Earlier this month, the Department of Labor proposed a new independent contractor rule. While not surprised, we are disappointed that it does not currently offer the members of the Financial Services Institute and the broader industry the clarity we need around this issue.
As a refresher, the previous administration finalized a rule in early 2021 that did precisely that, providing the independent financial services industry the promise of consistency in the application of a commonsense economic reality test. Unfortunately, the current administration delayed that rule upon assuming office and, in time, rescinded it entirely.
Our response was measured but forceful. On behalf of our members, we sued the DOL, joining a coalition of partners that spanned multiple industries. A federal court in Texas ultimately ruled in our favor.
Though we were delighted with the outcome, we knew the current administration wasn’t likely to let that court decision be the final answer — even as doing so would benefit millions of Americans who rely on our industry to receive much-needed retirement advice.
The DOL has now responded. In simple terms, the new proposal makes it more likely that workers would be deemed employees if they could in any way be considered economically dependent on a company.
By comparison, the 2021 regulation was more sensible, giving extra weight to an economic reality test that put more emphasis on the level of control a company exercises over a worker. In addition, it provided a safe harbor for anyone required to comply with specific legal obligations or to meet certain quality control standards — such as the regulatory supervision requirements in the independent financial adviser model.
Without the clarity and consistency provided by the 2021 rule, advisers will be forced to devote more of their attention to defending their independent contractor classification, which could result in them spending less time with clients. That’s a no-win situation for everyone.
We continue to engage with the DOL, stressing that our members do not want to work for anyone, much less their broker-dealer. They have made a conscious choice to be entrepreneurs and small-business owners.
Many, in fact, started their careers as W-2 employees with Wall Street-based institutions and willingly left that model to have more freedom and flexibility to run their businesses and serve their clients as they see fit. In doing so, they have made a real difference in the lives of millions of American families.
However, making progress on this issue is not something we can do by ourselves. Indeed, it's critical that the DOL and members of Congress hear from the hundreds of thousands of independent financial advisers across the nation about what their independent contractor status means, not just to them but to their clients as well.
Advisers being independent contractors is a defining characteristic of our industry, which is why this matter has been a leading priority for our organization through the years. We will continue to give this issue our full attention and fight the good fight. We hope you will join us in our efforts in the weeks and months ahead.
Dale Brown is president and CEO of the Financial Services Institute.
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