1.4 License Law Violations and Ethics
Key Takeaways
- Net listings are illegal in New York because the agent's interest conflicts with the seller's
- Commingling (mixing client escrow money with personal/operating funds) and conversion (using client funds) are major violations; conversion can be criminal
- Paying a commission or fee to an unlicensed person violates RPL 442 (the 'splitting fees' prohibition)
- Blind ads are banned — under 19 NYCRR Part 177 every ad must identify the licensed broker's name
- DOS may fine up to $1,000 per violation and a revoked licensee generally cannot reapply for one year
Trust-Fund and Listing Violations
Net Listings — Illegal in New York
A net listing lets the agent keep everything above a price the seller "nets." It is illegal in NY because it pits the agent's profit motive against the seller's interest.
Worked example: Seller says, "Get me $300,000 net." The agent sells for $360,000 and pockets $60,000. This is a prohibited net listing — and likely also a fraud/misrepresentation charge.
Commingling vs. Conversion
These two are constantly confused on the exam:
| Term | Definition | Severity |
|---|---|---|
| Commingling | Mixing client escrow funds with the broker's personal or operating money | License discipline |
| Conversion | Actually using/taking client funds for the broker's own purposes | Discipline plus possible criminal larceny |
Brokers must hold earnest money and deposits in a separate escrow/trust account. Even briefly parking client money in the operating account is commingling, regardless of intent to repay.
Paying Unlicensed Persons (RPL 442)
RPL 442 prohibits a broker from splitting a commission or paying a fee for brokerage services to anyone not licensed. A broker may, however, pay a referral fee to a licensee (including a cooperating broker in another state) when properly disclosed.
Advertising, Supervision, and Misrepresentation
Blind Ads (19 NYCRR Part 177)
A blind ad omits the licensed broker's name. New York's advertising rules in 19 NYCRR Part 177 require every advertisement — print, online, or social — to clearly identify the broker's licensed name. A salesperson may include their own name only alongside the broker's.
| Advertising violation | Why prohibited |
|---|---|
| Blind ad (no broker name) | Violates 19 NYCRR 177 |
| Bait-and-switch | Advertising property not actually available |
| False/misleading claims | Misrepresentation |
Salespersons Cannot Operate Independently
| Prohibited for a salesperson | Required |
|---|---|
| Collecting a fee directly from a client | All compensation flows through the sponsoring broker |
| Advertising in their own name only | Broker's name in every ad |
| Operating with no active sponsor | Must have a sponsoring broker on file with DOS |
Misrepresentation
| Type | Example |
|---|---|
| Fraud | Intentional false statement of material fact |
| Negligent misrepresentation | Careless false statement relied upon |
| Omission | Failing to disclose a known material defect |
Penalties and Best Practice
- Administrative (DOS): reprimand, fine up to $1,000 per violation, suspension, or revocation; revoked licensees generally wait one year to reapply.
- Criminal (DA): conversion/larceny and unlicensed practice can bring separate prosecution.
Best practice: keep a dedicated escrow account, document every disclosure, run all compensation through your broker, and put the broker's name on every ad.
Fair Housing and Discrimination Violations
Discrimination is among the most serious — and most tested — categories of misconduct. New York licensees answer to three layers of fair housing law:
| Law | Protected classes added beyond the others |
|---|---|
| Federal Fair Housing Act | Race, color, religion, national origin, sex, familial status, disability |
| NY State Human Rights Law | Adds age, marital status, sexual orientation, gender identity, military status, lawful source of income, disability, and more |
| Local (e.g., NYC Human Rights Law) | May add still more (e.g., lawful occupation) |
Source of income is a NY-specific landmine: refusing a tenant because they pay with a Section 8 / housing voucher is illegal discrimination in New York, even though source of income is not a federal protected class.
Steering, Blockbusting, and Redlining
| Prohibited practice | Definition |
|---|---|
| Steering | Directing buyers toward or away from neighborhoods based on a protected class |
| Blockbusting | Inducing panic selling by suggesting a protected group is moving in |
| Redlining | Denying loans/insurance in an area based on its demographics |
Worked scenario: A buyer asks, "Is this a good area for families like mine?" The compliant answer points the buyer to objective resources (school district data, crime statistics, demographic websites) rather than the agent characterizing the neighborhood's racial or religious makeup — doing the latter is steering.
Putting Ethics Into Practice
| Situation | Compliant action |
|---|---|
| Earnest money received | Deposit promptly into the broker's escrow/trust account |
| Multiple offers | Present all written offers to the seller |
| Known material defect | Disclose; never conceal to push a sale |
| Compensation from a third party | Disclose to the client in writing |
| Voucher-holding applicant | Treat identically to any other qualified applicant |
The through-line of NY ethics is the same as the purpose of Article 12-A: protect the consumer. When an exam scenario offers a choice between the agent's short-term gain and the client's interest, the client's interest (and full disclosure) is virtually always the correct answer.
Unlicensed Activity and the Commission Bar
Under RPL 440-a, no person may bring an action to recover a commission unless they were duly licensed at the time the services were performed. This is the practical teeth behind the licensing requirement: an unlicensed "finder" who arranges a deal simply cannot sue to get paid, and the broker who agreed to pay them violates RPL 442. Performing brokerage acts without a license is a misdemeanor.
| Scenario | Outcome |
|---|---|
| Unlicensed person sues for a commission | Court dismisses — RPL 440-a bar |
| Broker pays an unlicensed referrer | RPL 442 violation; discipline |
| Licensee performs acts after license lapsed | Unlicensed practice; commission unrecoverable |
Worked example: A friend tips a buyer to a listing and the grateful broker promises "a few thousand dollars." If the friend is unlicensed, that payment is illegal under RPL 442, and if the broker refuses to pay, the friend has no court remedy under RPL 440-a. The only lawful way to share brokerage compensation is between licensees.
What is the key difference between commingling and conversion in New York?
A salesperson posts a listing online showing only their own name and phone number, with no brokerage identified. What violation is this?