For years, broker-dealer groups have questioned whether their representatives could be paid through personal service companies.
The practice is common in other industries, where individuals choose to route income via separate entities for efficiency and tax purposes, claims Red Oak.
However, uncertainty over whether unregistered entities could receive transaction-based compensation has pushed financial firms to avoid the option out of caution. Recent regulatory clarity suggests the answer is yes — but not without limits.
On 17 November 2025, the US Securities and Exchange Commission issued a long-awaited no-action letter stating it would not pursue enforcement actions when a representative routes transaction-based compensation through an unregistered personal entity. The move addresses inconsistencies in previous interpretive letters that had left firms uncertain about whether such arrangements could trigger unintended broker-dealer violations.
Crucially, the SEC’s position only applies where the entity does not conduct broker-dealer activities. It cannot solicit, negotiate or execute trades, nor act in any manner that would meet the definition of a broker or dealer. The registered broker-dealer must still control and supervise the conduct of its associated representatives, meaning the relief does not relax core oversight expectations.
To support this position, the regulator outlined a detailed operational framework. Broker-dealers must maintain dedicated accounts through which compensation is paid. They must instruct or approve the size and timing of payments, keeping discretion over remuneration even if employees of the entity provide recommendations.
Once approved funds are transferred, the entity is permitted to distribute compensation promptly, retaining only what it needs for administrative and overhead costs. The broker-dealer must also keep full records of payments in line with Exchange Act rules, ensuring transparency at the individual registered representative level.
The SEC further requires that individuals who own the entity must also be registered with the same broker-dealer. Its location must be designated as either a branch or supervisory office, and appropriate policies and supervisory procedures must be in place. A written contract between the firm and the entity is mandatory, explicitly reaffirming that supervision, regulatory responsibility and disciplinary authority rest solely with the broker-dealer.
The terms forbid the entity from presenting itself as a broker-dealer or paying incentive bonuses to unregistered staff tied to transaction-based compensation flows. Any unregistered employees may only perform clerical or administrative tasks.
The no-action relief offers welcome flexibility for registered representatives seeking to structure compensation more efficiently. Yet, firms must apply the policy carefully. Failure to follow the letter’s conditions could lead to the very regulatory breaches it seeks to prevent, making strong governance and meticulous compliance critical for those looking to leverage the change.
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