SEC No-Action Letter Permits Payment of Broker Fees to Unregistered Entities Owned by Registered Representatives — With Conditions

On November 17, 2025, the SEC (U.S. Securities and Exchange Commission) staff provided a letter to the Financial Services Institute (FSI) agreeing that it would not recommend enforcement action to the commission if a personal services entity (PSE) that is wholly owned by registered representatives (RRs) of a broker received transaction-based compensation (TBC) without registering as a broker or dealer.

Background

Licensed individuals registered with brokers on an independent contractor basis have often wanted to have their TBC paid to a PSE, such as an LLC or limited partnership, wholly owned by them. Having payments made to PSEs may result in tax savings and ease the burdens related to succession and estate planning. However, payments to PSEs have largely been prevented by two things: SEC interpretations of the definition of “broker” and Financial Industry Regulatory Authority (FINRA) Rule 2040, which prohibits sharing of fees with a person not registered as a broker.

“Broker” is defined in section 3(a)(4) of the Securities Exchange Act of 1934 as a person “engaged in the business of effecting transactions in securities for the account of others.” Notwithstanding the “effecting transactions in securities” element of the definition, the SEC staff has looked closely — sometimes exclusively — at the “engaged in the business” element (i.e., the receipt of TBC). Consequently, the staff has previously declined to provide no-action relief to RRs who sought to have fee payments made to their PSEs. The ability of brokers and their counsel to take a position based on the statutory language of section 3(a)(4) rather than SEC staff guidance is constrained in this instance by FINRA Rule 2040, which effectively prohibits members and associated persons from making TBC payments to unregistered individuals and entities.

Basis and Conditions for Relief Under the FSI Letter

The letter permits a broker to pay, and a PSE to receive, TBC if, among other conditions,

• the PSE is wholly owned by one or more RRs;

• the RRs to be paid through the PSE are all registered with the same broker, and that broker is making the payment;

• neither the PSE nor any unregistered employee of the PSE performs any broker services; and

• the broker supervises the RRs and the payment process.

That is the simplified version. The requesting letter from the FSI contains seven conditions to be met and 10 obligations, responsibilities, and limitations that are expected to be included in a written independent contractor servicing (ICS) agreement. Some of the more significant terms of compliant ICS agreements include:

• Dedicated Bank Account: The broker must maintain a bank account for paying TBC to RRs who are PSE employees. The no-action request letter does not explain the purpose of this condition, other than citing the September 2003 Investacorp Group no-action letter, which involved payroll services provided by an affiliate of a broker. At a minimum, having a dedicated bank account for payments to PSEs will facilitate SEC and FINRA examinations of those payments.

• Broker Instruction of Payments by PSE/Prompt Payments: The broker will instruct the PSE on the size and timing of TBC to be paid to RRs. Registered principals who are employees of the PSEs may make recommendations to the broker regarding the size and timing of TBC to be paid, but the broker will have final discretion regarding these decisions. For this purpose, PSE “employee” may be read to include independent contractors and owners of the PSE who are RRs of the broker. Upon receiving instructions or approval from the broker regarding payments of TBC to RRs, the PSE is expected to promptly distribute the TBC as instructed. However, the letter also says that the PSE may retain a portion of the payments received to pay for overhead and administrative expenses. Overhead includes the salaries of personnel who do not provide, and are not compensated for, broker services. One of the other terms to be included in the ICS agreement is that the PSE will not pay unregistered personnel any bonuses that are tied to TBC paid to the PSE by the broker.
  
  A question raised by the prompt payment requirement is whether RRs may retain their payments in their PSE partner or member accounts. There may be tax or estate-planning benefits to leaving the funds in the PSE, or the owner may wish to retain a cushion in the PSE’s accounts to cover future contingencies.

• PSE Ownership: Each owner of the PSE must be an RR with the same broker, but not all RRs employed by a PSE are required to be owners.

• Branch Office or OSJ: The PSE’s location must be designated as a branch office or an Office of Supervisory Jurisdiction (OSJ) of the broker. This raises an interesting question if the PSE does not have a location, other than, for example, a Delaware agent or post office box. An RR may have established a PSE solely to receive payments, with no other business. Common sense suggests that a separate branch office or an OSJ would not be necessary if the RR is working out of an existing branch office or OSJ. However, it is less clear whether a home office not required to be a branch office would have to be designated as a branch office for the RR to have a qualifying PSE.

• No Holding Out: The PSE may not hold itself out as a broker. This should not prevent the PSE from holding itself out as engaged in another business — for example, as an insurance agency. To the extent that services are provided at the PSE location, those services should be clearly identified as services of the registered broker.
  
  Some individuals conduct a private placement or investment banking business by registering with a broker on an independent contractor basis while at the same time engaging in activities through a separate entity, often described as a consultant, that does not require broker registration. Up to now, those arrangements required the broker to make TBC payments directly to the RRs, while the consultant entity received fees from the client company solely for services not requiring registration, such as corporate governance advice or market analysis of the client’s current and proposed products. The FSI letter could permit the consultant entity to qualify as a PSE for purposes of receiving TBC fees to be paid to the RRs. However, care will need to be taken to make sure that the entity does not hold itself out as a broker. Use of the term “investment bank” to describe the PSE could be regarded as holding itself out as a broker. 

FINRA Rule 2040

As noted earlier, Rule 2040 prohibits a FINRA member or associated person (including any RR of the member) from sharing TBC with unregistered persons. The rule does not, of course, prohibit brokers from paying vendors, service providers, or contractors for non-broker services and products. The rule is intended to prevent the payment of TBC for activities that require registration. Supplementary Material .01 to Rule 2040 provides that, in reaching a determination that a payment to another person would not require that person to be registered as a broker, the paying broker may rely on, among other sources and guidance, an SEC no-action letter. The FSI letter should provide adequate support for a Rule 2040 determination if the conditions of the letter are met. We recommend that a broker seeking to make payments to PSEs implement written policies and procedures reasonably designed to ensure compliance with the conditions of the letter and require a written ICS agreement including terms reflecting the obligations, responsibilities, and limitations prescribed in the letter.

What the Letter Does Not Do

The FSI letter does not offer a backdoor method to get TBC payments to unregistered individuals or entities for services in connection with a transaction in securities. TBC received by a PSE may be used for overhead, including payments to employees performing only ministerial, clerical, and administrative services. It may not be used to pay a finder who introduces prospective investors or a marketer who identifies potential brokerage clients for the broker. Those situations must be analyzed separately rather than under the FSI letter.

We would be pleased to advise you in setting up a qualifying PSE and designing appropriate compliance policies and procedures, whether you are an RR or a representative of the broker. 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.