On November 17, 2025, the U.S. Securities and Exchange Commission (SEC) issued a significant No-Action Letter. This letter confirms that personal services entities (PSEs) owned by registered representatives can receive transaction-based compensation (TBC) without the need to register as broker-dealers (BDs). This decision marks a pivotal shift in the regulatory landscape for PSEs, which are often affiliated with BDs.
Historically, the SEC has maintained that any entity earning transaction-based compensation must register as a broker-dealer under Section 3(a)(4)(A) of the Securities Exchange Act of 1934. A key aspect of this regulation is that any person involved in buying or selling securities for others must register with the SEC. Until the recent No-Action Letter, PSEs had not received explicit assurance that receiving TBC would not necessitate BD registration.
Key Provisions of the No-Action Letter
The SEC’s No-Action Letter outlines specific parameters that must be met for PSEs to qualify for this exemption. TBC arrangements must ensure that the registered BD retains full authority to supervise its associated persons effectively. The arrangements should also allow the SEC and other regulatory bodies to maintain oversight over the BD and its operations.
Certain conditions are crucial for compliance:
1. The BD must have a dedicated bank account for TBC payments to independent contractor registered representatives (RRs) linked to the PSE.
2. The BD will provide instructions on the size and timing of TBC payments, with final discretion resting with the BD.
3. Upon receiving instructions, the PSE is permitted to distribute TBC payments to RRs, retaining a portion for overhead costs.
4. The BD must maintain detailed records of all compensation payments made to the PSE, ensuring transparency in transactions.
Furthermore, all RRs and registered principals associated with the PSE must be registered with the same BD. Each PSE owner is also required to be a registered person of the BD, and the PSE’s location must be recognized as a branch office or an “Office of Supervisory Jurisdiction” of the BD.
Compliance and Future Considerations
In addition to these requirements, the SEC advises BDs to implement policies ensuring compliance with the outlined conditions. It is recommended that BDs and PSEs formalize their relationship through an independent contractor servicing agreement. This agreement should clarify the responsibilities and limitations of both parties.
Key obligations include:
– The BD’s exclusive control over day-to-day securities activities.
– Responsibility for hiring, training, and supervising RRs.
– The PSE’s prohibition from engaging in activities requiring BD registration or presenting itself as a BD.
To facilitate compliance with the No-Action Letter, PSEs should review existing policies with their affiliated BDs. This may involve reassessing subcontracting agreements or profit-sharing arrangements linked to TBC.
It is important to note that SEC No-Action Letters reflect the staff’s views and do not constitute formal regulations. These letters are non-binding and context-specific, meaning that different circumstances may lead to different conclusions from the SEC. Interested parties are advised to consult legal counsel when determining permissible actions regarding TBC received by any PSE.
