The Clarity for Compensation Act seeks to update Securities and Exchange Commission rules to "permanently allow commission payments to be made directly to advisors' business entities," according to the Financial Services Institute and Association of African American Financial Advisors.
Both groups applauded the bill.
"Small-town financial advisors shouldn't be treated differently just because the rules haven't kept up," Rep. Zach Nunn, R-Iowa, the bill's sponsor, said in a statement. "These are folks helping families save for college, buy their first home, or plan for retirement. Our bipartisan bill gives them the same flexibility other professionals already have and helps keep trusted, independent advisors serving local communities."
Dale Brown, FSI's president and CEO, said in a statement Thursday that rules must "modernize" to serve both advisors and investors.
"Independent financial advisors need clarity and certainty that receiving commissions through their business entities will not expose them to claims by a future SEC that they are required to register as broker-dealers," Brown added.
The SEC issued a no-action letter in November granting limited relief for payments to ensemble practices. No-action letters can be overturned by SEC commissioners or completely scrapped.
The Clarity for Compensation Act, introduced Thursday by Nunn and Rep. Gregory Meeks, D-N.Y., seeks to provide a more permanent solution, according to FSI.
The bill "ensures that these businesses can operate more efficiently, recruit the next generation of advisors, and offer their clients a wider range of products and services to better meet their financial needs," Brown said.
As it stands, advisors are often prohibited from using their own business entities to receive compensation.
The independent financial advisory industry "has evolved from solo practices to ensemble businesses that allow advisors to improve efficiency and provide more holistic, comprehensive financial planning services," FSI said.
"However, outdated SEC rules have required securities commissions be directly paid to individuals — not business entities — which has created operational inefficiencies by complicating payment of business expenses and hindering advisory practices' ability to attract and compensate the next generation of advisors entering the industry," FSI added.
Dave Bellaire, FSI's general counsel, told ThinkAdvisor on Friday that while passing legislation is typically a multi-year process, FSI is "committed to the long term and moving this legislation forward."
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