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There’s a lot of confusion around the particulars of the National Association of Realtors (NAR) commission lawsuit settlement and the resulting business practice changes. Compliance expert Summer Goralik is here to help clear up some of the looming questions so that we can move forward together as an industry.
Read the entire series.
This week’s question
As a broker supervising Realtors, is there a single compliance issue that could put me at risk with all enforcement bodies in the new regulatory environment?
Compliance expert answer
A long-time broker client recently asked this question while updating their internal policies following the National Association of Realtors (NAR) settlement. It’s a valuable question because it highlights three key points.
First, multiple regulatory bodies are scrutinizing Realtors, each with its own area of focus and oversight. Second, it suggests that while violating new standards is serious, it may not trigger action from every relevant authority. Notably, the disconnect between state law and practice guidelines has added complexity for Realtors.
Lastly, this question reinforces the fact that “designated brokers” — the licensees responsible for agent supervision — must manage numerous layers of compliance to maintain a successful brokerage.
In a recent Inman article, I outlined key compliance areas and essential levels of supervision for brokers. However, this is just the beginning. Designated brokers need thoughtful and all-encompassing compliance plans to effectively monitor their agents’ licensed activities.
To answer the question directly: is there a single activity that could tip the scales with all enforcement bodies? As a compliance consultant, I could point out many risks, but one particular issue comes to mind: “secret profit.” This term should catch your attention, and here’s why.
Under current practice rules, a Realtor must have a buyer representation agreement with the buyer in place before any home tours. The representation agreement’s purpose is straightforward: it should outline the services a buyer broker will provide, clearly convey compensation terms, and disclose to the buyer that commissions are negotiable, not fixed by law. This agreement is crucial to transparency between the buyer broker and home buyer.
The compliance risk
Buyer brokers cannot receive compensation exceeding what’s specified in the representation agreement. Engaging in such activity would directly violate the terms of the NAR settlement. Consequently, while accepting additional compensation beyond the agreed-upon amount constitutes a violation in itself, doing so without full disclosure to the buyer could escalate this issue into major breaches of new and long-standing rules.
In California — and conceivably in other states as well — brokers must disclose all compensation related to licensed activity to their principals. Disclosure of compensation is an essential requirement stemming from the fiduciary duty owed by agents to their clients, which mandates utmost care, loyalty, honesty, and the disclosure of material facts.
Therefore, if a buyer broker or agent receives or contracts for additional undisclosed compensation, it represents a secret profit — a significant violation under California law.
Secret profit
For those unfamiliar with this stringent term, secret profit generally refers to any undisclosed compensation, commission, or profit taken by a licensee or any failure by a licensee to disclose to their client the full extent of their compensation under any agreement authorizing them to perform licensed acts.
At least in California, even if a licensee’s compensation is paid from a source other than the client, disclosure to the client is still warranted. This is not a minor issue; failure to disclose subjects both the broker and agent to substantial legal implications.
As a former Department of Real Estate investigator, I have logged enforcement mileage in this area, investigating real estate licensees who violated these disclosure rules. My enforcement days, of course, predate the NAR settlement, a time when traditional cooperative compensation was the norm.
Fast forward to today, and it’s not difficult to imagine situations where some Realtors might attempt commission workarounds. While creative approaches may be permissible if they comply with the settlement, others could involve undisclosed agreements — either verbal or written — such as private side arrangements between agents or unreported commission adjustments intended to secure additional compensation.
Here’s an example I recently encountered: A buyer’s agent and a listing agent negotiate a verbal agreement where, if the buyer offers X over the list price, the listing agent will get the seller to agree to pay buyer broker compensation of Y, an amount higher than what the seller originally intended to offer. The buyer’s agent then returns to the buyer, disclosing only that there are multiple offers on the property and suggesting they offer X over the list price. However, the buyer’s agent does not reveal the specific commission arrangement, only that the seller is open to offers that include broker compensation.
Some may believe that the outcome of this conduct doesn’t matter due to existing guardrails: the buyer’s agent cannot receive more than what was originally agreed upon in the buyer representation agreement. While that may be true, here’s the crux: no buyer representation agreement was in place before the property tour.
