FTC Declines to Make New Rules About Qualified Intermediaries

The Federal Trade Commission has denied a petition by the Federation of Exchange Accommodators (FEA), an industry group, to develop a rule regarding qualified intermediaries (QIs), who are independent third parties that facilitate 1031 exchanges. The FEA had asked the FTC to establish a mandatory registration process and operational standards for qualified intermediaries, who are currently virtually unregulated on the federal level. The FEA asked the FTC to “adopt a regulation that would apply the force of federal law to accepted industry standards and conduct that are intended to protect consumers who engage the services of exchange facilitators,” as it said in the 2007 petition. The organization more specifically asked for the FTC to adopt uniform nationwide rules that would “require persons who want to act as exchange facilitators to register with the FTC; impose standards to safeguard consumer funds entrusted to like-kind exchange facilitators; and establish standards to demonstrate that a person has the appropriate level of competency to act as a facilitator.” The FTC said no in a 5-0 vote among its commissioners. According to the commission, “the FTC recognizes that the potential for misconduct on the part of QIs is a valid concern. The FEA’s petition identified 23 instances in the past 20 years of such misappropriations by QIs.” These incidents, however, are not frequent enough to justify new rulemaking on the part of the FTC, the commission asserted. “Notwithstanding the significant losses that some consumers have sustained, the commission concluded that the proposed rule is not likely to reduce the harm, that the potential costs of the rulemaking and proposed registration process would outweigh the likely benefits of the proposed remedy, and that the overall incidence of the problem practices does not warrant a rulemaking proceeding,” it said in a statement on the matter. The commission added that in the 23 cases of the QI misconduct, criminal investigations or prosecutions resulted most of the time, and victims typically sued for damages. “We’re disappointed by the decision, but we are also going to pursue other avenues to establish regulation of qualified intermediaries,” Mary Foster, president of the FEA, told CPN Net Lease Newsletter. “It’s an important initiative.” Congress itself doesn’t seem interested in the matter, but Foster said that the Internal Revenue Service is considering amending the regulations governing Section 1031 of the Internal Revenue Code to cover qualified intermediaries. Also, a number of states have taken action to regulate them, especially California, whose legislature passed a bill (SB 1007) dealing with the subject recently, which is awaiting Gov. Schwarzenegger’s signature. Among other provisions, the bill requires QIs to either maintain $1 million fidelity bond or deposit that amount in an interest-bearing deposit account with a financial institution, or deposit all exchange funds in an escrow account and provide that any withdrawals from the account require the client’s written authorization. “We expect the governor to sign it, and as a bellwether state, the law will be important in persuading other states to deal with the issue,” said Foster, who added that the matter is also being considered by Colorado and Washington state.