Recovering Losses caused by Investment Misconduct

Self-Directed IRAs Carry Risk of Fraud, Warns SEC and NASAA

The SEC and the North American Securities Administrators Association (the NASAA) recently issued a joint investor alert warning investors about the risk of fraud in self-directed Individual Retirement Accounts (IRAs).

Investors currently hold approximately $4.7 trillion in IRAs, primarily because of the substantial tax benefits they provide. All IRAs are held for investors by a custodian or trustee, and most IRAs limit investment options to firm-approved stocks, bonds, mutual funds, and CDs. Self-directed IRAs, however, allow for investment in a broader range of assets, such as real estate, promissory notes, and private placement securities. (Approximately $94 billion of the $4.7 trillion in IRAs are held in self-directed IRAs.)

"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," warned the alert.　"Those risks can include a lack of disclosure and liquidity　-- as well as the risk of fraud."

According to the alert, the NASAA has observed a recent increase in fraudulent investment schemes that include a self-directed IRA as a key feature. Securities regulators believe scam artists are using the self-directed IRA feature as a way to lend credibility to the fraud and lure in additional investors.

"While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self-directed IRA," warned the alert. "Investors should understand that the custodians and trustees of self-directed 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 always, the SEC and the NASAA advise investors to thoroughly investigate any investment opportunity before parting with their hard-earned money. For more information, read the full alert here.

 

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