SEC Exonerates IRA Custodian

The full SEC dismissed an enforcement case against a self-directed IRA custodian because it had no fiduciary or other obligation to investigate the merits of underlying investments.  The custodian held assets that ultimately turned out to be Ponzi schemes, but the SEC opined that the custodian, which was not registered as an investment adviser or broker-dealer, had no implied duty to conduct due diligence in the absence of actual knowledge of red flags suggesting misconduct.   The SEC cited the custodian’s low per account fees and its client agreements which specifically disclaimed any fiduciary obligation.  The SEC determined that the firm acted as a reasonably prudent passive self-directed IRA custodian, as determined by governing state law.  The SEC dismissed the appeal of the Enforcement Division from a similar finding by the Administrative Law Judge.

OUR TAKE:  The full SEC came to the right decision on the law given the Enforcement Division’s dubious legal theory that could encompass almost any third party actor in any way connected to a fraudulent transaction.  (See https://www.cipperman.com/2015/06/17/sec-takes-action-against-ira-custodian/.)  Unfortunately, it took the respondent more than 2 years to clear its name.  Third party service providers would be better off conducting due diligence and avoiding any SEC entanglements altogether.

https://www.sec.gov/litigation/opinions/2017/33-10420.pdf