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REFERENCE TITLE: exchange facilitators regulation |
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State of Arizona Senate Forty-ninth Legislature Second Regular Session 2010
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SB 1333 |
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Introduced by Senator Verschoor
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AN ACT
amending title 6, Arizona Revised Statutes, by adding chapter 16; relating to exchange facilitators.
(TEXT OF BILL BEGINS ON NEXT PAGE)
Be it enacted by the Legislature of the State of Arizona:
Section 1. Title 6, Arizona Revised Statutes, is amended by adding chapter 16, to read:
CHAPTER 16
EXCHANGE FACILITATORS
ARTICLE 1. GENERAL PROVISIONS
6-1601. Definitions
In this chapter, unless the context otherwise requires:
1. "Affiliated with" means that a person directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the other specified person.
2. "Client" means the taxpayer with whom the exchange facilitator enters into an agreement described in paragraph 4, subdivision (a), item (i).
3. "Commingle" means to mix together exchange funds, as described in section 6-1606, with operating and other nonexchange funds belonging to or under control of the exchange facilitator in such a manner that a client's exchange funds cannot be distinguished from operating or other nonexchange funds belonging to or under control of the exchange facilitator.
4. "Exchange facilitator":
(a) Means a person that does any of the following:
(i) For a fee, facilitates an exchange of like-kind property by entering into an agreement with a taxpayer by which the exchange facilitator acquires from the taxpayer the contractual rights to sell the taxpayer's relinquished property located in this state and transfer a replacement property to the taxpayer as a qualified intermediary as that term is defined under treasury regulation section 1.1031(k)-1(g)(4), enters into an agreement with a taxpayer to take title to a property in this state as an exchange accommodation titleholder as that term is defined in internal revenue service revenue procedure 2000-37 or enters into an agreement with a taxpayer to act as a qualified trustee or qualified escrow holder as those terms are defined under treasury regulation section 1.1031(k)-1(g)(3), except as otherwise provided in subdivision (b).
(ii) Maintains an office in this state for the purpose of soliciting business as an exchange facilitator.
(b) Does not include:
(i) The taxpayer or disqualified person as that term is defined under treasury regulation section 1.1031(k)-1(k) seeking to qualify for the nonrecognition provisions of section 1031 of the internal revenue code.
(ii) Any financial institution, title insurance company, underwritten title company or escrow company that is merely acting as a depository for exchange funds or that is acting solely as a qualified escrow holder or qualified trustee as those terms are defined under treasury regulation section 1.1031(k)-1(g)(3), and that is not otherwise facilitating exchanges.
(iii) A person that advertises for and teaches seminars or classes, or otherwise gives presentations to attorneys, accountants, real estate professionals, tax professionals or other professionals in which the primary purpose is to teach the professionals about tax deferred exchanges or train them to act as exchange facilitators.
(iv) A qualified intermediary as that term is defined under treasury regulation section 1.1031(k)-1(g)(4) that holds exchange funds from the disposition of relinquished property located outside of this state.
(v) An entity that is wholly owned by an exchange facilitator or by the same person as the exchange facilitator and that is used by the entity to facilitate exchanges or to take title to property in this state as an exchange accommodation titleholder.
5. "Fee" means compensation of any nature, direct or indirect, monetary or in-kind, that is received by a person or a related person as defined in section 267(b) or 707(b) of the internal revenue code for any services relating to or incidental to the exchange of like-kind property under section 1031 of the internal revenue code.
6. "Financial institution" means any bank, credit union, savings and loan association, savings bank or trust company chartered under the laws of this state or the United States whose accounts are insured by the full faith and credit of the United States, the federal deposit insurance corporation, the national credit union share insurance fund or other similar or successor programs.
7. "Person" means a natural person, cooperative association, limited liability company, firm, partnership, corporation or other legal entity and includes the agents and employees of any such person.
8. "Pool" means to aggregate exchange funds of multiple clients for investment purposes to achieve common investment goals and efficiencies. Exchange funds that have been pooled, though aggregated into common investments, must be readily identifiable as to each client for whom they are held through an accounting or subaccounting system.
9. "Prudent investor standard" means the prudent investor rule as defined by the uniform prudent investor act or as otherwise defined by the laws of this state.
10. "Publicly traded company" means a corporation whose securities are publicly traded on the New York stock exchange, the American stock exchange or the national association of securities dealers automated quotations, and the subsidiaries of the publicly traded company.
6-1602. Client notification; change in control; definition
A. Except as otherwise provided in this subsection, an exchange facilitator shall notify all existing exchange clients whose relinquished property is located in this state, or whose replacement property held under a qualified exchange accommodation agreement is located in this state, of any change in control of the exchange facilitator. The notification shall be made to the exchange facilitator's clients within ten business days after the effective date of the change in control either by fax or e-mail transmission or by first class mail and by posting the notice of change of control on the exchange facilitator's website for a period of at least ninety days after the change in control. The notification shall set forth the name, address and other contact information of the transferees. If the exchange facilitator is a publicly traded company and remains a publicly traded company after a change in control, the publicly traded company is not required to notify its existing clients of the change in control.
