Commission Denies Petition for Rulemaking Related to Qualified Intermediaries Under Internal Revenue Code Section 1031

The Commission has denied a petition by the Federation of Exchange Accommodators (FEA) requesting that the FTC develop a Trade Regulation Rule (Rule) related to Qualified Intermediaries (QIs). The FEA is a national trade association of QIs, independent third parties that facilitate tax-deferred investment and business property exchanges under Internal Revenue Code Section 1031, 26 U.S.C. § 1031. These exchanges, known as “like-kind” exchanges, involve strict and complex requirements to avoid capital gains taxes when the owners of investment and business property want to sell one property and purchase another like-kind property. Due to the complexity of these requirements, QIs oversee and act as custodians of related taxpayer funds during such transactions. The Rule proposed in the FEA’s petition would establish a mandatory registration process and operational standards for QIs.

As detailed in the letter denying the petition, 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. 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 therefore determined that a rulemaking proceeding would not be in the public interest at this time.

The FTC noted that the vast majority of the incidents identified in the FEA’s Petition resulted in criminal investigations or prosecutions, as well as civil suits for recovery. The FTC will “continue to monitor consumer complaints and make appropriate referrals to criminal authorities,” the letter states.

The Commission vote denying the FEA’s petition was 4-0. A copy of the FTC letter to the FEA can be found on the Commission’s Web site as a link to this press release. (FTC File No. P074807; the contact is the Office of Public Affairs, 202-326-2180.)

Copies of the documents mentioned in this release are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

(FYI 42.2008.wpd)