More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
When Financial Services Institute (FSI) member firm Waddell & Reed became the target of a lawsuit in 2009 alleging that it had wrongly classified its advisors as independent contractors rather than as employees, the company’s leaders and advisors knew they were facing a direct challenge to one of the most important components of their business model—and a crucial protection for advisors’ independence.
They also knew they had a key ally in FSI.
The lawsuit, filed by two former Waddell & Reed financial advisors and later joined by a third, alleged that by implementing SEC and FINRA-imposed regulations concerning advertising, correspondence and other practices, Waddell & Reed had exercised a level of control over its affiliated advisors that indicated an employee relationship. The plaintiffs argued that they should have been compensated as salaried employees, rather than as independent contractors.
In addition to contributing subject matter expertise and strategic advice, FSI also filed an amicus brief supporting the firm.
A ruling in favor of the plaintiffs in this case could have seriously jeopardized the autonomy that independent advisors hold dear, even potentially forcing them to become employees of their broker-dealers.
The independent contractor issue is central to the independent broker-dealer business model. This issue affects not just Waddell & Reed, but a whole segment of the financial services industry that plays a vital role in ensuring that Main Street Americans have access to professional advice, products and services to help them plan for the future.
With FSI’s help, Waddell & Reed presented a strong defense against the plaintiffs’ claims. In August 2012, the U.S. District Court for Southern California granted Waddell & Reed’s motion for summary judgments on the first two plaintiffs. In February 2013, the court awarded the firm summary judgment on the third as well, thereby establishing a strong precedent in the fight to maintain advisors’ independence.
Orrin Harrison, a partner at prominent law firm Akin Gump and lead outside counsel to Waddell & Reed in the case, praised the outcome as a crucial win for financial advisors.
“Waddell & Reed’s independent advisors are free to choose their own clients and how best to serve those clients under the firm’s current model,” he said. “If Waddell & Reed had not won, they would have been faced with a completely different way of doing business. I think it’s fair to say that most independent advisors don’t want to be dictated to.”
Despite Waddell & Reed’s victory in this case, the future lawsuits and legislation threatening financial advisors’ independent contractor status cannot be ruled out.
We continue to see proposals at both the federal and state level that will make it more difficult for companies to classify workers as independent contractors going forward, so this issue will continue to be a key focus for FSI until we get a permanent fix.