The Shape of Regulation to Come, Part 2: Introducing RINRA

In Part 1, I speculated on the obvious first-order regulations headed our way as an industry, as well as the need for further regulation and enforcement mechanisms that those top-level regulations will create. In particular, I thought that the government (whether FTC or someone else) will need to figure out how to get information and data from the industry and provide oversight:

However I think these things through, I can’t escape the fact that any government regulation of these rules and policies requires if not regulation of the MLS, at least direct oversight of the MLS. At a minimum, it requires data collection and/or reporting from the MLS to whatever enforcement agency to make sure that the rules and regulations are being followed appropriately.

Just like mortgage banks and health insurance companies are required to submit information and reports to regulators, the MLS will have to be required to submit information and reports to regulators. And that’s at a minimum. At the maximum is total government control, a government-operated listings exchange.

The reality, I thought, was somewhere in between minimal reporting requirements and government-operated listing exchanges.

Turns out, there is a model already existing, already successful, and already operating that fits rather perfectly: FINRA, or the Financial Industry Regulatory Authority. A RINRA, or the Realty Industry Regulatory Authority, would accomplish almost everything the government wants to accomplish, win support from huge segments of the industry, as well as garner support from the think tanks, media, influencers and the various nonprofits that want to see the real estate industry change.

Therefore, I fully expect to see RINRA or something very similar be the endgame of this round of regulations.

Please note: description is not prescription and speculation is not advocacy. I am a libertarian, leaning towards anarchist these days. I happen to think the government is more often a problem than a solution. So when I describe these things and speculate on what might or might not happen, that does not mean I want those things to happen.

FINRA, An Overview

We ought to begin with an overview of FINRA, and why I think it is the model that the government may follow for regulating the real estate industry.

For starters, despite its official sounding name, FINRA is not a government agency. It is a private nonprofit that nonetheless exercises immense regulatory authority in the financial services industry. From Wikipedia:

The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) which regulates member brokerage firms and exchange markets. FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) as well as the member regulation, enforcement, and arbitration operations of the New York Stock Exchange. The US government agency which acts as the ultimate regulator of the US securities industry, including FINRA, is the US Securities and Exchange Commission (SEC).

The Securities Exchange Act of 1934 provides for self-regulatory organizations (SROs) under the control of the actual government agency, the SEC. But the truth is that SROs are a common feature in the American administrative state and there are thousands of them. In fact, Wikipedia says:

The National Association of Realtors (NAR) is an example of an SRO that fills the vacuum left by the absence of government oversight or regulation. The NAR sets the rules for multiple listing services and how brokers use them.

The problem for NAR is that unlike FINRA or other SROs under securities law, it has no official statutory status. It just kind of… came to be. There is no Securities Exchange Act of 1934 to provide for a real estate industry SRO.  Which means that unlike FINRA and other finance SROs, there is no government agency that controls and regulates NAR. Yet.

But back to FINRA for a moment…

The Digital Guardian has a great overview of FINRA, and it’s worth reading in full if you’re interested in this topic. But here’s one key excerpt:

FINRA, on the other hand, is not part of the U.S. government. Instead, it is composed of brokerage firms and exchange markets. The self-regulatory FINRA can only impose its rules on members, and it is responsible for regulating and licensing broker-dealers. FINRA is also under the purview of the SEC.

In short, FINRA is tasked with regulating brokerage firms and stockbrokers, while the SEC is more focused on individual investors.

Doesn’t that sound… extremely familiar? Take a look at some the things that FINRA regulates, again from Digital Guardian:

Over the years, FINRA has taken on several roles including:

• Regulating all trading in corporate bonds, equities, options, and securities futures.
• Being responsible for ensuring membership from firms, which are not under the Municipal Securities Rulemaking Board and other self-regulating organizations.
• Conducting exams for members, including the yearly Regulatory and Examinations Priorities Letter, which affects associated insurance companies, broker-dealers, and banks.
• Licensing individual brokers and firms.
• Coming up with rules to oversee their members and checks for member compliance to regulations. 
• Disciplining members who fail to obey with the organization’s rules and federal securities regulations.
• Preparing materials for qualification and education examinations for brokers and other industry professionals.
• Supplying outsourced regulatory services and products to the American Stock Exchange, the International Securities Exchange, and other stock exchanges and stock markets.

One of the main functions of FINRA is to come up with rules and guidance for its members to protect investors and ensure that the integrity of the market is upheld. FINRA enacts these rules and then publishes them to all securities firms and individual brokers.

