Current through Register Vol. 47, No. 17, September 10, 2024
5.1. Establishment
of Internal Accounting Controls
Any Brokerage Firm or Broker who receives Money Belonging to
Others must establish written accounting control policies and procedures, which
must include adequate checks and balances over the financial activities of the
Broker, Brokerage Firm, and unlicensed persons, as well as manage the risk of
fraud or illegal acts.
5.2.
Trust or Escrow Accounts
All Money Belonging to Others accepted by a Broker or
Brokerage Firm for deposit into the Broker's or Brokerage Firm's Trust or
Escrow Account must be deposited in one or more accounts separate from other
money belonging to the Broker or Brokerage Firm. The Broker or Brokerage Firm
must identify the fiduciary nature of each separate Trust or Escrow Account in
deposit agreements with a Recognized Depository by the use of the word "trust"
or "escrow" and a label identifying the purpose of such account, such as "sales
escrow", "rental escrow", "security deposit escrow", or other abbreviated form
defined in the deposit agreement. The Broker or Brokerage Firm must retain a
copy of each executed Trust or Escrow Account deposit agreement for inspection
by the Commission.
5.3.
Accounts in the Name of the Brokerage Firm or Broker
A. Brokerage Firms acting in the name of the
Employing Broker or Independent Broker as a sole-proprietor must maintain
separate Trust or Escrow Accounts in the name of the Employing Broker or
Independent Broker.
B. Brokerage
Firms licensed as a partnership, corporation, or limited liability company must
maintain separate Trust or Escrow Accounts in the name of the licensed
partnership, corporation, or limited liability company.
C. The Employing Broker or Independent Broker
are responsible for, must maintain and be able to withdraw money from each
separate account, but may authorize other licensed or unlicensed cosigners.
However, such authorization will not relieve the Employing Broker or
Independent Broker of any responsibility under the Commission statutes and
these Rules.
5.4. Number
of Separate Trust or Escrow Accounts may vary from Zero to Unlimited
A Brokerage Firm is not limited as to the number of separate
accounts, which may be maintained for Money Belonging to Others. If the
Brokerage Firm is not in possession of Money Belonging to Others, there is no
obligation to maintain a separate Trust or Escrow Account.
5.5. Separate Trust or Escrow Accounts
Required for Rental Receipts and Security Deposits
A Brokerage Firm who engages in Property Management must
deposit rental receipts and security deposits and disburse money collected for
such purposes in separate Trust or Escrow Accounts, a minimum of one for rental
receipts and a minimum of one for security deposits.
5.6. Trust or Escrow Funds must be Available
Immediately without Penalty
Unless otherwise agreed to in writing by the parties, Money
Belonging to Others must not be invested in any type of account, security, or
certificate of deposit that has a fixed term for maturity or imposes any fee or
penalty for withdrawal prior to maturity.
5.7. Time Limits for Deposit of Money
Belonging to Others
A. All Money Belonging to
Others received by a Brokerage Firm for Property Management must be deposited
in the Brokerage Firm's appropriate Trust or Escrow Account no later than five
(5) business days following receipt of funds or mutual execution of a lease,
whichever is later.
B. All other
Money Belonging to Others which is received by a Brokerage Firm must be
deposited in the Brokerage Firm's Trust or Escrow Account no later than three
(3) business days following receipt of funds or mutual execution of contract,
whichever is later.
5.8.
Transfer of Security Deposits
A. Owner-Held
A Brokerage Firm receipting for security deposits will not
deliver such security deposits to an owner without the tenant's written
authorization in a lease or unless written notice has been given to the tenant.
Such notice must be given in a manner so the tenant will know who is holding
the security deposit and the specific requirements for the procedure in which
the tenant may request return of the security deposit. If a security deposit is
delivered to the owner, the Management Agreement should place financial
responsibility on the owner for its return, and in the event of a dispute over
ownership of the security deposit, must authorize disclosure to the tenant of
the owner's true name and current mailing address.
