A Refresher on Broker-Dealer Expense Sharing Agreements

Broker-dealers often incur real estate, technology, and back-office costs that are paid by a parent company or affiliate. The Securities and Exchange Commission (“SEC” or the “Commission”) and Financial Industry Regulatory Authority (FINRA) expect firms to execute and implement expense-sharing agreements with those third parties and meet related net capital requirements.

All broker-dealers should understand these requirements. Auditors and regulators have increased scrutiny of expenses that affect financial statements and FINRA’s Annual Regulatory Oversight Reports have repeatedly flagged expense-sharing agreements as a recurring examination finding.

Key Takeaways

• Expense-sharing agreements remain a regulatory priority, now codified in Rule 15c3-1(c)(2)(i)(F), reaffirmed by FINRA, and flagged in recent oversight reports.
• Recording expenses is a books-and-records issue; net capital treatment is a separate, GAAP-dependent analysis.
• GAAP alone does not determine net capital treatment. A non-GAAP liability may still require deduction if the third party’s independent resources are not supported.
• ASC 606 and ASC 842 add related documentation considerations for revenue-sharing terms and lease assets/liabilities.
• Auditor testing is also under scrutiny, with PCAOB inspections citing deficiencies in expense-related items and related-party transactions.
• Broker-dealers should separately document both the recordkeeping mechanism and the GAAP-based net capital analysis.

In October 2003, FINRA, then NASD, issued Notice to Members (“NTM”) 03-63 to address concerns that broker-dealers were not properly recording expenses and liabilities. That guidance is now codified in Rule 15c3-1(c)(2)(i)(F) of the Exchange Act and was reaffirmed by FINRA’s January 20, 2026 interpretation, keeping the recordkeeping mandate fully in force.

Rule 15c3-1(c)(2)(i)(F) requires broker-dealers to subtract from net worth any business-related liability or expense assumed by a third party unless the broker-dealer can demonstrate that the third party has adequate independent resources to pay it.

Under Rule 17a-3(a)(1) and (a)(2), NTM 03-63 also requires broker-dealers to maintain records of each business expense and related liability, even when a third party assumes responsibility and regardless of accounting treatment or net capital impact.

NTM 03-63 Outlines Some Basic Principles When Drafting Expense Sharing Agreements:

• Expense allocations to third parties must be reasonable, consistent, and supported by evidence available to FINRA.
• Covered expenses should include costs that benefit the broker-dealer or that it would otherwise be responsible for paying.
• Common covered expenses include rent, communications, registered personnel compensation, technology, and back-office services such as compliance, legal, and operations.
• Arbitration awards against a broker-dealer may not be satisfied by a third party.
• FINRA continues to cite inadequate allocation documentation as a recurring exam finding.

Net Capital Implications

For net capital issues, NTM 03-63 states that expenses and liabilities assumed by third parties must be liabilities for the broker-dealer for purposes of net capital unless:

1. The third party has agreed in writing that the broker-dealer is not responsible for the expense or liability (for vendor payments, the vendor agrees that the broker-dealer is not responsible).
2. No evidence indicates that the broker-dealer is responsible for the expense or liability.
3. The broker-dealer does not incur liability under GAAP.
4. The broker-dealer can evidence that the third party maintains resources, independent of the broker-dealer, to pay the expenses.

In 2013, the SEC amended its broker-dealer net capital and financial responsibility rules to address third-party assumption of broker-dealer liabilities and expenses. Under Rule 15c3-1, a broker-dealer must include assumed liabilities in net worth when calculating net capital unless it can demonstrate that the third party has sufficient resources, independent of the broker-dealer’s income and assets, to pay them.

The SEC’s concern was that undercapitalized third parties could obscure a broker-dealer’s true financial condition. Broker-dealers should maintain evidence of the third party’s ability to cover assumed liabilities and expenses, such as recent audited financial statements, tax returns, or regulatory filings.

Codification and Current Status: Rule 15c3-1(c)(2)(i)(F) and the January 2026 FINRA Interpretation

This guidance no longer rests solely on a stand-alone SEC staff letter. In 2013, the SEC codified Rule 15c3-1(c)(2)(i)(F), requiring broker-dealers to demonstrate a third party’s independent ability to pay assumed expenses or liabilities. The SEC also confirmed that firms may continue relying on the original July 11, 2003, Third Party Expense Letter when applying the rule, including its recordkeeping expectations under Rules 17a-3 and 17a-4 and its requirement for a written expense-sharing agreement.

On January 20, 2026, FINRA added Interpretation 15c3-1(c)(2)(i)(F)/01, which cross-references the Third Party Expense Letter to the current rule text. Together with FINRA’s “FINRA Forward” initiative and Regulatory Notice 25-12, the update confirms that firms and examiners should apply the 2003 guidance under the modern citation: Rule 15c3-1(c)(2)(i)(F), not just NTM 03-63. Firms should update internal policies accordingly.

FINRA’s Continued Examination Focus

Expense-sharing agreements remain an active area of FINRA examination, specifically called out in each of FINRA’s Annual Regulatory Oversight Reports for the last few years.

Recurring deficiencies include expense-sharing and service-level agreements that fail to document the allocation methodology required under NTM 03-63 (now Rule 15c3-1(c)(2)(i)(F)), as well as findings of unregistered persons obtaining authority over broker-dealer bank accounts under such arrangements. Each report continues to point firms back to NTM 03-63 as the operative guidance for a compliant expense-sharing agreement.

Interaction with Revenue Recognition - FINRA Regulatory Notice 23-21 and ASC 606

FINRA Regulatory Notice 23-21 reminded member firms of their net capital, recordkeeping, and financial reporting obligations under ASC 606. FINRA found that some firms recognized non-refundable fees as revenue without support that the related performance obligation had been satisfied, which overstated revenue, understated non-allowable assets and liabilities, and in some cases created net capital deficiencies.