These rules are formulated and promulgated with the help of the Securities and Exchange Commission, other self-regulating organizations, regulators, and even investors. [Emphasis added]

That sounds an awful lot like what an MLS does: come up with rules, check for member compliance, discipline members who fail to comply, etc. etc. The main function of FINRA sounds an awful lot like the goal of the MLS: protect consumers and ensure that the integrity of the market is upheld.

In fact, the tagline of the FINRA website in the featured image above sounds an awful lot like “Making the Market Work” from CMLS.

A national regulatory body, that is comprised of brokerage firms and exchange markets, that creates rules, checks for member compliance, and does enforcement sounds precisely like what NAR could be and should be… and kind of is today as NAR policy controls most of the MLSs.

But there are at least three major differences between FINRA and NAR, and why I think what the government will do is RINRA.

Differences: Statutory Status, Governance, and Rulemaking

One major difference, as I pointed out above, is that NAR has no statutory status provided by an Act of Congress. It is a self-created self-regulatory organization, under no authority of the government agency. FINRA, like other financial SROs, are under the SEC’s control but has its self-regulation authorized by actual legislation.

Accordingly, the governance of FINRA is very different from that of NAR, or any MLS in North America today:

FINRA’s Board is currently composed of 23 industry and public members, with 10 seats designated for industry members, 12 seats designated for public members and one seat reserved for FINRA’s Chief Executive Officer.

The majority of FINRA’s Board is comprised of “public members” who are at least theoretically outside of the securities industry. And while there are debates around the independence of these public members, the fact that debate exists suggests that public pressure could be brought to bear, and that ultimately, the SEC or Congress can change things up if there is too much regulatory capture.

NAR’s governance, obviously, is nothing like that.

And finally, and perhaps most importantly, FINRA rulemaking is subject to SEC oversight and control. The SEC is involved with FINRA’s rules from fairly early on in the process to the finalization of the rules:

Once the proposal is filed with the SEC, SEC staff reviews the rule proposal to determine whether it is consistent with the requirements of the Securities Exchange Act of 1934 (Exchange Act).  The SEC staff may request changes or amendments to the rule proposal.

If the SEC does not make changes to the rule proposal, it will publish the proposed rule in the Federal Register. Most critically, many/most FINRA rules are not final until the SEC approves it.

NAR’s rules, of course, are its own rules. They do not seek the government’s approval for these rules. In fact, the government has sued NAR over these rules.

RINRA

The parallels are obvious, and it doesn’t feel like the federal government needs to reinvent the wheel when it comes to real estate brokerage and listings markets. The FTC would need Congress to pass some new legislation giving either the FTC or HUD or some new government agency statutory authority for real estate SROs.

I would imagine that HUD would jump at the opportunity to get power over the brokerage and listings industry, in much the same way they jumped at the chance to get power over Fannie Mae and Freddie Mac in 1992. So take the FINRA process, and just replace SEC with HUD wherever that appears.

It’s simply a matter of standing up a nonprofit with a Board of Governors, the majority of whom must be “public members” however that’s defined. The FINRA structure is something that the real estate industry would find extremely familiar:

Seven of the industry governor seats—three small firm governors, one mid-size firm governor and three large firm governors—are designated for individuals associated with FINRA members that corresponds to each firm size. A small firm employs at least one and no more than 150 registered persons, a mid-size firm employs at least 151 and no more than 499 registered persons and a large firm employs 500 or more registered persons.

We already have a number of MLSs that use this “small, mid-size, large” setup for brokerages on their Boards. There’s no reason why RINRA would not adopt the same setup.

RINRA rules would now have the force of law, because they would go through the rulemaking process that includes publication in the Federal Register, and HUD approval. Compliance is no longer a matter of ignoring the MLS’s poorly staffed compliance department, but possibly legal penalties.

The Challenge of Licensing

One of the biggest differences between FINRA and RINRA is around licensing. Securities licenses are granted by FINRA, under the SEC’s authority, or by NASAA (see below). In contrast, real estate licenses are granted by each state under each individual state’s real estate laws.

However, I think that can be addressed by something like NASAA. NASAA is the North American Securities Administrators Association, and it is the organization of state and provincial securities regulators. Obviously, they would not be organized under federal law, but each member of NASAA is a duly authorized regulator for the state.

