As Wall Street bankers try to squirm out of stricter oversight from financial regulatory legislation now wending through Congress, Michael Halloran is taking the opposite tack. Halloran is the chief executive officer of NES Financial, whose Nationwide Exchange Services unit in San Jose, Calif., sets up and manages escrow accounts that hold funds for property sales, ranging from real estate to corporate aircraft. Halloran or his lobbyists have spent the past 18 months meeting with more than 100 lawmakers, urging them to regulate his industry.
Surprisingly, his crusade so far has come to naught, despite a spike in fraud cases over the past couple of years in which consumers have been ripped off by firms that looted funds or invested in risky securities that went kaboom. "It's hard to fathom when you are looking at all this financial regulation and you're saying, 'Please regulate us,' that you can't get it done," says Halloran.
Specifically, Halloran wants closer oversight of his industry, which handles so-called 1031 exchanges, named for the section of the U.S. Tax Code that allows property sellers to defer capital-gains taxes if they give their funds to a "qualified intermediary" (an escrow agent) and buy something similar within six months. Halloran wants Congress to require the firms to keep client money in segregated Federal Deposit Insurance Corp.-insured accounts and submit to an annual audit. The Federation of Exchange Accommodators, a trade group representing 150 companies, is also pushing for federal regulation, though the group differs with Halloran on the details.
Only eight states regulate these qualified intermediary companies, which is inadequate, says Representative Mike Michaud (D-Me.), author of the provision calling for stricter industry oversight that made it into the House bill. "We need appropriate protections in place nationwide," Michaud says. New Jersey resident Rosanna Passantino wouldn't quibble with that: She lost $351,570 in savings when a firm she entrusted money to went bust. "We need to have these laws passed," she says.
The Senate financial overhaul bill calls for no industry oversight. So Halloran is pressing hard to get the escrow provision into the final House-Senate bill, expected to hit the President's desk by July 4. Turns out persuading Congress to regulate your industry is hard work.
The bottom line: Congress isn't eager to expend much energy passing new rules for the escrow firms, a niche industry too obscure to grab headlines.