In what may become a series within my 1031 Exchange series, Nevada acts! Will others follow? Part 1: A long awaited law to regulate 1031 Exchange Qualified Intermediaries was passed and signed into law by the state of Nevada. SB 476 was passed on June 4 and signed into law on June 14 by Governor Jim Gibbons. The law, designed to regulate Qualified Intermediaries, became effective July 1.
According to Net Release Forum’s Michelle Napoli, “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.”
The new 1031 “Cop” is required to perform a number of functions. The first line of defense to prevent the type of losses that happened in the Ed Okun 1031 Tax Group or McGhan’s Southwest Exchange fiascos is as follows. Let’s take the points, reported by Michelle Napoli, one at a time:
* “The DFI must audit all Qualified Exchange Intermediaries at least once every five years. . . “
Why this (audit) is not once every year or every other year is beyond me. It seems to me that Nevada does not want to spend the money, time, or man power to properly enforce this law.
* “Conduct random “Partial” audits on licensees with a history of violations. . . “
Why would the state even entertain the idea of allowing licensees who have violated the regulations or laws to maintain their license to practice as a Qualified Intermediary? What is a “Partial” audit? And would a “Partial” audit be enough to determine if a QI is getting ready to cheat it’s clients?
* “Money movers would have to pass a background check and they would be required to register with the state. . . purchasers of QI businesses have to pass background checks and be licensed by the state before purchasing the business.”
Registering “money movers” with the state is a good idea. It’s a great idea if the state would then stand behind some type of guarantee. If the state grants a registration, then it (Nevada) should be equally responsible for any losses suffered by victims of 1031 exchange rip offs. In my opinion, it would take a commitment of this depth to ensure the public’s safety and restore consumer confidence.
Another good idea is requiring all purchasers of 1031 businesses to pass background checks as long as the checks are performed with a “fine tooth comb.” In order for the purchaser to take title to the 1031 business he/she/it would have to have a Nevada 1031 Exchange license. In my opinion the best model to emulate would be the tough Nevada Gaming Commission’s stringent rules for attaining Gambling licenses in Nevada.
*”. . . 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 requirements of $1-million fidelity bond coverage and minimum of $250,000 errors and omissions coverage on the surface seems fair and good. Yet there is NO language outlining the actual requirements of payout that victims’ situations would have to meet in order for the insurer to pay off. Simply put the insurance company has the right to pick and choose which deals they choose to pay out to victims. How does this actually work?
Please come back as Part 2 of this Series will describe “the rest” of SB 476 and what California is doing to pass laws regulating the 1031 Exchange industry.
If you have any further questions please contact Dean Guadagni at firstname.lastname@example.org