Multiple states have recently passed laws regulating Qualified Intermediaries, and we've now made the text of these bills available for download.
Below is the Federation of Exchange Accommodators statement on the California bill's passage:
CALIFORNIA QI BILL ENACTED INTO LAW
October 2, 2008
The Governor of California signed SB 1007 into law and a copy of the new law is attached. We believe that this represents a victory for the FEA and the QI industry. Many FEA members worked hard to get the law into a form that would accomplish the goal of providing consumer protection to exchangers without unduly burdening the QI industry.
The provisions of the new law will be effective for all exchanges after January 1, 2009. Therefore, you should review the requirements to be sure that your company is in compliance if you do business in California.
What does the law provide? The California law does not provide for registration or licensing, but does provide for insurance and investment standards for exchange facilitators. The major provisions of California bill are as follows:
1. Application. The law applies to all exchange facilitators considered to be "doing business in California". "Doing business" means the relinquished property in the exchange is located in California, or the EAT holds title to property in California. It also applies to someone who maintains an office in California or advertises in California provided the relinquished property is in California.
2. Insurance, Bonding and/or Security Requirements. Exchange facilitators must:
(A) (1) maintain a fidelity bond of at least $1,000,000, OR (2) deposit cash, securities or a letter of credit for at least $1,000,000, OR (3) use a qualified escrow or trust; AND
(B) (1) maintain errors and omissions insurance of at least $250,000, OR (2) deposit cash, securities or a letter of credit letter in that amount.
3. Investment Standards. Exchange facilitators must act as a custodian of the exchange funds and meet the "prudent investor" standard in the investment of funds, and satisfy investment goals of liquidity and preservation of principal. The exchange facilitator cannot comingle exchange funds with operating accounts, or loan or transfer funds to an affiliate (other than to an affiliate financial institution or to an exchange accommodation titleholder pursuant to the exchange contract).
4. Prohibited Acts. Exchange facilitators must not engage in various bad acts, such as material misrepresentations, false advertising, failure to account for moneys or property, failure to return exchange funds to clients, fraud, criminal conduct, etc.
5. Notification of Change of Ownership. Exchange facilitators must notify clients in writing within 10 days after a change in ownership (more than a 50% change).