Considered a win for independent broker/dealers and their advisors, the California state Senate passed a bill Thursday night that tightens rules governing independent contractor status but omits onerous paperwork requirements. The bill now moves on to Gov. Jerry Brown for signing.
The Financial Services Institute, the IBD trade group, said it supports the legislation, which prohibits the “willful misclassification” of independent contractors who instead qualify as employees. The FSI initially tried and failed to get an exemption for the independent b/d industry into the bill, but it did manage to convince the sponsor to amend the bill in August, removing the record keeping and “notice” requirements. The record keeping and notice provisions were the part of the bill FSI was most opposed to, having argued that the requirements would add unnecessary costs and increase compliance burdens for independent broker/dealers. Following the amendments, FSI changed its position on the bill to “neutral.”
“I’m very happy with the end result,” said Matt Schwartz, FSI’s government affairs counsel. California is often a trendsetter when it comes to legislation, and this bill will most likely thwart other states from introducing bills that have unintended consequences, Schwartz said. When initially introduced, FSI felt financial advisors were being drawn into the legislation when it should not apply to them. Independent financial advisors are properly classified, he argues. The group has done legal analysis showing that IBD advisors are properly classified under Internal Revenue Service and state statutes.
Mark Quinn, chief risk officer at San Diego, Calif.-based First Allied Securities, said the firm is neutral on the bill as passed. The onerous parts—the record keeping and notice requirements—were taken out, so it’s now something the IBD can live with, he said. The amended bill is a sign that regulators are recognizing the benefits of having independent advisors because the model makes it more economically efficient to open offices and bring financial advice to smaller communities, he said. Independent contractor status in the IBD channel is pretty well-established and understood, Quinn added.
In a letter to the California State Assembly, SIFMA outlined the characteristics of independent b/d reps that distinguish them from other independent contractors, saying that reps are sophisticated, highly educated entrepreneurs who operate as small independent businesses with their own offices, staff and operational expenses.
Still, under the common law definition, independent b/d advisors could qualify as employees. To figure out which bucket a worker falls into, you must ask three questions, according to the IRS. The first is behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? The second is financial: Are the business aspects of the workers' jobs controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies. And the third is what type of relationship the individual has with the firm: Are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?
When describing the relationship between advisors and b/ds, the answer to some of these questions might be yes. For example, b/ds are responsible for supervising their independent reps’ activities, control certain ways in which the workers are paid and what expenses are reimbursed, and their relationships are governed by written contracts.
“From my perspective, we meet those tests,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network. “The amendments have really eliminated any concerns that we would have had. Fundamentally, we are not willfully misclassifying anybody.”
Although independent b/ds have to enforce rules and regulations, these firms do not have any authority over how independent advisors run their businesses beyond that, Tolley said. “They are clearly business owners in every sense of the word.”
Under the amendments to the bill, any company found to have violated the law by engaging in willful misclassification of independent contractors will have to post a “notice” on its website or in its office so that employees can see it. If applicable, the notice must say that the employer has violated the law, that the firm has changed its business practices to avoid committing further violations, and that employees who feel they are being misclassified should contact the Division of Labor Standards Enforcement, the Employment Development Department, or the Franchise Tax Board.
Senate bill 459 has been passed on to Gov. Brown, who has until Oct. 10 to sign or veto the bill. Schwartz expects Brown to sign because he’s aligned politically with the sponsor, Ellen Corbett, also a Democrat.