A large and important segment of the securities brokerage industry is composed of broker-dealers that classify their registered representatives as independent contractors. As an independent contractor, a registered representatives may wish to establish a personal service entity (“PSE”) for numerous reasons including, critically, tax strategy and succession planning. However, uncertainty as to a broker-dealer’s ability to pay a representative’s PSE has persisted for decades because of uncertainty as to whether such payments would result in a violation of Section 15(a) of the Securities Exchange Act of 1934. The SEC has now issued guidance that seems to provide much needed clarity for industry participants and their advisers. On November 17, 2025, SEC staff affirmed that it would not recommend enforcement action against a PSE based on its receipt of transaction-based compensation from a broker-dealer under certain facts and circumstances. Here we outline the relevant measures and some practical considerations for broker-dealers and their representatives as they look to take advantage of the newfound clarity.
Background
The Financial Services Institute (“FSI”) submitted a letter to the SEC’s Division of Trading and Markets (the “Staff”) detailing conditions that it believed should support the Staff confirming that it would not recommend enforcement action in connection with the use of registered representatives’ PSEs. In presenting the conditions, FSI focused on prior no-action relief and other guidance associated with the receipt of transaction-based compensation (e.g., commissions) by entities not registered as broker-dealers.
Cited Conditions
In order to rely on the recent no-action relief, broker-dealers considering payment of transaction-based compensation to representatives’ PSEs must address the following core areas and specific conditions.
Broker-Dealer Must Maintain Control and Supervision
- The broker-dealer will maintain a bank account for paying transaction-based compensation to registered representatives associated with the broker-dealer and who are also employees or independent contractors of the PSE.
- The broker-dealer will instruct or approve the size and timing of transaction-based compensation to be paid to each registered representative.
- Registered principals of the BD that are affiliated with the PSE may recommend amounts and timing, but the broker-dealer must make the final decision on payment amounts and timing.
- The broker-dealer will have sole and exclusive control over the day-to-day securities-related activities of all its associated persons.
- The broker-dealer will be solely responsible for hiring, proper registration, licensing, training, supervision, and the discipline and termination of associated persons.
- Each registered representative and registered principal affiliated with the PSE will be registered with the same broker-dealer.
- Each owner of the PSE will be a registered person of the broker-dealer.
- The PSE’s location will be designated as either a branch office or an Office of Supervisory Jurisdiction of the broker-dealer.
PSE Requirements and Limitations
- The PSE must promptly distribute transaction-based compensation to the registered representatives upon receiving the broker-dealer’s instruction or approval to do so.
- The PSE can retain a portion of the total transaction-based compensation for overhead and administrative expenses.
- The PSE will not engage in soliciting, executing, or negotiating securities transactions, or any other activities requiring broker-dealer registration.
- The PSE will not hold itself out as a broker-dealer.
- Unregistered personnel employed by the PSE will not engage in securities-related activities requiring registration and will only perform clerical or ministerial tasks in connection with securities transactions.
- The PSE will not pay bonuses to unregistered personnel that are tied to transaction-based compensation paid by the broker-dealer to the PSE.
Record-Keeping, Broker-Dealer Oversight and Regulatory Access Must be Maintained
- The broker-dealer will maintain records of all compensation payments made to the PSE, including details of payments allocated to each registered representative, as required by Exchange Act Rules 17a-3 and 17a-4.
- All books and records in the PSE’s possession that are maintained on behalf of the broker-dealer will be available for inspection by the SEC, any self-regulatory organization, or any other regulatory authority with jurisdiction over the broker-dealer’s business.
- The broker-dealer will not assert that any agreement with the PSE affects the authority of the SEC, any SRO, or other relevant regulators to regulate, examine, or discipline the broker-dealer or its associated persons.
Policies and Procedures Must Account for Conditions
- The broker-dealer will maintain policies and procedures designed to ensure all stated conditions are satisfied.
The Broker-Dealer and PSE will Enter into a Servicing Agreement
- Primary purpose of the agreement is to ensure the conditions above can be maintained in a manner that does not compromise broker-dealer supervision or regulatory oversight.
- The broker-dealer must agree to:
- Comply with all applicable federal, state and local regulations and registration/licensing requirements.
- Maintain sole and exclusive control over the day-to-day securities related activities of all of its associated persons.
- Maintain sole responsibility for hiring, proper registration, licensing, training, and supervision of all of its registered representatives.
- Retain exclusive right to discipline and terminate the broker-dealer’s associated persons that are employed or contracted with the PSE.
- Not assert that the servicing agreement, or any other agreement with the PSE prevents or limits regulatory authorities ability to regulate, examine or discipline the broker-dealer or any of its associated persons.
- The PSE must agree to:
- Make available for inspection by relevant regulatory authorities any books or records maintained by the PSE on behalf of the broker-dealer.
- Not engage in any securities-related activities that would require it to register as a broker-dealer.
- Not hold itself out as broker-dealer.
- Ensure all personnel of the PSE who are not registered will not be permitted to engage in any securities-related activities that would require registration, and such personnel will only have clerical or ministerial responsibilities with securities transactions.
- Promptly distribute transaction-based compensation to registered representatives based on the specific instructions and approvals provided by the broker-dealer.
- Not pay any bonuses to unregistered personnel based on the amount of transaction-based compensation paid by the broker-dealer to the PSE.
Conclusion
Decades of conflicting and unclear discussion in SEC guidance and caselaw have saddled compliance-oriented firms from supporting independent contractor registered representatives’ use of PSEs for valuable tax and succession planning. The FSI No-Action letter now represents the clearest outline of how firms can proceed in allowing the use of PSEs. As firms look to capitalize on the no-action relief, we encourage them to look beyond just the listed conditions. Instead, we recommend focusing on the central principles and craft additional measures where necessary to: ensure the broker-dealer remains in complete control of securities activity and compensation and ensure that broker-dealer supervision and regulatory oversight is never compromised by the arrangement.