BILL REQ. #:  H-0106.6 

Prefiled 01/07/09. Read first time 01/12/09.   Referred to Committee on Financial Institutions & Insurance.

     AN ACT Relating to exchange facilitators; and adding a new chapter to Title 19 RCW.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION.  Sec. 1   The legislature finds that there are no statutory requirements for persons who facilitate like-kind exchanges pursuant to section 1031 of the internal revenue code and associated treasury regulations. The purpose of this chapter is to create a statutory framework that provides consumer protections to those who entrust money or property to persons acting as exchange facilitators.

NEW SECTION.  Sec. 2   The definitions in this section apply throughout this chapter unless the context clearly requires otherwise.
     (1) A person or entity "affiliated" with a specific person or entity, means a person or entity who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person or entity specified.
     (2) "Client" means the taxpayer with whom the exchange facilitator enters into an agreement as described in subsection (3)(a)(i) of this section.
     (3)(a) "Exchange facilitator" means a person who:
     (i)(A) Facilitates, for a fee, 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 defined under treasury regulation section 1.1031(k)-1(g)(4); (B) enters into an agreement with a taxpayer to take title to a property in this state as an exchange accommodation titleholder, as defined in internal revenue service revenue procedure 2000-37; or (C) enters into an agreement with a taxpayer to act as a qualified trustee or qualified escrow holder, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3); or
     (ii) Maintains an office in this state for the purpose of soliciting business as an exchange facilitator.
     (b) "Exchange facilitator" does not include:
     (i) A taxpayer or a disqualified person, as 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 of 1986, as amended;
     (ii) A financial institution that is (A) acting as a depository for exchange funds and is not facilitating an exchange or (B) acting solely as a qualified escrow holder or qualified trustee, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), and is not facilitating an exchange;
     (iii) A title insurance company, underwritten title company, or escrow company that is acting solely as a qualified escrow holder or qualified trustee, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), and is not facilitating an exchange;
     (iv) A person that advertises for and teaches seminars or classes, or otherwise makes a presentation, to attorneys, accountants, real estate professionals, tax professionals, or other professionals, when the primary purpose is to teach the professionals about tax-deferred exchanges or to train them to act as exchange facilitators;
     (v) A qualified intermediary, as defined under treasury regulation section 1.1031(k)-1(g)(4), who holds exchange funds from the disposition of relinquished property located outside of this state; or
     (vi) An affiliated entity that is used by the exchange facilitator to facilitate exchanges or to take title to property in this state as an exchange accommodation titleholder.
     (c) For the purposes of this subsection, "fee" means compensation of any nature, direct or indirect, monetary or in kind, that is received by a person or 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.
     (4) "Financial institution" means a 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.
     (5) "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, or any other form of a legal entity, and includes the agents and employees of that person.
     (6) "Prudent investor standard" means the standard for investment as described under RCW 11.100.020.

NEW SECTION.  Sec. 3   (1) Except as provided under subsection (2) of this section, a person who engages in business as 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. Notification must be provided within ten business days of the effective date of the change in control by hand delivery, facsimile, electronic mail, overnight mail, or first-class mail, and must be posted on the exchange facilitator's internet web site for at least ninety days following the change in control. The notification must set forth the name, address, and other contact information of the transferees.
     (2) If an exchange facilitator is a publicly traded company or wholly owned subsidiary of the publicly traded company and remains a publicly traded company or wholly owned subsidiary of the publicly traded company after a change in control, the publicly traded company or wholly owned subsidiary of the publicly traded company is not required to notify its existing clients of the change in control.
     (3) For purposes of this section, "change in control" means any transfer of more than fifty percent of the assets or ownership interests, directly or indirectly, of the exchange facilitator.

NEW SECTION.  Sec. 4   (1) A person who engages in business as an exchange facilitator shall:
     (a) Maintain a fidelity bond or bonds in an amount of not less than one million dollars executed by an insurer authorized to do business in this state; or
     (b) Deposit an amount of cash or securities or irrevocable letters of credit in an amount of not less than one million dollars into an interest-bearing deposit account or a money market account with the financial institution of the exchange facilitator's choice. Interest on that amount accrues to the exchange facilitator; or
     (c) Deposit all exchange funds in a qualified escrow account or qualified trust, as both terms are defined under treasury regulation section 1.1031(k)-1(g)(3), with a financial institution and provide that a withdrawal from that escrow account or trust requires the exchange facilitator's and the client's written authorization.
     (2) A person who engages in business as an exchange facilitator may maintain a bond or bonds or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts under this section.
     (3) The requirements under subsection (1)(a) of this section are satisfied if the person engaging in business as an exchange facilitator is listed as a named insured on one or more fidelity bonds that have an aggregate total of at least one million dollars.