As it happens, ARELLO (Association of Real Estate License Law Officials) already exists. It is the exact parallel to NASAA, as it is comprised of state officials, and its regular members are all duly authorized regulators of real estate for the state. ARELLO could work closely with RINRA and HUD exactly like how NASAA works closely with FINRA and SEC to establish what is effectively a national regulatory regime for professionals.

I imagine ARELLO and its members too would jump at the chance to increase their own power.

So while licensing will be a challenge to overcome, the FINRA-NASAA-SEC model provides a blueprint and a template for everybody involved in government to come away with increased power, increased payrolls, and increased job security. I think that gets resolved fairly quickly.

Industry Support

When I think about RINRA as a concept, I believe that huge swaths of the real estate industry would support such a move. Despite what you might hear from NAR, support for NAR as an organization is at an all-time low. Most brokers and agents join NAR not because they have some deep abiding love for the Code of Ethics or care deeply about political advocacy or whatever, but because they have to join in order to get access to the MLS.

We have already discussed in Part 1 of this series how the FTC is likely to go after that linkage between REALTOR membership and MLS access. Most of the large brokerage firms in the industry today, including the large franchise networks, would welcome that delinking. It would save them and their agents a lot of money, by simply removing the need to pay REALTOR dues on top of MLS fees.

Note that in many markets today, even in Thompson States or California where requiring REALTOR membership to access the MLS is not allowed by law, we still have very robust Association membership. There are quite a few reasons for that, including things like lockbox access and forms, as well as things like the Principal REALTOR rule. It isn’t as if broker-owned MLSs (such as FMLS in Atlanta) leads to a decimation of Association membership. However, my view is that once the FTC and the DOJ get through with the industry, I imagine most of the linkage between the Association and the MLS will be removed.

Furthermore, the governance structure of RINRA tends to strengthen the large firms. They are, after all, the ones with the most resources to devote to rulemaking and to interface with government agencies, as well as the ones with the most at stake when rules are promulgated. The reason why the large firms don’t bother with the current MLS structure is that there are around 600 of them, and the REALTOR domination leads to a loss of power, not a gain.

So yeah, I think the Realogy, HomeServices of America, RE/MAX, Keller Williams, eXp Realty, Compass, Howard Hanna, etc. would welcome RINRA.

Additionally, the Big Tech companies in real estate would, I think, embrace the hell out of RINRA. Again, it is easier for them to work with and deal with one national SRO (self-regulatory organization) than with 600ish fiefdoms. I see real support coming from Zillow, Opendoor, CoStar, Realtor.com, Redfin, and other multi-billion dollar enterprises for RINRA. There’s virtually no scenario where RINRA’s data rules and information access rules would look anything like the fragmented rules in place today. On that basis alone, technology companies may want to see RINRA happen.

Note also that large companies pretend not to want heavy regulation, but in fact recognize that heavy regulation is a competitive advantage for them. They have the money, the staff, the legal team, etc. to take on the costs of heavy regulation. Their smaller competitors do not.

The large MLSs should embrace RINRA as well, because they are the ones who will likely make up the bulk of RINRA… including the staff. Consider that FINRA itself is actually the result of a merger between the National Association of Securities Dealers (which used to own and operate NASDAQ) and NYSE’s regulation/enforcement arm. The top 10-20 largest MLSs in the country would end up making up the bulk of the staff and resources of RINRA, and drive consolidation across the industry.

Of course, in case it needs to be said, one of the key benefits of going under the government’s direct oversight and authority is immunity from antitrust lawsuits.

Small brokerages, many of whom dominate local REALTOR Boards of Directors, and the smaller MLSs along with NAR and other REALTOR organizations would be pissed off, of course, but… the rest of the industry would support something like RINRA.

Heavy regulation under penalty of law will naturally drive consolidation in the industry, as the smaller brokers, smaller MLSs, small tech companies, etc. find the burden of compliance with regulation to be too much for profitability. Whether that’s a good thing or a bad thing depends, I suppose, on who you are.

Political Support from Outside the Industry

Furthermore, I think the world outside the industry who gives a crap about real estate brokerage and listings would support RINRA.

The various do-gooder nonprofits are obvious, because they can bring political pressure onto RINRA and HUD and Congress in a way that they really can’t to NAR and the MLS systems of today. Consumer Federation of America can publish white papers until they are out of ink, but neither NAR nor any of the MLSs today care one whit what they have to say. RINRA would care far more. Various affordable housing advocates or racial equality activists or whoever would have a direct target for their efforts once a RINRA is setup.

