How Brokers Can Navigate SEC Rule 506(c)

by Bilzin Sumberg
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How does the Securities and Exchange Commission’s (SEC) Rule 506(c) impact commercial real estate brokers? What can real estate brokers do to meet securities broker-dealer requirements? And is it possible to obtain dual licenses as real estate and securities brokers?

GlobeSt.com caught up with corporate attorneys David T. Schubauer, a partner with Miami-based Bilzin Sumberg Baena Price & Axelrod, and associate Amy Podolsky, also with the firm’s corporate group, discuss the answers to these questions. If you missed part one of this exclusive interview this morning, you can still read it: Will This SEC Rule Boost CRE Crowdfunding?

GlobeSt.com: How does the new SEC rule impact real estate brokers?

Podolosky: Real estate brokers and others involved in offering and selling condo hotel units that are marketed with a rental arrangement and, thus, economic benefits, are deemed to be acting as a securities broker. For that reason, they are required to be registered as such with the SEC and relevant State securities regulators. They also need to be a registered member of the Financial Industry Regulatory Authority (FINRA).

GlobeSt.com: What can real estate brokers do to meet securities broker-dealer requirements?

Schubauer: If a real estate brokerage firm is involved in offering and selling condo hotel units that are marketed with a rental arrangement, the firm would need to be registered as a securities brokerage firm. Individual real estate sales associates can become dually licensed with a securities brokerage firm and a real estate brokerage firm, in which case all of their commissions for selling condo hotel units must be paid through the securities brokerage firm.

However, in the case of dually licensed sales persons, there must be a clear separation between securities and non-securities real estate activities—such as the real estate brokerage firm that itself is not also licensed as a securities brokerage firm must not be involved in selling condo hotels—and the real estate brokerage firm that itself is not dually licensed must not directly or indirectly receive any of the commissions or other compensation related to sales of condo hotel units.

Real estate brokerage firms can, without being a licensed securities brokerage firm, require that their dually licensed sales associates pay them a flat periodic fee under what is referred to as a "desk fee" arrangement to cover overhead and other expenses. But the securities activities of the sales associates must not affect the amount of compensation received by the real estate brokerage firms. In these arrangements, a licensed securities brokerage firm is required to have control and supervision over sales associates who are offering and selling the condo hotel units.

GlobeSt.com: Is it possible to obtain dual licenses as real estate and securities brokers? If so, what are the steps to take?

Podolosky: Yes. In fact, as noted above, the individual sales persons would need to be dually licensed as a sales associate of a licensed real estate brokerage firm and as a registered representative of a licensed securities brokerage firm. In addition, companies can be dually licensed as a real estate brokerage firm and as a securities brokerage firm.

Licensing requirements for real estate brokers are generally governed by the state laws where the firm is operating. Licensing requirements for securities brokers are governed by federal and state laws. FINRA is the primary regulatory authority responsible for reviewing licensing applications for securities brokers.

Applicants also must file a registration form with the SEC and there is a coordinated registration process with the relevant States. All registered securities brokerage firms also must be members of the Securities Investor Protection Corporation.

This article is reprinted with permission from GlobeSt.com.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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