SEC PUBLISHES INVESTOR ALERT ON SELF-DIRECTED IRAs & THE RISKS OF FRAUD.
A self-directed IRA is much like a standard IRA. It’s a retirement account that you contribute funds to, and those funds grow through investments. But a major difference between a standard IRA and a Self-Directed IRA is in the kind of investments you can make. In a standard IRA, you will be investing in publicly traded products like stocks, bonds, and mutual funds. With a Self-Directed IRA, you can choose almost any type of alternative asset. It’s common to use a Self-Directed IRA for real estate, precious metals, cryptocurrency, crowdfunded assets such as loans and private placements.
A self-directed IRA is held and administered by way of a “custodian” that allows investment in a broader set of assets than most IRA custodians permit.
Self-directed IRAs have some risks that differ from those involved with IRAs offered by registered broker-dealers and investment advisers. These risks can be substantial and include a lack of legal and regulatory protection and a heightened risk of fraud, particularly when investing in alternative assets.
Self-directed IRA promoters are individuals or companies that promote and solicit money from investors for self-directed IRA investments. These promoters may not be licensed investment professionals and may not be subject to the same regulatory oversight and investor protection rules that govern the securities industry. These promoters may be affiliated with one or more self-directed IRA custodians (or could be custodians themselves).
Fraudsters may exploit self-directed IRAs because custodians or trustees of these accounts may offer only limited protections and will usually not investigate the assets or the promoter’s background.
Following are some examples of how fraudsters may try to use self-directed IRAs to perpetrate a fraud on unsuspecting investors:
– Fake Custodians
– Fraudsters may still attempt to sell you fraudulent investments through legitimate custodians
– Misrepresentations Regarding Custodial Responsibilities
– Exploitation of Tax-Deferred Account Characteristics
– Complex Tax Rules
In any case, remember that custodians generally do not due financial or investment-related due diligence on the investment going into the self-directed IRA. One should not even rely on the custodian to tell you if the investment going into the self-directed IRA might be fraudulent. The responsibility of due diligence is completely on the investor.
There are ways to help avoid Fraud with Self-Directed IRAs
· Verify information in self-directed IRA account statements.
· Avoid unsolicited investment offers
· Ask questions.
· Be wary of “guaranteed” returns
· Consult a professional
See the U.S. Securities and Exchange Commission’s February 7, 2023-posted “Investor Alert: Self Directed IRAs and the Risks of Fraud” (https://lnkd.in/gZU5ZPME) for more information.