When 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 regular employees, the company’s leaders knew they were facing a direct challenge to one of the most important components of the independent advisory business model.
They also knew that they had a key ally – and a leading source of subject matter expertise – in FSI.
According to Orrin Harrison, a partner at prominent law firm Akin Gump and lead outside counsel to Waddell & Reed in the case, “When the suit was initially filed, we met with FSI and their outside counsel to get their thoughts on our defense strategy. FSI has been a leading voice in this particular area for many, many years, and has been a constant watchdog in Congress, at the IRS, and around the country in fighting for advisors’ independent contractor status.”
The lawsuit, filed by two unsuccessful former Waddell & Reed financial advisors, 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 two plaintiffs argued that they should have been compensated as salaried employees, rather than as independent contractors.
FSI provided crucial assistance early on in helping Waddell & Reed think through its defense strategy, based on FSI’s extensive experience in advocating on the issue, and the ongoing feedback it receives from members.
“FSI assisted us in going through the SEC and FINRA rules,” said Harrison, “and provided a lot of support for our central argument that Waddell & Reed’s implementation of those rules should not be considered in determining whether it had acted as an employer with respect to its advisors.
In addition to providing Waddell & Reed with crucial subject matter expertise and strategic advice, FSI also filed an amicus brief supporting the firm.
David Bellaire, FSI’s Executive Vice President and General Counsel, said that a ruling in favor of the plaintiffs in this case could have had seismic implications for the industry, potentially opening independent broker-dealers to a wave of new costs and uncertainty and jeopardizing the autonomy that advisors in this sector hold dear.
“The independent contractor issue is central to the independent broker-dealer model,” said Bellaire. “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 two summary judgments in the case, thereby upholding the firm’s classification of its affiliated advisors and creating a strong potential precedent for future challenges to advisors’ independent contractor status. (The court did, however, allow an amendment to add a third plaintiff to the suit. Summary judgment is now pending against the third plaintiff on the same grounds.)
Harrison noted that the outcome of the case was a crucial win for Waddell & Reed’s advisors and for small businesses in general. “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. These are exactly the kinds of small businesses that we need so much in America,” he said. “If Waddell & Reed had not won, they would have been faced with a completely different way of doing business.”
He summarized, “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, Bellaire said that future lawsuits and legislation threatening financial advisors’ independent contractor status – and the industry’s fundamental business model along with it – 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,” he said.
Bellaire believes that the collaboration between FSI and Waddell & Reed in this case will serve as a valuable model in the future as FSI continues to work closely with members to foster an environment in which independent broker-dealers and their affiliated advisors can thrive.
“Our work with Waddell & Reed to protect independent contractor status represents a perfect model for the kind of support our member firms can expect from FSI on core issues that directly affect their ability to stay in business, earn a living, and serve their clients,” said Bellaire. “We look forward to working with all of our members to protect their businesses in the years ahead.”