Staffers with the Securities and Exchange Commission have cleared the way for a registered representative-owned personal services entity (PSE) to receive transaction-based compensation (TBC) without registering as a broker-dealer.
The staff of the SEC Division of Trading and Markets clarified its position in a recent no-action letter to the Financial Services Institute. (FSI) Previously, the staff had said that a PSE established by a registered representative for purposes unrelated to the securities business could not receive any portion of transaction-based compensation if it was not registered as a broker-dealer.
The FSI, which represents independent financial services firms and advisers, had sought assurance from the SEC that PSEs could receive transaction-based compensation without triggering broker-dealer registration under Section 15(b) of the Securities Exchange Act of 1934 (the Exchange Act).
FSI noted that independent registered representatives, often classified as independent contractors rather than employees, establish PSEs for succession, tax planning, and other business endeavors, including those subject to oversight by regulators such as state insurance authorities. The request emphasized that mere receipt of TBC should not cause PSEs to meet the definition of “broker” or “dealer” under the Exchange Act, thus requiring registration.
The no-action position by the SEC staff is based on the broker-dealer’s ability to effectively supervise the registered representatives, including by determining and directing the amount of compensation payable to each registered representative, and on its full regulatory access to applicable books and records.
In its response to FSI, the SEC Staff noted that permitted transaction-based compensation arrangements would have to be structured with specific safeguards, including:
-The broker-dealer must retain full supervisory authority over its brokerage business and the registered representatives’ brokerage activities.
-The broker-dealer must determine the timing and amount of compensation paid to each representative.
-The PSE itself may not solicit, execute, or negotiate securities transactions or hold itself out as a broker-dealer.
-The SEC and SROs must have full access to any books, records, and other information they may require to assert regulatory oversight of the broker-dealer, its registered representatives, and its business operations.
-The broker-dealer must maintain a bank account for paying TBC to its independent-contractor registered representatives who are also employees or contractors of the PSE.
-The broker-dealer instructs (or otherwise approves) the PSE regarding the size and timing of TBC paid to each registered representative.
-The PSE performs only clerical or ministerial functions through unregistered personnel and does not pay them bonuses tied to transaction-based compensation.
Upon receiving the broker-dealer’s instruction or approval, the PSE will promptly distribute transaction-based compensation to the registered representatives, retaining only a portion for overhead and administrative expenses; the broker-dealer will maintain records of all compensation payments made to the PSE and details of payments made to each registered representative as required by Rules 17a-3 and 17a-4.
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