LAW-42-15-00015-P Digital Submission Requirements for Cooperative Interests in Realty

10/21/15 N.Y. St. Reg. LAW-42-15-00015-P

NEW YORK STATE REGISTER

VOLUME XXXVII, ISSUE 42

October 21, 2015

RULE MAKING ACTIVITIES

DEPARTMENT OF LAW

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. LAW-42-15-00015-P

Digital Submission Requirements for Cooperative Interests in Realty

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of Parts 18, 20, 21, 22, 23, 24 and 25 of Title 13 NYCRR.

Statutory authority:

General Business Law, section 352-e(2-b)

Subject:

Digital Submission Requirements for Cooperative Interests in Realty.

Purpose:

To streamline the Department of Law's regulations and internal operations while also reducing transaction costs and paper waste.

Substance of proposed rule (Full text is posted at the following State website:www.ag.ny.gov/pdfs/ref/TextReg.pdf):

Pursuant to its authority under New York General Business Law Section 352-e(2-b), the Department of Law proposes to revise Parts 18, 20, 21, 22, 23, 24, and 25 of Title 13 of the Official Compilation of Codes, Rules, and Regulations of the State of New York. In brief, the Department of Law’s proposed regulations would require sponsors of cooperative interests in realty to submit to the Department of Law fewer paper copies of their offering plans and the amendments and exhibits thereto. Instead, sponsors must submit a digital copy of those documents.

The proposed regulations define a digital copy as: “. . . a copy that is identical in content to a paper copy except that it is recorded electronically in read-only.pdf format or other electronic format that the Department of Law determines to be acceptable. Digital copies of the plan shall include all the supporting documents included in Part II of the plan. Digital copies of the exhibits to the plan shall include all documents referenced in section [18.2(c)(4), 20.2(c)(5), 21.2(c)(3), 22.2(c)(6), 23.2(c)(5), 24.2(c)(4), or 25.2(c)(5)], as applicable. Digital copies of the amendment shall include all exhibits, back-up documents, and other supplemental documents annexed to the amendment, as applicable.”

Under the proposed regulations, sponsors will need to submit one paper copy and one digital copy of their offering plans as well as each subsequent amendment thereto. The proposed regulations will also require sponsors, when submitting an amendment to the Department of Law, to include “[o]ne digital copy of the offering plan including all previously filed amendments, if not already submitted to the Department of Law.” Similarly, the proposed regulations mandate that the attorney transmittal letter for amendments state “the date on which sponsor submitted a digital copy of the offering plan and all previously filed amendments to the Department of Law or whether this is the first time sponsor is submitting a digital copy of the offering plan and previously filed amendments, if any.”

The proposed regulations also alter the procedure by which sponsors submit exhibits to offering plans. The revisions require “One paper copy of all original exhibits to the offering plan and one digital copy of all exhibits to the offering plan.”

Finally, in order to ensure that the Department of Law’s submission requirements are consistent throughout Title 13, the proposed regulations amend and add several other related sections to Title 13. These revisions, which are most evident in the proposed additions to Part 21, streamline the Department of Law’s regulations and ensure sponsor compliance with General Business Law Section 352-(e)(7)(a).

A complete version of the Department of Law’s proposed revisions is available on the Department of Law’s website. Additionally, further clarification regarding the proposed regulations will be set forth in a Department of Law Guidance Document pursuant to the State Administrative Procedure Act Section 102(14). Such Guidance Document will be available on the Department of Law’s website, as required by State Administrative Procedure Act Section 202(e).

Text of proposed rule and any required statements and analyses may be obtained from:

Jacqueline Dischell, Department of Law, 120 Broadway, 23rd Floor, New York, NY 10271, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority. New York General Business Law Article 23-A (“the Martin Act”) regulates the advertisement, sale, purchase, and investment advice given to securities and other covered investment vehicles. See NYS CLS GBL § 352(1). Included under the Martin Act’s purview is the regulation of real estate syndication offerings, including the offering of “cooperative interests in realty,” which must be sold pursuant to an offering plan filed with the Real Estate Finance Bureau of the New York State Law Department. See NYS CLS GBL § 352-e(1)(a). New York General Business Law (“GBL”) Section 352-e(2-b) authorizes the Attorney General to “adopt, promulgate, amend and rescind suitable rules and regulations” to carry out the provisions of GBL Section 352-e.

