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150 William Street. 13th FL.

New VOfl<. N V. 10038

(212) 264-8290

Ur\ITED STATES OF AMERICA

FEDERAL TRADE COMMISSIONSEW YORK REG!ONAL OFFICE COMMISSION AUTHORIZED

July 6, 1990

Ms. Gail A. Bates, DirectorDivision of Licensing ServicesN.Y.S. Department of State162 Washington AvenueAlbany, New York 12231

Dear Ms. Bates:

The staff of the Federal Trade commissionl is pleased torespond to the request of the Department of State for comments onthe preliminary "Codification of Rules and Regul~tions AffectingReal Estate Licensees" ("Proposed Regulations"). We understandthat the Proposed Regulations are intended to reduce confusionand misunderstanding among consumers, real estate brokers andsalesperso~ ("Licensees") and to promote better "operationalstandards."

The Proposed Regulations would, among other things, requireLicensees to make specified disclosures to home sellers andprospective buyers regarding, for example, Licensees' obligationsto each: proscribe certain forms of representation, such as dualagency: and limit specified contract terms, such as the durationof listing agreements. We believe that disclosure requirementsmay benefit consn-era in some circumstances, which we discusssubs&quently. We note, however, that the Proposed Regulations'

1 This letter presents the views of the staffs of the LosAngeles and New York Regional Offices and the Bureau ofCompetition of the Federal Trade Commission. They are notnecessarily the views of the ~ommission or of any individualCommissioner.

2 OUr comments are limited to the potential effects of theProposed Regulations' residential real estate brokerage provi­sions and, in particular, to those proposed regulations that .ostsignificantly may affect consumers. We express no opinion as tothe Department of State's authority to promulgate theregulations.

3 Memorandum from Gail S. Shaffer, Secretary of State,State of New York, to Members of the Real Estate Industry(December 18, 1989).

limitation of certain real estate practices and contract termsunnecessarily may harm some consumers.

I. INTEREST AND EXPERIENCE OF THE STAFFOF THE FEDERAL TRADE COMMISSION

The Federal Trade Commission is charged with preventingunfair methods of competition and unfair or defeptive acts orpractices in or affecting interstate commerce. consistent withthis mandate, the staff of the Federal Trade Commission oftensubmits comments, upon request, to federal, state, and localgovernmental bodies to help them assess the competitive andconsumer welfare'implications of pending proposals.

The staff of the Commission has considered numerous issuesrelating to competition in rea15 estate markets, including NewYork state real estate markets. In addition, the staff of theCommission's Los Angeles Regional Office conducted a study of theresidential real estate industry. That study included a nation­wide survey of consumer experiences with real gstate brokers,some of the findings of which are noted below.

II. PROPOSED DISCLOSURE REQUIREMENTS

Section 4 of the Proposed Regulations would impose onLicensees various disclosure obligations designed to ensure thatall prospective parties to real estate transactions understand

4 15 U.S.C. § 41 et seg.

5 See, e.g., Multiple Listing Service Mid County, Inc., 110F.T.C. 482 (1988); Orange County Board of Realtors, Inc., 106F.T.C. 88 (1985). Enforcement matters involving non-New YorkState real estate markets include Florence MUltiple ListingService, Inc., 110 F.T.C. 493 (:988); and Multiple ListingService of Greater Michigan City Area, Inc., 106 F.T.C. 95(1985).

6 The Residential Real Estate Brokerage Industry,Washington, D.C.: Los Angeles Regional Office of the FederalTrade Commission (1983) ("staff Report"). See also Butters,Consumers' Experiences with Real Estate Brokers: A Report en theConsumer Survey of the Federal Trade Commission's ResidentialReal Estate Brokerage Investigation, Washington, D.C.: FederalTrade Commission (1983).

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Licensees' agency status and obligations.7 In substantial part,the disclosure requirements appear to be a resyonse to someprospective buyers' misunderstanding of the role and obligationsof Licensees who are assisting themsin "house hunting," but whomay be acting as agents of sellers.

Prospective buyers typically are introduced to properties byagents retained by home sellers or by cooperating brokers whoseek to share in cemmissions paid by sellers and who may be sub­agents of sellers. The circumstances surrounding "the house

7 An agency may arise by express or implied agreement. Animplied agreement may be inferred from facts and circumstances,especially the words and conduct of the parties. In general,unless an agreement to the contrary is established, a real estatebroker is deemed to be an agent of the seller--typically becausethe seller is responsible for paYment of the commission to beearned. However, seller responsibility for paYment of a coop­er~ting brc~~ar's commission ordinarily does not preclude theparties' agreeing that the broker will represent the purchaser.See, e.g., CUrrier, Finding the Broker's Place in the TypicalResidential Real Estate Transaction, 33 U. Fla. L. Rev. 655, 660­65 (~9S1).

