ASSEMBLY, No. 3438

STATE OF NEW JERSEY

214th LEGISLATURE

 

INTRODUCED OCTOBER 25, 2010

 


 

Sponsored by:

Assemblyman  PETER J. BARNES, III

District 18 (Middlesex)

 

 

 

 

SYNOPSIS

     Regulates individuals engaged in the facilitation of like-kind exchanges of property pursuant to Section 1031 of the United States Tax Code.

 

CURRENT VERSION OF TEXT

     As introduced.

  


An Act concerning exchange facilitators and supplementing chapter 10B of Title 46 of the Revised Statutes.

 

     Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

      1.   As used in this act:

      "Client" means a taxpayer that enters into an agreement with an

exchange facilitator for services.

      "Commissioner" means the Commissioner of the Department of Banking and Insurance.

      "Department" means the Department of Banking and Insurance.

      "Exchange facilitator" means a person that does any of the following:

      a.   (1) facilitates, for a fee, an exchange of like-kind property by entering into an agreement with a client by which the exchange facilitator acquires from the client the contractual rights to sell the client's relinquished property located in this State and transfers a replacement property to the client as a qualified intermediary as that term is defined under Section 1.1031(k)-1(g)(4) of title 26, Code of Federal Regulations; or

      (2)  enters into an agreement with a client 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

      (3)  enters into an agreement with a client to act as a qualified trustee or qualified escrow holder as those terms are defined under Section 1.1031(k)-1(g)(3) of title 26, Code of Federal Regulations, except as provided in subsection d. of this section.

     b.    Maintains an office in this State for the purpose of soliciting business as an exchange facilitator.

     c.     Holds himself out as an exchange facilitator by advertising any of the services listed in paragraph (1) of subsection a. of this section or soliciting clients in printed publications, direct mail, television or radio advertisements, telephone calls, facsimile transmissions, or other electronic communications directed to the general public in this State for purposes of providing any of those services.

     d.    The term "Exchange facilitator" does not include any of the following:

     (1)   taxpayer or a disqualified person, as that term is defined under Section 1.1031(k)-1(k) of title 26, Code of Federal Regulations, seeking to qualify for the nonrecognition provisions of Section 1031 of the federal Internal Revenue Code of 1986.

     (2)   A financial institution that is 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 Section 1.1031(k)-1(g)(3) of title 26, Code of Federal Regulations, and that is not facilitating exchanges.

     (3)   A title insurance company, underwritten title company, or escrow company that is acting solely as a qualified escrow holder or qualified trustee, as those terms are defined under Section 1.1031(k)-1(g)(3) of title 26, Code of Federal Regulations, and that is not facilitating exchanges.

     (4)   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.

     (5)   A qualified intermediary, as that term is defined under Section 1.1031(k)-1(g)(4) of title 26, Code of Federal Regulations, who holds exchange funds from the disposition of relinquished property located outside this State.

     (6)   An entity in which an exchange accommodation titleholder, as that term is defined in Internal Revenue Service Revenue Procedure 2000-37, has a 100 percent interest and which is used by the exchange accommodation titleholder to take title to property in this State.

      "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 sections 267(b) or 707(b) of the federal Internal Revenue Code for any services relating to or incidental to the exchange of like-kind property.

      "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.

      "Person" means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust, or any other form of a legal entity, and includes the agents and employees of that person.  For the purposes of this act, a person is "affiliated" with another specified person if the 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.   a.  No person shall, directly or indirectly, engage or attempt to engage in business as an exchange facilitator, or attempt to perform services as an exchange facilitator, or advertise or hold itself out as engaging in or conducting business as an exchange facilitator without first obtaining a registration issued by the department under the provisions of this act.  

      b.   Every exchange facilitator shall annually register with the department.  An application for registration shall be on a form provided by the department and shall be accompanied by a reasonable fee, set by the commissioner in an amount sufficient to defray the department’s expenses incurred in administering and enforcing this act.

      c.   Every exchange facilitator required to register under this act shall file an amended registration within 20 days after any change in the information required to be included thereon.  No fee shall be required for the filing of an amendment.

 

      3.   a.  A person who engages in business as an exchange facilitator in this State 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.  For purposes of this section, "change in control" means any transfer of more than 50 percent of the assets or ownership interests, directly or indirectly, of the exchange facilitator.

      b.   The notification requirement set forth in subsection a. of this section shall be provided to the client within 10 business days of the effective date of the change in control by certified or registered mail, in a sealed envelope with proper postage prepaid and return receipt requested, and shall be posted on the exchange facilitator's website for at least 90 days following the change in control.  The notification shall set forth the name, address, and other contact information of the transferees in a manner to be prescribed by the commissioner.

 

      4.   a.  A person who engages in business as an exchange facilitator shall at all times comply with one or more of the following:

      (1)  Maintain a fidelity bond or bonds in an amount not less than $1,000,000, 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 not less $1,000,000 in an interest-bearing deposit account or a money market account with the financial institution of the person's choice.  Interest 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 Section 1.1031(k)-1(g)(3) of title 26, Code of Federal Regulations, with a financial institution and provide that any withdrawals from that escrow account or trust require that person's and the client's written authorization.

      b.   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.

      c.   If the person engaging in business as an exchange facilitator is listed as a named insured on one or more fidelity bonds that total at least one $1,000,000, the requirements of this section shall be deemed satisfied. 

      d.   An exchange facilitator in possession of one of the types of insurances set forth in section 6 of this act shall file evidence of such insurance with the department.  Cancellation or nonrenewal of such proof shall not be effective unless and until at least 10 days' notice of intention to cancel or nonrenew has been received in writing by the department.

