Bill Text: CT HB05415 | 2012 | General Assembly | Comm Sub
Bill Title: An Act Providing Consumer Protection To Clients Of Exchange Facilitators For Tax Deferred Exchanges.
Spectrum: Bipartisan Bill
Status: (Engrossed - Dead) 2012-05-05 - Senate Calendar Number 511 [HB05415 Detail]
Download: Connecticut-2012-HB05415-Comm_Sub.html
General Assembly |
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February Session, 2012 |
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AN ACT PROVIDING CONSUMER PROTECTION TO CLIENTS OF EXCHANGE FACILITATORS FOR TAX DEFERRED EXCHANGES.
Be it enacted by the Senate and House of Representatives in General Assembly convened:
Section 1. (NEW) (Effective October 1, 2012) As used in this section and sections 2 to 7, inclusive, of this act:
(1) "Affiliated with" means that a person, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with another specified person;
(2) "Client" means a taxpayer with whom an exchange facilitator enters into an agreement, as described in subparagraph (B) of subdivision (3) of this section;
(3) "Exchange facilitator" means a person who: (A) Maintains an office in this state for the purpose of soliciting business facilitating the exchange of like-kind property, as described in subparagraph (B) of this subdivision; or (B) for a fee (i) facilitates an exchange of like-kind property by entering into an agreement with a client pursuant to which the exchange facilitator acquires from such client the contractual rights to sell such client's relinquished property located in this state and transfer a replacement property to such client as a qualified intermediary, within the meaning of 26 CFR 1.1031(k)-1(g)(4), (ii) enters into an agreement with a client to take title to a property in this state as an exchange accommodation titleholder, as defined in Internal Revenue Service Procedure 2000-37, or (iii) enters into an agreement with a client to act as a qualified trustee or qualified escrow holder, as such terms are defined in 26 CFR 1.1031(k)-1(g)(3); but shall not include:
(I) Any financial institution, as defined in subdivision (6) of this section, that is acting solely as a depository for exchange funds or solely as a qualified escrow holder or qualified trustee, as such terms are defined in 26 CFR 1.1031(k)-1(g)(3), and is not otherwise facilitating exchanges in accordance with subparagraph (B) of subdivision (3) of this section;
(II) An individual or entity that is teaching seminars or classes or giving other presentations to attorneys, accountants, real estate professionals, tax professionals or other professionals where the primary purpose is to teach about tax deferred exchanges or to train such professionals to act as exchange facilitators, or any individual or entity advertising for such seminars, classes or other presentations; or
(III) An entity that is wholly owned by an exchange facilitator or by a person acting as the exchange facilitator and used by such exchange facilitator or person to facilitate exchanges or take title to property in this state as an exchange accommodation titleholder;
(4) "Exchange funds" means the funds received by an exchange facilitator from or on behalf of a client for the purpose of facilitating an exchange of like-kind property;
(5) "Fee" means compensation of any nature, direct or indirect, monetary or in-kind, that is received by a person or related person, as defined in Section 267(b) or Section 707(b) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as amended from time to time, for any services relating or incidental to the exchange of like-kind property under Section 1031 of said Internal Revenue Code;
(6) "Financial institution" means any bank, federal credit union, Connecticut credit union, savings and loan holding company, savings and loan association, savings bank, trust company or trust bank, as such terms are defined in section 36a-2 of the general statutes, chartered under the laws of this state or the United States whose accounts are insured by the full faith and credit of the United States of America, the Federal Deposit Insurance Corporation, the National Credit Union Share Insurance Fund or other similar or successor programs;
(7) "Person" means a natural person, cooperative association, limited liability company, firm, partnership, corporation or other legal entity, and includes any agent or employee of any such person;
(8) "Pool" means to (A) aggregate exchange funds of multiple taxpayers for investment purposes to achieve common investment goals and efficiencies, and (B) ensure that such exchange funds are readily identifiable as to each taxpayer for whom they are held, through an accounting or subaccounting system;
(9) "Prudent investor standard" means the prudent investor rule, as set forth by the Connecticut Uniform Prudent Investor Act, or as otherwise defined by part VII of chapter 802c of the general statutes; and
(10) "Publicly traded company" means a corporation whose securities are publicly traded on the New York Stock Exchange, the American Stock Exchange, or the national market system of the National Association of Securities Dealers Automated Quotation System established pursuant to the Securities Exchange Act of 1934, and the subsidiaries of any such corporation.
Sec. 2. (NEW) (Effective October 1, 2012) An exchange facilitator shall notify each client, whose relinquished property, as defined in 26 CFR 1.1031(k)-1(a), is located in this state or whose replacement property, as defined in 26 CFR 1.1031(k)-1(a), held under a qualified exchange accommodation agreement is located in this state, of any change in control of the exchange facilitator. The exchange facilitator shall notify each such client not later than ten business days after the effective date of such change in control by facsimile, electronic mail transmission or first class mail and by posting such notice of change of control on the exchange facilitator's web site for a period ending not earlier than ninety days after the change in control. Such notification shall set forth the name, address and other contact information of the persons to whom control was transferred. Notwithstanding the provisions of this section, if the exchange facilitator is a publicly traded company and remains a publicly traded company after a change in control, the publicly traded company shall not be required to notify its existing clients of such change in control. For purposes of this section, "change in control" means any transfer or transfers within a twelve-month period of more than fifty per cent of the assets or ownership interests, directly or indirectly, of the exchange facilitator.
