Many commercial brokers have little reason to think about being sued. Their clients are typically sophisticated parties who want to make a deal and most deals are lawyered-up. Disclosure issues do not pop up as frequently in commercial transactions as in residential transactions. However (you knew it was coming), trouble may be on the way from the biggest and most well-funded antagonist, the federal government. While everyone is enjoying a fruitful comeback from the nasty real estate downturn, Congress has been creating a new regulatory framework that may be beyond your E & O coverage.
Securities Laws. Brokers sometimes partner with contractors and developers, and may raise capital from investors. When a deal sours, it’s not just your partner or investor who may file suit. I’m willing to bet that some aspect of your transaction may have violated the Securities Act of 1933 or the Securities Exchange Act of 1934. You may have inadvertently sold a security, e.g., a partnership or LLC interest, which must either be registered with the SEC or fall within an exemption. Even an exempt sale is subject to certain compliance requirements. The penalties for non-compliance may be both civil and criminal.
Privacy Regulations. The Federal Trade Commission’s “Privacy Act” requires “financial institutions” (defined broadly to include commercial brokers) to explain their information-sharing practices to customers and to safeguard sensitive data. You all have “sensitive data” in your files, Brokers have become increasingly dependent on social media. Data breaches pose a series of risks, from financial to reputational. Liability could result from simply using the wrong photos of a property. The FTC may bring an enforcement action in federal district court and may seek the full scope of injunctive and ancillary equitable relief. The FTC also has the authority to examine privacy policies and practices for deception and unfairness.
The MAP Rule. The Mortgage Acts and Practices – Advertising Rule (the MAP Rule) gives the FTC the power to seek civil penalties for deceptive mortgage advertising and for breach of record-keeping requirements. The Rule extends beyond the mortgage industry and applies to all entities within the FTC’s jurisdiction (including real estate agents and brokers). Anyone subject to the rule must maintain records of specific forms of communication for 24 months. Failure to retain these records my constitute a violation of the MAP Rule and subject the violator to some very harsh civil penalties.
FTC Green Guides. The FTC enforces regulations designed to penalize marketers who make untrue claims about the environmental attributes of real estate. FTC regulations apply to brokers who have made broad, unqualified claims that a building is “environmentally friendly”, “eco-friendly” or environmentally “certified.” The FTC believes that such claims are likely to be exaggerated. If a broker makes an inaccurate written or verbal statement extolling the environmental or energy saving virtues of a building, or that some level of environmental certification has been conferred when it has not, harsh civil penalties for deceptive practices may be the result.
There is good and bad news. The bad news is that I didn’t cover any of the state regulations. The good news is that there are too few regulators. However, if you don’t want to play those odds, there are protective measures you can take. Unfortunately, I have already hit my word limit.