New SEC Guidance on PSE Compensation Structure

The SEC recently released a no-action letter¹ allowing broker-dealers to pay transaction-based compensation due to a representative through the representative’s owned personal services entity (PSE). The request letter came from the Financial Services Institute (FSI), on behalf of its member broker-dealers who classify their registered representatives (RRs) as independent contractors. These independent contractors would often establish PSEs for succession and tax-planning purposes.

FSI noted that, according to SEC staff responses to other no-action letters, as well as SEC enforcement actions, “The receipt of [transaction-based compensation] has been deemed dispositive of one’s need to register as a broker-dealer with the SEC.”² Yet, FSI noted that courts had carved out a number of exceptions where receipt of transaction-based compensation alone would not trigger a registration requirement. The FSI sought to clarify the SEC’s position regarding transaction-based compensation received by PSEs.

The SEC responded that a representative-owned PSE can receive transaction-based compensation if the following factors are true:

• Supervision of the registered representatives’ brokerage activities and supervision over the broker-dealer’s brokerage business remain with the broker-dealer.
• The broker-dealer retains the ability to effectively supervise its registered representative, including by determining and directing the compensation to be paid to each registered representative.
• The SEC and any applicable self-regulatory organizations (SROs) will have access to books, records, and other information they may require to exercise regulatory oversight over the broker-dealer, its registered representatives, and its business operations.
• The PSE does not engage in soliciting, executing, or negotiating securities transactions, or in any other activities that would reasonably cause the PSE to meet the definition of “broker” or “dealer” under the Securities Exchange Act of 1934 (Exchange Act).

The SEC stated that its position was based strictly on the facts and circumstances discussed by FSI.

ACA noted that FSI’s letter provided a series of additional details on how broker-dealers would comply with the four factors above (including requirements regarding payment of the transaction-based compensation, recordkeeping, registration, written supervisory procedures, and maintaining a written independent contractor servicing agreement with the PSE) in order to rely on the SEC’s no-action position.³

Details on these requirements are listed below:

Payment of Transaction-Based Compensation

• The broker-dealer will maintain a bank account for paying transaction-based compensation to its independent contractor registered representatives who are also employees or independent contractors of the PSE and associated with the broker-dealer (the RRs).
• The broker-dealer will instruct (or otherwise approve) the PSE regarding the size and timing of transaction-based compensation to be paid to the RRs. Such instructions (or approval) will be specific to the payment to be made to each RR. In this regard, registered principals who are also employees or independent contractors of the PSE may make recommendations to the broker-dealer regarding the size and timing of transaction-based compensation to be paid to the RRs. However, the broker-dealer will have final discretion regarding the size and timing of the payment to each of the RRs.
• Upon receiving instructions or approval from the broker-dealer, the PSE will promptly distribute transaction-based compensation to the RRs, provided that the PSE may retain a portion of such payments for its use in paying for its overhead and administrative expenses.

Records

• As required by Rules 17a-3 and 17a-4 of the Exchange Act, the broker-dealer will maintain records regarding all compensation payments it makes to the PSE. These records will provide required details regarding payments made to each RR.

Registration

• Each of the RRs and registered principals of 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 either be designated as a branch office or as an office of supervisory jurisdiction of the broker-dealer.

Written Supervisory Procedures

• The broker-dealer will maintain policies and procedures designed to ensure that the conditions set forth in this letter are satisfied.

Written Independent Contractor Servicing Agreement

• The broker-dealer and PSE will enter into a written independent contractor servicing agreement, which will include the following requirements:
  • The broker-dealer will be obligated to comply with all applicable federal, state, and local regulations, and registration and licensing requirements.
  • 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 the hiring, proper registration, licensing, training, and supervision of all its registered representatives with respect to the broker-dealer’s obligations under all applicable securities laws, rules, and regulations.
  • The broker-dealer will retain the exclusive right to discipline and terminate its associated persons.
  • All books and records in the possession of the PSE that are maintained on behalf of the broker-dealer will be made available for inspection by the SEC, any SRO, or any other regulatory authority with jurisdiction over the broker-dealer’s business.
  • The broker-dealer will not assert that the existence of any agreement with the PSE in any way affects the ability of the SEC, any SRO, or any other relevant regulatory authority to regulate, examine, or discipline the broker-dealer or any of its associated persons for violations of applicable securities laws.
  • The PSE will not itself engage in any securities-related activities that would require it to register as a broker-dealer.
  • The PSE will not hold itself out as a broker-dealer.
  • To the extent the PSE employs any person who is not registered, such personnel will not be permitted to engage in any securities-related activities that would require them to become registered representatives of a broker-dealer. Such personnel will also have only clerical or ministerial involvement in securities transactions.
  • The PSE will not pay unregistered personnel any bonuses that are tied to transaction-based compensation paid by the broker-dealer to the PSE.

Building Resilient Compliance Frameworks

Regulatory changes like the SEC’s guidance on PSE compensation highlight the importance of strong supervision, clear documentation, and proactive compliance oversight. ACA partners with broker-dealers to:

• Strengthen supervisory frameworks with policies, procedures, and monitoring that align with regulatory expectations.
• Enhance recordkeeping and reporting to ensure books and records are complete, accessible, and exam ready.
• Reduce operational burden through managed services that support compliance without compromising firm control.

Our goal is to help you stay ahead of regulatory requirements while maintaining efficiency and reducing risk.