Watch Out When Recommending Early IRA Withdrawals

October, 2007—The Financial Industry Regulatory Authority (FINRA) is examining sales practices that suggest clients make early withdrawals from IRAs in order to make new investments. Broker/dealer representatives who encourage prospects to withdraw their IRA money prior to age 59 1/2 under Section 72 (t) of the IRS code may attract close FINRA scrutiny, according to published reports.

In the wake of an NASD enforcement action against Citigroup Global Markets earlier this year, FINRA is now attempting to ferret out financial professionals who give misleading advice about early IRA withdrawals or who make misleading statements about potential returns when the proceeds are invested elsewhere.

In the earlier case, FINRA fined Citigroup $3 million in connection with retirement seminars it delivered to employees of BellSouth. Apparently, Citigroup brokers encouraged BellSouth employees, many of whom were unsophisticated investors, to systematically withdraw their pension and 401 (k) savings in order to invest the proceeds with Citigroup. The Citigroup brokers made exaggerated and unwarranted projections of future earnings, according to NASD, without fully explaining the risks involved. Many BellSouth employees apparently gave up secure pensions, believing they could afford to retire early. But they ended up with much smaller retirement nest eggs as a result of working with the Citigroup brokers.

So if you are giving seminars and providing information about early withdrawals, redouble your efforts to remain in compliance. Specifically, make sure you know IRS Section 72 (t) and make sure that your broker-dealer has approved your seminar materials.

What “Red Flags” are affecting your business? The National Ethics Bureau welcomes your input. Send your comments to: hlew@ethicscheck.com