2. Legislative Objectives. The Martin Act demonstrates a clear intent to provide prospective purchasers with adequate information upon which to base their investment decisions. To illustrate, GBL Section 352-e(1) mandates that before any person may engage in a public offering of cooperative interests in realty, including condominiums, he or she must file with the Department of Law (“DoL”) an offering plan that contains “the detailed terms of the transaction” and “such additional information…as will afford potential investors, purchasers and participants and adequate basis upon which to found their judgment.” See also GBL Section 352-e(5). The Martin Act authorizes the DoL to develop and implement its own procedures with respect to the filing of this information regarding cooperative interests in realty. Under GBL Section 352-e(6), the Attorney General is “authorized and empowered to adopt promulgate, amend, and rescind suitable rules and regulations for the method, contents and filing procedures with respect to the statements required by subdivision one and the making of amendments.”

Pursuant to this authority, the DoL’s regulations mandate the procedures by which sponsors of cooperative interests in realty must submit to the DoL their offering plans and the subsequent amendments thereto. These regulations require a sponsor, “upon preliminary advice from the Department of Law that the proposed offering plan may be filed,” to provide the DoL with three or four “copies of the typed or printed, bound offering plan.” See 13 NYCRR §§ 18.2(d)(2); 19.2(d)(2); 20.2(d)(2); 22.2(d)(2); 24.2(d)(2); 25.2(d)(2). The regulations also require sponsors to submit to the DoL “three copies of the amendment to the offering plan.” See 13 NYCRR §§ 18.5(b)(2); 19.5(b)(2); 20.5(b)(2); 21.5(b)(2); 22.5(b)(2); 24.5(b)(2); 25.5(b)(2).

In light of new technologies, as described below, the DoL’s current regulations no longer represent the most effective means for the Agency to solicit, file, and store offering plans and amendments. Therefore, in accordance with its authority under the Martin Act, the DoL proposes to amend its regulations to increase its efficacy and efficiency while simultaneously reducing paper waste. The proposed revisions will also allow the DoL to better effectuate the investor protection provisions of the Martin Act by increasing the ease with which prospective purchasers and the public can access relevant information upon which “to found their judgment.” See GBL Section 352-e(1).

3. Needs and Benefits. As described above, current DoL regulations require sponsors to submit to the DoL three or four paper copies of their offering plan and three paper copies of each subsequent amendment. This creates an incredibly high volume of documents for the DoL to process and store as well as considerable paper waste. The current regulations contain no provisions for digital submission of offering plans or the amendments thereto. When the DoL promulgated its regulations in 1989, the above procedures represented the most logical means for the Agency to solicit, file, and store information about cooperative interests in realty. However, technological advancements over the past twenty-six years have greatly changed how information is distributed, accessed, and stored. In light of the widespread access to, ownership of, and knowledge of computers and other digital devices, the DoL proposes to amend its regulations to require sponsors to submit to the DoL fewer paper copies of their offering plans and amendments, and instead submit a digital copy. The DoL expects that the use of digital copies will increase the efficiency of the DoL, which will, in turn, benefit prospective purchasers, sponsors, and the environment.

An offering plan is typically a voluminous bound document containing several hundred pages or more. In 2014, the DoL accepted for filing 402 offering plans (three or four copies of each) and 3648 amendments (three copies of each). The DoL must file and store this high volume of documents, which is costly to the Agency. The proposed revisions will help to ameliorate this problem. Digital submission of offering plans and amendments will create fewer physical documents necessitating processing and storing, thereby reducing the associated costs.

In addition, no central repository for offering plans and amendments exists. As a result, it can be difficult for prospective purchasers, other members of the public, and even the DoL to access older information, particularly because many of these files are maintained off-site in upstate New York. The DoL is currently developing an agency-wide e-filing and case management system, one benefit of which will be the creation of a thorough digital catalogue of New York State’s offering plans and amendments. However, this system will not take effect for several years. In the meantime, the proposed revisions act as an important interim step towards creating a permanent comprehensive digital storage framework: because less physical storage space is required for digitized documents, information can be retained and accessed for longer periods of time without being cost prohibitive to the Agency.

