Cambridge Investment Research's 1,600 financial advisers are independent contractors who run their own businesses, but legislation introduced in both the House and Senate is threatening that business model.

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

The bill was introduced in the Senate on Dec. 14, and President Obama used similar language in his proposed budget, but no action has been taken, leaving independent contractors in limbo.

Eric Schwartz, Cambridge's chairman and chief executive officer, said one of his successful financial advisers has 13 of his own employees and $800,000 in overhead. "He runs his own office," Schwartz said in an interview Tuesday. "We don't tell him when to show up, who to hire, who not to hire and so on. If this legislation barred us from using independent contractors, does that mean we need to make this adviser an employee? Then what happens to his employees? Do we have to pay his overhead? Our role with him completely changes."

Schwartz said he understands the motivation for the legislation, which was introduced in the House in late July by Rep. Jim McDermott, D-Wash., and in the Senate by Sen. John Kerry, D-Mass. It is meant to curb abuses in some industries where employees are classified as independent contractors in order to avert costs for health insurance, workers' compensation, Social Security, Medicare, overtime and unemployment compensation.

But financial advisers working for Cambridge average $200,000 of compensation annually, Schwartz said. "They are not making a decision to be an independent contractor because they have no choice," he said. "Any one of our financial advisers that wanted to could work for a wire house that would make them employees, but they want to own their own businesses."

Dan Barry, a government relations director of the Financial Planning Association, said its 25,000 members find the model productive. "We are concerned that the IRS with a sweeping brush could eliminate a legitimate and effective business model," he said. "The fact that Senator Kerry introduced the legislation to the Senate side gives it all the more urgency and seriousness because we know it's not going to be a one-House proposal. It's something we need to keep a close eye on and advocate strongly on."

But Ed Shelleby, the communications director for Rep. McDermott, said businesses, including independent broker-dealers, that follow the rules have nothing to worry about. "Rep. McDermott is continuing to work with Treasury officials and the Senate on the legislation so that worker rights are protected and there aren't any unintended consequences for businesses, including independent broker-dealers," Shelleby said. "No businesses that reasonably pass the current 20-point test should be concerned about being negatively affected by this bill. It will be crafted to catch the real problems in the labor market and create a path for those who are abusing the loophole to come clean."

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