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PROVIDES CONSUMER PROTECTION FOR INVESTORS

On April 13, 2009, the State of Washington joined other western states enacting legislation to regulate 1031 exchange companies (the QI Act). The new law, which takes effect on July 26, 2009, applies to all qualified intermediaries that hold exchange funds for exchange customers who sell relinquished property in Washington, maintain an office in Washington for the purpose of soliciting business, or act as an exchange accommodation titleholder (EAT) if the property held by the EAT is located in Washington (e.g., to facilitate reverse and/or improvement exchanges). The law was also subsequently modified, effective July 28, 2013.

Where applicable, the Act requires an intermediary to maintain a fidelity bond and errors and omissions insurance meeting standards summarized below. The Act also provides a customer with a private civil action for damages that occur as the result of an intermediary’s failure to comply with the Act. Certain specific violations are subject to criminal penalties punishable as a misdemeanor or class B felony. Some specific provisions of the Act are described below:

  • Investment Standards: Exchange funds must be invested in a manner meeting the “prudent investor standard” described in Revised Code of Washington (RCW) Section 11.100.020. The Act specifies that the intermediary is a custodian of the client’s property and funds. Exchange funds are not subject to execution or attachment on any claim against the intermediary.
  • Bonding Requirements: An intermediary must maintain a fidelity bond or bonds in an amount not less than $1 million for the benefit of the client; or, deposit all exchange funds in a qualified escrow account or qualified trust. Errors and omissions insurance must also be maintained. The intermediary must provide evidence to each client that these requirements are satisfied before entering into an exchange agreement.
  • Segregated Accounts: All client funds must be deposited in a separately identified account for the particular client or client’s matter, and the client must receive all the earnings credited to the separately identified account.
  • Change in Ownership: An intermediary must notify all existing exchange clients of any change in control of the intermediary within 10 days of any such change. For this purpose, “change in control” means any transfer of more than 50% of the assets or ownership of the intermediary.
  • Prohibited Acts: The QI must not knowingly, or with criminal negligence, engage in certain acts such as making false, deceptive or misleading material representations or advertising, engage in any unfair or deceptive practice, fail to account for money or property, or fail to return funds to clients, or commit a “covered dishonest act”, such as a crime involving fraud, embezzlement, misappropiation of funds, robbery or other theft of property.
  • The law does not provide for registration or licensing. Visit WA QI Law and the 2013 Amendments to see the full text of this law.

When selecting a Qualified Intermediary, many factors should be taken into consideration. Security of the exchange funds is paramount, but the experience and expertise of the exchange counselors and staff is also critical. We invite you to call us to learn more about The API Advantage™ and Asset Preservation’s commitment to the highest level of security for exchange proceeds and customer satisfaction.

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