B. For the purposes of this section, "change in control" means any transfer within twelve months of more than fifty per cent of the assets or ownership interest, directly or indirectly, of the exchange facilitator.
6-1603. Fidelity bonds; deposits or letters of credit; qualified escrows; qualified trusts
An exchange facilitator at all times shall do one of the following:
1. Maintain a fidelity bond or bonds in an amount of at least one million dollars executed by an insurer authorized to do business in this state.
2. Deposit an amount of cash or securities or irrevocable letters of credit in an amount of at least one million dollars in an interest-bearing deposit account or in a money market account with a financial institution of the exchange facilitator's choice. The interest earned on that amount shall accrue to the exchange facilitator.
3. Deposit all exchange funds in a qualified escrow account or qualified trust as those terms are defined under treasury regulation section 1.1031(k)-1(g)(3) with a financial institution and provide that any withdrawals from that escrow account or qualified trust require the client's and the exchange facilitator's written authorization.
6-1604. Action on bonds, deposits or letters of credit
Any person claiming to have sustained damage by reason of the failure of the exchange facilitator to comply with this chapter may file a claim against the exchange facilitator on the bonds, deposits or letters of credit to recover the damages incurred.
6-1605. Errors and omissions insurance; deposits or letters of credit
An exchange facilitator at all times shall either:
1. Maintain a policy of errors and omissions insurance in an amount of at least two hundred fifty thousand dollars executed by an insurer authorized to do business in this state.
2. Deposit an amount of cash or securities or provide irrevocable letters of credit in an amount of at least two hundred fifty thousand dollars.
6-1606. Accounting for monies and property
A. Every exchange facilitator shall hold all exchange funds, being monies, property, other consideration or instruments received by the exchange facilitator from or on behalf of the client, except monies received as the exchange facilitator's compensation, in a manner that provides liquidity and preserves principal. Every exchange facilitator that invests exchange funds shall invest exchange funds in investments that meet the prudent investor standard and that satisfy investment goals of liquidity and preservation of principal. Exchange funds may be pooled with exchange funds of other clients to achieve common investment goals and efficiencies. The following are violations of the prudent investor standard:
1. The exchange facilitator knowingly commingling exchange funds with the operating accounts of the exchange facilitator.
2. Loaning or otherwise transferring exchange funds to any person or entity affiliated with or related to the exchange facilitator, except that this paragraph does not apply to a transfer or loan made to a financial institution that is the parent of or related to the exchange facilitator or to a transfer from an exchange facilitator to an exchange accommodation titleholder as required under the exchange contract.
B. Exchange funds are not subject to execution or attachment on any claim against the exchange facilitator. An exchange facilitator shall not knowingly keep or cause to be kept any monies in any financial institution under any name designating the money as belonging to a client of the exchange facilitator unless the money equitably belongs to the client and was actually entrusted to the exchange facilitator by the client.
6-1607. Prohibited acts
A person that engages in business as an exchange facilitator shall not do any of the following:
1. Make any material misrepresentations concerning any like-kind exchange transaction that are intended to mislead.
2. Pursue a continued or flagrant course of misrepresentation or make false statements through advertising or otherwise.
3. Fail, within a reasonable time, to account for any monies or property belonging to others that may be in the possession or under the control of the exchange facilitator.
4. Engage in any conduct constituting fraudulent or dishonest dealings.
5. Commit any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery or theft of property. Commission of such a crime by an officer, director or employee of an exchange facilitator is not a violation of this paragraph if the employment or appointment of the officer, director or employee has been terminated and no clients of the exchange facilitator were harmed or full restitution has been made to all harmed clients.
6. Materially fail to fulfill its contractual duties to a client to deliver property or monies to the client unless the failure is due to circumstances beyond the control of the exchange facilitator.
6-1608. Violation
A person that violates this chapter is subject to civil suit in a court of competent jurisdiction.
Sec. 2. Legislative intent
The legislature finds that there are no statutory requirements for the monitoring and regulation of persons or entities that facilitate like-kind exchanges pursuant to section 1031 of the Internal Revenue Code of 1986, as amended, and the treasury regulations promulgated thereunder. The purpose of this act is to create a law that provides consumer protection and imposes safeguards ensuring that persons or entities acting as qualified escrows, qualified trusts, qualified intermediaries and exchange accommodation titleholders as defined under treasury regulations section 1.1031(k)-1(g)(3) and (g)(4) and internal revenue service revenue procedure 2000-37 respectively are required to comply with certain standards and practices and are prohibited from performing certain acts while they are acting as exchange facilitators in section 1031 internal revenue code exchanges in this state. This act provides legal recourse if the exchange facilitator fails to fulfill its material contractual obligations to deliver property or monies to a client or misappropriates a client's monies.