The proposed revisions will expedite public information requests under New York’s Freedom of Information Law (“FOIL”). At present, those making a FOIL request for offering plans and/or amendments generally must make an appointment to visit the DoL’s offices to review and make photocopies of the requested information. In 2014, the DoL received 1,216 FOIL requests for 1,888 offering plans. Processing this high number of requests is quite time consuming, both for the public and the DoL. The proposed revisions will allow the DoL to distribute much of this information digitally, thus hastening the FOIL process as well as benefiting the environment by drastically reducing the amount of photocopies the public must make.

Similarly, the DoL issued Cooperative Policy Statement #10 (“CPS-10”) in October 2011 to permit sponsors to distribute digital copies of their final offering plans and/or amendments to perspective purchasers (if both parties so elect). The goal of CPS-10 was to “reduce transaction costs and aid Offerors, Offerees, and their counsel in their review of Plans and/or Amendments.” However, the use of CPS-10 has been rather limited to date: for example, in 2014, only 16 of the offering plans submitted to the DoL participated in CPS-10. Under the proposed revisions, sponsors are required to create digital copies of their final offering plans and/or amendments; the DoL expects that this will lead to an increase in the number of sponsors participating in CPS-10’s digital distribution framework, which will further increase the public’s ease of access to information about offering plans and amendments.

In addition to increasing the efficiency of the DoL and the ability of the public to access information stored by the Agency, the proposed revisions will have the benefit of reducing the cost to sponsors of reproducing numerous paper copies of offering plans (as described below) and the impact of such reproduction on the environment. For all of these reasons, the DoL believes that amending its regulations to require the digital submission of offering plans amendments is fully warranted.

4. Costs.

(a) Costs to regulated parties. The proposed revisions may impose nominal costs to the regulated parties as a result of the implementation and continued compliance with the rule. Under the proposed revisions, sponsors will be required to submit to the DoL fewer paper copies of their offering plans and amendments than is currently required, instead submitting a digital copy. The DoL expects the costs, if any, associated with creating and submitting a digital copy of the offering plan to be nominal due to the widespread access to, ownership of, and knowledge of computers and other digital devices. The DoL believes that any potential nominal costs to regulated parties are outweighed by the aforedescribed benefits of the proposed revisions.

However, the proposed revisions will likely reduce costs for sponsors: estimates from several print shops, as well as the DoL’s Administrative Services Bureau, demonstrate that the cost of creating a digital copy of offering plan and amendments is less than producing numerous bound paper copies. To illustrate, the cost of printing and binding a black and white 500-page (250 double-sided pages) offering plan is between $50 and $70, while the cost of a USB drive or CD-ROM is usually less than $20. The cost of a digital copy as compared to numerous paper copies is further reduced when factoring in the shipping costs associated with paper copies.

(b) Costs to the agency, the state and local governments. The DoL will incur certain administrative costs as a result of the proposed revision. The DoL currently has no digital submission framework in place, and therefore will incur costs related to the implementation of this system. However, the Department of Law’s information technology specialists estimate that that these costs will be reasonable and within the Real Estate Finance Bureau’s Special Fund budget. See NY State Fin L § 80 (2012). The DoL believes that these costs are necessary to effectuate the proposed revisions, and are outweighed by their utility. Moreover, the DoL expects that the proposed revisions will result in a long-term reduction of costs for the Agency, because, as described above, digitized offering plans and amendments will lead to decreased transaction costs associated with filing and storing paper copies of offering plans and amendments. The DoL foresees no costs to any other state agencies or local governments.

(c) Information and methodology upon which the estimate is based. The estimated costs to regulated parties, the agency, and state and local governments is based on the assessment of the Attorney General, in reliance upon data and information available to him maintained by the DoL’s Real Estate Finance Bureau.

5. Local Government Mandates. The proposed revisions do not impose any programs, services, duties, or responsibilities on any county, city, town, village, school district, fire district, or other special district.

6. Paperwork. The proposed revisions reduce the amount of physical paperwork for both regulated parties and the Department of Law. As described above, the proposed revisions will require sponsors to submit to the DoL fewer physical copies of their offering plans and amendments than is currently required, instead submitting a digital copy. The result will be less physical paperwork for sponsors to produce and for the DoL to file and store.

7. Duplication. The proposed revisions will not duplicate any existing state or federal rule.

8. Alternatives. The DoL believes that there are no significant alternatives to the proposed revisions, and has concluded that the proposed revisions are the most effective means of increasing the efficiency and efficacy of the DoL, allowing the public to more readily access information about cooperative interests in realty, and reducing the Agency’s environmental footprint.

