SEC warns investors about self directed Individual Retirement ...

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The SEC?s Office of Investor Education and Advocacy (OIEA) and the North American Securities Administrators Association (NASAA) are warning investors of the potential risks associated with investing through self-directed Individual Retirement Accounts (self-directed IRAs).

For its part, NASAA has noted a recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature.

What?s more, state securities regulators have investigated numerous cases in which a self-directed IRA was used in an attempt to lend credibility to a fraudulent scheme.

Similarly, the SEC has brought numerous cases in which promoters of fraudulent schemes steered investors to self-directed IRAs.

According to the SEC and NASAA, self-directed IRAs can be a safe way to invest retirement funds, but investors should be mindful of potential fraudulent schemes when considering a selfdirected IRA.

For instance, the SEC and NASAA said in an Investor Alert that investors should understand that the custodians and trustees of selfdirected IRAs may have limited duties to investors, and that the custodians and trustees for these accounts will generally not evaluate the quality or legitimacy of an investment and its promoters.

?As with every investment, investors should undertake their own evaluation of the merits of a proposal, and should check with regulators about the background and history of an investment and its promoters before making a decision,? the SEC and NASAA said in their release.

What is a self-directed IRA?

An Individual Retirement Account (IRA) is a form of retirement account that provides investors
with certain tax benefits for retirement savings. Some common examples of IRAs used by investors include the traditional IRA, Roth IRA, Simplified Employee Pension (SEP) IRA, and Savings Incentive Match Plan for Employees (SIMPLE) IRA. All IRA accounts are held for investors by custodians or trustees. These may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as a trustee or custodian.

A self-directed IRA is an IRA held by a trustee or custodian that permits investment in a broader set of assets than is permitted by most IRA custodians. Most IRA custodians are banks and broker-dealers that limit the holdings in IRA accounts to firm-approved stocks, bonds, mutual
funds and CDs. Custodians and trustees for self-directed IRAs, however, may allow investors to invest retirement funds in other types of assets such as real estate, promissory notes, tax lien
certificates, and private-placement securities. While self-directed IRAs may offer investors access
to an array of private investment opportunities that are not available through other IRA providers, investments in these kinds of assets may have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity ? as well as the risk of fraud.

? Source: SEC and NASAA

The risk of fraud

Estimates from various sources approximate that investors? hold 2 %, or $94 billion, of IRA retirement funds in self-directed IRAs.

And, according to the SEC and NASAA, the large amount of money held in selfdirected IRAs makes them attractive targets for fraud promoters. In addition, the regulators said fraud promoters also may target other types of retirement accounts by attempting to lure investors into transferring money from those accounts to new self-directed IRAs in order to participate in the fraud promoter?s scheme.

In particular, the regulators said fraud promoters who want to engage in Ponzi schemes or other fraudulent conduct may exploit self-directed IRAs because they permit investors to hold unregistered securities and the custodians or trustees of these accounts likely have not investigated the securities or the background of the promoter.

The SEC and NASAA said there are a number of ways that fraud promoters may use these weaknesses and misperceptions to perpetrate a fraud on unsuspecting investors. There are, however, ways to avoid fraud with self-directed IRAs.

Ways to avoid fraud with self-directed IRAs

Verify information in self-directed IRA account statements. Alternative investments may be illiquid and difficult to value. As a result, self-directed IRA custodians often list the value of the investment as the original purchase price, the original purchase price plus returns reported by the promoter, or a price provided by the promoter. Investors should be aware that none of these valuations necessarily reflect the price at which the investment could be sold, if at all.

Avoid unsolicited investment offers. Investors should be very careful when they receive an unsolicited investment offer. Whether from a total stranger or from a friend, trusted co-worker, or even family member, investors should ask themselves, ?Why would anyone tell me about a really great investment opportunity??

Investors also should be especially wary of an unsolicited investment offer that promotes the use of a self-directed IRA. As noted above, fraud promoters may attempt to lure investors into transferring money from traditional IRAs and other retirement accounts into new self-directed IRAs in order to participate in the fraud promoter?s scheme.

Ask questions. Always ask if the person offering the investment is licensed and if the investment is registered, then check out the answers with an unbiased source, such as the SEC or your state securities regulator. The SEC has a short publication called ?Ask Questions? that discusses many of the other questions investors should ask of anyone who wants them to make an investment.

Be mindful of ?guaranteed? returns. Every investment carries some degree of risk, and the level of risk typically correlates with the return an investor can expect to receive. Low risk generally means low yields, and high yields typically involve higher risk. Fraud promoters often spend a lot of time trying to convince investors that extremely high returns are ?guaranteed? or ?can?t miss.? Don?t believe it. High returns represent potential rewards for investors who are willing and financially able to take big risks.

Ask a professional. For complex investment opportunities, particularly those which involve the opening or creation of a new account outside a traditional financial institution or well-recognized broker, investors should consider getting a second opinion from a licensed unbiased investment professional or an attorney.

Let Tarkenton Financial of Clearwater help you sort through your retirement needs. We will be their for your children or spouse if something happens to make sure your plans are meet.

Source: http://tarkentonfinancialofclearwater.com/sec-warns-investors-about-self-directed-individual-retirement-accounts-and-the-risk-of-fraud

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