QI Mess Threatens TIC Marketplace
The greed of Qualified Intermediaries is threatening to undo the TIC business as two QIs stole $250 million of investor exchange funds. I have blogged about this before. The QIs were using exchange funds for their own purposes rather than segregating the cash and holding it in trust for the short (up to 180 days) exchange period. Exchange monies are very short term and should only be invested in the best money market funds or other cash equivalents. The QIs were using the funds for other businesses or personal activities and could not meet payment obligations. One misappropriated $95 million and the other $151 million.

The Wall Street Journal has an article explaining the two cases. A top TIC lawyer, Richard Lipton of Baker & McKenzie, recommends only using QIs affiliated with top firms:

Many large financial institutions have QI services business. J.P. Morgan Property Exchange Inc. is a unit of J.P. Morgan Chase & Co.; Wachovia Exchange Services is a unit of Wachovia Corp. Mr. Lipton of Baker & McKenzie says that because of the lack of regulation, he refers clients to QIs that are affiliated with regulated entities.

This advice is so simple and smart it almost begs the question as to why everyone does not follow it. If you look into the relationship between QIs and registered reps, I bet you will find the answer. QIs are a top referral source for registered reps specializing in tenant in common transactions. The rep gets referred clients who need an exchange and will buy a product that pays a 7% commission to defer the taxes. The QI gets the use of the exchange assets for up to 180 days. This is a mutually beneficial relationship and the client likely has no idea. A rep's allegiance to a QI can be built in a short period. (I would be surprised if reps know of malfeasance on the part of the QI.) Broker/dealers need to stop these relationships immediately and require only QIs affiliated with large banks or title companies. This referral source is brining in clients the rep does not know from a source that may be suspect.