RCA - Summer 2001 - Compliance Focus: Disclosure In "Stretch IRA" Sales Material

The NASD staff has recently observed several situations in which members used communications with the public about individual retirement accounts reflecting current changes to Internal Revenue Service rules. The term "stretch IRA" is used to describe an IRA that is set up to extend the period of tax deferred earnings beyond the lifetime of the individual who created the account. The accounts are typically designed to last over multiple generations.

Communications seen by the Department have described investments such as mutual funds and variable products to fund the account.

Sales presentations for stretch IRAs often include hypothetical illustrations in the form of value tables showing how much the account will be worth over time. The NASD staff has commented to members about illustrations that cover extended periods, such as 90 years. The illustrations also contain other assumptions that are not stated or described clearly to the reader.

To avoid misleading the public about these accounts, members must make sure that they are described accurately and the assumptions used in the illustrations are stated clearly. No material fact or qualification may be omitted if it would cause the communication to be misleading. Following are certain issues that the NASD staff believes members must address in stretch IRA sales presentations:

  • Members must explain clearly that stretch IRAs are designed for investors who will not need the money in the account for their own retirement needs.

  • Members must show the rate and age at which each distribution throughout the illustration periods begin.

  • Hypothetical illustrations must not state or imply that results shown are on behalf of any specific investment product.

  • Illustrations must not use unreasonable rates of return or lengthy time periods that would cause them to be exaggerated, promissory, or misleading.

  • In preparing these illustrations members should consider various factors affecting an investor's decision such as possible changes to tax laws, the impact of inflation, and other risks.