Home Brokers & Agents The NAR Code of Ethics is Illegal (Probably)

The NAR Code of Ethics is Illegal (Probably)

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I got a heads-up from a source, which then led me to investigate further, and… unless there’s something I am missing, the NAR Code of Ethics is (probably, in all likelihood) illegal as it stands today. It will need to be rewritten.

News from federal regulators rarely make the front page. In fact, they rarely make any page of any newspaper unless it’s a Really Big Deal, and few regulatory actions are that. But… last month, the FTC (Federal Trade Commission) entered into a consent decree with the National Association of Residential Property Managers that should be sending shockwaves throughout the ranks of REALTOR Associations.

From the official Press Release:

The FTC’s complaint against NARPM, which represents more than 4,000 real estate managers, brokers, and agents, alleges that NARPM and its members restrained competition in violation of the FTC Act through provisions in its code of ethics that restrict comparative advertising and solicitation of competitor’s clients. The provisions read, “The Property Manager shall not knowingly solicit competitor’s clients,” and “NARPM Professional Members shall refrain from criticizing other property managers or their business practices.”

The proposed consent order settling the FTC’s charges requires NARPM to stop restraining its members from soliciting property management work, and from making statements that are not false or deceptive about a competitor’s products, services, or business or commercial practices. NARPM also must implement an antitrust compliance program, among other things.

As all REALTORS know (or should know, if they are members of NAR, and therefore subject to the Code of Ethics), those two provisions are exactly equivalent to the Code of Ethics Article 16 and similar to Article 15.

Given the similarities involved in the NARPM case and as-yet-unfiled NAR case, I assume the only issue will be whether NAR proactively changes its Code of Ethics, or waits for the FTC to file a complaint. But as it stands today, the Code of Ethics is an illegal violation of anti-trust laws.

A quick dive into the issue…

NARPM and the FTC

From the Complaint filed by the FTC against NARPM:

III. NATURE OF THE CASE

5. Respondent maintains a Code of Ethics and Standards of Professionalism (“Code of
Ethics”) applicable to the commercial activities of its members. Respondent’s
members agree to abide by the Code of Ethics as a condition of membership.

6. Respondent has acted as a combination of its members, and in agreement with at least
some of those members, to restrain competition by restricting through its Code of
Ethics the ability of its members to advertise and to solicit the clients of their
competitors. Specifically, Respondent’s Code of Ethics contains a provision titled
“Relations With Other Property Managers” that states:

• “NARPM Professional Members shall refrain from criticizing
other property managers or their business practices.”

• “The Property Manager shall not knowingly solicit competitor’s
clients.”

7. Respondent established a process for receiving complaints about and resolving alleged
violations of the Code of Ethics. Respondent may sanction members found to violate
the Code of Ethics. Sanctions may include a letter of reprimand, probation or
suspension for a specified term, or expulsion from NARPM.

IV. VIOLATION CHARGED

8. The purpose, effects, tendency, or capacity of the combination, agreement, acts and
practices alleged in Paragraphs 6 and 7 has been and is to restrain competition
unreasonably and to injure consumers by discouraging and restricting competition
among property managers, by restricting truthful and non-deceptive comparative
advertising, and by depriving consumers and others of the benefits of free and open
competition among property managers.

Basically, the FTC charged that the Code of Ethics prohibition against solicitation of clients, and the restriction on criticizing other members or their business practices constitutes an anti-trust violation. NARPM, by entering into a consent decree, did not admit or deny a violation, but has agreed to a whole bunch of changes to get the FTC off its back.

The Decision and Order can be found here. It has a lot of provisions, but I’ll summarize them.

  • NARPM has to change its Code of Ethics to remove the offending provisions.
  • NARPM has to publicize these changes for five years, train its Board, officers, staff, etc. on these changes.
  • NARPM has to let every one of its members know about the change in the Code.
  • NARPM has to hire someone to oversee the entire thing, to make sure that it is in compliance with the Settlement Order.
  • NARPM has to hold events at its annual convention, other Code of Ethics training, etc. to make sure that everyone knows those provisions are invalid.

And a whole bunch of other things, like allowing FTC access to its documents and files with 5 days notice, filing a detailed plan of how NARPM plans to comply, etc. etc. etc.

Basically, the FTC is going to be all up in NARPM’s shit for the next five years to make sure it isn’t trying to do something else to make it harder for property managers to market to and solicit clients of other property managers.

Implications for NAR

There is no question that NAR’s Code of Ethics Article 16 will fall afoul of the exact same logic. If NARPM’s Code of Ethics prohibiting solicitation of clients is an anti-trust no-no, then the exact same clause in NAR’s Code of Ethics is an anti-trust no-no. There’s no possibly way around it.

