Do You Recruit? Be Aware of FTC Rule

Brokers….take heed..

A rule that took effect March 1 could hit you if you recruit salespeople to join your brokerage. The key is what you offer your recruits as part of your offer.

The Federal Trade Commission’s Business Opportunity Rule is about making sure that companies that offer a business opportunity in exchange for a fee are offering something legitimate and not just trying to separate you from your money. The FTC has a separate rule for franchise opportunities.

The typical target of the rule isn’t a company like a real estate brokerage; it’s a company like one that offers work-at-home opportunities or vending machine routes. In these cases, the people being recruited are offered a business opportunity in exchange for a payment to the company. The vending machine company, for example, solicits people to place, service, and collect the income from vending machines in exchange for paying the company for the machines or a split of the income or both.

Overall, there’s a three-part test: 1) a solicitation by the company, 2) the offer of some type of business assistance, and 3) a required payment.

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Although not the targets of the rule, real estate brokerages can get snagged in its disclosure requirements if the broker or recruiter reaches out to salespeople to join the brokerage, offers some type of assistance like a list of leads, and charges money. Because the rule’s language was not drafted in consideration of a real estate brokerages, NAR is seeking further clarification from the FTC on how this this will impact real estate brokerages.

The key part of the test for brokerages is the business assistance they provide. Assuming other parts of the rule apply, the rule is triggered when the solicitation promises “assistance” to the salesperson. What type of assistance? The type of assistance must be significant, and so might include offering a salesperson a list of customers or prospective home buyers, or otherwise promising to provide the salesperson all the “tools” needed to succeed in sales with the brokerage.

To be on the safe side, you want to be sensitive to the tangible assistance you offer to salespeople in your solicitations in exchange for joining the brokerage and a payment. The rule is intended to cover companies that offer all the tools necessary to enter the business. That’s not the typical real estate brokerage approach, since salespeople tend to develop their own tools to enter real estate. But since the brokerage recruitment could be interpreted to meet the rule’s requirements, you want to look at what you’re offering recruits so you can decide, with your lawyer, whether you need to disclose your practices.

NAR Legal Affairs has developed a summary of the rule and its potential impact on your business. Access the Business Opportunity Rule summary.

The FTC is hosting a workshop on the rule June 1.

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