BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair SB 510 (Correa) Hearing Date: April 27, 2011 As Introduced: February 17, 2011 Fiscal: Yes Urgency: No SUMMARY Would authorize an employing real estate broker or corporate officer appointed by an employing real estate broker to appoint branch office or division managers of real estate offices, as specified, and would subject these appointees to disciplinary action for failure to properly supervise. DESCRIPTION 1. Would authorize an employing real estate broker or corporate officer appointed by an employing real estate broker to appoint a licensee to manage a branch office or division of the employing broker's real estate business, and to delegate to the appointed manager the responsibility to oversee day-to-day operations, supervise the licensed activities of licensees, and supervise clerical staff employed in the branch office or division. 2. Would subject a licensee accepting appointment as a branch office or division manager to disciplinary action for failure to properly supervise licensed activity over which the appointee is given authority. 3. Would require any appointment made pursuant to the provisions of the bill to be made through means of a written contract in which the appointee accepts the delegated responsibility, and would require the employing broker or corporate officer to send a copy of the contract to the Department of Real Estate (DRE), along with a notice, in a form approved by the Commissioner of Real Estate (commissioner), identifying the appointee and the branch office or division the manager is appointed to supervise. 4. Would provide that a licensee may not be appointed as a manager, if he or she holds a restricted license, is subject SB 510 (Correa), Page 2 to an order of debarment, or is a salesperson with less than two years of full-time real estate experience when appointed. EXISTING LAW 5. Defines a real estate salesman (aka salesperson) as a natural person who, for compensation or in expectation of compensation, is employed by a licensed real estate broker to engage in one or more of the activities for which a real estate license is required (Business and Professions Code Section 10132; all further references are to the Business and Professions Code). 6. Provides that the commissioner may suspend or revoke the license of a real estate broker licensee who fails to exercise reasonable supervision over the activities of his or her salespersons, or who, as the officer designated by a corporate broker licensee, fails to exercise reasonable supervision and control over the activities of the corporation (Section 10177(h)). 7. States that no violation of any of the provisions of the Real Estate Law by a real estate salesperson or other employee of a licensed real estate broker shall cause the revocation or suspension of the license of the employing broker, unless it appears upon a hearing by the commissioner that the employing broker had guilty knowledge of such violation (Section 10179). 8. Sets out minimum standards of experience and education for persons who wish to obtain a real estate salesperson or real estate broker license, as follows (Sections 10150.6, 10151, and 10153.2): a. Applicants for a real estate salesperson license must pass three, three semester-unit courses, or the quarter equivalents thereof, including one class each in real estate principles and real estate practice, and one class from the following list: legal aspects of real estate, real estate appraisal, real estate financing, real estate economics or accounting, business law, escrows, property management, real estate office administration, mortgage loan brokering and lending, computer applications in real estate, or California law SB 510 (Correa), Page 3 relating to common interest developments. Real estate salesperson applicants must also pass the real estate salesperson examination administered by DRE, successfully complete a criminal background check and the DRE salesperson application, and pay their license fees, which are currently $245 for a four-year period. b. Applicants for a real estate broker's license must either have served for two years as a real estate salesperson or obtained a bachelor's degree in a subject that includes specialization in real estate, and have applied in writing for permission from the commissioner to substitute that bachelor's degree for the two years of real estate experience otherwise required. Real estate broker applicants must also pass eight, three semester-unit courses, or the quarter equivalents thereof, including one class each in real estate practice, legal aspects of real estate, real estate appraisal, real estate financing, and real estate economics or accounting; and three of the following: advanced legal aspects of real estate, advanced real estate finance, advanced real estate appraisal, business law, escrows, real estate principles, property management, real estate office administration, mortgage loan brokering and lending, computer applications in real estate, or California law relating to common interest developments. Real estate broker applicants must also pass the real estate broker examination administered by DRE, complete the real estate broker application, and, if they have not already been licensed as a real estate salesperson, successfully complete a criminal background check. Real estate broker applicants must also pay their licensees fees, which are currently $300 for a four-year period. EXISTING REGULATION Requires real estate brokers to exercise reasonable supervision over the activities of their salespersons, as specified, and provides that a broker may use the services of brokers and salespersons to assist in this task, as long as the broker does not relinquish overall responsibility for supervising the acts of salespersons licensed to the broker (Regulation 2725). SB 510 (Correa), Page 4 COMMENTS 1. Background and Discussion: This bill is sponsored by the California Association of Realtors (CAR), in order to enact one of the seven recommendations developed by a broker supervision task force convened by DRE during 2010. The task force included five representatives from DRE and nine from industry, including two from CAR. It was developed to discuss issues relating to broker supervision, including the challenges posed by the day-to-day oversight of large offices and multiple points of broker supervision. As discussed by DRE in its September 2010 task force report, "Currently, there are no license disciplinary consequences to any subordinate licensee when supervisorial authority is delegated under the provisions of Regulation 2725 for failure to properly supervise. It was decided that legislation should be considered to provide a multi-tiered operational structure that would hold a subordinate supervisor delegate liable for proper supervision potentially along with the designated officer or broker....Real estate licensee(s) accepting delegated supervisory authority shall be subject to disciplinary action, potentially along with the responsible broker or designated officer, for failing to properly supervise the licensed activities performed within his/her delegated areas of responsibility. Regardless of any such agreements, the principal real estate broker or designated officer of a corporation shall exercise reasonable supervision and control over all activities that require a real estate license." The task force concluded that requirements for appointment as an office manager should include those provided for in this bill (a minimum of two years for any real estate salesperson appointed to a branch manager position, inability of anyone with a restricted license or subject to a bar order to act as a branch manager, and a requirement that a written contract be in place between the employing broker and the branch manager). SB 510 is being sponsored by CAR, to implement the task force's recommendation. 