Fraud and failure under the 1031 tax exchange program has been an ongoing theme running through the calamitous last 12 months. There was the fraud perpetuated by Miami businessman Edward Hugh Okun, who was convicted in a $126 million scam run through his now-defunct, Richmond, VA-based businesses, Investment Properties of America and the 1031 Tax Group.

Another major setback for the industry occurred at the end of November 2008, when LandAmerica Financial informed its 1031 exchange customers that it was terminating its operations because a portion of the 1031 funds had been invested in illiquid auction rate securities that it could not access.

Since then, calls for reform have been made from many quarters, ranging from consumer protection agencies to within the industry itself. "Over the last four years $770 million has been jeopardized as a result of LandAmerica and Okun," Michael Halloran, president and CEO of NES Financial/NES Exchange Services, tells GlobeSt.com. "Some reform is obviously in order."

The Act's amendment calls for the director of the Consumer Protection Agency to review federal laws and regulations relating to the protection of investors that use exchange facilitators, then submit recommendations to Congress on possible additional or stronger measures. It also authorizes the CFPA to carry out this program.

The amendment makes no mention of what protections should be established, however. Halloran's wish list? A requirement that the exchanges hold investors' money in a bank--with specific prohibitions against illiquid investment vehicles. Also it should be required that the accounts are segregated so it would be clear to a bankruptcy court that these are investor funds and not the funds of the exchange. Finally, audits for basic financial sufficiency and oversight should be required as well, he says.