Client Alert: SEC No-Action – When a Rep’s PSE Can Receive Transaction-Based Compensation
February 9, 2026
Introduction:
The payment of transaction-based compensation (“TBC”) generally may only be made to a registered broker-dealer and its registered representatives. Some registered representatives have directed payment of TBC to a personal services entity (e.g. a personal LLC) (“PSE”), which are not registered as broker-dealers. A recent SEC staff no-action provides some comfort that such arrangements will not run afoul of broker-dealer registration requirements.
Key Takeaways:
- The SEC staff’s no-action letter permits a registered representative’s (“RR”) PSE”) to receive TBC ”) if certain strict conditions are met.
- See below for the specific guidelines on reasonable steps sponsors may undertake to mitigate risk.
- Broker-dealer (“BD”) control is decisive: the BD must determine and direct the size and timing of each representative’s compensation and maintain representative-level records.
- The PSE cannot perform broker functions (i.e., no solicitation, negotiation, or execution of transactions) and must not hold itself out as a BD.
Overview of No-Action Letter:
On November 17, 2025, the Securities and Exchange Commission’s (the “SEC”) Division of Trading and Markets issued a no-action letter stating it would not recommend enforcement if an RR-owned personal services entity (“PSE”) receives transaction-based compensation (“TBC”) without registering as a BD, provided the BD preserves supervision, controls compensation, and ensures full regulatory access to its books-and-records.
As a practical matter, there are no stand-alone policy reasons that prohibit routing TBC to a non-registered entity if a PSE is, in substance, an alter ego of a RR and the BD’s supervision, compensation control, and regulatory transparency remain intact. The staff’s no-action letter reflects that focus on controls and access rather than corporate form. However, the position is fact-specific and discretionary, does not preempt FINRA or state broker-dealer requirements, and preserves all anti-fraud and books-and-records obligations. The PSE must not solicit, negotiate, or execute transactions, handle customer funds or securities, or hold itself out as a BD. Additionally, securities-related communications, supervision, and rep-level compensation decisions must run through the BD. If a sponsor’s structure deviates from the stated conditions, sponsors should reassess their operations before relying on the letter.
How to Mitigate Risk Associated with Payment of TBC to a PSE:
In scenarios where a PSE truly is an alter ego of the RR, use the following checklist to mitigate risk:
- Confirm alter-ego status. The PSE should be owned by, and exist solely to provide the services of, the RR. Non-registered owners or business lines suggesting independent broker activity should be avoided.
- Anchor broker-dealer control over pay. Document that the BD determines and directs the size and timing of each of its representative’s compensation. The PSE may recommend amounts of pay, but it cannot decide.
- Keep broker functions at the broker-dealer level. The PSE must not solicit, negotiate, or execute transactions. All such activity should occur under the BD’s sponsorship and supervision.
- Paper the relationship. Use a written agreement that includes supervision, exclusive control, record access, activity limits, and termination rights. Align branding to avoid the PSE holding out as a BD or performing broker functions.
- Books-and-records maintenance. Maintain representative-level compensation records at the BD and map any records at the PSE.
- No TBC to unregistered personnel. Prohibit bonuses or variable comp for non-registered PSE staff tied to transaction-based metrics. Such persons should be limited to clerical/ministerial work.
- Disclose and coordinate across regimes. Calibrate Form ADV filings, offering materials, and investor communications as needed. Consider consulting tax and employment counsel to ensure the PSE structure aligns with non-securities rules.
As detailed in the no-action letter, the following conditions are designed to ensure that, while a PSE may receive TBC, it does not engage in soliciting, executing, or negotiating securities transactions, or otherwise meet the definition of “broker” or “dealer” under the Securities and Exchange Act of 1934 (the “Exchange Act”):
- The BD will maintain a bank account for paying TBC to independent contractor RRs associated with the BD and the PSE.
- The BD will instruct or approve the size and timing of TBC to be paid to each RR. Registered principals affiliated with the PSE may recommend amounts to the BD, but the BD has final discretion over the size and timing of the payment to each of the RRs.