8 For example, Section 4(a) of the Proposed Regulationsprovides that "[a] licensee shall make his agency status andobligations clear to the clients, customers and other licenseeswith whom the licensee deals." Section 4(g) provides that"[w]hile representing a Client, a licensee shall not, by words orconduct, cause a customer or customer's agent to believe that thelicensee can or will represent the interests of the customer."And Section 4(j) states that "[w]henever the words or conduct ofa customt''t" indicate that the customer has misconstrued or misun­derstood the relationship between the licensee and the customer,the licensee shall take prompt, unequivocal and affirmativeaction to clarify the true relationship between the licensee andcustomer."

9 The listing agreement used by members of at least one HewYork State multiple listing service, Rockland County MultipleListing System, provides that the home seller engages everymember of the mUltiple listing service as his or her authorizedagent. The subagent designation is more often intended bycooperating brokers in New York State, the Handbook of MultipleListing Policy (1980) of the National Association of Realtors("HAR") providing, in Section 1.2:

A MUltiple Listing Service is defined as a means bywhich one Participant makes a blanket unilateral offerof subagency to the other participants and as afacility for the orderly correlation and dissemination

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hunt"m may lead some prospective buyers to assume that Licenseesrepresent them, whether or not it is so. prospective buyers whounknowingly treat sellers' agents as their own may be harmed inat least two ways. First, they may unintentionally reveal tosellers' agents--and through the agents to the se1Iers--"propri­etary" bargaining-related information. Second, prospectivebuyers may unwittingly fail to secure fiduciary representation orassistance, such as the services of a buyer's broker or an ap­praiser. The Staff Report on the residential brokerage industryprovides some support for the belief that a substantial number ofprospective buyers beliene themselves to be "represented" by thebrokers who assist them. Insofa~as some of these brokers maysee themselves as sellers' agents, consumer injury may result.

Where, as may be true here, some consumers lack informationnecessary to protect and advance their interests, adoption of aregulation requiring the disclosure of pertinent information maybe beneficial. Whether or not such a regulation will promoteconsumer well-being may depend on the utility of the informationto be disclosed, the manner in which it is to be disclosed, and

of listing information among the Participants so thatthey may better serve their clients and the public.

Approximately 90% of the nation's mUltiple listing services areaffiliated with the NAR. See Staff Report at 8.

ID For example, prospective buyers often initiate thecontacts with Licensees. Thereafter, prospective buyers mayshare a great deal of personal information--about family needs,about personal preferences, and about economic circumstances,among other things--with Licensees. Prospective buyers andLicensees may spend a considerable portion.of their time forseveral days in succession in one another's exclusive company.These circumstances also may bear on whether or not an agencybetween a Licensee and a prospective buyer will be implied. Seenote 7 supra.

II Nearly three quarters of the home sellers and of thehome buyers who responded and who had participated in co-brokeredtransactions believed that the cooperating brokers were, in somesense, "representing" the buyers. Staff Report at 8, 14, and 180et seq. Nearly three quarters of the home buyer-respondersreportedly told the agents with whom they worked the highestprice that they would pay for the property sought; and more thanfour fifths of these buyers believed tha~ the agents would keepthat information in confidence. Staff Report at 186.

See note 9 supra.

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the countervailing costs of making the mandated disclosure.DAccordingly, if the state determines that the market is failingto provide prospective real estate buyers with adequate informa­tion regarding agency, it may wish to adopt a cost-effectivedisclosure regulation.

Section 4 of the Proposed Regulations further would requireeach Licensee to disclose to prospective listers of property allof its policies and procedures that "affect the marketing" oflisters' properties. These policies and procedures expresslyinclUde, but are not limited to, refusals to deal with specificcompanies and refusals to offer commission sp~its of at least 50%to subagents, co-brokers, or buyers' brokers. It may be thatin listing their homes some consumers are disadvantaged, and theefficient operation of the real estate market frustrated, becauseof Licensees' u~disclosed in-house policies. For example, apolicy of refusing to deal with off-price brokers and buyers'agents may reduce the exposure of listers' homes, possiblyaffecting listed homes' time-on-market and selling prices. Thesame may be said of a policy of s~verely restricting compensationoffered to successful co-brokers. Timely disclosure of theseand like policies would permit consumers to take their potentialeffects into account in deciding with whom to list properties.If the state determines that a substantial number of consumers isharmed by non-disclosure, it may wish to adopt cost-effectivedisclosure requirements.

We urge the state to consider with caution, however, therequirement in the Proposed Regulations that all in-house

D See generally International Harvester Co., 104 F.T.C.949 (1984).

