SEC Reins In Administrator of Self-Directed IRAs

The Securities and Exchange Commission has lowered the boom on an independent pension plan administrator that was allegedly operating as an unregistered broker-dealer.

The SEC issued a cease-and-desist order this month against Transcorp Pension Services, administrator for $700 million of assets in about 30,000 self-directed individual retirement accounts and qualified plans.

At issue, the SEC said, was whether Irvine, Calif.-based Transcorp had gone beyond just bookkeeping and gained too much leeway with customers' assets without adequate supervision.

"Legally, they could write checks without any oversight," said Lisa A. Gok, assistant director in the SEC's Los Angeles office. "The ability with one stroke of the pen or one phone call to transfer money to the Caymans is there."

The company agreed to abide by the June 4 order without admitting wrongdoing.

The SEC's enforcement action shines a bright light on third-party pension administrators - independent companies that banks rely on to keep the books for billions of dollars in self-directed individual retirement accounts.

The accounts, typically set up through a stockbroker, allow individuals to make their own investment choices while relying on a bank-custodian to execute their instructions. Assets in self-directed IRAs amounted to $415 billion at the end of 1995, according to an estimate by the Investment Company Institute.

Unlike 410(k) administrators, which are scrutinized by the Department of Labor, companies specializing in self-directed IRAs are subject to little specialized oversight.

But the action against Transcorp suggests that closer inspection is on its way. It also highlights the need for bankers to look more closely at the companies to which they outsource.

"People, possibly without much capital, are in charge of millions of dollars in assets - including cash - with no one looking at them,"said Jack E. Sweeney, chairman of First Regional Bank.

Los Angeles-based First Regional, with $135 million in assets, relied on Transcorp to handle accounting and administrative chores for its retirement accounts.

Ms. Gok emphasized that there was no allegation of fraud or diversion of assets in the Transcorp case, but the lack of oversight created an opportunity for that to occur, she said.

For instance, Transcorp in 1994 held $16 million of assets in its own offices and had easy access to cash held in a master custodial account, the SEC said in its order.

By effectively gaining control over customer assets from First Regional, Transcorp crossed the line from bookkeeper to broker-dealer, the SEC said.

Transcorp must now register as a broker-dealer, become part of a bank or trust company that would be exempt from securities regulation, or get out of the business of bookkeeping for retirement plans.

The company will decide what action to take by July 7, said David J. Bevins, senior vice president for operations at Transcorp.

The SEC's "main concern is that someone watch administrators," Mr. Bevins said. "You can get to funds and a client would never know."

Ms. Gok also criticized the specifics of First Regional Bank's contract with Transcorp. The bank had "delegated almost all duties to Transcorp," she said. "It was almost a sham agreement."

But First Regional's Mr. Sweeney said the arrangement is far from unusual.

"What's going on here is what's going on with every pension fund administrator," he said. "They weren't doing anything wrong. We do audits and they're performing their work."

Several industry executives criticized the SEC for making regulatory policy by enforcement without explaining what's needed to comply. They had hoped the SEC would issue guidelines or regulations instead.

"What's confusing about this entire issue is that the SEC has failed to define lines for people in the pension industry," said Ronald Thon, chairman of Bankers Pension Services, a pension administrator based in Tustin, Calif. "We're all sitting here saying what did they do wrong? What makes someone a broker-dealer?"

In 1994, the SEC found that another administrator, First Pension Corp., also of Irvine, had defrauded clients of $128 million. And last year, the SEC sued Qualified Pension Inc., Glendale, Calif., for diverting more than $4 million in customer funds.

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