The business model for independent brokerage firms is under threat, calling into question the livelihood of more than 178,000 registered representatives.

Currently, independent brokerage firms pay their reps as contractors, allowing them to work for themselves. But a piece of legislation introduced in the House in late July by Rep. Jim McDermott, D-Wash., and in the Senate in December by Sen. John Kerry could lead to high costs and extra hassle for independent broker-dealers.

The legislation, titled the Taxpayer Responsibility, Accountability and Consistency Act of 2009, would remove the safe-harbor provision of Section 530 of the Revenue Act of 1978, which could force independent broker-dealers to reclassify independent financial advisers as employees, subjecting the firms to back taxes, penalties and interest.

Dale E. Brown, the president and chief executive of the Financial Services Institute, a membership group which represents 118 independent broker-dealers, said in a phone interview last week that the FSI supports the goals of legislation to correct abuses in the independent contractor classification. But, he said, the concern is that the financial adviser community will get caught up in legislation ostensibly intended for the trucking and construction industries.

"The independent broker-dealers and the independent contractors they license have a three-decade record of compliance with applicable rules, so there is no need for the IRS to be given any reason to question whether or not our industry is appropriately classified," Brown said.

"We are an extremely regulated industry. There are no cash transactions, so everything is highly auditable, and tax compliance is not an issue."

The FSI is also worried that if the Internal Revenue Service succeeds in forcing independent broker-dealers to reclassify their advisers as employees instead of independent contractors, the excess cost would shatter their business model and take away a lot of their independence.

"Our business model is unique because instead of advisers being employees, they are self-employed and own their own advisory" businesses, Brown said.

"They decide what hours they will work, they rent their own office space, hire their own staff and assume all the risk of being a business owner. This legislation would pull the rug out from under one of the foundations of our business model."

If independent broker-dealers go out of business or are hindered in their ability to compete because of rising costs, that would mean less access to affordable financial advice for Main Street, Brown said.

A press release on Kerry's Web site states that the legislation would "provide workers with the rights they deserve" and says that the "current tax loophole, which allows employers to misclassify some workers as 'independent contractors,' denies employees valuable rights and protections."

The legislation would ensure that workers' compensation, Social Security, Medicare, overtime, unemployment compensation and the minimum wage are offered to all employees, the press release said.

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