Does George Babbitt Need a Broker-Dealer License (Part IV)

Today's post picks up where I left of more than seven years ago with the question of whether a licensed real estate broker must be licensed as a broker-dealer under the California Corporate Securities Law of 1968.  See Does George Babbitt Need a Broker-Dealer License (Part I)? and Does George Babbit Need a Broker-Dealer License (Part II)? My earlier posts concerned two exemptions from the CSL's licensing requirement - one statutory (§ 25206) and the other regulatory (10 CCR 260.204.1).  A third post concerned whether the exclusion of licensed real estate brokers meeting certain conditions from the definition of "broker-dealer".  See Does George Babbitt Need a Broker-Dealer License (Part III).  

Brass Tacks Facts on Real Estate Broker Licensing

Occasionally, a real estate broker will engage in a transaction that involves a sale of shares.  One such case involved a licensed real estate broker who sold residences in a senior mobile home park here in Orange County, California.  A homeowners association, a California nonprofit mutual benefit corporation, maintained and operated the park.  Seniors buying a residence in the park were required to purchase the selling resident's share in the assocation. Only residents were permitted to own shares in the association and residents were requried to sell their shares to their buyers when they moved out. 

The then acting Commissioner of Corporations, William P. Wood, issued a desist and refrain order against a real estate broker who was selling residences in the community.  Commissioner Wood alleged that the real estate broker was not licensed as a broker-dealer as required by Section 25210 of the California Corporations Code.  The broker went to hearing and the Administrative Law Judge, Ralph B. Dash, issued a Proposed Decision vacating the Commissioner's order on the basis that the share in the homeowners association was not a security under either the investment contract test established by the U.S. Supreme Court in Securities and Exchange Commission v. Howey, 328 U.S. 293 (1946) or the risk capital test established by the California Supreme Court in Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811 (1961).  Wayne Strumpfer, who was then Acting Commissioner, rejected the Proposed Decision primarily on basis of the lack of a "full and complete legal analysis of the issues" in the Proposed Decision.  Ultimately, the parties stipulated to a withdrawal of the desist and refrain order.

Although the Department of Corporations (now known as the Department of Business Oversight) eventually relented, this administrative proceeding illustrates that the line between a real estate transaction and a securities transaction is not always clear (even to a regulator).  Note too that the case was not against an issuer or other person alleged to have sold a security without qualification under the CSL.  Had the Department proceeded against the association as an issuer, it may also have argued that its shares were not securities within the meaning of the CSL.  Furthermore, the association may have argued that even if the shares met the definition of a "security", the offer and sale was exempt from qualification under the CSL.  The latter argument would not have helped the broker, however, because an exemption from the qualification requirement does not constitute an exemption from the broker-dealer licensing requirement.