BARRISTER'S BRIEFING: An Update on Regulations Concerning Commingling of Client’s Funds
Leon Cameron, Esq. | August 2018
Since Jan. 4, 2017, the New York Department of State amended 19 NYCRR §175.1, dealing with commingling client monies, to now read as follows:
“A real estate broker shall not commingle the money or other property of his principal with his own and shall at all times maintain a separate, special bank account to be used exclusively for the deposit of said monies and which deposit shall be made within three business days. Until such time as the money is deposited into a separate, special bank account, it shall be safeguarded in a secure location so as to prevent loss or misappropriation. Said monies shall not be placed in any depository, fund or investment other than a federally insured bank account. Accrued interest, if any, shall not be retained by, or for the benefit of, the broker except to the extent that it is applied to, and deducted from, earned commission, with the consent of all parties.” (amendment underlined).
The original §175.1 required the deposit of client monies “as promptly as practicable.” Subsequently, in 1991 the DOS issued a decision (DOS v. Baramonde, 48 DOS 91) where “as promptly as practicable” was interpreted to be the next business day. This was problematic for many brokerages as depositing such funds by the next business day was logistically impossible, particularly for small firms. Under the amended regulation, client deposits may be made up to three business days following the receipt of the funds by the licensee.
This practice is common among licensees in upstate New York who often use pre-contract “binders” whereby a small deposit from the buyer client is received. Brokers must be sure the funds are safeguarded in the event they are not deposited immediately upon receipt. They may be found in violation of the regulation if they are not, with fines and penalties to be determined by DOS after an inquiry and hearing. Although not explicitly required by the regulation, brokers should implement a written office policy explicitly stating what qualifies as “safeguarding.”
It is quite possible that “safeguarding” will be interpreted by the DOS as meaning under “lock and key.” Stapling or clipping the check inside of the transaction folder does not constitute “safeguarding” unless the folder is then placed under “lock and key.” There is an exception to the regulation when the escrow agreement requires a longer time period or a condition to occur before the deposit is made. It should be understood that the exception only applies to those escrow agreements that dictate specific conditions under which an escrow deposit shall be made.
For more information, please see the article entitled “DOS clarifies exception to escrow deposit regulation and decision” from New York State REALTOR magazine, September/October 2016 edition.
Editor’s Note: The foregoing article is for informational purposes only and does not confer an attorney/client relationship. For a legal opinion specific to your situation, please consult a private attorney.