Y See Proposed Regulations at 4(e). The reference to"subagents" apparently relates to non-residential listings.

~ The requirement in Section 4(e)(3) that a Licenseedisclose to prospective listers any policy to refuse to offer toco-brokers and buyers' agents at least a 50% share of thecommission may inappropriately discredit every split weighted infavor of the listing broker. It may be preferable to limitcommission split-related rules to the disclosures contained inSections 15(c) and 16(d) of the Proposed Regulations. Section15(c) provides that listing brokers must explain to prospectivelisters "the client's right to determine and specify the amountof compensation and all other terms upon which listing broker maybe authorized to offer compensation to subagents, co-brokersand/or buyer's [sic] agents." Section 16(d) provides that everyagency agreement shall set forth, among other things, thecommission split that the listing broker is authorized to offerto co-brokers and to buyers' agents.

policies and procedures that "affect the marketing" of listedproperties be disclosed. A tremendous variety of policies andprocedures could be deemed to "affect the marketing" of proper­ties, and their disclosure could entail costs--including reducedconsumer attention to the most significant aspects of theproposed brokerage arrangement--in excess of their benefits.

III. PROSCRIPTION OF CERTAIN FORMSOF REPRESENTATION

The Proposed Regulations may be construed to ban certaintypes of representation. For example, Section 5 of the ProposedRegulations, which specifies that "[a] licensee shall not repre­sent adverse interests in the same real estate transaction," maybe taken to ban so-called "dual agencies." We have been advisedthat the Secretary of State concludes that New York State law nowbars dual agencies on the premise that one actor cannot satisfyfiduciary obligations to parties with adverse interests, and thatsectiFn 5 of Proposed Regulations merely restates the generallaw.

Some limited forms of dual representation may not imposeconflicting obligations on Licensees, however. For example,

[a]fter full disclosure of the representation alter­natives, the buyer and the seller might agree that thebroker will be a collector of information and amessenger of positions, rather than a broker who willinvestigate, disclose, advise, negotiate and fullyprotect a principal's best interests.. . .

Part of the special arrangement could be that.. confidential information, such as the buyer's ultimate

negotiaffng position, may not be revealed to theseller. .

~ We understand, however, that in some circumstancesparties' informed consent to dual agency will constitute anaffirmative defense in an action against the dual agent. Thisdefense is not lightly established: "Informed consent is morethan just knowing that one and the same agent represents both thebuyer and the seller. The broker is obligated to disclose allfacts relevant to the buyer's and the seller's decisions ofwhether or not to consent to the common representation." J.Reilly, Agency Relationships in Real Estate, Real Estate Educa­tion Co. 63-65 (1987) (emphasis in original).

J] Id.

€

The availability of such a representation alternative maye::able some home sellers and home buyers to obtain wanted--andonly wanted--Licensee services at prices less than the cost ofseparate and inclusive representation. As we understand it, thegeneral law's bar does not necessarily extend to some limitedforms of dual representation. Accordingly, the state may wish tomodify the Proposed Regulations to clarify or recognize theappropriateness of dual representation consistent with theavoidance of Licensee conflicts-of-interest.

The Proposed Regulations also appear to prohibit a listingbroker from offering subagencies to Licensees not affiliated withhim or her. Such Licensees would be "cooperating brokers," asdefined in the Proposed Regulations, and therjfore would notoperate as agents or subagents of homeowners. We understandthat the intent underlying restriction of subagency offers is toavoid potential homeowner liability for wrongful acts andomissions of brokers with whom homeowners have no direct rela­tionship. However, it is difficult to determine precisely howthe proposed regulation would affect the rights and liabilitiesof homeowners and cooperating brokers, and whether the proposedregulation would impair the efficient delivery of brokerageservices. Accordingly, the state may wish to further ~ess thelikely effectiveness and costs of the ban on s~agency, and tomodify the proposed regulation if appropriate.

IV. LIMITATIONS OF CONTRACT TERMS

The Proposed Regulations also contain provisions that wouldrestrict the terms of contract between Licensees and homeowners.Restrictions on terms of contract may, in some instances, advance

~ See. for example, Sections l(a) and (e), 6, and 16(e).Section 1 contains applicable definitions. Section 6 precludesbrokers' offering and accepting of offers of subagency from otherbrokers. And Section l6(e) prohibits brokers' use of agencyagreements authorizing the making of subagency offers.

~ The comments of mUltiple listing services-and tradeassociations regarding the Proposed Regulations may be ofsubstantial assistance to the state in understanding theefficiency implications of the proscription of subagency offers.

