For years, many industries have used separate business entities to receive compensation on behalf of independent contractors, often for tax reasons or administrative efficiency. In the securities sector, however, there has long been uncertainty.
Broker-Dealer firms have frequently asked whether unregistered entities can legally receive transaction-based compensation (TBC) on behalf of their registered representatives. The US Securities and Exchange Commission (SEC) has now provided clarity — but with strict conditions attached, claims Red Oak.
On 17 November 2025, the SEC issued a no-action letter confirming that, in some circumstances, a personal services entity owned by a registered representative can receive TBC even if that entity is not separately registered under Section 12(b) of the Exchange Act.
Historically, firms were cautious or outright prohibited these structures, largely due to a patchwork of conflicting earlier letters and the risk of breaching broker-dealer registration rules. The new position attempts to resolve these inconsistencies and give firms clearer guidance.
The SEC made clear that the allowance is narrow. The unregistered entity receiving compensation cannot solicit business, negotiate trades, or perform activities that would cause it to meet the definition of a broker or dealer. Moreover, the Broker-Dealer must still supervise all registered representatives effectively and remain responsible for oversight. The SEC’s conditions are detailed and prescriptive.
Under the framework, Broker-Dealers must maintain a bank account for paying TBC to independent contractor registered representatives (RRs). The Broker-Dealer must also approve the size and timing of payments, retaining final discretion over remuneration to each RR. While the unregistered entity can distribute TBC promptly, it may only retain a portion to cover overhead and administrative expenses.
Record-keeping rules are equally stringent. In line with Rules 17a-3 and 17a-4, Broker-Dealers must maintain clear documentation of all payments. All owners and principals of the unregistered entity must be registered with the same Broker-Dealer, and the entity must be treated as a branch office or Office of Supervisory Jurisdiction.
Finally, the SEC requires that the Broker-Dealer enter into a formal written agreement with the entity that covers areas including supervision, licensing, regulatory inspections, hiring, termination, and restrictions on unregistered personnel. The unregistered entity must not present itself as a Broker-Dealer, nor pay bonuses to unregistered staff linked to TBC.
This relief marks a significant development for firms seeking greater administrative and tax flexibility. However, experts have warned that compliance must be taken seriously to avoid inadvertent registration issues. The core message from the SEC is clear: unregistered entities may receive TBC, but only if Broker-Dealers maintain tight supervision, robust procedures and comprehensive documentation.
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