the transaction. A third-party custodian is a company that keeps track of the IRA and completes the required reporting to the IRS in order to keep the money in a tax-deferred status.
“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,” Beatty said. “The third-party custodian’s sole responsibility is to report information to the IRS and from the issuer to the investor.”
The NASAA encourages people with questions to contact the appropriate regulatory body, a list of which can be found here.
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