NEW SECTION.  Sec. 5   A person who claims to have sustained damages by reason of the failure of a person engaging in business as an exchange facilitator to comply with this chapter may file a claim on the bonds, deposits, or letters of credit described in section 4 of this act to recover the damages.

NEW SECTION.  Sec. 6   (1) A person who engages in business as an exchange facilitator shall:
     (a) Maintain a policy of errors and omissions insurance in an amount of not less than two hundred fifty thousand dollars executed by an insurer authorized to do business in this state; or
     (b) Deposit an amount of cash or securities or irrevocable letters of credit in an amount of not less than two hundred fifty thousand dollars into an interest-bearing deposit account or a money market account with the financial institution of the exchange facilitator's choice. Interest on that amount accrues to the exchange facilitator.
     (2) A person who engages in business as an exchange facilitator may maintain insurance or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts under this section.
     (3) The requirements under subsection (1)(a) of this section are satisfied if the person engaging in business as an exchange facilitator is listed as a named insured on one or more errors and omissions policies that have an aggregate total of at least two hundred fifty thousand dollars.

NEW SECTION.  Sec. 7   (1) A person who engages in business as an exchange facilitator shall act as a custodian for all exchange funds, including money, property, other consideration, or instruments received by the exchange facilitator from, or on behalf of, the client, except funds received as the exchange facilitator's compensation. The exchange facilitator shall hold the exchange funds in a manner that provides liquidity and preserves principal, and if invested, shall invest those exchange funds in investments that meet a prudent investor standard and satisfy investment goals of liquidity and preservation of principal. For purposes of this section, a prudent investor standard is violated if:
     (a) Exchange funds are knowingly commingled by the exchange facilitator with the operating accounts of the exchange facilitator; or
     (b) Exchange funds are loaned or otherwise transferred to any person or entity, other than a financial institution, that is affiliated with or related to the exchange facilitator, except that this subsection (1)(b) does not apply to the transfer of funds from an exchange facilitator to an exchange accommodation titleholder in accordance with an exchange contract.
     (2) 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 money in any bank, credit union, or other financial institution under a name designating the money as belonging to the client of any exchange facilitator, unless that money belongs to that client and was entrusted to the exchange facilitator by that client.

NEW SECTION.  Sec. 8   A person who engages in business as an exchange facilitator must administer each of his, her, or its places of business under the direct management of an officer or an employee who is either:
     (1) An attorney or certified public accountant admitted to practice in any state or territory of the United States; or
     (2) A certified exchange specialist as certified by the federation of exchange accommodators.

NEW SECTION.  Sec. 9   A person who engages in business as an exchange facilitator shall not:
     (1) Make a material misrepresentation concerning a like-kind exchange transaction that is intended to mislead;
     (2) Pursue a continued course of misrepresentation or make false statements through advertising or any other means;
     (3) Fail, within a reasonable time, to account for any moneys or property belonging to others that may be in the possession of, or under control of, the exchange facilitator;
     (4) Engage in any conduct that constitutes fraudulent or dishonest dealings;
     (5) Commit a crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or theft; or
     (6) Materially fail to fulfill the exchange facilitator's contractual duties to a client to deliver property or funds to the client, unless that failure is due to circumstances beyond the control of the exchange facilitator.

NEW SECTION.  Sec. 10   A person who violates this chapter is subject to civil suit in a court of competent jurisdiction.

NEW SECTION.  Sec. 11   The legislature finds that the practices covered by this chapter are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW. A violation of this chapter is not reasonable in relation to the development and preservation of business and is an unfair or deceptive act in trade or commerce and an unfair method of competition for purposes of applying the consumer protection act, chapter 19.86 RCW.

NEW SECTION.  Sec. 12   Sections 1 through 11 of this act constitute a new chapter in Title 19 RCW.