 

      5.   a.  Any person claiming to have sustained damage by reason of the failure of a person engaging in business as an exchange facilitator to comply with this act may file a claim on the bonds, deposits, or letters of credit described in section 4 of this act to recover the damages.

      b.   A client may bring an action in Superior Court against an exchange facilitator for any violation of this act, for treble damages, attorneys’ fees, costs of suit and appropriate equitable relief.

      c.   Any person who commences an action as set forth in subsection b. of this section shall notify the department upon filing a civil action to recover damages.

 

      6.   a.  A person who engages in business as an exchange facilitator shall at all times comply with either of the following:

      (1)  maintain a policy of errors and omissions insurance in an amount not less than $250,000, executed by an insurer authorized to do business in this State; or

      (2)  deposit an amount of cash or securities or irrevocable letters of credit in an amount not less than $250,000 in an interest-bearing deposit account or a money market account with the financial institution of the person's choice.  Interest on that amount shall accrue to the exchange facilitator.

      b.   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.

      c.   If the person engaging in business as an exchange facilitator is listed as a named insured on an errors and omissions policy of at least $250,000, the requirements of this section shall be deemed satisfied.

      d.   Every proof of an errors and omissions policy required to be filed with the department shall provide that cancellation or nonrenewal of the policy shall not be effective unless and until at least 10 days' notice of intention to cancel or nonrenew has been received in writing by the department.

 

      7.   a.  A person who engages in business as an exchange facilitator shall have the responsibility to act as a custodian for all exchange funds, including, but not limited to, money, property, other consideration, or instruments received by the person from, or on behalf of, a client, except funds received as the person's compensation.

      b.   A person who engages in business as an exchange facilitator shall invest those exchange funds in investments that satisfy the investment goals of liquidity and preservation of principal and such other criteria as may be prescribed by the commissioner. 

      c.   In developing the criteria, the commissioner shall consider that a prudent investor standard may be violated if any of the following occurs:

      (1)  Exchange funds are knowingly commingled by the exchange facilitator with the operating accounts of the exchange facilitator.

      (2)  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.  This subparagraph does not apply to the transfer of funds from an exchange facilitator to an exchange accommodation titleholder in accordance with an exchange contract.

      (3)  Exchange funds are invested in a manner that does not provide sufficient liquidity to meet the exchange facilitator's contractual obligations to its clients and does not preserve the principal of the exchange funds.

      d.   Exchange funds shall not be subject to execution or attachment on any claim against the exchange facilitator. 

      e.   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 actually entrusted to the exchange facilitator by that client.

 

      8.   The commissioner may suspend, revoke, or refuse to renew or issue an application for registration if a person engaged in business as an exchange facilitator:

      a.   Makes any material misrepresentations concerning any like-kind exchange transaction that are intended to mislead.

      b.   Pursues a continued or flagrant course of misrepresentation, or makes false statements through advertising or otherwise.

      c.   Fails, 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 person.

      d.   Engages in any conduct constituting fraudulent or dishonest dealings.

      e.   Commits any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or theft; or

      f.    Materially fails to fulfill its 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 person engaging in business as an exchange facilitator.

 

      9.   The Commissioner of Banking and Insurance shall, in accordance with the "Administrative Procedure Act," P.L.1968, c.410 (C.52:14B-1 et seq.), adopt and promulgate such rules and regulations as may be necessary for the implementation of this act.

 

      10. This act shall take effect on the 90th day following the date of enactment.

 

 

STATEMENT

 

      This bill provides for the regulation of exchange facilitators by the Department of Banking and Insurance. 

      An “exchange facilitator” or “qualified intermediary” facilitates an exchange of like-kind property by acquiring from a client the contractual rights to sell the client's property and transferring a replacement property of the same kind.  These “like-kind” exchanges, also known as Section 1031 exchanges, are eligible for favorable capital gains treatment under Section 1031 of the Internal Revenue Code.  Such exchanges are extremely common in real estate, but can also apply to nearly any kind of investment property. 

      The bill requires an exchange facilitator to register with the Department of Banking and Insurance prior to offering services in the State.  The bill requires a person engaging in business as an exchange facilitator to comply with certain bonding and insurance requirements, as specified in the bill, and to notify existing exchange clients whose relinquished or replacement property is located in this State of any change in control of the exchange facilitator.

      The bill requires a person engaging in business as an exchange facilitator to, among other things, act as a custodian for all exchange funds and to invest those funds in investments that meet a prudent investor standard as to be prescribed by the Commissioner of the Department of Banking and Insurance.

      The bill also prohibits these individuals from performing specified acts, including, but not limited to, making material misrepresentations and engaging in conduct constituting fraudulent or dishonest dealings.

      The bill makes any person who violates these provisions subject to civil suit in a court of competent jurisdiction and provides that a person claiming to have sustained damage because of a failure to comply with these provisions may file a claim on specified bonds, deposits, or letters of credit to recover the damages.