Sec. 3. (NEW) (Effective October 1, 2012) An exchange facilitator at all times shall:
(1) Maintain a fidelity bond in an amount of not less than one million dollars executed by an insurer authorized to do business in this state;
(2) Deposit all exchange funds in a separately identified account, as defined in 26 CFR 1.468B-6(c)(2)(ii)(A), and provide that any withdrawals from such separately identified account require the written authorizations of both the client and the exchange facilitator. Deliver authorization for withdrawals by any commercially reasonable means, including (A) the client's delivery to the exchange facilitator of the client's authorization to disburse exchange funds and the exchange facilitator's delivery to the depository institution of the exchange facilitator's sole authorization to disburse exchange funds, or (B) delivery to the depository institution of both the client's and the exchange facilitator's authorizations to disburse exchange funds; or
(3) Deposit all exchange funds in a qualified escrow or qualified trust, as such terms are defined in 26 CFR 1.1031(k)-1(g)(3), with a financial institution and provide that any withdrawals from such qualified escrow or qualified trust require the taxpayer's and the exchange facilitator's written authorization.
Sec. 4. (NEW) (Effective October 1, 2012) An exchange facilitator at all times shall: (1) Maintain an errors and omissions policy of insurance in an amount not less than two hundred fifty thousand dollars executed by an insurer authorized to do business in this state; (2) deposit an amount of cash or securities; or (3) provide irrevocable letters of credit in an amount not less than two hundred fifty thousand dollars.
Sec. 5. (NEW) (Effective October 1, 2012) Any person claiming to have suffered damage by reason of the failure of an exchange facilitator to comply with the provisions of sections 2 to 7, inclusive, of this act may file a claim against the exchange facilitator to recover such damage from (1) the fidelity bond maintained in accordance with subdivision (1) of section 3 of this act, (2) cash or securities deposited in accordance with subdivision (2) of section 4 of this act, or (3) letters of credit provided in accordance with subdivision (3) of section 4 of this act.
Sec. 6. (NEW) (Effective October 1, 2012) (a) An exchange facilitator shall hold all exchange funds, including money, property, other consideration or instruments received by the exchange facilitator from or on behalf of the client, but not including funds received as the exchange facilitator's compensation, in a manner that provides liquidity and preserves principal. An exchange facilitator shall provide the client with written notification of the manner in which the exchange funds will be invested or deposited and shall deposit or invest exchange funds in investments which meet the prudent investor standard and which satisfy investment goals of liquidity and preservation of principal. Exchange funds may be pooled. For purposes of this section, an exchange facilitator violates the prudent investor standard if:
(1) Exchange funds are knowingly commingled by the exchange facilitator with the operating accounts of the exchange facilitator; or
(2) Exchange funds are loaned or otherwise transferred to any person or entity affiliated with or related to the exchange facilitator except that this subdivision shall not apply to a transfer made pursuant to the exchange contract (A) for payment of an exchange expense or completion of the acquisition of the replacement property, (B) for depositing exchange funds with a financial institution, or (C) to an exchange accommodation titleholder, a trustee of a qualified trust or a qualified escrow agent.
(b) Exchange funds are not subject to execution or attachment on any claim against the exchange facilitator. An exchange facilitator shall not knowingly keep or cause to be kept any money in any financial institution under any name designating the money as belonging to a client of the exchange facilitator unless the money equitably belongs to the client and was actually entrusted to the exchange facilitator by the client.
Sec. 7. (NEW) (Effective October 1, 2012) No exchange facilitator or, in the case of an exchange facilitator that is an entity, no owner, officer, director or employee of such exchange facilitator, shall knowingly:
(1) Make any material misrepresentations concerning any exchange facilitator transaction that are intended to mislead;
(2) Pursue a continued or flagrant course of misrepresentation or making false statements through advertising or by any other means;
(3) Fail, within a reasonable time, to account for any money or property belonging to another person that may be in the possession or under the control of the exchange facilitator;
(4) Engage in any conduct constituting fraudulent or dishonest dealings;
(5) Commit any crime related to the exchange facilitation business involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery or other theft of property, except that commission of such crime by an officer, director or employee shall not be considered a violation of this section, provided (A) the employment or appointment of such officer, director or employee has been terminated, and (B) no clients of the exchange facilitator were harmed or full restitution has been made to all harmed clients;
(6) Materially fail to fulfill the exchange facilitator's contractual duties to the client to deliver property or funds to the client unless such failure is due to circumstances beyond the control of the exchange facilitator; and
(7) Materially violate any provision of sections 2 to 6, inclusive, of this act or the rules adopted pursuant to said sections.
Sec. 8. (NEW) (Effective October 1, 2012) A person who violates any provision of sections 2 to 7, inclusive, of this act is subject to civil suit in a court of competent jurisdiction.
This act shall take effect as follows and shall amend the following sections: | ||
Section 1 |
October 1, 2012 |
New section |
Sec. 2 |
October 1, 2012 |
New section |
Sec. 3 |
October 1, 2012 |
New section |
Sec. 4 |
October 1, 2012 |
New section |
Sec. 5 |
October 1, 2012 |
New section |
Sec. 6 |
October 1, 2012 |
New section |
Sec. 7 |
October 1, 2012 |
New section |
Sec. 8 |
October 1, 2012 |
New section |
BA |
Joint Favorable Subst.-LCO |
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APP |
Joint Favorable |
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JUD |
Joint Favorable |