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Designated Broker Policies

I am aware that Colorado’s Designated Brokerage legislation requires all brokerage firms, even one person offices, to have a brokerage relationship policy. What are the issues which should be addressed in such a policy?

General Theme

The drafting of an agency policy requires the balancing of a variety of considerations. The policy should create predictability without being unduly rigid. (Yet flexibility enhances complexity.) The policy should be specific without being unnecessarily complicated. It needs to strike a balance between the company’s need to control the behavior of employed licensees without setting a standard of care so high that the policy creates a liability trap. (Avoid hoisting by one’s own petard.). Though not necessarily a zero sum choice, some issues require a balancing between the goals of risk reduction and income maximization. Brokers must balance all of these considerations in crafting their policy.

Specific Issues

Keeping in mind that there is no exhaustive list of all of the issues which should be covered, policies should address the following:

    A.   May designated sellers’ brokers allow sellers to engage them as sellers’ agents only, transaction-brokers only, or may sellers choose between agency or transaction-brokerage?
    B.   Companies which permit licensees to work as sellers’ agents need to address the capacity in which the designated seller’s broker will work with buyers in transactions where that designated broker is the “one licensee” involved in the deal. (The Real Estate Commission’s forms call these “In-Company Transactions–One broker.”) The REC agency listings provide three options for addressing the one licensee transactions. The policy should address how the company’s licensees must make the selections among the three options.
    It is beyond the scope of this article to address the advantages and disadvantages among the three options. For this article, suffice it to say that to the extent an employing broker permits flexibility about how those boxes are checked, the broker increases the complexity of broker’s supervisory duties. There are at least two levels of complexity. One level requires uniform checking by a licensee, but allows inconsistency within the company (e.g. Sam must always choose option one and Frank must always choose option two). A more complicated model would permit inconsistency by a licensee (e.g. Mary may choose among the three choices on a case-by-case basis). The options selected dictate the nature of the disclosure made to buyers. Listing licensees who have some listings checked one way, other listings checked another way (and perhaps a third set of listings checked another way) face a disclosure quagmire when working with unrepresented buyers.
    Licensees who make the selection so that they will always be a seller’s agent face a lawyer-like conflict of interest if one of their buyer clients want to purchase such a listing. The policy should address how to manage those conflicts.
    C.   Policies should address the issues analogous to those raised in A & B above for designated buyer’s brokers.
    D.   Agency policies should specify how designated brokers will handle one-licensee transactions when the choices made in the seller listing agreement are incompatible with the choices made in the buyer listing.
    E.   The law allows employing brokers to both participate in and supervise a deal, yet the policy should manage the potential conflicts associated with those different roles. Among the options are: (1) to specify that any time the employing broker is working a transaction, that the employing broker shall work the deal as a transaction-broker (this allows the employing broker to keep the confidences of the employing broker’s non-client confidential from the employing broker’s original client); (2) in offices which are large enough to have both an employing broker and a managing broker, to require the employing broker to supervise the employing broker’s deals and vice versa; and (3) the employing broker, on a case-by-case basis could designate some other licensee to work as the supervising broker. Each option (and the others) has its advantages and disadvantages. The policy should address which options are permitted and, if more than one option is permitted, how the choice will be made among the options.
    F.   Because the confidentiality duties that one licensee has to his or her clients does not extend to other licensees within the company, brokerage policies must satisfy the employing broker’s responsibility to prevent a client’s secrets from being shared within an office. The policy should address the scenario where one licensee within the company becomes aware of the secrets of another company client.
    G.   When one licensee covers for another licensee, the covering licensee may become aware of confidential information of a company client who is not an initial client of the covering licensee. The policy should address situations where a covering licensee later represents his or her own client who has an interest adverse to the covered client’s interest.
    H.   Sometimes licensees will enter into agency relationships where it will be difficult to operate in a neutral fashion. Except for the very small minority of licensees that either exclusively represent sellers, or exclusively represent buyers, most companies will need to address how to handle one licensee transactions where that one licensee has a special relationship with a client which interferes with a more general policy requiring the designated broker to act neutrally between the seller and the buyer.
    I.   Brokerage firms which permit teams should define the nature of the team and address the issues specific to teams.
    J.   Most companies will have seller or buyer listings from 2002 which carry over into 2003. Agency policies should specify what needs to be done to bring listings created under the old statute into compliance with designated brokerage.

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Because of the inherent trade-offs and complexities above, brokers should work with their attorneys in drafting these policies.



A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

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