Registered Reps and Broker-Dealer Alert: Recent SEC No-Action Relief Allows B-D’s to Pay Transaction-Based Compensation to Personal Service, Pass-Through Entities Rather Than to Registered Persons, Subject to Limitations

On November 17, 2025, the staff of the Securities and Exchange Commission (“SEC”) issued a no-action letter to the Financial Services Institute that meaningfully alters the regulatory landscape governing how registered representatives may receive transaction-based compensation. Previously, there was an absolute ban on broker-dealers paying transaction-based compensation to anyone other than the registered person generating the commissions.  For the first time, however, the SEC staff stated it would not recommend enforcement action when a broker-dealer pays transaction-based compensation to an unregistered, pass-through, personal services entity wholly owned by one or more registered representatives, provided a detailed set of conditions is satisfied.

Although the relief is narrow, it addresses a long-standing structural problem for independent registered representatives who wish to operate through an entity (LLC, SubS corporation, partnership, etc.) for tax, administrative, estate-planning, or liability reasons. At the same time, the letter underscores the SEC’s continued insistence on strict supervision, control, and separation between registered and unregistered activities.

Regulatory Background

For decades, SEC staff has viewed the receipt of transaction-based compensation as a hallmark of broker activity. Even if an individual was properly registered and supervised, payment of commissions to an entity—rather than directly to the registered individual—often was treated as evidence the entity itself was acting as a broker. As a result, personal services, pass-through entities owned by registered representatives, were effectively barred from receiving commissions unless they registered as broker-dealers.  Many of our registered clients operate with pass-through entities and receive commissions from their broker-dealers personally and deposit those funds into their wholly owned entities.  In several instances, however, the IRS has recast those payment transfers with substantial, negative repercussions to the individual registered person.

FINRA Rule 2040 reinforced this position by prohibiting members and associated persons from sharing transaction-based compensation with unregistered persons or entities, including wholly owned entities. Although the rule was intended to prevent payment for unregistered brokerage activity, its practical effect was to prohibit entity-based compensation structures and the favorable tax consequences of having the entity pay various expenses related to the practice, even where no unregistered activity occurred.

The cumulative result was regulatory rigidity, particularly from the SEC and IRS, that ignored the economic reality that the registered representative, rather than the entity, performed the brokerage services, and that the entity was a way to operate the day to day business in an entity format.

Scope of the No-Action Relief

The SEC staff’s letter represents a limited but important shift. The relief permits a broker-dealer to pay transaction-based compensation to a personal services entity without requiring the entity to register as a broker-dealer, provided that several core principles are observed.

1. Ownership and affiliation must be tightly controlled. The personal services entity must be wholly owned by one or more registered representatives, all of whom must be registered with the same broker-dealer making the payments. No outside owners are permitted.

2. Only registered persons may perform brokerage services. Neither the entity itself nor any unregistered employee or contractor of the entity may engage in activities requiring broker registration. Unregistered personnel may perform only ministerial, clerical, or administrative functions.

3. Supervision must remain with the broker-dealer. The broker retains responsibility for supervising the registered representatives and the compensation process. The broker, not the entity, determines the amount and timing of transaction-based compensation.

4. The entity may not hold itself out as a broker. Any public-facing materials must distinguish between the broker-dealer’s regulated activities and any other business conducted by the entity.

Contractual and Operational Requirements

The no-action relief is conditioned on the existence of a detailed written independent contractor servicing agreement. The agreement must reflect numerous obligations, responsibilities, and limitations designed to preserve regulatory oversight.

Among other requirements, the broker must maintain a dedicated bank account for transaction-based compensation paid to registered representatives through personal services entities. This structure facilitates regulatory examinations and reinforces the broker’s control over compensation flows.

The broker must instruct the entity regarding compensation payments, and the entity is expected to distribute compensation promptly in accordance with those instructions. While the entity may retain a portion of the funds to cover overhead and administrative expenses, it may not use transaction-based compensation to reward unregistered personnel or pay bonuses tied to brokerage revenue.

The agreement must also address recordkeeping, audit access, compliance cooperation, and termination rights, ensuring that the broker can enforce compliance with the SEC’s conditions.

Interaction with FINRA Rule 2040

FINRA Rule 2040 remains in effect, but the no-action letter provides a framework under which compliance with the rule is possible. FINRA’s supplementary material expressly allows members to rely on SEC no-action letters when determining whether a payment requires broker registration.

Accordingly, where the conditions of the no-action letter are met, a broker-dealer should be able to conclude that payments to a qualifying personal services entity do not violate Rule 2040. Brokers relying on the relief should still adopt written policies and procedures specifically addressing these arrangements.

What the Letter Does Not Permit

The SEC staff was clear about the limits of the relief. The no-action letter does not permit transaction-based compensation to be paid to unregistered finders, marketers, or consultants who introduce investors or solicit brokerage business. Nor does it permit entities to disguise brokerage activity under alternative labels.

Similarly, the relief does not eliminate the need for careful analysis of hybrid structures in which an entity provides both regulated and unregulated services. In those cases, firms must ensure that compensation is properly allocated and that the entity does not hold itself out as engaging in brokerage activity.

Practical Considerations

For registered representatives, the no-action letter opens the door to entity-based compensation planning that was previously unavailable. At the same time, the operational and compliance burden is significant, and not all firms will be willing to support these arrangements.

For broker-dealers, the relief presents both opportunity and risk. While it may enhance recruiting and retention, it also requires robust supervision, detailed agreements, and ongoing monitoring. Firms should expect regulators to scrutinize these structures closely.

Conclusion

The SEC staff’s no-action letter provides long-awaited but tightly circumscribed relief for paying transaction-based compensation through personal services entities owned by registered representatives. It reflects a pragmatic recognition of modern business realities while reaffirming the central role of broker-dealer supervision and investor protection.

Firms considering reliance on the letter should proceed deliberately, with careful attention to documentation, supervision, and compliance. The relief is useful, but only for those prepared to follow its conditions precisely.

If you are considering recasting future commission payments from individual, registered representatives to their wholly owned, personal services entities, contact us to discuss.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.