Directing the Custodian to Make the Investment

You can usually get all the forms and instructions you need from a SDRA custodian’s website. Then it’s a matter of filling the forms out correctly and providing any other required documentation.

The Custodian’s Compliance Review

It’s important to understand the language of custodian investment instructions. Custodians don’t “approve” investments. They “accept” them. “Approval” of an investment carries with it the connotation that they have evaluated the investment and agree that it’s a good or suitable investment. SDRA custodians don’t do that.

Instead, SDRA custodians review your instructions for compliance purposes. Does the transaction look like a prohibited transaction? If it’s a real estate transaction, will they be holding good title? Is the mortgage to secure a promissory note correctly prepared and filed?

The Role of Bank Regulators

Why? In general, custodians are banks, and subject to state or Federal banking regulators. The regulators examine their files periodically to determine whether they are complying with applicable laws, rules and regulations. If the examiners find that the documentation for a supposedly secured promissory note is inadequate, of if the transaction looks like a prohibited transactions, the custodian could be forced to take actions to correct the deficiencies, divest themselves of the account, or reduce the value of their accounts because of the likelihood of default or account disqualification and be required to come up with additional capital to cover the anticipated losses and stay solvent.

Investment Prudence Is Up To You

Remember, SDRA custodians are not fiduciaries on your account like the trustees of a retirement plan at work, or like registered investment advisors. You agree to that when you open your account. As a result, they don’t evaluate whether what you are instructing them to buy is a prudent investment, or suitable for you. Also, for an IRA, there is no requirement that you invest the funds prudently anyway. After all, if you decide to invest your IRA in something and lose the entire amount of your investment, who’s going to sue you for negligence?

So, as you might imagine, SDRA custodians review your instructions in general for “compliance” purposes, not to determine whether the investment is prudent or suitable for you. Your SDRA custodian will never object to the investment you are instructing them to make on the basis that they think it is a bad investment. That’s up to you.