The various financial institutions who have interests in the housing market, from mortgage banks to hedge funds, would support RINRA for the same reason that Big Tech would support RINRA: access to nationally regulated data on the real estate market. Even if they have to pay for that data, they would want a single source (or perhaps a few sources, instead of 600 sources who won’t actually sell them any data) for it. So RINRA would win over Wall Street.

Academics and think tanks would love RINRA, both as a source of data for their studies into the housing market, but also because like the various advocacy groups, having one agency or one SRO to convince on a policy or another enhances their power and influence. Brookings Institute has no interest in going to talk to some regional MLS in Arkansas about what rules it should implement, but it does have an interest in talking to the Board of Governors of RINRA about what rules they should implement for the country.

And the media — outside of the few libertarian types on YouTube — would support RINRA because they support most things that give power to the government.

Is This Realistic?

If we were living in normal times with normal partisan politics, I would think RINRA would happen in the blink of an eye. A simple amendment to 42 U.S. Code Chapter 44 (which sets up Housing and Urban Development as a department) would be sufficient. A copy-and-edit-and-paste job with the SEC’s role in regulating financial industry SROs would do it.

And in normal times, I think NAR’s political power in Washington DC would mean that NAR would be that statutorily-authorized SRO. Essentially, NAR would spin off RINRA out of its MLS Policy Committee and dominate governance of that RINRA.

But these are not normal times. NAR’s political power is at a low point, for a variety of reasons. The federal government has made it perfectly clear, through the DOJ’s actions, that it doesn’t particularly like NAR. The DOJ would prefer to punish NAR, not empower them.

And partisanship in Congress has never been more bitter. It isn’t clear to me that the current Congress could pass an Act declaring that 2+2=4. Could they really pass legislation to take federal control over the real estate industry?

Having said that, if the intelligentsia wants RINRA, then there’s a decent chance that they can get Congress to go along. Here’s how.

Blame NAR for the Housing Market

The crazy housing market of 2020 and 2021 is starting to become a political issue. Mainstream media is starting to talk about it, and the alternative media on YouTube and the internet have been on it for longer. So far, the media has been wanting to blame Wall Street and tech bros and the Elites. More and more young people are starting to realize that many of them will never be able to afford a home… and even if they could, they would end up mortgage slaves well into retirement years.

This isn’t me saying it; it’s the young people themselves saying it:

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With the DOJ pulling out of the NAR settlement, and the FTC under orders from the administration to pass regulations for brokerages and listing services, it would not be difficult to point the media at NAR. Given the revelation that the White House is fully coordinating with Big Tech social media companies, it wouldn’t be overly difficult to start amping up stories of REALTOR malfeasance, of NAR’s political power, etc. It wouldn’t be difficult at all to drum up outrage at the big paydays that REALTORS get, since most consumers have NO idea what it is that a REALTOR actually does, and NO idea of the behind-the-scenes work that agents actually do.

Now layer on the racist past of NAR, which NAR itself fully acknowledged and apologized for, and just how hard would it be to make NAR politically toxic?

Turn NAR and REALTORS into something akin to Big Tobacco or Oil & Gas, so that congresscritters would have to think twice before accepting NAR contributions. No one running for office wants to be accused of being in the REALTOR Lobby’s pocket, to keep home prices high for the rich elites or institutional landlords.

The solution offered by all the talking heads on CNN and all the OpEd writers on Washington Post would be something like, “The real estate industry needs to be regulated; Congress oughta pass a law.”

It isn’t as if this is a new playbook. We’ve seen it happen in British Columbia, Canada in the wake of the “shadow flipping” controversy.

But what if despite the media campaign, Congress still can’t get their act together?

Non-Statutory RINRA

There are a number of SROs who have no statutory authority. NAR is named as one, as is the American Medical Association. In a 2005 speech to the Better Business Bureau, then Chair of the FTC, Deborah Majoras, laid out the FTC’s thinking about SROs. I don’t know whether the principles in that speech remains valid within the FTC of today, but until we get another policy announcement by the FTC like this one, I think it’s fair to assume that they still hold sway today.

In that speech, Majoras said:

There are hundreds, if not thousands, of trade groups and self-regulatory organizations that provide, to varying degrees, various functions that can be most efficiently and lawfully provided by some level of coordinated action. These entities can help markets work more efficiently if they reduce transaction costs or production costs, increase interchangeability or compatibility, reduce consumer risk, or set ground rules upon which competition can flourish. [Emphasis added]

The justification for self-regulation, according to the Majoras speech, is that SROs can reduce transaction costs, production costs, increase compatibility, reduce consumer risk, or set rules to enable competition to flourish.