B. New Property Management Company
A Brokerage Firm which begins management of a property most
recently managed by another Brokerage Firm must disclose to the owner and the
current tenant, in writing, and within thirty (30) days after execution of a
Management Agreement, the status of any security deposit held by the previous
Brokerage Firm, including the amount of the security deposit and confirmation
of receipt of the funds. The Brokerage Firm must verify that each security
deposit transferred to them matches the amount listed in the current lease and
disclose any discrepancy to the owner and current tenant. The Brokerage Firm
must inform the tenant, in writing, if the owner is holding the security
deposit.
5.9.
Diversion and Conversion Prohibited
Money Belonging to Others belonging to one beneficiary must
not be used for the benefit of another beneficiary. Money Belonging to Others
must not be used for the benefit of the Brokerage Firm or Broker.
5.10. Commingling Prohibited
A Broker's or Brokerage Firm's personal or business operating
funds must not be commingled with Money Belonging to Others. One or more
separate Trust or Escrow Accounts may be maintained by a Brokerage Firm
pursuant to the following duties and limitations:
A. Money held in a Trust or Escrow Account
which becomes due and payable to the Brokerage Firm must be withdrawn
monthly.
B. Money advanced by a
Brokerage Firm for the benefit of another may be placed in the Trust or Escrow
Account and identified as an advance but may be withdrawn by the Brokerage Firm
only on behalf of such person. Any amount advanced to a Trust or Escrow Account
must be identified and recorded in the journal and the ledger and disclosed in
accounting to the beneficiary as set forth in Rule 5.15.
C. In the absence of a specific written
agreement to the contrary, commissions, fees, and other charges collected by a
Brokerage Firm for performing any service on behalf of another are considered
"earned" and available for use by the Brokerage Firm only after all contracted
services have been performed and there is no remaining right of recall by
others for such money. The Brokerage Firm must identify and record all
commissions, fees, or other charges withdrawn from a Trust or Escrow Account on
the account journal and individual ledgers of those against whom the fees or
commissions are charged. If a single disbursement of fees or commissions
includes more than one (1) transaction, rental period or occupancy or includes
withdrawals from the account of more than one (1) Trust or Escrow Account
beneficiary, the Brokerage Firm, upon request, must produce for inspection by
the Commission a schedule which details:
1.
The individual components of all amounts included in the sum of such
disbursement; and
2. Specifically
identifies the affected beneficiary or property ledgers as set forth in Rule
5.14.B.
D. Rental
proceeds received by a Broker for managing Broker's own properties through the
Broker's Brokerage Firm, including any Broker's properties held in partnership
with others, joint ventures, or syndications provided the Broker's ownership in
the entity or property is more than the 20% threshold pursuant to section
12-10-201(6)(b)(VII),
C.R.S. must be deposited in an account separate from any other Trust or Escrow
Accounts maintained for Money Belonging to Others. Such funds are not subject
to Trust or Escrow Accounts and record keeping requirements as set forth in
Rules 5.2. and 5.14.
5.11. Money Belonging to Others for deposit
by a Broker for Non-Real Estate Brokerage Services
A. Money Belonging to Others which is
accepted for deposit in connection with activities not involving Real Estate
Brokerage Services must be deposited into Broker's or Brokerage Firm's Trust or
Escrow Account(s). Such activities not involving Real Estate Brokerage Services
include:
1. Guest deposits for short term
rentals;
2. Security deposits for
Broker's own rental properties including any Broker owned properties held in a
partnership, or other entity with others, any join ventures, or syndications
provided the Broker's ownership in the entity or property is more than the 20%
threshold pursuant to section
12-10-201(6)(b)(VII),
C.R.S.;
3. Deposits from a buyer
when the Broker is acting as a builder; or
4. Any other non-Real Estate Brokerage
Service purposes.
