Not content to “let it be,” the Financial Services Institute (FSI) sought and received, on November 17, 2025, a significant SEC staff no-action letter relating to the broker-dealer status of personal service entities (PSEs) owned by registered representatives. Prior to the FSI letter, decades of conflicting guidance and doubt found PSEs in “times of trouble.”
The status question is whether PSEs may receive transaction-based compensation without registering as broker-dealers under the Securities Exchange Act of 1934 (Exchange Act). The FSI letter answers this question in the affirmative: the SEC staff will not recommend enforcement action to the SEC against a PSE solely for receiving transaction-based compensation under the terms and conditions described in the FSI letter.
Why Do Registered Representatives Form PSEs?
In lieu of receiving transaction-based compensation in an individual capacity, some registered representatives form a limited liability company or other business entity that receives compensation for services rendered by the registered representatives to third parties. PSEs may result in tax savings and assist with succession and tax planning. PSEs are sometimes known as practice groups or ensembles and may engage in non-brokerage-related activities that do not require the PSE to register as a broker-dealer.
Regulatory Landscape
FSI’s incoming request letter urged a “fresh look” at the compensation question due to contradictory interpretive positions and court decisions analyzing the fundamental question of whether the person or entity receiving transaction-based compensation is “engaged in the business of effecting transactions in securities for the account of others.” FSI’s incoming letter discussed years of SEC no-action letter guidance and court opinions analyzing whether “mere receipt” of transaction-based compensation is dispositive of broker-dealer activity.
Conditions
Reliance on the FSI letter is subject to satisfaction of conditions that FSI designed to provide the staff with assurances that the PSE would not be engaged in soliciting, executing, or negotiating securities transactions, or any other activities that would reasonably cause the PSE to meet the definition of a broker or dealer under the Exchange Act, as follows:
- Broker-dealer maintains a bank account for paying transaction-based compensation to its registered representatives who are also employees or independent contractors of the PSE and associated with broker-dealer.
- Broker-dealer instructs the PSE regarding (or otherwise approves) the size and timing of transaction-based compensation to be paid to the registered representatives. Broker-dealer has final discretion regarding the size and timing of the payment to each of the registered representatives.
- Upon receiving instructions or approval from broker-dealer, the PSE promptly distributes transaction-based compensation to the registered representatives, provided that the PSE may retain a portion of such payments for its use in paying its overhead and administrative expenses.
- Broker-dealer maintains records regarding all compensation payments it makes to the PSE that provides required details regarding payments made to each registered representative.
- Each of the registered representatives and registered principals of the PSE are registered with the same broker-dealer.
- Each owner of the PSE is a registered person of broker-dealer.
- The PSE’s location is either designated as a branch office or as an office of supervisory jurisdiction of brokerdealer.
- Broker-dealer and PSE enter into a written independent contractor servicing agreement containing specified provisions.
Importance of FSI Letter to FINRA Rule 2040
While not discussed in the FSI letter, the letter “will be an answer” to another regulatory issue. FINRA Rule 2040 prohibits payments of transaction-based compensation to unregistered persons who, by reason of receipt of transaction-based compensation, are required to be registered. Supplementary Material .01 to Rule 2040 notes that “FINRA expects members to determine that their proposed activities would not require the recipient of the payments to register as a broker-dealer and to reasonably support such determination.” For broker-dealers that are unsure whether an unregistered person may be required to register, Rule 2040.01 states that support for the determination may be derived from “no-action letters or interpretations from the Commission or Commission staff that apply to their facts and circumstances.”
The FSI letter is just the kind of interpretation from which broker-dealers and registered representative-owned PSEs may derive support for the payment of transaction-based compensation to unregistered PSEs without requiring PSEs to register as broker-dealers. So long as unregistered PSEs satisfy the conditions of the FSI letter and enter into a written servicing agreement with the broker-dealer, the FSI letter “whispers words of wisdom” that Rule 2040 is not violated because broker-dealer registration is not required for PSEs that receive transaction-based compensation.