9. Federal Standards. The proposed revisions do not exceed any minimum standards of the federal government for the same or similar subject.

10. Compliance Schedule. The proposed revisions will go into effect on January 1, 2016. The proposed revisions will apply to any and all future offering plans submitted to the Department of Law. The proposed revisions will also affect offering plans that the DoL has accepted for submission, but has not yet not accepted for filing.

Regulatory Flexibility Analysis

1. Effect of rule. The proposed regulatory revisions will have the effect of increasing the efficiency and efficacy of the Department of Law (“DoL”), which will, in turn, benefit prospective purchasers, sponsors of cooperative interests in realty, and the environment. The proposed revisions do not affect any local governments.

The proposed revisions may affect certain small businesses: specifically, sponsors of cooperative interests in realty. However, the majority of offering plans submitted to the DoL are sponsored by single-purpose limited liability companies that are directly affiliated with larger entities. The State Administrative Procedure Act (“SAPA”) Section 102(8) defines a defines a small business as, “[a]ny business which is resident in this state, independently owned and operated and that employs 100 or less people.” Accordingly, the DoL believes that very few small businesses, as defined by SAPA Section 102(8), will be affected by the proposed revisions.

Under the proposed revisions, sponsors will be required to submit to the DoL fewer paper copies of their offering plans and amendments than is required by current regulations, and instead, submit a digital copy. The DoL expects the cost (if any) and effort associated with providing digitized documents to be nominal due to the widespread access to, ownership of, and knowledge of computers and other digital devices. In fact, as described below, the proposed revisions will likely result in a net reduction of costs for sponsors.

2. Compliance requirements. The proposed revisions do not affect local governments; thus, they do not require local governments to undertake any new reporting or recordkeeping procedures.

As mentioned above, the proposed revisions will require sponsors of cooperative interests in realty to submit to the DoL fewer paper copies of their offering plans and amendments than is currently required, and instead, submit a digital copy. The DoL does not expect compliance with this requirement to be onerous to sponsors due to the widespread access to, ownership of, and knowledge of computers and other digital devices.

3. Professional services. The proposed revisions do not affect local governments; therefore, local governments will not need to employ any professional services in order to comply with the proposed revisions.

The proposed revisions will require sponsors of cooperative interests in realty to incur certain professional costs associated with the preparation of a digital version of their offering plan, such as legal fees. However, in all cases, the sponsor would have already been employing these legal services in the preparation of their offering plan, and, as described above, the cost and effort associated with creating a digital version of the offering plan is expected to be nominal. In fact, the proposed revisions will likely reduce costs for sponsors: estimates from several print shops, as well as the DoL’s Administrative Services Bureau, demonstrate that the cost of creating a digital copy of offering plans and amendments is less than printing numerous bound paper copies. To illustrate, the cost of printing and binding a black and white 500-page (250 double-sided pages) offering plan is between $50 and $70, while the cost of a USB drive or CD-ROM is usually less than $20. The cost of a digital copy as compared to numerous paper copies is further reduced when factoring in the shipping costs associated with paper copies.

4. Compliance costs. The proposed revisions do not affect local governments; therefore, the DoL foresees no initial capital costs nor any additional annual costs to local governments as a result of compliance with the proposed revisions.

The DoL also foresees no initial capital costs nor any additional annual costs to regulated small businesses as a result of compliance with the proposed revisions, other than the aforementioned potential nominal costs associated with the creation of a digital copy of the offering plan and amendments. Additionally, the DoL believes that any potential costs to regulated parties are outweighed by the benefits of the proposed revisions. These costs will not vary depending on the type and/or size of the regulated business.

5. Economic and technological feasibility. Compliance with the proposed revisions is both technologically and economically feasible for local governments, as the proposed revisions do affect them in any way.

The proposed revisions are also technologically and economically feasible for regulated small businesses. While the proposed revisions do impose a technological requirement upon sponsors of cooperative interests in realty (submitting to the DoL a digital copy of their offering plan and amendments), the DoL does not expect this requirement to be onerous to them due to the widespread access to, ownership of, and knowledge of computers and other digital devices. In addition, the costs associated with this technological requirement are, as detailed above, expected to be nominal or nonexistent. Indeed, the proposed revisions will likely result in a net savings to sponsors, because, as described above, the cost of producing a digital copy is expected to be less than producing numerous bound paper copies.

6. Minimizing adverse impact. The proposed revisions do not affect local governments, and therefore have no adverse economic impact on them.

