FINOP Expense Sharing Agreements Best Practices

By Jeff Harpel and Clark Tucker

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Navigating Broker Dealer Expense Sharing Agreements

The requirement for broker-dealers to provide to regulators their expense sharing agreements is not new, yet it keeps coming up in FINRA’s exam priorities every year.  In this Oyster Stew Podcast our FINOP experts Jeff Harpel and Clark Tucker discuss FINOP expense sharing best practices.


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Transcript provided by TEMI

Libby Hall:  Hi, and welcome to the Oyster Stew podcast. I’m Libby Hall, Director of Communications for Oyster Consulting. The requirement for broker dealers to provide to regulators their expense sharing agreements is not new, but it still keeps coming up every year in FINRA’s exam priorities. We’ve covered this topic in a few of our FOP related podcasts. So we thought we’d make it easier for everyone. If all of the expense sharing information from our experts was in one place. Join us today as Jeff Harpel and Clark Tucker, two of Oyster’s FOP consultants discuss what is required and some of the finer points of creating expense sharing agreements. Clark, let’s get started with you.

Clark Tucker:  Always an exciting topic, I know, but to summarize expense sharing agreements are simply contracts from a parent provider company to a subsidiary or affiliate broker dealer for commonly shared costs such as personnel that split time between two entities, or real estate office space and utilities, and things like that. and Jeff mentioned, cost drivers. These are not complicated. They should be very simple.  It helps with the fair and reasonable aspect of this, that they be fairly determined and reasonably determined. You know, if you have an employee who is perhaps doing accounting in the parent company, but spends 30% of his time in the subsidiary broker dealer, you would want to properly credit charges to the broker dealer for its portion. And in this case, that driver would be time spent. So you would allocate 30% of the personnel cost for that and multiply that for any other individuals that have a similar role on things like floor space, office space, rent, occupancy, utilities, telephones, equipment very simply.  That can be done, as you know, a percentage of the total floor space that the broker dealer occupies as compared to the larger entity.

So if it’s 10% of the office space, then 10% of the cost should be applied. I think where a lot of firms run into issues, as Jeff mentioned, is that they don’t clearly explain those cost drivers in the schedule, and show an example of how to do it, how they’re going to allocate the cost. The specific numbers are probably less important than the methodology. If the methodology is fair and reasonably determined, and then the outcome of the allocations, meaning that the charges are consistently applied month after month. Most of the time firms don’t have a problem with these agreements. They have to be properly executed, fairly determined reasonable for the business, and then consistently applied. FINRA issued Notice to Members 3603, now 18 years ago. And most of the notice is crystal clear as to what’s expected in the of the broker dealer, if it has a parent or an affiliate that is providing some shared services, be it rent or personnel or equipment, et cetera.

You know, the broker dealer is still required to properly account for all of its own expenses. And that includes a portion of what was shared.  The expense sharing agreement just kind of confirms that in writing.   According to the notice to members, the broker dealer needs to have in a written agreement with the parent or affiliate or whoever the provider, the third party provider. And there are a few criteria. The expenses have to be fair and reasonable in their determination, and then they must be consistently applied in order to determine fair and reasonable. Most firms will look at something like rent and assign a cost driver like a percentage of square footage, and that can typically cover rent and equipment and physical assets.  That’s a pretty reasonable driver for personnel. It might be the time spent.  Employee of the parent or affiliate might spend 5%, 10% of their time on a new broker dealer.

And so you would apply 5 or 10% of that person’s or those people’s expense to the broker dealer. And then you would record that, of course, monthly.  There would be other requirements on that, meaning that it has to be written to the third party, not just the broker dealer.  But the third party has to commit in writing to the broker dealer that the broker dealer is not directly or indirectly liable to any vendor for that expense. So the parent company signs the lease agreement for office space, and the broker dealer is using a portion of it. We’ve talked about how to allocate a portion of that expense, but also the parent is the lessee. And so the broker dealer would not be directly or indirect responsible for that expense. The parent or the third party is, and the broker dealer must reimburse that third party.

So once we’ve worked out those details and written them down, typically on a Schedule A at the end of the expense agreement.  We’ve agreed that the broker dealer is not directly or indirectly responsible to the vendor that it complies under GAP. We would put that into the body of the agreement. And we would also include that in a Schedule A at the end of the agreement. And then where I have seen is typically, that in company, a payable would need to be resolved at least annually. It doesn’t have to be done monthly.  But if we’re accruing X dollars per month that are payable to our third party provider being the parent or affiliate, we need to resolve that periodically. We can do that a couple of ways with a cash payment or a forgiveness of the intercompany debt. But the key there is that we need to resolve it on a reasonable time basis.

