Record Retention – What are the “Best Practices?”

QUESTION: I am the Broker-in-Charge of my office. An agent who is leaving our firm is insisting that, because of the Real Estate Commission’s record retention rule, he must copy all of his transaction files for the last three years. Is he correct? Also, I have heard that our firm should retain our transaction files for longer than three years. What do you recommend?

ANSWER: Real Estate Commission Rule A.0108, available here, identifies the records that brokers are required to retain. That rule also sets forth the required retention period: “The broker shall retain records for three years after all funds held by the broker in connection with the transaction have been disbursed to the proper party or parties or the conclusion of the transaction, whichever occurs later.”

In the course materials for the 2019-2020 BIC Update Course, available here, the Commission addressed the question of whether the BIC or the broker, or both, are responsible for record retention. It first cited section (g)(5) of the Broker-in-Charge rule (Rule A.0110) which explicitly obligates BICs to “retain and maintain records relating to transactions conducted by or on behalf of the firm, including those required to be retained pursuant to Rule .0108.” The Commission then wrote, with bold print in the original materials: “A BIC and broker are both responsible for retaining records. The BIC must ensure the firm has copies of all documents and complete transaction files; the broker must also have copies of their transactions.” Note that this guidance differs from that given in the materials for the Commission’s 2012-2013 Broker-in-Charge Annual Review. There, the Commission wrote that once a transaction is concluded, an affiliated broker usually may rely on the Broker-in-Charge to handle the affiliated broker’s record retention responsibilities.

While Rule A.0108 only requires brokers to retain records for three years, our recommendation is that records be kept much longer. Why? In the event a legal claim is made against a broker or a firm, the firm’s transaction file will be absolutely crucial in defending that claim. While many legal claims in North Carolina have a three-year statute of limitations, the fact is that many claims can be brought after that three-year period. For example, the statute of limitations for an action alleging a violation of the Unfair and Deceptive Trade Practices Act is four years. A claim of constructive fraud based on an alleged breach of fiduciary duty has a ten-year statute of limitations. And even though the statute of limitations for actions alleging fraud or negligent misrepresentation is only three years, that limitations period does not begin to run until the aggrieved party discovers (or reasonably should have discovered) the facts constituting the fraud or misrepresentation. This so-called “discovery rule” can extend the time for filing a claim well beyond three years. The best way for brokers and firms to protect themselves from claims brought more than three years after a transaction is complete is to retain their transaction files for significantly longer than the Commission’s rule requires.

Release Date: 11/14/2024