A workers' compensation carrier has claimed that Finra's supervisory rules have led it to conclude that independent registered reps at a pair of California broker-dealers are employees.
State Compensation Insurance Fund, a workers' comp insurer set up by California's Legislature but operating as an independent company, this summer audited Investment Architects Inc., which has about 30 independent reps in Petaluma, Calif., and WBB Securities LLC of San Diego, which has about 45 reps.
State Fund hit Investment Architects with a $20,000 assessment after the insurer took issue with a phrase in the firm's contract with its independent reps that indicated that the brokers were required to obtain written permission from the firm before affiliating with another broker-dealer.
Anthony Duckworth, vice president of Investment Architects, fought the assessment but received a letter from State Fund dated Nov. 4 that claimed that the
Financial Industry Regulatory Authority Inc.'s supervisory regulations give the broker-dealer too much control over independent reps.
“According to Finra, specific rules of conduct exist for registered representatives, including the firm's ownership of accounts and related documents, and the requirement of supervision by a ‘registered principal,'” State Fund senior audit specialist Lynette Carrillo wrote in the letter to Mr. Duckworth.
Citing Finra's requirements that reps conduct securities business under the broker-dealer's direct supervision, Ms. Carrillo noted that the rules give the firm “a pervasive level of direction and control over the duties and operations of the representatives that are far beyond that which could be considered ‘independent contractor' in nature for workers' compensation purposes.”
The workers' comp carrier declined to reverse its conclusions.
State Fund sent a similar letter to WBB Securities' chief executive Timothy U. Morton, who had thought the firm was in the clear after the audit. The broker-dealer was later hit with an assessment that found that the reps were employees and should have had workers' compensation coverage.
“Right now, this is an unresolved issue,” said Mr. Morton, who is appealing the finding. “Where does this stop? If they want to file suit against us to collect their premiums, even if it's under arrears, they'd have a fight on their hands.”
Finra spokesman George Smaragdis declined to comment on State Fund's interpretation of its rules.
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Though Benjamin Edokpayi, spokesman for State Fund, insisted that the carrier is not targeting broker-dealers specifically, both Mr. Morton and Mr. Duckworth argue that the company hasn't made any real evaluation of the relationship between broker-dealers and their independent-contractor reps. The two have aligned to notify independent broker-dealers in California out of concern that their cases could set a precedent.
Earlier this year, a state bill was introduced that would have punished firms and others for misclassifying employees as independent contractors, charging them with fines as high as $25,000 for deliberately mislabeling their workers.
Firms also would have had to archive for at least two years paperwork detailing a person's independent-contractor status. Amendments made in August after fierce lobbying from the Financial Services Institute removed the paperwork archiving requirements, but maintained the fines.
