Can Unregistered Entities Receive TBC? The SEC Finally Says Yes (Sometimes)

Speaker 1: 00:00 
Okay, let's dive in. So think about this. If you're an independent contractor, I mean pretty much anywhere, right? A high-level consultant, a software developer, whatever, it's super common to set up what's called a personal services entity, a PSE, to get paid. 
 
Speaker: 00:15 
Oh, absolutely. Yeah. It's just, you know, it's standard operating procedure, it can make things easier administratively, and there are potential tax planning benefits. 
 
Speaker 1: 00:23 
For years, the broker dealer community has been looking at this very normal practice and asking this huge regulatory question. 
 
Speaker: 00:31 
Aaron Powell A multi-million dollar question, really. Can our registered representatives, our RRs, actually use this? Can an unregistered entity that the RR owns receive their commissions, their transaction-based compensation without blowing up the whole registration system? 
 
Speaker 1: 00:47 
Aaron Powell And that uncertainty has been a major roadblock for decades. I mean, our source material points to historical inconsistencies among earlier letters and the resulting confusion. So most firms, just to be safe, said no. It was just easier to prohibit these PSEs than to risk the regulatory headache. 
 
Speaker: 01:03 
Aaron Powell It was total risk aversion. But that all changed, or at least started to, on November 17, 2025. The SEC issued a clarifying no action letter. And that really is what granted the specific relief the industry was looking for. So our mission today is to get into the weeds on this. 
 
Speaker 1: 01:21 
And this is not a free-for-all. I think that's the key takeaway. The SEC has opened a door, but it's a very narrow one. And it's surrounded by uh tripwires. So we're gonna unpack exactly what's allowed and maybe more importantly, what the strict boundaries are so that door doesn't just slam shut on you. 
 
Speaker: 01:37 
Aaron Powell Let's start with the core relief itself, because on its face, it's a huge step forward. The SEC has basically stated it will not pursue an enforcement action against an RR's unregistered PSE. 
 
Speaker 1: 01:48 
Okay. 
 
Speaker: 01:49 
Solely for the act of receiving that transaction-based compensation. That statement alone clears up a massive amount of ambiguity. 
 
Speaker 1: 01:55 
But that word solely is doing a lot of heavy lifting there. 
 
Speaker: 01:59 
A ton of work. This is the absolute non-negotiable line. The PSE can be a pass-through for payments, but it cannot function as anything more than that. 
 
Speaker 1: 02:06 
So it can't be a shadow brokerage firm. 
 
Speaker: 02:08 
Not in any way, shape, or form. The unregistered entity may not engage in any activity that meets the definition of a broker or dealer. Period. 
 
Speaker 1: 02:17 
So give us the specifics. What are the forbidden activities? 
 
Speaker: 02:20 
The big three are soliciting, executing, or negotiating transactions. Think of it this way: the PSE can cash the check, but it can't pitch the business, structure the deal, or place the trade. 
 
Speaker 1: 02:32 
Any of those, and the relief is gone. 
 
Speaker: 02:34 
Instantly. The whole framework is built on one overarching requirement. The broker dealer has to be able to effectively supervise and oversee the rep, just as if the PSE didn't even exist. 
 
Speaker 1: 02:46 
So it's all about control. 
 
Speaker: 02:47 
Absolute control. That one principle dictates every single condition that follows. 
 
Speaker 1: 02:51 
Okay, so let's get into those conditions. Let's talk about the money. If control is everything, how does the compensation have to flow to make sure the BD never loses its grip? 
 
Speaker: 03:00 
  Well, the mechanics are uh surprisingly specific. They're designed to create a closed auditable loop. First, the BD has to maintain a specific bank account just for paying this kind of compensation.  
 
Speaker 1: 03:11 
Segregated funds, clear traceability makes sense. 
 
Speaker: 03:14 
Exactly. And second, and this is crucial, the broker dealer must instruct or approve the PSE on the size and the timing of every single payment made to the RRs. 
 
Speaker 1: 03:25 
So this isn't a blanket authorization for the year. 
 
Speaker: 03:27 
No, not at all. It's specific to each payment. Now, what's interesting is that the registered principals at the PSE can make recommendations. They can say, hey, we need to pay R.R. Smith this much this week.   
 
Speaker 1: 03:38 
But the BD has to sign off. They have the final say. 
 
Speaker: 03:41 
Final. Absolute discretion. Yeah. It's a massive limitation, but it ensures the PSE never gains any real financial independence or control over that revenue stream. 
 
Speaker 1: 03:51 
So the PSE gets the funds, and then what? It can't just sit on the money? 
 
Speaker: 03:56 
Nope. The directive is prompt distribution. It has to pass that TBC along to the RRs quickly. It reinforces its role as just a temporary conduit. 
 
Speaker 1: 04:05 
But here's the part that makes it all worthwhile for the RR, right? The administrative benefit. 
 
Speaker: 04:08 
  That's it. The PSE is allowed to keep a portion of the payments, but only to pay for its overhead and administrative expenses. 
 
Speaker 1: 04:15 
Which is the whole point of the structure for them. 
 
Speaker: 04:17 
Exactly. It's the mechanism for that tax and admin efficiency. 
 
Speaker 1: 04:20 
And with money flowing like this, I have to assume the record keeping requirements are intense. 
 