2. Are the task force's recommendations adequately protective of the public? As noted above, the task force envisions that real estate brokers who head up large real estate offices will be able to delegate branch manager SB 510 (Correa), Page 5 responsibilities to real estate salespersons and real estate brokers in their employ. This is nothing new; employing brokers already delegate branch manager and office manager responsibility to others. What is new in this bill is the concept that the people to whom this responsibility is delegated will be subject to disciplinary action for failure to properly supervise. However, the task force report is somewhat vague in its desire to ensure that the accountability of branch office managers is additive to the responsibility that employing brokers already have to exercise adequate supervision over all of those who report to them, rather than in lieu of that existing responsibility. In more than one place, the task force report suggests that, after delegating responsibility to a branch office manager, the potential could exist for the employing broker to be subject to disciplinary action for failure to properly supervise. In order to minimize the possibility that an employing broker will seek to shield him- or herself from discipline by delegating tasks to branch managers, staff has requested, and the sponsor has agreed to language clarifying that nothing in the bill is intended to absolve employing brokers of their responsibilities to perform adequate supervision of those who report to them (see Amendments section below) . Staff also asks, "Should the minimum experience level among branch managers be increased? Is a salesperson (junior level licensee) with two years of experience experienced enough to run a large office that could include a few hundred other salespersons and brokers?" The bill's sponsor asserts that the task force concluded two years' experience as a salesperson is sufficient experience to run a real estate office. Additional years of experience were deemed unnecessary by the task force, as was a requirement that anyone placed in charge of a branch office hold a real estate broker (senior level) license. Further, the task force did not propose any minimum level of experience for branch managers who are real estate brokers. Staff is less optimistic than the task force about the management qualities of relatively inexperienced real estate licensees. As noted above, real estate salespersons are required to pass only three courses in order to obtain their licenses, and none of these courses is required to cover management or supervision. Prospective real estate SB 510 (Correa), Page 6 salespersons may, but are not required to, take an elective on real estate office administration. Real estate salespersons must operate under the supervision of real estate brokers at all times; unlike real estate brokers, they may not act independently. Should real estate salespersons with as few as two years of experience be sanctioned as managers of large real estate offices, where mortgages are brokered, escrows are handled, and residential and commercial properties are managed, bought, and sold? Would a requirement that branch office managers have at least four years of recent experience if they are salespersons, or two years of recent experience if they are brokers, be more protective of the public? 3. Summary of Arguments in Support: In its letter of support, CAR states that SB 510 will add two much-needed changes to state law - first, minimum standards for appointment of a branch manager, and second, a statutory duty to supervise the salespersons that report to the office manager, with resultant license discipline for failure to properly supervise. CAR states that SB 510 does not remove any existing accountability for the employing broker that is at the head of the company. 4. Summary of Arguments in Opposition: None received. 5. Amendments: a. The sponsor has agreed to the following amendments, some at the request of Committee staff, and others at the request of DRE. Page 2, lines 3 and 4: After "corporate" insert: designated broker, and strike "appointed by an employing broker" Page 2, line 5: After "broker's" insert: or employing corporate designated broker officer's Page 2, line 10, insert the following after "(b)": Notwithstanding subdivision (a), nothing in this section shall limit the responsibilities of an employing broker or a corporate designated broker officer pursuant to subdivision (h) of Section 10177. Page 2, line 15: After "corporate" insert: designated SB 510 (Correa), Page 7 broker Page 2, lines 16 and 17: Strike "send a copy of the contract to the department, along with a notice"" and insert: retain a copy of the contract and send a notice Page 2, line 23, after "is" insert: or has been Page 2, line 25, strike "when appointed" and insert: within five years preceding the appointment. Page 2, between lines 25 and 26, insert: (e) Whenever an appointment of a branch manager is terminated or changed, the employing broker or corporate designated broker officer shall immediately notify the commissioner thereof in writing. Delay the operative date of the bill to July 1, 2012. b. As noted above, staff is concerned that the experience requirements for branch office managers may not be sufficiently protective of the public, but was unable to reach agreement with the bill's sponsor on an amendment to address this concern prior to the hearing. If this committee wishes to increase the experience requirements of branch office managers, staff suggests the following changes on page 2, lines 24 and 25: "The licensee is, a salesperson with less thantwofour years of full-time real estate experience during the six years preceding appointment, or a broker with less than two years of full-time real estate experience during the four years preceding appointmentwhen appointed." LIST OF REGISTERED SUPPORT/OPPOSITION Support California Association of Realtors (sponsor) Opposition None received Consultant: Eileen Newhall (916) 651-4102 SB 510 (Correa), Page 8