IRA’s and The Loophole That Breaches Securities Laws

IRA’s and The Loophole That Breaches Securities Laws

Actually, for Wall Street, nothing has changed since the 1970′s.

The IRA was created in the early 1970′s with a so-called “loophole” that not even the latest White House Report on conflicted investment advice described.  The scope of the issue is significant, (one) that this so-called “loophole” has existed to the detriment of every retirement saver for 40 years and (two), because the media has yet to report it and cover its implications and (three), it doesn’t need public comments at the Department of Labor to change it:

Congress should insist the IRS Code be updated today to eliminate this loophole, with $7.1 trillion dollars at stake and subject to this “loophole”.

The “loophole” allows SEC Registered Investment Advisors, under the Investment Advisers Act of 1940, to avoid that Act’s fiduciary requirements.

The significance is many Americans have been paying for investment advice for their IRA for over 40 years, to a SEC registered investment advisor, believing this advisor was paid a quarterly fee to monitor their IRA investments on a regular basis.  When the IRA investor goes to FINRA because they have suffered losses due to a fiduciary breach, under the Investment Advisers Act of 1940,  the FINRA arbitration panel agrees to this Wall Street loop hole, “You may have been paying us a fee for investment advice, but we did not agree that we were providing you investment advice on a regular basis. Check the fine print!”

Brillant loophole, simply brilliant.

Brief History of Investment Adviser Act of 1940

Following the Great Depression, Congress enacted several securities laws to protect investors, including the Investment Advisers Act of 1940, which the SEC describes here, the fiduciary duty of anyone provided advice on investments:

Study on Investment Advisers and Broker-Dealers

“Investment Advisers: An investment adviser is a fiduciary whose duty is to serve the best interests of its clients, including an obligation not to subordinate clients’ interests to its own. Included in the fiduciary standard are the duties of loyalty and care. An adviser that has a material conflict of interest must either eliminate that conflict or fully disclose to its clients all material facts relating to the conflict.”

How Is “Investment Advice” Defined by the SEC and Interpreted by the Courts?

If a regular fee is paid for investment advice, the Advisor providing the “advice” is subject to the fiduciary standard and must place the interests of their client ahead of their own.  To the contrary, a stockbroker can place his employer’s interests first and ensure the product recommended is “suitable” at the time it is sold.

Example:  A retirement investor pays a quarterly fee to an “advisor”, an intermediary, registered with the SEC, an RIA, a “fiduciary” for ongoing advice on what product to buy and hold in their IRA.  This “advisor” also is a broker, like the Charles Schwab, Fidelity or Vanguard model or many “CFP’s” advisors that charge a quarterly fee for “investment advice” for managing your IRA.

The retirement investor is led to believe this advisor is a fiduciary.  They are told that.  The retirement investor believes that since he is paying a quarterly fee, that the advisor is looking at the investments and monitoring them.  That is what the “advice” fee is for.

The “Loop Hole” that Negates the Investment Advisers Act of 1940

IRS Code in IRA’s, written in the early 1970′s, provided an avenue for Wall Street firms to negate the fiduciary standard of the Investment Advisers Act of 1940.

The loophole:  The IRA retirement investor pays a quarterly fee to a SEC Registered Advisor, for selection and monitoring of all the  investments in his IRA.  He believes this SEC Registered Advisor (RIA) is monitoring what he was recommended on an ongoing basis for the quarterly fee.

No, Wall Street added to the IRS Code in 1975, the “loophole”;  “We have to mutually agree that we are providing you investment advice”.  Thus, Wall Street adds to its IRA Client Agreements:

“(Name of Wall Street firm) will make investment recommendations for your Portfolio, you are free to disregard those recommendations….”You acknowledge and understand that this is not a mutual agreement between you and (Wall Street firm) under which (Wall Street firm) provides recommendations on a regular basis, individualized for your IRA or other retirement plan, that serves as a primary basis for the plan’s investment decisions.”

The significance of this breach of securities law, The Investment Advisers Act of 1940

Nothing has changed since the 1970′s, except IRA’s have grown to over $7 trillion dollars and Americans have been schooled through Wall Street advertising, as disclosed in this Public Interest Arbitration Association Report, that they are dealing with fiduciaries that have their best interest before theirs.

The reality is much worse than the Public Interest Arbitration Association Report or President Obama’s report on $17 billion dollars in losses annually due to conflicted advice.  American investors paid Wall Street an “investment advice” fee on a quarterly basis, yet Wall Street had no legal duty to monitor the IRA investments that they recommended, despite the ongoing fee!

The reality is the SEC registered fiduciaries, at Charles Schwab for example, are breaching securities laws, through a “loophole” no American retirement investor is aware of.  The media has not told IRA investors of this loophole, nor has the SEC or FINRA.  Main Street has been duped by Wall Street, for over 40 years, by a very, very clever scheme.

What evidence does one need?  Wall Street will never be a fiduciary.  Is it not unconscionable to set up laws in IRS code to evade existing securities laws?

Wall Street’s chance has come and gone. No more intermediaries.  The retirement investor does have a choice.



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