Recordkeeping for Compensation

The rule turns compensation supervision from policy-level to transaction-level. A firm cannot satisfy the per-AP compensation recordkeeping rule with general contest rules and commission grids; it must produce, on demand, the trade-by-trade record of who got paid what.

SEA Recordkeeping Authority

The Securities Exchange Act of 1934's broker-dealer recordkeeping authority lets the SEC require broker-dealers to:

• Make and preserve records of their business activity
• File reports with the SEC and SROs (e.g., Financial and Operational Combined Uniform Single (FOCUS) reports)
• Submit to examinations by SEC staff

This statutory authority is the foundation for the 17a-3 (records to be made) and 17a-4 (records to be preserved) regime. Every specific recordkeeping rule for broker-dealers traces back to it.

Per-AP Transaction Record

For each AP, the firm must create a record listing each purchase and sale of a security that is attributable for compensation purposes to that AP.

The record must include, for each transaction:

What "Attributable for Compensation Purposes" Means

The record links every customer trade to the AP credited with compensation, whether or not the AP personally executed the trade.

• A trade executed by a desk trader on behalf of an AP's customer is attributable to the AP if the AP receives the production credit
• A trade in a team-account structure may be attributable to multiple APs if the firm's compensation framework splits credit
• A trade processed by an unregistered clerical employee under the exempted-activities safe harbor is attributable to the supervising registered person who confirmed the order

Non-Monetary Compensation Detail

The "non-monetary description" requirement reaches sales contests, gifts, trips, and any incentive contingent on hitting a sales goal. A firm that runs a sales-incentive trip for top producers must record the incentive against each qualifying rep's transactions, not just maintain the contest rules generally.

Think of it this way: The transaction record must answer the question "for this specific trade, what compensation flowed to which person?" Cash compensation is straightforward (the commission amount). Non-cash compensation requires the firm to allocate the value of the non-cash item across the qualifying transactions; a trip earned for hitting $10 million in sales must be allocated across the trades that contributed to that $10 million.

Exam Tip: Gotchas

• The transaction record's "non-monetary compensation description" requirement reaches sales contests, gifts, trips, and any incentive contingent on hitting a sales goal. A firm that runs a sales-incentive trip for top producers must record the incentive against each qualifying rep's transactions, not just maintain the contest rules generally. The exam tests this with fact patterns where the firm has "the contest rules on file" but no transaction-level allocation.
• The transaction record must run per-AP, not per-trade. A firm that maintains a transaction-by-transaction record without an AP roll-up fails the rule even if every trade is otherwise documented; the regulator must be able to look up an AP and see the AP's full compensation-attributable trade history.

Compensation Agreement Summaries

The firm must maintain a record of agreements pertaining to the relationship between each AP and the firm, including:

• A summary of each AP's compensation arrangement (the rep's payout grid, base salary, draw, override structure)
• Commission and concession schedules applicable to the AP (the rate cards used to calculate commissions on each product type)

Why the Summary and the Schedules Are Both Required

The summary describes the rep's specific arrangement; the schedules describe the firm-wide rate cards. Together they let a regulator verify that a particular trade's commission was calculated correctly:

• The schedule answers "what was the commission rate on this product type?"
• The summary answers "what is this rep's payout percentage?"
• The per-AP transaction record answers "how much did this rep actually receive on this trade?"

A regulator can reconstruct the third number from the first two; a discrepancy indicates either a calculation error or an off-grid payment that the firm must explain.

Alternative Compliance: Produce on Request

A firm may elect not to make the record continuously if it can promptly produce the equivalent information on request of a securities regulatory authority.

• The "produce on request" alternative is not a permission to skip recordkeeping
• The firm must still have systems capable of generating the information promptly
• A firm that cannot reconstruct per-rep, per-transaction compensation on regulatory request fails the rule even if no continuous "record" was prepared

The alternative recognizes that modern firms maintain compensation data in trade-processing and payroll systems rather than in a static report. As long as the underlying data exists and can be produced quickly, the firm is not required to run a daily aggregation job.

Exam Tip: Gotchas

• The "produce on request" alternative is not a permission to skip recordkeeping. The firm must still have systems capable of generating the information promptly. A firm that cannot reconstruct per-rep, per-transaction compensation on regulatory request fails the rule even if no continuous "record" was prepared. The exam tests this with fact patterns where the firm "has the data somewhere" but cannot produce a coherent per-rep view in a reasonable time.
• The summary and the schedules must both be on file. A firm with a complete commission schedule but no per-rep summary cannot demonstrate that any specific rep's trades were paid correctly. A firm with per-rep summaries but no schedules cannot demonstrate that the rep was paid the firm-wide rate. Both records are required, and the firm cannot satisfy the rule with one substituted for the other.

Connection to Compensation Supervision

The per-AP compensation recordkeeping rule gives the firm and regulators a transaction-level audit trail tying every customer trade to the rep credited with compensation. This audit trail is essential for supervising:

Without the transaction-level record, the firm has no basis for supervising any of these risks. A WSP that says "the firm will monitor sales contests for issuer-bias" is unenforceable if the firm cannot produce the per-rep, per-trade allocation of contest credits.