~ For example, the State may wish to permit informed home­owners to consent to their brokers' extending offers of subagencyto prospective cooperating brokers. This is the approach adoptedin the Proposed Regulations' application to non-residential realestate transactions. See Section 7 of the Proposed Regulations.See also Section 15, relating to disclosure of homeowners' rightsto determine contractual options that limit personal liability.

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public interests. However, restrictions on terms of contractalso may impose unnecess~ry costs on consumers. Section 16(c) ofProposed Regulations, which limits listing agreements to not morethan 90 days, may be an example of the latter.

The activity level in real estate markets may vary consider­ably from area to area and from time to time. In some instances,a 90-day listing period may provide more than enough time for aLicensee to promote the sale of a property. Under other marketconditions, however, a 90-day listing period may be quiteinadequate. When homeowners and Licensees are free to negotiatethe duration of listing agreements, local market conditions canbe considered and the interests of homeowners and Licenseesaccounted for. In contrast, administrative determination of "theappropriate" listing contract duration may lock homeowners andLicensees into contract terms that, at times, serve neither.

Listi~ brokers may provide a variety of useful services tohomeowners. The availability of these services may depend onlisting brokers' expectations that the costs of providing theservices will b! recouped from commissions on sales of propertieslisted by them. Limiting by regulation the duration of listingagreements may reduce the likelihood that homes will be soldduring given listing periods, particularly in a "buyers' market."If listing brokers believe that they cannot recover their costsduring the regulated listing period, they may reduce servicesprovided and/or increase the price charged for those services.~In either event, homeowners' interests may suffer. Accordingly,

~ These services may include: the preparation of detailedmarket analyses to guide homeowners in establishing list prices;the holding of open houses to acquaint prospective cooperatingbrokers and prospective purchasers with listed properties; thepreparation and publication of pictorial advertisements featuringlisted properties and other promotional materials; the analysisof prospective purchaser traffic and feedback and the provisionof related guidance to homeowners as to prospective purchaserobjections (such as the market will not support the asking price,or the dirty kitchen cabinets are turning people off); and theprovision of "house-sitting" services on behalf of listers thathave relocated at a distance from listed properties.

~ Costs are not necessarily recouped in each transaction.Rather, each listing broker ordinarily expects to recoup costsover the course of several transactions.

~ Some listing brokers might reduce their costs andincrease their revenues by requiring home listers to separatelycontract and pay for services, such as "for sale" advertising,that now often are provided without additional charge pursuant tolisting agreements.

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the state may wish to explore less restrictive alternatives tothe proposed Section 16(c), such as requiring Licensees to make acautionary disclosure, or abandon it.

section 16(f) also restricts the terms of contract betweenLicensees and homeowners. That section provides that "[a] realestate broker shall not use any agency agreement which authorizesthe real estate broker to limit offers of compensation to membersof any particular trade group or association." Homeowners typi­cally may seek to list their properties in a manner that willensure widespread cooperative brokerage efforts. Some home­owners, however, might prefer to restrict offers of compensationto members of a given organization, where membership in thatorganization attests to some quality of importance. For example,organizational membership may be limited to persons having exten­sive training and/or experience, or may certify compliance with ahigh-minded code of professional ethics. ThUS, by agreeing tolimit offers of compensation to members of such an organization,homeowners might increase the effectiveness of cooperativebrokerage efforts, or reduce the risks of dealing with brokersand sales representatives who engage in ethically questionablepractices. Accordingly, the State may wish to reconsider theadvis~ility of adopting section 16(f) of the Proposed Regula­tions.

v. CONCLUSION

We have limited our comments to matters substantiallyaffecting competition and consumers in residential real estatemarkets. Within that context, we adhere to the view, in partreflected in the Proposed Regulations, that information failuresthat deprive consumers of the ability to act in their self­interest are best addressed by adoption of narrowly tailoreddisclosure requirements. overly broad disclosure requirementsmay impose substantial and unnecessary consumer costs. Similar­ly, some proposed restrictions on forms of Licensee representa­tion and on contract terms may frustrate some consumers' effortsefficiently to satisfy their wants. In those instances, carefulidentification of the public policies to be advanced may permitthe adoption of less restrictive regulations, such as narrowly

~ If the proposed Section 16(f) were withdrawn, Licenseeswould likely be obligated under Section 4 of the Proposed Regu­lations to disclose to prospective listers any in-house policieslimiting offers of compensation to members of a particular tradegroup. See discussion at pages 5 and 6 supra.

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tailored disclosure requirements, or the dropping of the proposedr(~gulation.

Very t~ruYours,.~~ 2:_/%~~~~l l~~

Regiona DirectorNew York Regional Office

YlI~r (\ ,~. :i!~/~MaJc;y J k! Tiffany'llRegional DirectorLos Angeles Regional 0 fice

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