Executive Summary
On November 17, 2025, the Securities and Exchange Commission’s (SEC) Division of Trading and Markets issued a much-anticipated no-action letter clarifying whether a representative-owned Personal Services Entity (PSE) can receive transaction-based compensation (TBC) without registering as a broker-dealer. The Staff determined that a PSE may receive TBC only if the broker-dealer maintains exclusive supervisory authority and the PSE does not perform any securities functions. This clarification replaces years of inconsistent precedent and has immediate implications for broker-dealers, independent contractor networks, dual registrants, and affiliated RIAs. Firms intending to rely on representative-owned entities for securities compensation must revise supervisory procedures and implement compensation controls before examiners begin evaluating this new framework.
Historical Background: Decades of Confusion Around Personal Service Corporations
For nearly four decades, the securities industry has struggled with the SEC’s inconsistent approach to personal corporations formed by registered representatives. Independent contractor representatives often formed LLCs or service entities to manage their various business activities, frequently for tax planning, liability protection, and succession planning.
But the SEC has traditionally treated the receipt of transaction-based compensation by an unregistered entity as evidence that the entity was “engaged in the business” of effecting transactions, creating the risk that such a PSE was an unregistered broker-dealer. Earlier no-action letters warned against routing commissions to representative-owned entities, while other letters permitted similar structures when linked to payroll consolidation or insurance business operations.
This contradictory approach has caused unpredictable examination results. Some BDs were forced to unwind longstanding compensation arrangements; others operated under uncertainty. The Courts ultimately rejected the idea that transaction-based compensation alone equals broker-dealer activity. In SEC v. Kramer, the court emphasized a functional test and required that an entity be “in the business of effecting transactions for others” before registration is required. But the SEC’s no-action position did not keep pace.
Thus, the 2025 no-action letter aligns the industry’s reality, case law, and supervisory obligations.
What the 2025 No-Action Letter Actually Allows
The SEC now allows a representative-owned PSE to earn transaction-based compensation if the arrangement meets strict supervisory requirements. The exemption applies only when:
- The broker-dealer retains exclusive supervisory authority over the registered representative and all securities activities.
- The PSE performs no securities functions, meaning no solicitation, negotiation, recommendation, or handling of orders.
- The broker-dealer determines the exact amount and timing of all compensation, and the PSE merely distributes funds as instructed.
- All owners and principals of the PSE are registered with the broker-dealer.
- The SEC, FINRA, and the broker-dealer have unrestricted access to books and records maintained by the PSE.
- The PSE’s office is treated as a branch or OSJ of the broker-dealer when applicable, subject to inspections.
- Unregistered personnel may only perform clerical tasks and cannot receive bonuses tied to transaction-based compensation.
The Staff explicitly superseded earlier no-action positions that conflicted with this framework. The relief, therefore, functions as a new, unified supervisory standard. Notably, the letter does not alter the definition of a broker-dealer. Instead, it establishes a conditional framework under which a PSE may receive transaction-based compensation without registering, and provided they meet all the supervisory, compensation, and recordkeeping conditions specified.
Impact on Broker-Dealers: New Supervisory and Operational Requirements
Broker-dealers that rely on independent-contractor models must modify their supervisory systems to meet each condition outlined in the no-action letter. At a minimum, firms should adopt the following measures:
- Formal PSE Approval Process. Broker-dealers must develop a documented pre-approval process requiring disclosure of the PSE’s ownership, business lines, personnel, location, technology, and compensation structure. The firm should maintain records demonstrating why the arrangement meets SEC conditions.
- Mandatory PSE Agreement. A written agreement must confirm the broker-dealer’s exclusive supervisory control; restrict the PSE from securities activity; ensure regulatory access to records; prohibit production-based payments to unregistered persons; and authorize the broker-dealer to terminate the arrangement if supervision is impaired.
- Compensation Direction Controls. The broker-dealer must determine the amount and timing of compensation. The PSE cannot adjust or direct payouts. Firms should maintain compensation logs and written instructions to document compliance.
- Branch/OSJ Classification and Inspections. If the PSE’s location qualifies as a branch or OSJ, the firm must perform inspections consistent with FINRA Rule 3110, including unannounced visits where risk warrants.
- Books and Records. Any BD-related records maintained by the PSE must be retained and produced according to SEC Rules 17a-3 and 17a-4. Examiners will expect immediate access.
- Training and Testing. Firms should train supervisors and registered representatives and incorporate PSE monitoring into annual testing under FINRA Rules 3110, 3120 and 3130.
Finally, these steps must be reflected in the Written Supervisory Procedures and must match actual business operations.
Impact on Dual Registrants and RIAs: Indirect but Significant
Although the no-action letter applies specifically to broker-dealer activities under Section 15(a), it has meaningful implications for dual registrants and affiliated SEC-registered investment advisers.
RIAs must ensure that the PSE is not used to receive advisory fees in a manner inconsistent with the Advisers Act. Advisory compensation typically belongs to the advisory firm, not the individual representative or a personal corporation.
As such, dual registrants should review:
- Form ADV disclosures relating to compensation, conflicts, and outside business activities.
- The RIA’s Compliance Manual, including dual-hat supervision and conflicts management.
- Fee billing and solicitation arrangements, ensuring advisory activity is not routed through the PSE.
- Marketing and business descriptions, preventing client confusion about entity roles.
Hybrid firms should update their annual risk assessment and confirm that the PSE is not inadvertently performing advisory functions.
Action Items Moving Forward
To the extent broker-dealers rely on the no-action letter, they should immediately update their WSPs, draft PSE agreements, implement a formal PSE approval workflow, and document supervisory access and compensation control procedures. Additionally, dual registrants relying on the non-action letter will need to revise their Form ADV disclosures, review conflicts, and confirm that no advisory revenue is improperly flowing through the PSE.
Ultimately, firms should expect examiners to test these structures aggressively in 2026 for firms that allow their registered representatives to utilize their PSEs.
Conclusion
The SEC’s 2025 no-action position marks a significant and long-awaited evolution in the regulatory treatment of PSEs that receive transaction-based compensation. By moving from narrow, exception-driven interpretations to a supervisory-anchored framework, the Staff has provided clarity that reflects current industry realities. To the extent you need clarification or assistance in implementing the new framework, The LeGaye Law Group offers broker-dealers and dual registrants assistance with updating WSPs, drafting PSE agreements, revising Form ADV disclosures, and preparing supervisory checklists necessary for compliance.