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- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
In a potentially precedent-setting case, the U.S. District Court for Southern California handed down a legal victory for Waddell & Reed upholding the firm’s classification of its brokers as independent contractors, ruling against brokers claiming they should be regarded as employees.
The California court granted Waddell’s motion for two summary judgments, but allowed the two former broker plaintiffs to add a third broker to their suit. That new broker now has 30 days to amend the complaint.
The decision has potentially far-reaching consequences for broker-dealers because the plaintiffs specifically alleged that SEC and FINRA regulations with which Waddell & Reed was legally bound to comply—matters such as how a broker can advertise, what his business card says and how to treat e-mail—indicated the sort of control found in an employee relationship.
The court, however, was unimpressed with that argument, relying heavily on an analogous case that came out in January involving the role of an insurance agent, says Orrin Harrison of Akin Gump Strauss Hauer & Feld, Waddell’s attorney.
“It’s precedent if [the plaintiffs] decide to take it on appeal. There are other cases that hint around this … but nothing that is really up front on a national basis,” Harrison said.
“The difference between the insurance cases and the broker-dealer cases,” Harrison continued, “is the level of control that a broker-dealer has to exercise over a financial advisor due to the legal requirements.
“Financial advisors are essentially the same as an insurance agent. They solicit their clients, they sell their own products and they are not subject to the dictates of the insurance carrier or BD in terms of how they exercise their business,” he said.
The court also granted a summary judgment in favor of Waddell with regard to a new California act regarding the misclassification of independent contractors, ruling that that law—passed after the plaintiffs’ affiliation with Waddell ended—is not retroactive. (Phone and e-mail efforts by AdvisorOne to reach plaintiffs' attorneys went unanswered.)
With favorable decisions on two key points and one ruling allowing the plaintiffs to add another broker to their suit, the decision was hailed as a victory for the broker-dealer model by the Financial Services Institute (FSI), which filed an amicus brief supporting Waddell.
FSI’s general counsel and director of government affairs, David Bellaire, told AdvisorOne it got involved in the case to let the court know there is a broader context beyond the individual parties to the suit. Bellaire said FSI was also concerned that California is a “bellwether state,” where trends often start before spreading throughout the country.
He said the court needed to hear that there are “middle-class investors that need financial advice and products and services and want to get it from someone operating a small business in their home town rather than having to get service through a call center.”
Bellaire said this is not the first time a broker has argued that following FINRA or SEC rules make their BD into an employer.
“They will point to these regulatory requirements to indicate the broker-dealer was controlling their behavior, was establishing policies and procedures they had to comply with.
“It’s very important to us that the courts interpret properly. They’re just carrying out their regulatory responsibilities,” Bellaire said.
If the court ruled otherwise, that would potentially open up claims to unemployment insurance, overtime pay, breaks and discrimination claims.
According to Harrison, the plaintiffs were independent contractors who just weren’t any good at their work. “These were failed former financial advisors. One earned about $7,000 and the other earned about $8,000 or $9,000.” Harrison said they were looking for a payoff from Waddell “with the encouragement of counsel,” who were working on a contingency basis.