B. If a
Broker accepts Money Belonging to Others for deposit into Broker's or Brokerage
Firm's Trust or Escrow Account as set forth in subsection A. of this Rule for
activities not involving Real Estate Brokerage Services, the Broker must:
1. If required by the Broker's Brokerage
Firm's Office Policy Manual, deposit the funds in the Broker's Brokerage Firm's
Trust or Escrow Accounts as set forth in Chapter 5 of these Rules; or
2. Deposit the funds into Broker's own Trust
or Escrow Accounts as set forth in Rule 5.2 . and must also comply with the
following Chapter 5 Rules:
i. Rule 5.6 .
Trust or Escrow Funds must be Available Immediately without Penalty;
ii. Rule 5.9 . Diversion and Conversion
Prohibited;
iii. Rule 5.10 .
Commingling Prohibited;
iv.
Maintain a "journal" as set forth in Rule 5.14.A . and perform a two-way
reconciliation monthly to show that on the date of reconciliation the cash
balance shown in the journal and the reconciled bank balance are the same;
and
v. Rule 5.21 . Production of
Documents and Records
5.12. Earnest Money
A. Any Broker receiving earnest money must
deliver such earnest money to the earnest money holder to be deposited in
accordance with the contract. The Broker must obtain a dated and signed receipt
from the person or entity to whom the Broker has been instructed to deliver the
deposit.
B. If the Brokerage Firm
will be holding the earnest money in a transaction, the earnest money must be
deposited as set forth in Rule 5.7.B . The Brokerage Firm may transfer the
earnest money from the Brokerage Firm's Trust or Escrow Account to a lawyer or
a closing entity closing the transaction. The Brokerage Firm delivering the
earnest money deposit to a lawyer or a closing entity providing settlement
services must obtain a dated and signed receipt from the person or entity
providing settlement services.
5.13. Promissory Note for Earnest Money
If a promissory note is received as earnest money pursuant to
an executed contract, the seller must be informed of the date such promissory
note becomes due. If payment is not made by the due date of the promissory
note, the Broker must promptly notify the seller and deliver the original
promissory note.
5.14.
Recordkeeping Requirements
An Employing Broker or Independent Broker must maintain, at
the Brokerage Firm's licensed place of business, a record keeping system as set
forth in Rule 5.16 ., consisting of at least the following elements for each
required Trust or Escrow Account:
A. A
"journal" or an equivalent accounting system which records, in chronological
order, all Money Belonging to Others which is received or disbursed by the
Brokerage Firm.
1. For funds received, each
journal record must include:
a. The date of
receipt and deposit;
b. The name of
the person who is giving the money;
c. The name of the person and property for
which the money was received;
d.
The purpose of the receipt;
e. The
amount; and
f. A resulting cash
balance for the account.
2. For funds disbursed, each journal record
must include:
a. The date of
payment;
b. The check number or
electronic transfer record;
c. The
name of the payee;
d. A reference
to vendor documentation or other physical records verifying purpose for
payment;
e. The amount paid;
and
f. Resulting cash balance for
the account.
B.
A "ledger" or an equivalent component of an accounting system which records, in
chronological order, all money which is received or disbursed by the Broker on
behalf of each particular beneficiary of a Trust or Escrow Account. The ledger
record must show the monetary transactions affecting each individual
beneficiary and must segregate such transactions from those pertaining to other
beneficiaries of the Trust or Escrow Account. The ledger record for each
beneficiary must contain the same transactional information as set forth in
subsection A of this Rule. No ledger may ever be allowed to have a negative
cash balance. The sum of all ledger balances must agree at all times with the
corresponding journal after each transaction has been posted.
C. Three-way reconciliation must be performed
monthly to show that on the same date the cash balance shown in the journal,
the sum of the cash balances for all ledgers, and the reconciled bank balance
are the same. A three-way reconciliation report must be completed and
maintained monthly to show such three-way reconciliation. The Broker is not
required to maintain records or reconcile any Trust or Escrow Account when such
account does not contain Money Belonging to Others.
