Broker Supervision in Risk Management-BMC #3 – Supervision

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A broker has the responsibility to familiarize the sales associates and associate brokers with any federal or state rules and statutes per Commissioner’s Rule R4-28-1103(A)(4).  A broker then would have the responsibility to ensure that those in his or her employ are familiar with their duties to both their customers and clients.  The broker will also need to develop a system for monitoring compliance with these rules and statutes (R4-28-1103B).  It is also important for the broker to make sure that the salespersons that he or she employs understand that under “The Common Law of Agency”, there is one agent per employing broker and any subagent employed by that broker must represent whoever that broker represents.  Court decisions also interpret the laws and statutes determine how they apply.  What this means is that every agent they employ must represent the party that the broker also represents.  A broker will need to establish and clearly communicate their agency representation office policy and include that in their policy manual.

In line with this, the broker will want to ensure that first, the agents understand their obligations to customers and to clients.  It is advisable to include these in the broker’s policy manual.  A recitation of these might be included as follows:

Agent’s Duties To Customers & Clients:  The agent has duties to all parties with whom they deal.  The degree to which these duties are specific will depend on whether the agent is treating the party as a “customer” or a “client”.  It is said that the agent works “with” the customer and has a narrower scope in defining the duties to the customer.  The agent works “for” the client and has a much broader scope of obligations to the client.  The broker will need to really clarify this to the sales associates.

Quick Quiz

Fill in the Blank:
The agent has to all parties with whom they deal.

The agent has ministerial duties (imposed by law) to both the customers and clients.  These duties are defined as follows:

  • Honesty:  An agent has a duty, to be honest to all parties in a transaction including his or her broker.  The broker should be very clear here about being included in the loop on any transactions.
  • Disclosure of material facts:  An agent has a duty to disclose anything that is considered a material fact to all parties in the transaction.  The broker should be able to explain more intricately what are the true material facts that must be disclosed.
  • Accounting:  A broker will need to integrate well-defined systems to ensure the proper handling of the transaction paperwork.  Normally, the escrow company is the one making sure this is done, but the broker has the ultimate responsibility to see to it that this is done properly.
  • Reasonable skill and care:  A broker will need to clearly identify that an agent has a duty to deliver services to the customers and/or clients the standard of care that are industry standards either mandated or influenced by the Arizona Revised Statutes, Commissioner’s Rules & Policies, Court Decisions, the National Association of REALTORS® Code of Ethics & Standards of Practice, the Arizona Association of REALTORS® forms and general industry-wide practices.
  • Fairness:  Commissioner’s Rule AAC R4-28-1101A states the following:  A licensee owes a fiduciary duty to the client and shall protect and promote the client’s interests.  The licensee shall also deal “fairly” with all other parties to a transaction.  In Arizona case law, the word “fairly” has been interpreted to mean being truthful and honest.
Quick Quiz

Fill in the Blank:
A licensee owes a duty to the client and shall protect and promote the client’s interests.

Agent’s duties to clients:  An agent does have a fiduciary duty to his or her client.  Remember that an agent works “for” the client.  The fiduciary duty has the following components:

  • Confidentiality:  An agent shall keep confidential whatever his or her client confides in them unless the item is a material fact or the client consents to the disclosure of this information in writing.  Brokers should direct his or her agents that if they are not certain as to whether an item is a material fact that should be disclosed or an item that should be kept confidential, they should bring this to the broker’s attention and obtain advice.  A broker who is not certain should have an attorney on call to consult with on this matter.
  • Accounting:  While accounting is also a ministerial duty, the scope of this duty is much narrower under the ministerial umbrella and requires that the consumer is provided with legible and signed copies of the transaction documents.  Under fiduciary duty, the scope is much broader and requires the agent to perform a higher degree of due diligence on the documents.  A broker should be very careful to see to it that their salespersons assist the client in verifying information that is important to them.  An example would be for the agent to make sure that the HUD-1 Settlement Statement is consistent with the terms and conditions of the agreement to protect their client’s interests.
  • Reasonable Care & Diligence:  Under ministerial duties, the duty of reasonable skill and care is included.  Under fiduciary duty, the obligation to provide “reasonable care & diligence” is included with emphasis on the word diligence.  The agent plays a much more prominent role in assisting the client on the “due diligence” in the transaction.  The broker, for the most part, has a duty to ensure that the agents he or she employs, at least, meets the standards of care in the real estate industry.
Quick Quiz

Fill in the Blank:
Under duties, the duty of reasonable skill and care is included.

  • Loyalty/Advocacy:  As was stated in AAC R4-28-1101A, the agent must promote and protect the client’s interests in the transaction.  Common law has dictated that the agent must promote and protect the client’s interests even above his or her interests in the transaction.  A major challenge for a broker will be to make sure that the agents understand that they must put the client’s own interests before theirs or the broker’s interests in a transaction.
  • Obedience to Lawful Instructions:  The agent has a duty to obey instructions from the client as long as the instructions are lawful.  For example, a seller asking an agent to not market their property to a certain ethnic group would be an unlawful instruction as it would be violating the Fair Housing Laws.  The agent would not be able to lawfully obey to that instruction and if the seller insisted on the agent’s obedience of this instruction, the agent’s only justifiable action would be to walk away from that seller.  The broker should advise the salespersons to notify the broker when an instruction from a client appears to be in conflict with any rules, statutes or company policies.
  • Accountability:  An agent can be held accountable for their oral representations.  An agent needs to be very careful about what they say.  This is why a broker should advise the salespersons to be very careful about how they answer questions and if asked a question they are unable to answer confidently, the sales associate should indicate their lack of knowledge on the situation and advise the client that they will help them find out the answer.
  • Disclosure of any information that would benefit the client:  If an agent obtains information about the other party that could be to his or her client’s benefit, they have a duty to disclose this information to their client.  For instance, if the listing agent tells a buyer’s agent that the sellers are vulnerable and would probably accept a lower price, the buyer’s agent has a duty to share this with their buyer/client.  The broker will need to be very clear about how information is to be shared and under what circumstances.  In limited representation, the broker will need to be very specific about the information that is being shared or not shared and under what circumstances.  However, if the agent is a limited agent, the duty of full disclosure conflicts with the duty of confidentiality, and confidentiality will normally trump full disclosure unless the item in question is a material fact.  A broker who allows the practice of dual agency in their practice should have a policy of how a situation like this would be handled.
Quick Quiz

Fill in the Blank:
If an obtains information about the other party that could be to his or her client’s benefit, they have a duty to disclose this information to their .

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