- Upon BD instruction/approval, the PSE will promptly distribute TBC to the RRs and may retain a portion solely for overhead and administrative expenses.
- The BD will maintain compensation records as required by Exchange Act Rules 17a-3 and 17a-4, with details for each RR.
- Each RR and registered principal of the PSE will be registered with the same BD.
- Each owner of the PSE will be a registered person of the BD.
- The PSE’s location will be designated as a branch office or an Office of Supervisory Jurisdiction of the BD.
- The BD will maintain policies and procedures to ensure the above conditions are satisfied.
- The BD and PSE will enter into a written independent contractor servicing agreement addressing supervision, exclusive control, hiring/registration/training/discipline, regulatory access to books-and-records, PSE activity limitations, and a prohibition on bonuses to unregistered personnel tied to TBC.
How Private Fund Sponsors Should Think About Fund-Raising In General: Background on Rule 3a4-1 Associated Person Safe Harbor and Placement Agents:
In-House Fund-Raising: Rule 3a4-1 Associated Person Safe Harbor: Generally, Exchange Act Rule 3a4-1 (known colloquially as the safe harbor for associated persons of an issuer) provides that, in certain private offerings, a sponsor may rely on in-house personnel (typically full-time employees of the general partner / manager or a controlled affiliate) to support fundraising efforts without engaging a registered BD; provided that, those employees have (i) bona fide non-sales duties, (ii) receive no sales-based compensation (e.g., no commissions or success fees), and (iii) keep activities within limited, supervised parameters (e.g., factual presentations, diligence support, responding to investor-initiated inquiries). To evidence compliance, sponsors should adopt written procedures, maintain job descriptions reflecting non-offering responsibilities, train participants, and document that compensation is not tied to capital raised.
Out-Sourced Fund-Raising: Placement Agents Generally: Placement agents are registered BDs engaged by sponsors to help raise capital from institutional and qualified investors. They act as an extension of the sponsor’s distribution team, coordinating outreach, managing pipelines, and shepherding prospective limited partners through the diligence process. Sponsors use placement agents (i) to access curated investor networks across geographies and strategies, (ii) to add credibility with investment committees that expect third-party vetting and (iii) to professionalize execution with disciplined timelines, data rooms, and coordinated Q&A. Experienced agents also bring marketing and positioning expertise (storyline, track record presentation, fee/terms benchmarking) and provide compliance infrastructure, including supervised communications, KYC/AML onboarding workflows, blue-sky/filing support, and robust recordkeeping. In short, placement agents broaden reach, accelerate fundraising, and reduce execution risk while embedding regulated processes that many sponsors cannot efficiently replicate in-house.
Thinking About Distribution From Day One: Distribution Planning: At the outset of a fund launch, sponsors should lock in the distribution architecture and documentation, so fundraising does not stall later. This means determining whether any party (including a PSE) will engage in broker activity and, if so, ensuring proper BD registration or using an issuer/employee pathway within strict guardrails. Compensation structure should be clear at the outset. Controls should be documented and established so that any TBC is directed and supervised by a registered BD where required. In parallel, sponsors should design the books-and-records framework up front, including determining where records will reside, how regulators will have on-demand access, and how approvals/version control will be captured. Making these decisions at the beginning of the fundraising process avoids late-stage restructuring, disclosure rewrites, and timing risk.
Conclusion:
To operationalize the SEC’s position, sponsors should align existing structures with the core conditions by updating BD–PSE agreements, documenting BD authority over rep‑level compensation, mapping and testing books‑and‑records access (including any records maintained by or at the PSE), and designating and supervising PSE locations as branch/office of supervisory jurisdiction where applicable. Equally important are training and communications controls to keep broker functions at the BD, prohibiting TBC‑linked payments to unregistered personnel, and coordinate disclosures across regimes. Planning these items at the outset of a fundraise reduces the risk of late‑stage restructuring, disclosure rewrites, and timing slippage.
Questions? Please get in touch with David Skelding, Khalif Timberlake, or another member of the Private Funds & Investment Management team.
Key Contacts: