Jurisdictional Exception Rule – Only One Known Example


The Jurisdictional Exception Rule Frequently Misunderstood — Only One Known Example

(by William Novotny) USPAP’s JURISDICTIONAL EXCEPTION RULE is intended to address assignment conditions in which there is a conflict between USPAP requirements and the requirements of federal, state or local jurisdictions. Such conflicts would preclude appraisers from complying with those conflicted parts of USPAP. In this article I will briefly review the RULE, provide a typical example of how it is misapplied, and review the only known example of a jurisdictional exception.

I came across this sole example of a jurisdictional exception during a recent recertification process I underwent in order to renew my qualification as an AQB Certified USPAP Instructor for 2010-2011. That there is only one known example of a jurisdictional exception surprised me—as it did some of my colleagues as well.

USPAP defines a jurisdictional exception as:

JURISDICTIONAL EXCEPTION: an assignment condition established by applicable law or regulation, which precludes an appraiser from complying with a part of USPAP

And regarding the RULE, USPAP states:

“The JURISDICTIONAL EXCEPTION RULE provides a saving or severability clause intended to preserve the balance of USPAP if compliance with one or more of its parts is precluded by the law or regulation of a jurisdiction. When an appraiser properly follows this Rule in disregarding a part of USPAP, there is no violation of USPAP.”

Historically, appraisers have often thought that an assignment condition they were facing was a jurisdictional exception when in fact it was not. I will offer an example below. In a similar manner, users of appraisals were also often of the misconception that regulations, guidelines and requirements under which they were required to operate were jurisdictional exceptions when, in reality, they were not.

During the public exposure process for the changes to be incorporated into the 2010-2011 edition of USPAP, it became apparent from comments received that the ASB would have to confront the question of whether or not a continued need for the JURISDICTIONAL EXCEPTION RULE even existed—particularly in light of the fact that only one example of a jurisdictional exception was known to exist. Despite considerable input suggesting that the RULE be retired, the ASB decided to retain the rule just in case other laws that precluded USPAP compliance were to be established beyond 2011.

The general concept behind the JURISDICTIONAL EXCEPTION RULE is that if a law or regulation precludes the appraiser from complying with a part of USPAP then, and only then, should the appraiser invoke the RULE.

Here is an example based on a USPAP FAQ of an assignment condition that is not, in fact, a jurisdictional exception. This example deals with what might appear to be a conflict with the confidentiality part of USPAP, but is not.

A personal property appraiser was hired by a government agency to perform an appraisal of confiscated antiques, art and other objects of personal property. The agency has a regulation that requires the appraiser to provide copies of the appraisal report to other agencies if requested. Does this regulation create a jurisdictional exception to the Confidentiality section of USPAP’s ETHICS RULE?

At first blush, this scenario would appear to warrant the application of the JURISDICIONAL EXCEPTION RULE since USPAP requires that assignment results be kept confidential between the appraiser and the client which, in this case, is the government agency.

But to properly answer the question, we must first review USPAP’s Confidentiality section requirements regarding the disclosure of assignment results.

The Confidentiality section states that the appraiser must not disclose either confidential information or assignment results to anyone other than:

  • the client;
  • persons specifically authorized by the client;
  • state appraiser regulatory agencies;
  • third parties as may be authorized by due process of law; or
  • a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation

So, while it might first appear that USPAP prohibits sending copies of the report to other agencies, upon closer examination of the Confidentiality section, it is clear that the appraiser is allowed to disclose the report to those authorized by the client. In addition, the report may be disclosed to third parties as may be authorized by due process of law, such as would be required by the government agency’s regulation requiring that copies be sent to other agencies.

In other words, the agency regulation creates an assignment condition that is permitted by USPAP, and therefore does not require a jurisdictional exception since compliance with USPAP is not being precluded by the regulation. Only when USPAP compliance is precluded would a jurisdictional exception apply.

But what is the one known example of a jurisdictional exception?

In California, Probate Referees Association are appointed and serve as officers of the court. The website for the California Probate Referees Association explains the role of a probate referee:

… a Probate Referee’s appraisal is required for probate, small estate petitions, conservatorships, and guardianship matters filed with the courts, the Probate Referee can also assist the trustees in non-probate trust matters. Probate code section 16247 specifically allows Probate Referees to provide values in trust matters which are necessary for purposes of distribution, sale of assets, tax filings or general trust valuations. Using an independent Probate Referee for such matters helps relieve the Trustee of potential conflicts of interest or liability for errors…Probate Referees’ values are widely accepted by judges and the IRS as fair, accurate and impartial values.

Probate Referees are responsible for the valuation of all types of property and, as such, are acting as “appraisers.” The jurisdictional exception that would apply to Probate Referees results from the compensation arrangement established by California state law. For their valuation services, Probate Referees are paid a contingency fee that is based on a percentage of the value of subject property! Such a contingency fee arrangement is prohibited by the Management section of the ETHIC RULE which states that an appraiser must not accept a compensation agreement that is contingent upon the amount of a value opinion. Clearly, compliance with this particular part of USPAP is precluded by the fee schedule mandated for Probate Referees by the California regulation.

What steps can the Probate Referee take if he or she chooses to prepare appraisal reports in compliance with USPAP? The appraiser would be required to comply with the four action steps of the JURISDICTIONAL EXCEPTION RULE:

  1. Identify the law or regulation that precludes compliance with USPAP;
  2. Comply with that law or regulation;
  3. Clearly and conspicuously disclose in the report the part of USPAP that is voided by that law or regulation; and
  4. Cite in the report the law or regulation requiring this exception to USPAP compliance.

While the personal property appraiser is often involved with assignments in which limiting conditions and hypothetical conditions are encountered or in which extraordinary assumptions must be made, he or she will seldom, if ever, encounter jurisdictional exceptions.

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