The independent contractor status of the 140,000-plus registered representatives who work as brokers affiliated with broker-dealers is likely to come under attack once again.
The Financial Services Institute Inc. of Atlanta is bracing for the introduction of new legislation that would require independent broker-dealers to withhold taxes for their reps.
Such a move would place a new compliance burden on the shoulders of broker-dealers. It could also undermine the entrepreneurial spirit of reps affiliated with independent-broker-dealer firms, financial industry leaders say.
"It would devastate our business model," said Dale Brown, president and chief executive of the FSI, which represents 116 independent broker-dealer firms.
The industry has good reason to be worried.
President Obama has long fought for new rules governing independent-contractor status. As a U.S. senator from Illinois, he was a principal co-sponsor of legislation that would have severely restricted the ability of brokerage firms to classify their reps as independent contractors.
The legislation was not enacted.
What's more, many labor unions — which have been among Mr. Obama's biggest campaign supporters — have also lobbied to have taxes withheld for non-wage workers.
Rep. Rob Andrews, D-N.J., who last May sponsored a bill similar to Mr. Obama's, confirmed that he plans to reintroduce the legislation this year.
"This bill is designed to stop the abuse of the independent-contractor status by employers who control the terms and conditions of someone's employment, their hours, their compensation, where the employee really doesn't have any discretion in doing their job," he said.
Between 1996 and 2004, the federal government lost $34.7 billion in unpaid payroll taxes due to misclassification of workers as independent contractors, Mr. Andrews said. Employees who are misclassified do not get Social Security, disability and unemployment insurance, he added.
Even so, the concerns of the brokerage industry are ill-founded, Mr. Andrews said.
"The kind of person who pays their own rent, has their own book of business and is compensated based on their success, is and will be clearly an independent contractor, should our bill become law," he added.
The FSI, for its part, isn't taking any chances.
The organization is trying to identify key players in Washington with whom it will need to work on the issue, Mr. Brown said.
It also commissioned James McIntyre, a partner with McIntyre Law Firm PLLC in Washington, to write an analysis of the issue. Finally, the group is "preparing to mobilize FSI members to be involved from a grass-roots standpoint, contacting their elected officials," Mr. Brown said.
Virtually all of FSI's 116 independent broker-dealers classify their 140,000 registered reps as independent contractors.
The reps prefer that model "for the independence it gives them in serving their clients," Mr. Brown said.
Taxes generally do not have to be withheld by employers for payments to independent contractors.
The legislation sponsored by Mr. Obama in 2007 would have repealed a section of the tax code under which the brokerage industry now falls in classifying reps as independent contractors, according to Mr. McIntyre.
That section allows businesses to use the independent-contractor classification if they have a long-standing, recognized practice of paying workers that way, said the attorney, who was director of the Office of Management and Budget under former President Carter from 1978 to 1981.
"Treating registered representatives as independent contractors is a long-standing practice in this industry," Mr. McIntyre said.
If the tax code provision were repealed, all businesses, including brokerage firms, would be "severely" restricted in their ability to classify workers as independent contractors, he said.
WORKING FOR THEMSELVES
Unlike wirehouses, which typically employ registered reps directly as employees, independent brokerage firms pay their reps on an independent-contractor basis because it allows them to work for themselves, said Frank Tauches, executive vice president and general counsel of American Portfolios Financial Services Inc.
American Portfolios is a broker-dealer in Holbrook, N.Y., that manages more than $10 billion through some 500 independent-contractor registered advisers.
"These are individuals who have basically set up their own business and registered and affiliated with us," Mr. Tauches said.
American Portfolios provides the reps with the platform and technology through which transactions are conducted, and it collects and pays commissions to the brokers, he said.
As required by securities regulations, American Portfolios and other independent broker-dealer firms also supervise reps, Mr. Tauches said. That means reps can sell only through their primary -broker-dealer.
If the Obama legislation were enacted, that could pose a problem for brokers. Under IRS rules, taxpayers can be classified as independent contractors primarily if they can control the method in which they work.
For their part, many reps want to keep their independent-contractor tax status. "If I was forced to be an employee, then a whole bunch of negative changes would happen," said Mary Sterk, president of Sterk Financial Services Inc. of Sioux City, Iowa, which manages about $120 million and uses Woodbury Financial Services Inc. of Woodbury, Minn., as its broker-dealer.
"If I was not allowed to be an independent business owner, then I am essentially handcuffed in any decision-making ability on a day-to-day basis," she said.
E-mail Sara Hansard at shansard@investmentnews.com.