In this case, the buyer representation agreement was actually prepared after the buyer viewed the property and was ready to make an offer (issue No. 1). The final commission terms proposed by the buyer’s agent to the buyer were predetermined by the listing agent’s negotiation and subsequently formalized in the buyer representation agreement (issue No. 2). Although the buyer was informed that the seller would entertain offers including broker compensation requests, the buyer’s agent did not disclose that the negotiated commission rate was tied to an offer above the list price (issue No. 3).
The result? The buyer representation agreement and the purchase offer were prepared concurrently, with mirrored commission terms, and the seller ultimately agreed to pay Y commission to the buyer’s broker in the fully executed contract.
This is clearly unlawful behavior by the buyer’s agent and likely the listing agent, particularly if the seller was unaware of or did not authorize the agent to negotiate these commission terms before the offer. The situation illustrates potential misrepresentation, secret profits and deceptive activities by both parties, implicating the licensees in practices that extend beyond compliance with the NAR settlement, violating fundamental real estate laws, fiduciary duties and the standard of care designed to protect consumers.
Law-abiding Realtors will argue that these are clear violations of both the NAR settlement and state laws, asserting that only rule-breakers would attempt them. Still, with the adoption of new rules comes a shift in commission strategies, and brokers need to be mindful of the possible ramifications.
Enforcement trifecta
While state departments of real estate may not directly enforce new Multiple Listing Service (MLS) rules prohibiting offers of compensation related to property listings or requiring buyer representation agreements before home tours, they can take action if Realtors, and non-Realtor licensees, fail to adhere to statutory requirements governing licensed activities. Such violations can give rise to formal disciplinary measures against real estate licensees.
In essence, any activity involving secret profits, deceitful acts, or undisclosed compensation by Realtors could lead to regulatory action from multiple enforcement bodies, including NAR and its affiliated associations and MLSs (or another enforcer if circumstances change), state real estate regulators, and potentially the federal government.
Though federal intervention was once uncommon, clearly, times have changed. With Realtors’ compliance now taking center stage under the new practice rules, the federal government is indeed in the audience, closely observing their actions.
For instance, if undisclosed or excessive compensation suggests that a Realtor is engaging in deceptive practices, the Federal Trade Commission might view this as a violation of consumer protection standards, especially if it involves concealing financial arrangements from clients. Alternatively, depending on the context and how these activities are orchestrated, a pattern of steering could raise antitrust concerns and potentially lead to DOJ intervention.
In the current real estate climate, with all enforcement eyes on Realtors right now, they face a trifecta of regulatory examination, involving compliance evaluations from multiple agencies.
This spotlight on Realtors, which also includes assessment from consumer watchdog groups advocating for transparency and ethical practices, as well as private attorneys, only increases the supervisory burden on designated brokers.
To put it bluntly, prudent brokers need to identify and address potential issues before they spill over into the public domain and develop into compliance or legal problems.
Sidebar
Before presenting some suggested policy considerations, I’d like to briefly point out an adjacent topic regarding potentially prohibitive compensation post-settlement. While the focus here has been on undisclosed broker compensation, it’s important to clarify that even when buyers are fully aware of all compensation terms or agree to modify buyer representation agreements to increase commission fees, such actions may still be out of compliance with the NAR settlement.
Unfortunately, this subject has led to varied interpretations, resulting in a range of practice approaches often referred to as “workarounds.” Contract law professor Tanya Monestier recently filed a comprehensive 136-page objection to the proposed national settlement, highlighting, among other things, the types of workarounds emerging in the “new normal” and effectively challenging the value of the practice changes.
Even if some Realtors don’t agree with her, this is a must-read for brokers, as it pinpoints, through myriad real-life examples, where Realtor confusion under the new practice rules and misconduct critically intersect, adversely impacting both consumers and the overall industry. For now, I’ll set this conversation aside, hoping that clearer guidance from the top down will set the record straight in the future.
Mitigating Risk
While I don’t foresee noncompliance becoming prevalent, designated brokers must be aware of the risks and take a proactive approach to management. Why? Because it doesn’t need to be a widespread issue to cause serious problems for the brokerage.
