On November 17, 2025, the U.S. Securities and Exchange Commission (SEC) issued a significant No-Action Letter, allowing registered representative-owned personal services entities (PSEs) to receive transaction-based compensation (TBC) without the immediate need for broker-dealer (BD) registration. This decision marks a notable shift in the regulatory landscape surrounding compensation structures in the financial services industry.
Historically, the SEC has mandated that any individual engaged in buying or selling securities on behalf of others must register as a broker-dealer under Section 3(a)(4)(A) of the Securities Exchange Act of 1934. The recent clarification indicates that PSEs, along with their independent contractors who are affiliated with BDs, can receive TBC without being classified as a broker-dealer, provided they meet certain conditions.
Key Conditions for Compliance
The No-Action Letter outlines specific parameters that must be adhered to for PSEs to receive TBC. These include ensuring that the respective BD retains full authority over its business operations and supervisory responsibilities. For instance, the BD must maintain a dedicated bank account for TBC payments to independent contractor registered representatives (RRs) associated with the PSE.
Additionally, the BD will have discretion regarding the amount and timing of TBC distributed to each RR. While registered principals from the PSE may provide recommendations, the final decision rests with the BD. Upon receiving the necessary instructions, the PSE is authorized to promptly distribute TBC to the RRs, although it may retain a portion for administrative expenses.
The SEC emphasizes the importance of record-keeping, requiring BDs to maintain detailed records of all compensation payments made to PSEs, in compliance with Rules 17a-3 and 17a-4 of the 1934 Act.
Responsibilities of Broker-Dealers and PSEs
In order to delineate responsibilities, the SEC recommends that BDs and PSEs formalize their relationship through a written independent contractor servicing agreement. This agreement should outline the BD’s obligations to comply with federal, state, and local regulations, as well as its exclusive control over all securities-related activities conducted by associated persons.
Notably, the PSE is prohibited from engaging in any activities that would necessitate its registration as a broker-dealer. It cannot portray itself as a BD or facilitate transactions on behalf of others. Any unregistered personnel within the PSE are restricted to clerical roles and cannot participate in securities-related activities that would require them to be registered representatives.
As a precaution, PSEs should review their existing policies and procedures with affiliated BDs to ensure compliance with the SEC’s new guidelines. This may involve coordinating on subcontracts or revenue-sharing agreements related to TBC.
It is essential to note that SEC No-Action Letters represent the views of the SEC staff and do not constitute formal rules or regulations. They are fact-specific and non-binding, meaning that outcomes may vary under different circumstances. Entities considering actions regarding TBC should consult with legal counsel to navigate these new guidelines effectively.
This development in the regulatory framework reflects a growing recognition of the unique roles that PSEs play in the financial ecosystem, allowing them to operate with greater flexibility while still adhering to necessary compliance measures.
