FINRA Issues Guidance on Paying "Personal Services Entities"

FINRA clarified how its rules apply to transaction-based compensation tied directly to personal services entities ("PSEs") that do not register as broker-dealers.

In a regulatory notice, FINRA described no action relief granted by the SEC in 2025 from Rule 2040 ("Payments to Unregistered Persons,") which generally prohibits members and associated persons from paying compensation, fees, concessions, discounts, commissions or other allowances to persons not registered as broker-dealers when such payments and related activities would require registration, and limits payments to associated persons unless those payments comply with applicable federal securities laws.

The 2025 no action letter permitted a broker-dealer to pay transaction-based compensation to a PSE if each owner of the PSE is a registered person of the firm, the PSE's representatives and principals are registered with that same firm, and the PSE's location is designated a branch office or office of supervisory jurisdiction. Under the SEC letter, the PSE must promptly pass the compensation through to the representatives, though it may keep a portion for overhead, and the broker-dealer must control the bank account, approve the size and timing of payments, keep the required records, and sign a servicing agreement giving it sole control over the representatives' securities activities.

FINRA said members will satisfy Rule 2040 and related compensation and supervision rules by complying with the letter's conditions, and should update their written supervisory procedures accordingly. FINRA said a PSE may not hold itself out as a broker-dealer, and its unregistered staff may perform only clerical tasks and may not receive transaction-based pay.

FINRA said the guidance follows its 2025 Request for Comment on PSE arrangements, part of its "FINRA Forward" initiative.