Yesterday, the Senate voted 60-39 to approve the 2,315 page financial regulatory reform bill. The President is expected to sign the legislation sometime next week. The final Dodd-Frank bill requires the SEC to conduct a comprehensive study of all the issues involved in harmonizing the regulation of all providers of retail financial advice, including a fiduciary standard of care and enhanced supervision of RIAs. When signed by the President into law, the SEC would be required to report the results of the study to Congress within six months. At the conclusion of the study, the SEC may promulgate rules that would impose an obligation to act in the best interest of the client without regard to the financial or other interests of the broker, dealer, or investment adviser providing the advice.
“After almost two years of legislative activity, the real work begins as implementation of regulatory reform falls to the SEC and other regulators,” said Dale Brown, President & CEO of the Financial Services Institute. “We are already working to articulate unintended consequences and to bring the unique perspective of independent broker-dealers and financial advisors to this process.”
Our ultimate goal has been, and remains, a standard of care that works in all client situations and in all business models, combined with an industry-funded self-regulatory organization for investment advisers. We have supported the inclusion of the SEC study in the final bill throughout the legislative process. We believe the study represents the best available opportunity to achieve our goals.
We would like to thank everyone who acted on this important issue.
Tags: business, Compliance, Legislation, regulation
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The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408) was introduced in the House on July 30, 2009 by Rep. Jim McDermott (D-WA 7th). Senator John Kerry (D-MA) introduced a bill by the same name in the Senate (S. 2882) on December 23, 2009. The substantive language of the House and Senate bills are identical. On February 1, 2010, President Obama released the Administration’s 2011-2012 budget proposal, which contains sections that would repeal protections afforded by Section 530 of the Revenue Act of 1978 (Section 530).
The bills and the proposed budget would have serious consequences for independent broker-dealers by taking away an important safe harbor provision in Section 530. They seek to eliminate the “longstanding recognized practice” safe harbor and to increase financial tax penalties for employers who misclassify workers as independent contractors without a reasonable basis. Additionally, the bills propose to place the burden of proof on the taxpayer to demonstrate that the worker is properly classified and authorize an independent contractor to petition the IRS for a review of the contractor’s employment status. The House bill has been referred to the Ways and Means Committee, the Senate bill has been referred the Finance Committee, and the Administration’s 2011-2012 budget has been submitted to Congress for review and approval.
These items are particularly important to labor unions concerned about the misclassification of workers as independent contractors in certain industries. As a result, the labor unions have identified the issue as a top priority in their legislative agenda. The legislation may also gain momentum as legislators seek new sources of tax revenue. The misclassification of workers as independent contractors is an attractive target since it is estimated to result in billions in unpaid payroll taxes.
Independent broker-dealers and independent financial advisors operate in a heavily regulated and documented industry in which cash payment for services is strictly prohibited. They are not involved in the industries of concern to the proponents of the legislation, responsibly pay their taxes, and are properly classified as independent contractors. In fact, financial advisors choose to affiliate with independent broker-dealers so they can own and operate their own small business and exert greater control over the means of its operation. Nevertheless, the Financial Services Institute1 is concerned that if these items were passed into in their current form, it would have serious unintended negative consequences for independent broker-dealers, independent financial advisors, and their middle class clients.
For more than thirty years, the independent broker-dealer industry has provided the investing public with comprehensive and affordable financial solutions. The lynchpin of the independent broker-dealer industry is a network of financial advisors who operate with maximum flexibility and are responsible for the entirety of their business operations. These independent financial advisors are small business owners and entrepreneurs who benefit from a decentralized business structure. As small business owners, these financial advisors usually own or rent their own office, employ their own staff, and are subject to independent broker-dealer inspection primarily for the purposes of complying with securities laws. In the U.S., approximately 180,000 financial advisors – or approximately 61.7% percent of all practicing registered representatives – operate as self-employed independent contractors, rather than employees, of their affiliated broker-dealer firm.3 A careful analysis of the relationship between a registered representative and an independent broker-dealer firm makes it clear that registered representatives associated with independent broker-dealer firms are properly classified as independent contractors for purposes of employment taxes.
The independent broker-dealer business model focuses on offering financial solutions to clients who constitute the backbone of America’s investor class. Financial advisors associated with independent broker-dealers primarily serve “Main Street Americans” – families able to invest tens or hundreds of thousands – rather than millions – of dollars. The independent broker-dealer model provides those investors with access to products and services that maximize their ability to achieve their financial goals. The independent broker-dealer industry is able to efficiently serve consumers and offer services at affordable prices because the primary business relationship is between the financial advisor and the consumer.
The negative impact on independent broker-dealers, financial advisors and their clients would be significant. Section 530 has functioned effectively for over thirty years. Congressional efforts to repeal it add great uncertainty and new expenses for entrepreneurs, falling heavily on small businesses. Eliminating the safe harbor would discourage entrepreneurship and damage the economy. These general concerns would be heightened in the independent broker-dealer industry.
If independent broker-dealers were forced to reclassify their financial advisors as employees, the additional costs and compliance burdens would cripple their ability to remain profitable while also providing the services needed by their advisors and their clients. Independent broker-dealers would be exposed to unnecessary IRS scrutiny of their classification of workers, potentially subjecting them to substantial back taxes, penalties, and interest payments.
If the IRS forced independent financial advisors to become employees of their broker-dealer, they would lose much of the independence that is so vital to the advice, products, and services they provide their clients by undermining their entrepreneurial spirit. Additionally, repeal would wipe out the “sweat equity” independent financial advisors have built in their own practices and eliminate their ability to exert control over how they best serve their own clients. This would be a tragedy for middle class investors who have come to rely upon the unbiased professional financial services they receive from their local independent financial advisor.
For these reasons, we believe independent broker-dealers and financial advisors should be exempted from the H.R. 3408, S. 2882 and other attempts to narrow or eliminate the safe harbor provision of Section 530.
Tags: business, Legislation, regulation
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On March 22, 2010, the Senate Banking Committee (Committee) approved the Restoring American Financial Stability Act of 2010 (RAFSA), S-3217, by a party-line vote of 13 to 10. I am pleased to report that the bill passed by the Committee contains a provision directing the Securities and Exchange Commission (SEC) to study all the issues surrounding harmonization of broker-dealer and investment adviser oversight. We supported the inclusion of this study in RAFSA because it will provide the SEC, investor advocates, financial services industry professionals, and other stakeholders with an opportunity to shape these important regulatory reforms without a rush to judgment in a politically charged atmosphere. We support the creation of a new universal standard of care and an industry-funded self-regulatory organization for investment advisers. We believe the study represents the best available opportunity to achieve our goals.
On April 12, 2010, the Financial Services Institute submitted a letter to all Senators urging them to support the SEC study in the final version of RAFSA. RAFSA is expected to make its way to the Senate floor in the next couple of weeks.
Many of you have responded to our Calls to Action by letting your Senator know how you feel about important aspects of this legislation. We are grateful for your support and involvement in the process. It does make a difference!
Tags: business, independence, regulation
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