BILL ANALYSIS �
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THIRD READING
Bill No: SB 139
Author: Hill (D)
Amended: As introduced
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 8-0, 4/3/13
AYES: Berryhill, Beall, Calderon, Corbett, Correa, Hill, Hueso,
Roth
NO VOTE RECORDED: Walters
SUBJECT : Exchange facilitators
SOURCE : Author
DIGEST : This bill deletes the January 1, 2014 sunset date on
provisions of state law that regulate persons engaging in
business as exchange facilitators (EFs), as defined, and
continues these provisions indefinitely.
ANALYSIS : Existing law provides for the following, through
December 31, 2013:
1. Defines an EF as a person who (a) facilitates, for a fee, an
exchange of like-kind property, through an agreement with a
taxpayer to sell a taxpayer's property that is being
relinquished in this state; take title to a property in this
state on behalf of a taxpayer as an exchange accommodation
titleholder; or act as a qualified trustee or qualified
escrow holder, as specified; (b) maintains an office in this
state for the purpose of soliciting business as an EF; or (c)
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holds himself/herself/itself out as an EF by advertising
services or soliciting customers through various means.
2. Requires an EF to comply with provisions relating to fidelity
bond(s), deposits, insurance, client notifications, and
exchange funds.
3. Specifies prohibited acts of an EF, including, but not
limited to, engaging in any conduct constituting fraudulent
or dishonest dealings.
4. Provides that the aforementioned provisions may be enforced
via civil suit in a court of competent jurisdiction.
This bill deletes the January 1, 2014 sunset date and continues,
indefinitely, the provisions of state law regulating persons
engaged in business as EFs.
Background
EFs are persons who facilitate tax-deferred transactions known
as Section 1031 exchanges, after the Internal Revenue Code (IRC)
section that prescribes rules governing these transactions.
Under IRC Section 1031, no gain or loss is recognized for tax
purposes when property held for productive use in a trade or
business, or for investment, is exchanged for like-kind property
that will be held for productive use in a trade or business, or
for investment. Section 1031 allows a taxpayer who wishes to
dispose of an investment or business property to exchange it for
like-kind property, and defer the tax liability into the future.
An EF is an independent third party, not related to the
taxpayer, who, for a fee, manages the mechanics of a Section
1031 exchange, in accordance with IRC Section 1031 and
interpretive regulations issued by the Internal Revenue Service
(IRS). EFs take temporary custody of money and/or property,
during the period of time between a property owner's disposal of
one property and acquisition of new property, or, in a so-called
"reverse exchange", during the period of time between a property
owner's acquisition of new property and his/her disposal of old
property. Because IRC rules generally allow 180 days in which
to complete an exchange, an EF can have custody of several
million to several tens of millions of dollars of money and/or
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property at any given time.
Neither the IRS nor the United States Department of the Treasury
has published any minimum qualifications that must be met by an
EF, in order to act in that capacity, nor has either entity
published any rules regarding the ways in which an EF may use
the monies or properties entrusted to them for safekeeping.
Beginning in 2007, the Federation of Exchange Accommodators
(FEA; the trade association representing EFs) petitioned the
federal government to enact rules of that sort. However, the
FEA's attempts to secure federal legislation and regulations in
this area have been rebuffed (initially by the Federal Trade
Commission and the IRS, and more recently by the Consumer
Financial Protection Bureau).
Following several high-profile cases in which EFs
misappropriated their clients' funds, and in response to the
lack of any state or federal rules governing acceptable and
prohibited behavior by EFs, California enacted SB 1007 (Machado,
Chapter 708, Statutes of 2008), which established a set of
allowable, required, and prohibited behaviors by persons meeting
the definition of an EF.
Comments
According to the author, "SB 1007 provides a clear set of
guidelines for those who wish to reputably and ethically engage
in the field of exchange facilitation in California. While no
law can prevent wrongdoing by people who are intent on violating
the law, there is great value in establishing deterrents for
those violations, and in establishing minimum statutory
standards for responsible behavior in the exchange facilitation
field. Retaining California's law on our books is critical, as
California's housing market continues to recover, and Section
1031 exchanges regain the popularity they held before the
economic downturn."
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 4/11/13)
Escrow Institute of California
Federation of Exchange Accommodators
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ARGUMENTS IN SUPPORT : The FEA supported SB 1007, and supports
the extension of SB 1007's consumer protections indefinitely.
SB 139 will continue prudent funds management and other good
business standards for the Section 1031 exchange accommodation
industry, and will provide significant consumer protections for
the clients of FEA members.
The Escrow Institute of California believes that eliminating the
sunset date added by SB 1007 is an important consumer
protection. "From our vantage point and perspective the modest
requirements contained in the Machado legislation have been
effective in protecting consumer's exchange trust funds."
MW:k 4/11/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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