Understanding the FSI No-Action Letter: What It Does—and Does Not—Mean for RIAs

The SEC Staff’s recent no-action letter to the Financial Services Institute (FSI) has raised important questions for firms regarding compensation structures, affiliated entities, and registration requirements. The letter provides very narrow relief for broker-dealers that compensate a registered representative through a personal services entity (PSE) which the representative owns. Under the specific facts described, the staff has indicated that it will not recommend enforcement if the PSE receives transaction-based compensation so long as the broker-dealer maintains full supervisory control, determines the compensation, and the PSE performs no broker-dealer functions. The relief is limited to situations where the PSE merely acts as a conduit for payments, not as a participant in securities activity.

For RIAs, this is an important but potentially misunderstood distinction. The letter does not create a path for unregistered entities to solicit clients, negotiate securities transactions, or engage in distribution activities on behalf of an adviser or broker-dealer. It does not permit RIAs to “house” advisory fees, referral fees, or transaction-based compensation inside an affiliated LLC or consulting entity unless that entity is appropriately registered or exempt, and it does not modify the definition of “broker,” “dealer,” or “investment adviser” under federal or state law. Any entity performing solicitation or sales activity for compensation may still be required to register as a solicitor, broker-dealer, or investment adviser, depending on the nature of the activity.

The Staff’s relief also does not expand the scope of permissible solicitor arrangements under the Advisers Act, nor does it permit an RIA to circumvent the Custody Rule, the Marketing Rule, or state registration triggers by routing payments through a controlled entity or individual. In all cases, the firm must maintain direct oversight, retain required books and records, and ensure that no unregistered person or entity engages in activity that constitutes “effecting transactions” or providing investment advice for compensation. RIAs should also be aware that the no-action letter does not override FINRA rules, state securities laws, or anti-fraud provisions of federal securities laws.

In practice, the letter serves as a reminder, not an expansion, of regulatory boundaries. Compensation structures involving related entities, offshore affiliates, holding companies, legacy sales organizations, or contractor-style “consulting” entities remain high-risk if not carefully analyzed. RIAs considering alternative payment or referral structures should confirm that: (1) the entity receiving compensation has no functional involvement in advisory or securities transactions; (2) all advisory or solicitation activity is performed by properly registered persons; and (3) written agreements, supervision frameworks, and disclosures accurately reflect the structure. Where any of these elements drift from the facts in the FSI letter, the relief no longer applies. Compliance Risk Concepts (CRC) can help evaluate whether your compensation, entity, contractor, or solicitation arrangements align with SEC expectations, and help you redesign, document, or supervise these structures to ensure compliance. If you are considering changes to your compensation model, exploring new affiliate arrangements, or assessing broker-dealer or state registration implications, our team can provide a tailored analysis and clear, compliant solutions.