The “criticism” provision, however, may not be eviscerated as much, because unlike NARPM’s provision, NAR’s Article 15 prohibits “false and misleading” statements:

Article 15
REALTORS® shall not knowingly or recklessly make false or misleading statements about other real estate professionals, their businesses, or their business practices.

The question, I suppose, is what is meant by “misleading”. Perhaps a lawyer with far more experience might weigh in here, but a whole lot of things could be characterized as “misleading”.

For example, say REALTOR Smith takes out a radio ad stating that sellers shouldn’t list with REALTOR Jones, because Jones has a virtual assistant in the Philippines who does all of the complicated paperwork. “List with me, because I do all my own paperwork” or some such. That may be absolutely true. But is it “misleading”? The conclusion the consumer is supposed to draw is that Jones is shoddy, doesn’t take care of the details, etc. Is that misleading?

Or how about an email where Smith says, “You really should hire me over Jones, because Jones doesn’t even have a college degree.” That can be 100% true. Is it misleading? I suppose the client is supposed to conclude that maybe Jones isn’t as intelligent as Smith, or as hardworking, or whatever that statement is supposed to imply. Is it misleading?

I don’t know right now. FTC did say in its NARPM order that it can prohibit actions that NARPM “reasonably believes would be false or deceptive within the meaning of Section 5 of the Federal Trade Commission Act.”

Well, “deceptive” under Section 5 of the FTCA isn’t a simple thing, since nothing in law/regulation is actually simple and plain. That’s probably a long post, or a legal paper in and of itself, so I’ll just point the interested party to this explanation by the Federal Reserve on how Section 5 might apply to a bank.

In my humble opinion — not a legal opinion, please consult your own attorney, etc. etc. — I think for something to be “misleading” in the context of real estate brokerage, there has to be an outright falsehood or an omission that is material.

“Don’t work with Jones because she’s senile” is probably misleading. “Don’t work with Jones because she doesn’t have a college degree” is probably not misleading.

Implications for the Industry

Well, I think we all can imagine a whole variety of scenarios of how such a change would impact the real estate industry.

Right off the bat, lifting the ban on soliciting clients means that REALTORS are now free to call on existing listings. The minute you enter a listing into the MLS, or advertise it on Zillow, you have to expect that REALTORS will be contacting the seller to offer their superior, or cheaper, or whatever services.

You know how “FSBO strategy” is a mainstay of many training programs? Well, I think we can expect to add “Existing Listings strategy” to that mix. It will be the Wild West of competition — and that is precisely what the FTC wants, since competition tends to lower prices for consumers.

What might that mean for (a) listing agreements, (b) the MLS, (c) cooperation and compensation, and (d) brokerage structure? In theory, the minute one agent takes an appointment on a listing, her fellow agents in the same office could go solicit that same listing. Remember how all agents are 1099 independent contractors?

For that matter, Open House may become an extremely important place for listing agents to pick up buyer clients:

“This is a lovely house”

“Yes it is — are you working with a REALTOR?”

“Oh yes, yes I am.”

“Well, apparently not a good one, since you’re here by yourself. Can we talk about how I might be able to help you far better than your lazy incompetent agent?”

That conversation is not only possible, but entirely likely. (Yes, the actual script is likely to be far more subtle, since REALTORS tend to be a bit more subtle and classy in their sales efforts, but you get the point.)

If Article 15 has to be clarified so that “misleading” really means something closer to what the FTC means by “misleading”, we might start to see all kinds of fun advertising from agents and brokers.

“If you’re thinking about selling your home, don’t go to Keller Williams, Coldwell Banker, REMAX, or any of those big box brokerages! They’re filled with inexperienced agents fresh out of real estate school! Come to Jones Realty, where we only take agents with 10 years of experience!”

Yeah, that’ll make the industry a bit more “exciting”.

As I’ve said, once Article 16 (and possibly Article 15) are changed, a whole lot of things are going to change.

The Question

The real question, then, is this: Would things be better?

We talk at practically every industry gathering that brokers, agents, MLS, Associations, everyone has to become more “consumer-centric”. Since the FTC has spoken and stated clearly that Code of Ethics prohibitions against soliciting each others’ clients are anti-consumer… do you agree with the FTC or not?

Will opening up competition be better for consumers, or not?

Would they start to get more service at cheaper prices? Or not?

As far as I’m concerned, based on the facts of the NARPM case, NAR’s Code of Ethics will be changed. It’s just a matter of whether NAR does it prior to getting a call from the FTC, or afterwards. So that will change.

Question is what that world looks like.

Your thoughts are, as always, welcome.

-rsh

 

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