FINRA Clarifies Rules for Personal Services Entities Following SEC No-Action Relief

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The Financial Industry Regulatory Authority (FINRA) has issued Regulatory Notice 26-12, providing guidance on how existing FINRA rules apply to the SEC’s November 2025 no-action letter regarding Personal Services Entities (PSEs).

The guidance does not create new obligations. Instead, it explains how firms should apply existing FINRA rules when using PSE arrangements that satisfy the conditions outlined in the SEC’s no-action relief.

For many firms, this guidance provides long-awaited clarity around compensation structures that have historically created regulatory uncertainty.

What Is a Personal Services Entity (PSE)?

A Personal Services Entity (PSE) is typically an entity established by registered representatives to receive compensation and manage certain business functions.

These structures are often used for purposes such as:

  • Tax planning
  • Succession planning
  • Administrative efficiency
  • Managing advisory or insurance-related business activities

Historically, questions have existed regarding whether these entities could receive transaction-based compensation (TBC) without separately registering as broker-dealers.

The SEC’s November 2025 no-action letter addressed this issue by permitting certain arrangements under specified conditions.

What the SEC No-Action Letter Allows

Under the SEC’s 2025 no-action letter, broker-dealers may pay transaction-based compensation directly to qualifying PSEs without requiring the PSE to register as a broker-dealer.

However, several conditions must be satisfied. Among the most important:

  • Every owner of the PSE must be registered with the broker-dealer.
  • Registered representatives and principals of the PSE must be associated with the same broker-dealer.
  • The broker-dealer must maintain control over compensation decisions.
  • The broker-dealer must maintain required records.
  • The PSE cannot hold itself out as a broker-dealer.
  • The PSE cannot independently engage in securities activities requiring registration.

FINRA’s guidance focuses on how these requirements interact with existing FINRA rules.

How FINRA Rule 2040 Applies

One of the most important rules discussed in the notice is FINRA Rule 2040, which generally prohibits firms from paying transaction-based compensation to unregistered persons that should be registered as broker-dealers.

FINRA explains that firms relying on the SEC’s no-action letter may satisfy Rule 2040 because the SEC has already provided relief under the specific conditions outlined in the letter.

This provides firms with a framework for supporting their determination that a PSE does not require broker-dealer registration.

Firms evaluating compensation arrangements should review these issues as part of their broader
FINRA compliance programs.

Guidance on Variable Products and Investment Company Securities

The notice also addresses FINRA Rules 2320and 2341, which generally prohibit associated persons from receiving compensation related to certain securities products from anyone other than their member firm.

FINRA clarifies that firms using qualifying PSE arrangements can satisfy these rules if they:

  • Follow the conditions of the SEC no-action letter
  • Approve the arrangement
  • Treat compensation as compensation received by the member
  • Maintain required records

This clarification helps reduce uncertainty for firms using PSE structures involving investment company securities and variable products.

Supervision Remains a Major Focus

Although the SEC’s no-action relief provides flexibility regarding compensation payments, it does not reduce a firm’s supervisory responsibilities.

FINRA emphasizes that firms remain fully responsible for:

  • Registration oversight
  • Licensing requirements
  • Training
  • Supervision
  • Discipline
  • Termination decisions

Broker-dealers must maintain sole and exclusive control over the securities-related activities of associated persons.

Firms should evaluate whether their existing supervisory systems and procedures adequately address PSE arrangements under FINRA Rule 3110 supervision requirements. 

Key Areas Firms Should Review

FINRA specifically highlights several areas that firms should address in their supervisory procedures:

Registration Controls

All PSE owners and registered personnel must be appropriately registered with the same member firm.

Compensation Administration

The broker-dealer must maintain control over compensation approvals and payment processes.

Written Servicing Agreements

Broker-dealers and PSEs must enter into written agreements that clearly define responsibilities and regulatory obligations.

Limitations on Unregistered Personnel

Unregistered employees may perform only clerical or ministerial functions and cannot receive transaction-based compensation tied to securities activities.

Recordkeeping

Firms must maintain detailed compensation records and ensure regulatory access to books and records maintained by the PSE.

Communications With the Public

FINRA also reminds firms that communications involving associated persons employed through a PSE remain subject to FINRA Rule 2210.

This means communications must:

  • Be fair and balanced
  • Avoid misleading statements
  • Clearly identify the broker-dealer through which securities business is conducted

Importantly, the PSE itself cannot present itself as a broker-dealer.

Recordkeeping Expectations Remain Critical

The notice reinforces that firms must continue complying with:

  • Exchange Act Rule 17a-3
  • Exchange Act Rule 17a-4
  • FINRA Rule 4511

This includes maintaining records related to:

  • Compensation payments
  • Compensation arrangements
  • Associated person relationships
  • Servicing agreements
  • Regulatory access rights

Strong documentation remains one of the most important aspects of demonstrating compliance. Many firms incorporate these reviews into broader regulatory exam preparation and supervisory assessments.

What This Means for Broker-Dealers

The SEC no-action letter and FINRA’s accompanying guidance provide a clearer path forward for firms that wish to use Personal Services Entities while remaining compliant.

However, the relief is highly conditional. Firms must ensure that:

  • Supervisory systems are updated
  • Written agreements are properly structured
  • Compensation controls are documented
  • Recordkeeping obligations are met

While the guidance offers flexibility, it also reinforces FINRA’s expectation that firms maintain strong oversight and supervisory accountability.

Key Takeaways

  • FINRA Regulatory Notice 26-12 explains how existing FINRA rules apply to SEC no-action relief involving Personal Services Entities.
  • Qualifying PSEs may receive transaction-based compensation without broker-dealer registration under specified conditions.
  • Firms remain fully responsible for supervision, registration, recordkeeping, and compliance oversight.
  • Written agreements, compensation controls, and documentation are critical components of compliant PSE arrangements.
  • The guidance does not create new requirements but clarifies how existing rules apply.

Contact Us

Questions about Personal Services Entities, transaction-based compensation, or FINRA supervision requirements?

Contact Quadrant Regulatory Group to discuss compliance reviews, supervisory procedures, and regulatory readiness.

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