D. A Brokerage Firm may deposit personal
funds as may be required to pay any bank charges incurred in connection with
maintaining a Trust or Escrow Account without violating Rule 5.10 . An entry
showing such money must be made in the journal and on the ledger as set forth
in subsections A and B of this Rule.
E. The three-way reconciliation reports,
ledgers, journals, and bank account statements may be kept
electronically.
5.15.
Maintenance and Production of Reports to Beneficiaries
A. Brokerage Firms holding Money Belonging to
Others must provide detailed reports to each beneficiary. Any accounting report
furnished to beneficiaries must be prepared and delivered according to the
terms of the Management Agreement. In the absence of a provision in the
Management Agreement to the contrary, Brokerage Firms must deliver these
reports within thirty (30) days after the end of the month in which funds were
either received or disbursed.
B.
The Brokerage Firm must maintain supporting records, which accurately detail
all cash received and disbursed under the terms of any Management Agreement.
1. All deposits of funds into a Trust or
Escrow Account must identify each person tendering funds, the amount of funds
tendered, types of funds received from each person, and the property address
affected.
2. All disbursements of
funds from a Trust or Escrow Account must be supported by documents such as
bids, invoices, contracts, etc. Ledger and journal records must identify the
payees, property addresses affected and amount of funds transferred for each
property.
5.16.
Method of Accounting
In the absence of a written agreement to the contrary, the
"cash basis" of accounting must be used for maintaining all required Trust or
Escrow Accounts and corresponding records. A Brokerage Firm may use another
method of accounting if it is agreed upon in writing by the Brokerage Firm and
the beneficiary. The Brokerage Firm must maintain separate Trust and Escrow
Accounts and corresponding records for each beneficiary using a different
accounting method.
5.17.
Mark-Ups
Pursuant to sections
12-10-217(1)(d) and (t)
and
6-1-105, C.R.S., the Broker and
Brokerage Firm must obtain prior written consent from the owner to assess and
receive mark-ups and/or other compensation for services performed, regardless
if for the benefit of the Broker or another third party. The Broker and
Brokerage Firm must retain accurate on-going records, which verify disclosure
and consent and which fully account for the amounts or percentages of
compensation assessed or received.
5.18. Items in Lieu of Cash
Any instrument, equity, or Thing of Value taken in lieu of
cash must be held by the Brokerage Firm, except as otherwise agreed.
5.19. Branch Office Trust or
Escrow Accounts Require Branch Office Recordkeeping
In the event a branch office of a Brokerage Firm maintains a
Trust or Escrow Account separate from the Trust or Escrow Account(s) maintained
by the Brokerage Firm's main office, a separate record keeping system must be
maintained in the branch office. The responsibility of maintaining separate
record keeping systems will be the responsibility of the Employing
Broker.
5.20. Money
Collected by Brokerage Firm
A. When money is
collected by a Brokerage Firm for the performance of specific services or for
the expenses of performing such services, or for any other expense, and such
money is collected before the services have been performed, the Brokerage Firm
must deposit such money in a Trust or Escrow Account pursuant to section
12-10-217(1)(i),
C.R.S. No money may be withdrawn from the Trust or Escrow Account, except for
authorized expenses for performing such services. A full and itemized
accounting must be furnished as set forth in Rule 5.15.
B. Nothing in this Rule will prohibit a
Brokerage Firm from taking a non-refundable retainer that need not be deposited
into a Trust or Escrow Account provided this be specifically agreed to in
writing between the Brokerage Firm and the person paying the
retainer.
5.21.
Production of Documents and Records
A Broker and Brokerage Firm must produce for inspection by
the Commission any document or record as may be reasonably necessary for
investigation or audit in the enforcement of the Commission statutes and these
Rules. Failure to submit such documents or records within the time set by the
Commission in its notification will be grounds for disciplinary action unless
the Commission has granted an extension of time for such production.
5.22. Responsibility of the
Employing Broker or Independent Broker for Brokerage Firm's Compliance
The Employing Broker or Independent Broker are held jointly
responsible with the Brokerage Firm in complying with Chapter 5 of these
Rules.