Speaker: 04:25 
 Paramount. The broker dealer has to keep meticulous records of all payments made to the PSE, and this is mandated under rules17a-3 and 17a-4 of the Exchange Act. And critically, those records have to detail the final payments that go to each individual RR. So regulators can trace every single dollar. 
 
Speaker 1: 04:44 
Let's shift from the money to the people and the place. The SEC requires mandatory parity here. The PSE can't just be floating out there on its own. 
 
Speaker: 04:53 
Right. It has to be completely interwoven with the BD structure. The registration rule is strict. Every single RR and registered principal of the PSE has to be registered with the same broker dealer. 
 
Speaker 1: 05:05 
Which stops reps from using one PSE to collect commissions from like three different firms. 
 
Speaker: 05:09 
A supervisory nightmare. That's what they're preventing. And it goes beyond just the reps. It applies to ownership too. 
 
Speaker 1: 05:14 
So every owner has to be registered. 
 
Speaker: 05:16 
Every single owner of the PSE has to be a registered person of that same broker dealer. It walls it off from any outside unregistered influence. 
 
Speaker 1: 05:24 
And what about the physical location, the PSE's office? 
 
Speaker: 05:27 
That's another key control. The physical location of the PSE has to be officially designated as either a branch office or an OSJ, an office of supervisory jurisdiction of the broker dealer. 
 
Speaker 1: 05:39 
So the BD's compliance team can walk in and do an inspection anytime, just like any other branch? 
 
Speaker: 05:44 
That's the idea. There's no hiding place. It ensures full physical oversight and examination capabilities. 
 
Speaker 1: 05:50 
Okay. This is all leading up to the agreement itself. The contract between the broker dealer and the PSE sounds like it's the linchpin for all of this. 
 
Speaker: 05:58 
It's the final firewall. It's basically the BD's binding compliance checklist. And it has to explicitly lay out who's responsible for what. 
 
Speaker 1: 06:07 
So what has to be in it? 
 
Speaker: 06:08 
Well, for starters, it has to affirm that the BD is solely responsible for compliance with all regulations, federal, state, local, everything. And it has to state that the BD has sole and exclusive control over the day-to-day securities activities of all its reps. 
 
Speaker 1: 06:23 
So the contract basically strips the PSE of any claim to employment control. 
 
Speaker: 06:28 
Precisely. The agreement must say the BD is solely responsible for hiring, registration, licensing, training, and supervision. And the real kicker. 
 
Speaker 1: 06:39 
Let me guess. Firing. 
 
Speaker: 06:40 
The BD must retain the exclusive right to discipline and terminate its associated persons. The PSE has zero authority there. 
 
Speaker 1: 06:48 
And what about transparency? What if the SEC wants to see the books? 
 
Speaker: 06:51 
The contract has to spell that out. It must state that all books and records the PSE keeps on behalf of the BD are available for inspection immediately for the SEC, the NRA, anyone with jurisdiction. 
 
Speaker 1: 07:03 
And the BD can't use the PSE as a legal shield if something goes wrong. 
 
Speaker: 07:08 
No. The agreement explicitly forbids that. It must include a clause where the BD agrees not to claim the PSE, affects a regulator's ability to examine or discipline them or their reps. The BD accepts total liability. 
 
Speaker 1: 07:18 
Okay, one last piece. What about the people at the PSE who are not registered, like the admin staff? 
 
Speaker: 07:23 
  That's a crucial area. The agreement has to confirm the PSE will not engage in any securities activities itself. It can't hold itself out as a broker dealer. 
 
Speaker 1: 07:31 
And the unregistered staff, the office manager, for instance. 
 
Speaker: 07:35 
They're limited to purely clerical or ministerial work. They can't answer client questions about investments, they can't discuss the market, nothing that requires a license. 
 
Speaker 1: 07:44 
And the SEC closed a big potential loophole in how they get paid, right? 
 
Speaker: 07:48 
Yes, a very important one. The PSE is strictly prohibited from paying any bonuses to unregistered staff that are tied to the commissions the BD pays to the PSE. It prevents a back doorway of incentivizing security sales by people who aren't registered. 
 
Speaker 1: 08:04 
So after this deep dive, it is crystal clear that the SEC has given the industry a very, very detailed roadmap. Let's bring this back to the trade-off. On one hand, you get this long-awaited clarity, you get potential administrative and tax flexibility for the reps. 
 
Speaker: 08:18 
You absolutely do. But that flexibility is oh well, it's tethered by some very heavy chains of compliance. The source material says it requires strict adherence, and that's not an exaggeration. The risk of accidentally crossing that line of becoming an unregistered broker dealer is still very real. 
 
Speaker 1: 08:34 
You know, when you look at the whole picture, the mandatory registration, the physical office being a branch, the BD controlling hiring and firing, and especially the requirement for the BD to have final exclusive discretion over the size and timing of every single payment, it really begs a question about this flexibility. 
 
Speaker: 08:52 
It does. The compliance burden on the broker dealer is immense. 
 
Speaker 1: 08:55 
So here's the final thought we want to leave you with. If the whole purpose here is to give RRs some administrative flexibility, but the broker dealer has to retain absolute control over every single commission payment, is this structure truly delivering any operational independence? 
 
Speaker: 09:10 
Or is it really just a sophisticated high compliance tax optimization tool? 
 
Speaker 1: 09:14 
Something to think about as you navigate this new and very highly conditional regulatory accord.