Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

Carson City, NV—A law regulating 1031 exchange qualified intermediaries was passed and signed into law in Nevada and another has been proposed in California.

In Nevada, SB476 was passed by the State Senate on June 4 and signed into law by Gov. Jim Gibbons on June 14. The law, requiring greater regulation of exchange facilitators, became effective July 1. It transfers the regulation of licensing authority affecting QIs from one division of the Nevada Dept. of Business & Industry to another. Rather than the Real Estate Division, QIs are now regulated by the Division of Financial Institutions. The DFI commissioner is empowered to investigate exchange facilitators operating in the state and to fine and/or suspend their licenses for violations.

Among the provisions of the new Nevada bill: the Division of Financial Institutions is required to conduct an audit of all exchange facilitators at least every five years, as well as conduct random partial audits of any licensee who has a history of violations; owners, officers and any "money movers" have to pass background checks and are required to register with the state, and purchasers of qualified intermediary businesses have to pass background checks and be licensed by the state before purchasing the business. QIs are required to maintain a minimum $1-million fidelity bond coverage and a minimum $250,000 errors and omissions coverage. Certain exceptions are made for QIs that are owned by public companies and/or other regulated entities such as banks.

The Nevada law specifically terms a licensed exchange facilitator "a fiduciary of all money, property, other considerations and instruments received by the licensee from the client," and specifies that "money held in any account for a client may not be withdrawn from the account without the written approval of the licensee and the client." The law further specifies that "all exchange funds must be kept separate from money belonging to the licensee and must be deposited in a financial institution that is federally insured or insured by a private insurer approved" under the law, "unless another financial institution has been designated in writing in the exchange agreement."

Meanwhile, in California, SB1007 was introduced earlier this year and amended in late May, though it has since been referred to the Senate Banking, Finance and Insurance Committee for further consideration. Among its provisions, the amended proposal calls for licensing of QIs and for licensees to maintain a minimum $1-million fidelity bond and a minimum $250,000 errors and omissions insurance policy. Like the Nevada law, it terms an exchange facilitator licensee "a fiduciary with respect to all money, property and instruments received from a client." The proposal would require the Commissioner of Corporations to examine the books and accounts of a licensee at least every three years, and would authorize the commissioner to revoke or suspend a QIs license for violations.

Current California law that requires the licensing and regulation of financial institutions does not specifically regulate or license exchange accommodators. The California bill is likely to be the subject of hearings in the fall, says Tim Egan, a Sacramento-based policy specialist who is currently following the issue on behalf of the Escrow Institute of California and has previously worked as a policy and legislative advisor for the Federation of Exchange Accommodators.

Egan notes that like the Nevada law, the California proposal was prompted by a small number of headline-grabbing QI debacles this year, which were previously covered in NET LEASE forum. "There is a very serious focus on what has happened, especially from the Senate," he says of the California proposal. Egan adds that he would not be surprised if other states follow suit: "It will set the footprint for future legislation within other states."

Internal Revenue Service rules concerning 1031 exchanges do not require background checks, insurance or any similar regulation of qualified intermediaries. Even before adopting its new law, Nevada was the only state that practiced any kind of oversight, though its prior requirements were limited to QI businesses maintaining a $50,000 surety bond.

Instant Insights /

QI Laws Passed in NV, Proposed in CA

Related Stories

Recommended For You