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January 20, 2014 Article

NY Department of State Tightens Rules on Titles for Real Estate Agents

The change combats misleading language used by the Empire State's real estate agents

by John A. Snyder and Michael Taxin

The common practice of commercial and residential real estate agents in New York using fancier titles such as “president,” “vice president,” “managing director,” and “executive vice president” is subject to heightened scrutiny as a result of two recent letters from the New York Department of State (DOS) that give notice that use of such titles may be dishonest or misleading advertising and subject to penalty. In response to these opinion letters, companies must exercise due care when giving titles to brokers, associate brokers, or salespersons (known collectively as “agents”), whether they are affiliated with their brokerage firms as independent contractors or employees, and in preparing marketing or advertising material, such as business cards, show sheets, press packets, deal sheets, web sites, email auto-signatures, and social media.

The April Opinion Letter

On April 26, 2013, the DOS opined that a brokerage may not permit an agent to use the titles president, vice president, senior vice president, executive vice president, or managing director for marketing purposes unless the agent is, in fact, an officer or director of the brokerage company. The department noted that Section 441-c(1)(a) of the New York Real Property Law subjects an agent to potential suspension or revocation of his or her license; a fine not exceeding $1,000; or reprimand, if the agent is found to have engaged in “dishonest or misleading advertising” and that the use of such titles by noncorporate officers violates this statute. 

The DOS applied a common meaning standard to “dishonest or misleading advertising” in its opinion letter because the phrase is undefined by the statute and implementing regulations. In doing so, the department looked to New York’s Business Corporation Law and determined that a brokerage’s use of a corporate title for agents suggests that the brokerage company has officially elected or appointed the agents as officers under applicable corporate law, capable of making decisions for and binding the company and managing the daily business of the company. Therefore, an agent who is not a corporate officer who holds himself or herself out with a corporate title is engaging in dishonest or misleading advertising “because doing so would lead the public to believe that the brokerage entity has appointed or elected the Agent as an officer or to a comparable management position.” 

Next, the DOS stated that even if a brokerage has taken action to officially appoint or elect an agent as a corporate officer, any such action would need to comply with another New York requirement that prohibits the ownership of voting stock by salespersons and associate brokers (subordinate licensees) in 19 NYCRR 175.22 and N.Y. McKinney’s Real Property Law §441-b(2). Read together, these provisions prevent a subordinate licensee from holding voting stock or being appointed as an officer in a corporate brokerage company, a manager or member of a limited liability company, or a member of a partnership. Consequently, only brokers licensed as company brokers—those who supervise subordinate licensees and are made officers of the brokerage consistent with corporate law—can use titles such as managing director or vice president or similar titles suggestive of a corporate officer of management position. Subordinate licensees cannot use such titles.

The August Opinion Letter

In a second opinion letter, issued August 20, 2013, the DOS clarified several issues from its first opinion letter. The DOS first explained that a subordinate licensee cannot become an officer in a corporate brokerage, a manager or member of a limited liability company, or a member of a partnership unless he or she upgrades his or her license (really a reapplication) to that of a “broker” and acts as a company broker, meaning their license is not held underneath another individual “broker.” According to the second opinion letter, the rationale behind this restriction derives from the division of responsibilities between brokers and subordinate licensees. Citing N.Y. McKinney’s Real Property Law §440(5) and 19 NYCRR 175.2, the DOS stated that brokers are responsible for the conduct of the corporate brokerage and required to guide, instruct, oversee, and supervise the actions of subordinate licensees, while subordinate licensees are prohibited from running the daily operations of the brokerage or holding shares of voting stock.

The DOS also clarified whether a subordinate licensee may be appointed as a “director” of a brokerage corporation. Because the term director is not well defined under Real Property Law §441-b(2), the DOS looked to its general meaning under corporate law. Under New York Business Corporation Law §102(a)(5), a director is defined as “any member of the governing board of a corporation, whether designated as director, trustee, manager, governor, or by any other title.” A director assists in the business of managing the corporation as a member of a corporate board of directors. See Business Corporation Law §701. Given that a subordinate licensee is not permitted to participate in the management of a corporate brokerage, a subordinate licensee may not serve as a director.

Third, the letter clarified that a subordinate licensee who is an employee of the brokerage, rather than an independent contractor, may not hold a corporate officer position. Article 12-A of the Real Property Law does not recognize a distinction on the basis of independent contractor versus employee status. Relying on a prior opinion letter, the department stated that, at heart, the relationship between a broker and salesperson is that of principal and agent, even though the Internal Revenue Code allows for such salespeople to be treated as independent contractors. 26 U.S.C. § 3508. A broker (principal) is legally accountable for the acts of a salesperson or associate broker who is licensed with, by, or underneath that broker, even if such person is classified as an independent contractor.

Finally, the second opinion letter makes clear that Article 12-A does not prohibit the issuance of all titles to subordinate licensees. The DOS said Article 12-A only prohibits false and misleading advertising and prohibits a subordinate licensee from using a title that would mislead the public into thinking that the subordinate licensee is a corporate officer (or other elected position) of the brokerage company when he or she is not. Titles that imply that a subordinate licensee is involved in the management, supervision, and/or control of the brokerage company are false, misleading—and prohibited. Titles that do not reasonably lead to such implications or other descriptions of success or experience are permitted, as long as they are truthful and accurate.

These two opinion letters from the DOS have resulted in wholesale changes to the way the New York real estate industry—which, according to the Wall Street Journal, consists of 52,736 licensed real estate brokers and 57,347 salespersons—refers to its subordinate licensees, with only “brokers” being permitted to retain titles that signify corporate officership. As a result, business cards, vCards, and other promotional material are being modified and existing materials are being thrown in the trash bin. Going forward, to avoid potential pitfalls, including fines or license suspension and revocation, serious thought must be given to whether to keep existing titles, as well as whether to confer titles on new agents in New York, and companies must closely monitor the titles used in their external communications, social media, and advertising and marketing materials. It is widely expected that the state will begin enforcing these rules in 2014.

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