Both houses of Congress are considering bills that could revoke the independent contractor status among advisors and make them employees of their affiliated firms.

The House version came last summer when Rep. Jim McDermott (D-Wash) introduced legislation that would eliminate Section 530 of the Revenue Act of 1978, the so-called safe harbor provision that lets employers classify workers as independent contractors rather than employees as long as they meet specific criteria.

Critics contend the provision is a loophole used by some employers to avoid paying employment taxes and workers' compensation and benefits.

In December, Sen. John Kerry (D-Mass) introduced his version of a bill that aims to kill Section 530, or at least make it more difficult and costly for businesses to incorrectly classify employees as independent contractors.

Some advisor groups boo these developments. "Independent contractors are small businesses, but because regulators make us pay them individually we have to issue them a [Form] 1099," says Steve Distante, chairman of the National Association of Independent Broker-Dealers. "We're caught in-between in that we supervise small businesses but have to pay them individually."

Dale Brown, CEO and president of the Financial Services Institute (FSI), a membership group representing independent broker-dealers and advisors, says if independent advisors become classified as employees it could force broker-dealer firms to pay Social Security taxes, provide benefits and assume liabilities for these advisors. He adds it could mean additional personnel and compliance costs for many small and midsize independent broker-dealers.

Brown says FSI held talks with McDermott's staff in the autumn and got a commitment from his office to work with the industry to resolve the issue. "We emphasized that our business is already heavily regulated by federal and state authorities and the rules don't allow broker-dealers and advisors to do business in cash.  This means our business is easily audited and, therefore, tax compliance is not a concern," Brown said.

He said he also plans to meet with Kerry's staff in the coming weeks.