A single poor decision by an uninformed or unethical agent, coupled with the harm to a consumer, can significantly tarnish the company’s reputation and jeopardize its license — especially if there is evidence that the broker failed to provide adequate supervision, could have prevented the issue with stronger controls, or had prior knowledge of the noncompliant behavior.
How can brokers prevent such prohibited conduct and its potentially severe consequences?
An effective strategy begins with comprehensive broker supervision.
Generally, designated brokers should be well-versed in their state laws and the broader compliance dynamic — from federal regulations to state laws and practice guidelines. They must shape their supervision systems, policies, procedures, compliance checklists, and risk management protocols accordingly.
Once this supervision framework is in place, which covers compliance at every level, brokers must ensure that agents are fully educated, trained on these requirements, and adhere to them consistently.
With respect to the compliance risk highlighted in this piece, here are some key actions that brokers might prioritize on their supervision agendas:
- Train agents on the new practice rules and documentation, especially covering the prohibition against contracting for and/or accepting compensation beyond what’s outlined in the buyer representation agreement.
- Educate agents on the consequences of undisclosed compensation or secret profit activities and implement clear protocols and policies surrounding compensation disclosure, agency disclosure, and fiduciary duties.
- Implement systems, policies, and procedures to:
- Implement checkpoints and agent reporting requirements during the transaction process.
- Require agents to document all compensation disclosures and communications related to their agreements and commissions.
- Review and approve all buyer representation and listing agreements upon execution, including any proposed amendments or renewals that could impact compensation.
- Regularly review purchase agreements and/or other material documents, focusing on any agreed brokerage compensation terms.
- Monitor escrow commission instructions, estimated/final escrow closing statements, and broker-issued commission demands.
- Direct or control commission disbursements to agents in accordance with the fully executed contract and required file compliance.
While the above suggestions are not complete, the main point is to emphasize the importance of creating a system of supervision, a compliance roadmap if you will, to help identify agent missteps, noncompliance, and potential legal problems.
Broker supervision is vital
Designated brokers frequently ask, “How am I supposed to supervise all of my agents and make sure they’re following the rules?” While a broker cannot realistically control every action, establishing clear policies and procedures is paramount. By building a strong compliance network, implementing a robust supervision system, and enforcing well-structured policies, brokers set a high standard for adherence.
Agents who do not adhere to brokerage rules not only undermine the company’s integrity but also place themselves on the wrong side of compliance — a reality underscored by the number of enforcement authorities involved. An agent who disregards brokerage policy risks losing support from designated brokers during a regulatory investigation or lawsuit.
Failing to disclose all compensation related to licensed activities — resulting in a secret profit or similar violation — is a critical issue. Such misconduct not only compromises Realtors’ compliance with the NAR settlement but exposes both them and their brokerages to regulatory examination and license repercussions.
Some Realtors may dismiss these advisories, perhaps believing they will be too infrequent to be truly problematic for the industry. Maybe they’re right — and I certainly hope so. Yet, not too long ago, some buyer brokers presented their services as “free” to consumers and frequently neglected to disclose the compensation they received from licensed activities to their home-buying clients.
With new commission practices and motivations at the forefront, my goal is to reaffirm the core importance of disclosure and transparency in real estate practice. Designated brokers not only play an integral role but also have a substantial stake in ensuring compliance in this area.
I hope this article encourages brokers to reassess their compliance efforts, carefully review their agents’ practices and address any blind spots with a renewed focus on risk management.
Editor’s note: Licensed real estate agents should always check with their responsible brokers for guidance, direction and policy regarding the new practice changes, and licensed real estate brokers would be wise to consult with a licensed attorney for legal clarification and support.
The opinions, suggestions or recommendations contained in this discussion are based on Summer Goralik’s experience working for, and knowledge of the laws enforced by, the California Department of Real Estate and must not be considered legal advice or relied upon as legal advice. You should consult with your brokerage, and/or appropriate legal counsel in your jurisdiction, for further clarification.
Summer Goralik is a real estate compliance consultant and former CA DRE Investigator in Huntington Beach, California. Connect with her on LinkedIn.
