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Self-Directed IRA Scams Are on the Rise, State Securities Regulators Warn

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What You Need to Know

  • Bad actors are using self-directed IRAs as part of their scams with retirees and seniors.
  • State securities regulators brought 53 enforcement actions in 2020 involving self-directed IRA scams.
  • Digital assets and social media scams are also on the rise.

Self-directed IRA scams targeting seniors and retirees are growing, and state securities regulators are taking their concerns to Washington.

Melanie Lubin, Maryland Securities Commissioner and president of the North American Securities Administrators Association, said Tuesday during the group’s annual meeting, that NASAA “is optimistic that several lawmakers will join NASAA to examine policy solutions around self-directed individual retirement accounts. We know that gaps in the oversight of SD-IRAS increasingly threaten the retirement security of millions of Americans, and we’re working with Congress to address those gaps.”

Joe Borg, Alabama Securities Commissioner, said Tuesday during a panel discussion at NASAA’s annual meeting that “bad actors are using self-directed IRAs as part of their scams” with retirees and senior citizens. Scammers, he said, are incorporating self-directed IRAs into financial schemes.

“When you say the word IRA, it brings in visions of some sort of government oversight,” Borg said. “The problem is, most folks have no clue that a self-directed IRA does not have that same type of protections.”

State securities regulators have opened more than 80 investigations of suspect offerings tied to SDIRAs in each of the past two years, NASAA reported Tuesday.

In 2021, state-securities regulators reported more than twice as many state enforcement actions against promoters using SDIRAs, bringing 53 enforcement actions in 2020 compared to 24 enforcement actions in 2019.

In separate comments to ThinkAdvisor, Lubin said that “as a next step, Congress should use its oversight and investigations tools to gather additional information regarding SDIRAs so that lawmakers and regulators can better understand the scope of the problem and evaluate proposals to strengthen the regulatory framework.”

For instance, Lubin continued, Congress, through the Government Accountability Office, “should gather information from the regulators that collectively work to protect SDIRA owners,”  which includes the Securities and Exchange Commission, federal and state bank regulators, the Internal Revenue Service and state securities administrators.

“Speaking for NASAA, I know we’re eager to participate in a GAO interview and/or provide congressional testimony regarding this issue of importance to investors across the United States,” Lubin said.

Precious metals, for instance, is an example of a type of investment that can be put into a self-directed IRA, as is real estate, Borg said. “But the trust company that is set up as the custodian has no duty to tell you—‘Oh, by the way, the folks you’re dealing with have four or five government orders against them.’”

The bottom line: Individuals who open a self-directed IRA bear “all the risk,” Borg said. “There really is no real oversight. That may change going forward in that NASAA, as a group, is talking to the trust companies … to come up with best practices, and say, ‘Perhaps there is an area here where the trust company should have additional duties’” to the individual.

NASAA,  Borg continued, is in dialogue with the Association of Trust Companies and others in the marketplace to say: “’It’s time you stepped up to the plate and had duties to the customers, not just being an accounting sheet that says, ‘you bought this.’”

Bad actors also are leveraging technology to conduct their schemes, said Joe Rotunda, director of the Enforcement Division at Texas State Securities Board.

When it comes to digital assets and social media scams, state securities regulators reported 125 investigations this year compared to 67 investigations in 2019.