She then lays out some disadvantages, among them, this important consideration:

Finally, putting on my antitrust hat, self-regulatory procedures must not be used inappropriately to weaken competition and create barriers to entry or innovation. Depending on the type of activity, this can be more or less of a problem, but it clearly at times has been a concern with self-regulation of various professions, such as engineers and lawyers, and in the design and installation of electrical wiring systems.

NAR as an SRO, then, is in trouble under both of these prongs. It has literally been taken to court by the DOJ for keeping transaction costs high, reducing compatibility, and setting ground rules to stifle competition. The FTC believes NAR has behaved more like the SROs for engineers and lawyers that Majoras brings up, to weaken competition and to create barriers to entry or innovation.

Which is why I think NAR will not be the non-statutory RINRA; it has a tainted past with the federal government.

However, on the whole, the speech praises self-regulation and talks about how the FTC collaborates with industry SROs and self-regulation initiatives in advertising, alcohol, entertainment, weight loss advertising, etc. The general thrust of those efforts is that the FTC will let industry SROs be, and influence them indirectly… stepping in with lawsuits and other actions if necessary.

For example, the FTC worked with SROs in the alcoholic beverage industry to create advertising guidelines. Since these SROs (DISCUS, Beer Institute, and Wine Institute) have no statutory status, the FTC did not directly regulate them. Instead, they influenced them by conducting studies, writing reports to Congress, and making “suggestions.” Here’s how that worked:

Since 1999, the FTC has encouraged these trade associations to strengthen their programs. 12 We have asked them to adopt third-party review systems of ad compliance, so that the advertiser is not the sold arbiter of its own compliance. Additionally, we have asked them to make the process transparent by publicizing the results of any third-party review.

DISCUS has adopted a third-party review process. It has an industry review board consisting of DISCUS members to rule on complaints about advertising, and it has an external review board of experts in advertising and regulation that is available to rule on complaints in the event that the internal board cannot reach a decision. 13 In March 2005, DISCUS for the first time published a report detailing the internal review board’s action on fifteen advertising complaints received in 2004. 14 The injection of transparency into the third-party review process is a positive step, and I encourage other segments of the alcohol industry to follow suit.

We at the FTC work to encourage effective self-regulation in the alcohol industry. The FTC staff communicates with companies about the mechanisms that they use to ensure compliance with the 30% standard. We request audits of past placements to assist companies to identify placement problems and prevent recurrence. We communicate with companies when we see advertising that appears to be at odds with code standards, although in the end whether a violation has occurred must be determined by the industry, not the FTC.

A structure like this might work for a non-statutory RINRA, where the FTC (with HUD and DOJ input) makes “requests” and “suggestions” on the rules and policies of RINRA. Perhaps the FTC “communicates with RINRA about the mechanisms that they use to ensure compliance” and requests “audits to identify problems and prevent recurrence.”

The FTC and/or HUD do not need statutory authority to regulate RINRA if RINRA willingly and voluntarily agrees to be so regulated. If RINRA makes a point of sending along all of its rules and policies to HUD for approval prior to publication, then statutory authority is bit of a moot point. If RINRA agrees to accept HUD “suggestions” on who to put on its Board of Governors, then statutory status might not be as important. And if the DOJ tacitly agrees not to bring any antitrust actions against RINRA as long as it is being cooperative with HUD… well… there’s your protection from antitrust right there.

Rather than having to promulgate FTC regulations, then, the FTC can backdoor the regulations via the non-statutory RINRA, whose own rules and codes of conduct will be precisely what the FTC and HUD want them to be… all voluntarily, as it were.

Conclusions, For Now…

As this is pure speculation, obviously I don’t know whether RINRA could or would happen. I think it is a logical endpoint of all of the studies and regulatory activity that the FTC will undertake over the next several months, in conjunction with the DOJ. I think super smart people like Ben Harris at Treasury, who literally co-authored a paper calling for regulation of real estate, would see the obvious parallels between FINRA and something like a RINRA, and the Biden administration will work to make something happen.

I can’t say whether this would be a good thing or a bad thing. It’s speculation. I can’t say whether the industry would be disrupted or not. It isn’t super clear whether consumers would benefit from a RINRA or be hurt by it. Nothing is clear, except one.

The only thing I can safely conclude at this point is that none of us in real estate is ready for something like this today. But if you do strategy for your organization, perhaps it’s time to correct that and start thinking of how to get ready.

-rsh

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