And also both parties need to update that agreement. The fact that we could have signed an agreement in 2013, probably no longer applies.  Now personnel costs have certainly changed. Rent may have changed, other factors go in. So we should review the schedule at least annually. And if need be sign a new agreement. If something larger has happened that would, of course, require a resubmission to FINRA, but just updating the Schedule A should be a routine process to make sure that it continues to be fair and reasonable in its determination. And that it is still being consistently applied with all of those things baked in, if you will, to the expense sharing agreement.  Firms shouldn’t have a problem. Now they can get more complex, but in most of the firms that we’ve seen, there’s no real need to make it much more complex with larger companies and larger accounting divisions.

It can get more complicated with the drivers, et cetera, but for limited purpose firms or small firms, it really can be this simple.  Let’s just come to agreement on what the costs are. Let’s establish drivers, let’s allocate the actual percentages or numbers. And then let’s record that consistently. And then we update it annually and we make sure that we’re still on the same page. And I think if firms will do that, they really should not have any problems with expansionary agreement. This is not to be overly burdensome for either party. I stress to them that fair and reasonable is not just picking a number from the heavens. It means that we’ve really actually tried to take a realistic look at it and reasonably apply those costs between the two. And that’s why I identified different drivers for different things.

Because a new broker dealer, certainly if it’s being layered on top of an existing company, the broker dealer’s not taking 20% of the floor space or office space. And so to allocate 20% of that rent or whatever to the broker dealer would seem to be on the high side. To me, same with people.  Different people might spend different percentages of their time on broker dealer business.  We have an established business with all these salaried and well compensated people. Some might spend 10% of their time. Some might spend 5%, some might spend 1%. And the point is to try to intelligently review that and then document it appropriately. I would say that 20% numbers are arbitrary. I have seen where as they first pass, firms would opt for that, but I attempt to stress with them that we need to make this as realistic as possible so that we don’t have future problems.

Jeff Harpel:  You know, I agree with Clark a hundred percent and, I guess, I really want to stress a couple of things he said I think are really, really important. And one is the notion of reviewing it annually in the example of doing it in 2013 and still assuming it’s good today. That is usually a very bad assumption. I  think reviewing it every year is the right thing to do. I also think firms sometimes can do a great expense sharing agreement and then what they actually do is slightly different. So when you do it, make sure you have the processes and procedures to actually do what the agreement says.  I’ve seen that be a problem. And the same thing, as Clark said, with paying it off.  They might say in the agreement, we’re going to pay it monthly and then don’t.  Or they’re going to pay it annually, and all of a sudden they’re paying it monthly.  Just do what it says. And if you want to change your procedure, change the agreement to it. It’s not that hard. So I just wanted to emphasize those couple of things that I’ve seen go wrong.

Clark Tucker:  One other add on that I would offer here with relation to expense agreements is depending on the capital needs of the broker dealer.  Sometimes firms will settle up essentially paying the parent for its portion of costs on a monthly basis or a quarterly basis.  And that’s fine.  That would be whatever’s appropriate for those two entities in that unique situation. But it’s perfectly permissible to have that become a little bit broader, say for a startup firm. It makes little sense for a startup firm to, in essence, cut a check to its parent to pay for shared expenses, and then have the parent have to turn around and hand the money back. It’s a capital edition when drafting expense agreements.  One of my favorite phrases is that these will be resolved at least annually and then set a date, so that we can carry it on the broker dealers records throughout the year as a growing intercompany payable.  From parent it’s a growing intercompany receivable.

And then at the appropriate time that those can be settled either by cutting a check if fortune favors us or through a waiver of that intercompany debt, which also acts as a cashless capital contribution. The parent has that option as well. Simply executing a memo just as long as, as Jeff mentioned, the documentation is there, and the trail is easy to follow . When we can easily see what is being allocated, how it is being determined, that it’s being consistently applied and that we’re reevaluating periodically to make sure that the numbers and the ratios and the drivers still apply and are still reasonable and it’s being consistently applied. And then at the end that we’re acting to resolve whatever amounts owed, one way or another, in a timely manner.  Beyond that, it baffles me that that firms still have issues with expense agreements.

Libby Hall:  Thanks everyone for listening. If you’d like to learn more about our experts and how Oyster can help your firm, visit our And if you like what you heard today, follow us on whatever platform you listen to and give us a review.  Reviews make it easier for people to find us. Have a great day.

About The Podcast Speakers
Photo of Clark Tucker

Clark Tucker

Clark Tucker is a senior FINOP executive with more than 25 years of experience in the banking and securities industries. Clark’s Series 27 license and his broker dealer financial and operations expertise ensures our clients receive the high-quality outsourced FINOP support they need.

Photo of Jeff Harpel

Jeff Harpel

Jeff Harpel has over 30 years of expertise in accounting, finance, and auditing in the securities industry. Jeff’s FINOP and operations experience includes a comprehensive understanding of securities financial and operations requirements, dealing with regulatory examiners and a thorough command of internal controls, financial systems, and merger conversion activities.

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