The adverse economic impact on regulated small businesses will be minimal or nonexistent. Other than the potential fees associated with creating a digital copy of the offering plan and amendments—and, as mentioned above, there will likely be a net reduction in costs—the proposed revisions have no adverse economic impact on sponsors.

The DoL has considered various approaches fashioning the proposed regulatory revisions, including those set forth in SAPA Section 202-b(1). Nevertheless, the DoL has concluded that the proposed revisions are the most effective means of increasing the efficiency and efficacy of the DoL, allowing the public to more readily access information about cooperative interests in realty, and reducing the Agency’s environmental footprint.

7. Federal standards. The proposed revisions do not exceed any minimum standards of the federal government for the same or similar subject.

8. Small business and local government participation. To ensure that small businesses and local governments have an opportunity to participate in the rule making process as required by SAPA Section 202-b(6), a copy of the proposed revisions will be sent to members of the Bar who represent offerors and purchasers of condominiums. Copies will also be posted on the DoL’s website.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas. The proposed regulatory revisions apply uniformly throughout the state, including all rural areas. Executive Law, Article 19-F Rural Affairs Act, Section 481(7) defines a rural area as a county with a population of less than 200,000. New York currently has 44 rural areas. However, the vast majority of the offering plans submitted to the Department of Law (“DoL”) are for properties in New York City and its suburbs. Accordingly, the impact of the proposed regulatory revisions on both rural condominium offerors and rural condominium purchasers is likely to be very minimal. In any case, the proposed regulatory revisions will not affect rural areas more than any other area in the state.

2. Reporting, recordkeeping, and other compliance requirements; and professional services. The proposed regulatory revisions do not require new obligations for local governments in terms of reporting or recordkeeping in rural areas.

Under the proposed regulations, sponsors of cooperative interests in realty in rural areas will be required to submit to the DoL fewer paper copies of their offering plans and amendments than is required by current regulations, and instead, submit a digital copy. The DoL does not expect compliance with this requirement to be onerous to sponsors due to the widespread access to, ownership of, and knowledge of computers and other digital devices.

3. Costs. The DoL foresees no initial capital costs nor any additional annual costs to rural public entities as a result of compliance with the proposed regulatory revisions.

The DoL also foresees no initial capital costs to rural businesses as a result of compliance with the proposed regulatory revisions. In terms of annual costs to regulated rural businesses, sponsors of cooperative of condominium offerings operating in rural areas will incur the costs associated with preparing and submitting to the DoL a digital copy of their offering plan and amendments. This cost is expected to be nominal due to the widespread access to, ownership of, and knowledge of computers and other digital devices. In fact, the proposed revisions will likely reduce costs for sponsors: estimates from several print shops, as well as the DoL’s Administrative Services Bureau, demonstrate that the cost of creating a digital copy of offering plans and amendments is less than printing numerous bound paper copies. To illustrate, the cost of printing and binding a black and white 500-page (250 double-sided pages) offering plan is between $50 and $70, while the cost of a USB drive or CD-ROM is usually less than $20. The cost of a digital copy as compared to numerous paper copies is further reduced when factoring in the shipping costs associated with paper copies. These costs will not vary depending on the type and/or size of the regulated business.

4. Minimizing adverse impact. The proposed regulatory revisions do not affect local governments in rural areas, and therefore will have no adverse economic impact on them.

The adverse economic impact on regulated rural businesses will be minimal or nonexistent. Other than the potential fees associated with creating a digital copy of the offering plan and amendments—and, as mentioned above, there will likely be a net reduction in costs—the proposed revisions have no adverse economic impact on the very few sponsors operating in rural areas.

The DoL has considered various approaches fashioning the proposed regulatory revisions, including those set forth in State Administrative Procedure Act (“SAPA”) Section 202-b(1). Nevertheless, the DoL has concluded that the proposed regulatory revisions are the most effective means of increasing the efficiency and efficacy of the DoL, allowing the public to more readily access information about cooperative interests in realty, and reducing the Agency’s environmental footprint.

5. Rural area participation. To ensure that persons and entities in rural areas have an opportunity to participate in the rule making process as required in SAPA Section 202-bb(7), a copy of the proposed regulatory revisions will be sent to members of the Bar who represent offerors and purchasers of condominiums. Copies of the proposed regulatory revisions will also be posted on the DoL’s website.