Because expense-sharing and revenue-sharing terms often appear in the same intercompany agreements, firms should apply the same documentation discipline to both: contemporaneous support for expenses assumed by an affiliate and revenue allocated to or from that affiliate.

Interaction with Operating Lease Accounting - FINRA Regulatory Notice 19-08 and ASC 842

Rent is commonly addressed in expense-sharing agreements, and ASC 842 materially changed its accounting treatment. Under Rule 15c3-1, an operating lease right-of-use (ROU) asset is generally non-allowable, while the related lease liability generally increases aggregate indebtedness. SEC no-action relief, followed by FINRA Regulatory Notice 19-08, allows broker-dealers to add back an operating lease ROU asset to net capital up to the amount of the related lease liability, if both arise from the same lease.

Any excess lease liability must still be included in aggregate indebtedness. If an affiliate, rather than the broker-dealer, is the named lessee for shared office space, firms should confirm which entity records the ROU asset and lease liability under ASC 842 and ensure FOCUS Report presentation aligns with the lease structure and rent allocation.

PCAOB Focus on Related-Party Expense Allocations

The PCAOB has repeatedly flagged deficiencies in auditors’ testing of intercompany expense allocations under expense-sharing agreements, including in its Broker-Dealer Audit Focus publication and annual broker-dealer inspection reports.

Common findings include failure to test the basis and computation of allocations between a broker-dealer and its parent or affiliates, or to confirm that allocated amounts align with the governing agreement.

One industry summary found deficiencies in 53% of inspected engagements for expenses and related accruals and 36% for related-party relationships and transactions. Because auditors primarily test the broker-dealer’s agreement and supporting allocation records, weak documentation can surface as an audit finding even when the compliance file appears complete.

Notice to Members 03-63 Revisited: Separate Schedule of Expenses vs. Booking Expenses at the Broker-Dealer Level - GAAP or Non-GAAP?

This remains a common point of confusion because SEC staff guidance addresses two separate questions.

1. How must the expense be recorded? (A books-and-records question, not a GAAP question.)

The July 11, 2003 SEC Division of Market Regulation letter gives broker-dealers two ways to satisfy the Rule 17a-3(a)(1)/(a)(2) recordkeeping mandate: maintain a separate schedule of expenses assumed by the third party, or record those expenses directly in the general ledger and FOCUS Report. If the expense is already recorded with proper support, no separate schedule is required under NTM 03-63. This obligation applies whether or not GAAP requires the expense to be recorded, so a broker-dealer cannot avoid the recordkeeping requirement based on GAAP treatment alone.

2. Must the assumed expense be treated as a liability for net capital purposes? (This is where GAAP matters.)

GAAP matters at the net capital stage. Under NTM 03-63 and Rule 15c3-1(c)(2)(i)(F), an expense or liability assumed by a third party is presumed to be a broker-dealer liability for net capital purposes and deducted from net worth unless all conditions are met. One condition is that the liability is not a GAAP liability of the broker-dealer, but the others — written non-recourse acknowledgment, no other evidence of broker-dealer responsibility, and proof of the third party’s independent resources — apply regardless of GAAP treatment. As a result, even a non-GAAP liability may still require deduction if the independent-resources condition is not supported.

Practical Takeaway

Choosing a separate schedule versus general ledger/FOCUS Report presentation is an operational recordkeeping decision, not a GAAP question. The GAAP analysis is separate and determines net capital treatment. Because examiners and auditors test both independently, firms should clearly document: (i) how and where the expense is recorded, and (ii) the GAAP-based liability analysis supporting the net capital conclusion.

What Should Broker-Dealers Do?

FINRA and SEC guidance and rules provide a clear path for broker-dealers to follow when executing and implementing expense-sharing agreements with third parties. Some basic steps to take in preparing for audits or regulatory exams include:

1. Execute the expense-sharing agreement between the broker-dealer and the third-party, assuming broker-dealer expenses.
2. Itemize the list of expenses assumed by the third party.
3. Prepare supporting documentation for each expense, regardless of the amount or materiality.
4. Clearly document the rationale and methodology for expenses allocated to third parties and demonstrate the consistency and reasonableness of the allocation percentage.
5. Prepare evidence of the third party's ability to assume liabilities and expenses for the broker-dealer.
6. Periodically review (at least annually) the expense sharing agreements, allocation methodologies, and expenses or liabilities within the scope of the agreements, and update as needed based on business, operational, or regulatory changes.
7. Perform periodic testing of the effectiveness and implementation of the expense sharing agreements and remediate as needed.
8. Continuously confirm that the broker-dealer is meeting related net capital requirements.
9. Confirm that internal policies and expense-sharing agreements reference the current rule citation, Rule 15c3-1(c)(2)(i)(F), in addition to (or instead of) NTM 03-63.
10. Apply the same documentation discipline used for expense allocations to any revenue-sharing provisions in the same intercompany agreement, consistent with FINRA Regulatory Notice 23-21 and ASC 606.
11. Confirm which entity records the right-of-use asset and lease liability for any shared office space under ASC 842 and ensure FOCUS Report presentation is consistent with FINRA Regulatory Notice 19-08.
12. Document separately (i) the recordkeeping mechanism chosen for assumed expenses (a separate schedule vs. general ledger/FOCUS Report presentation) and (ii) the GAAP-based liability analysis supporting the resulting net capital treatment.

The Path Forward

Expense-sharing agreements remain a regulatory focus, reinforced by rule text, recent FINRA guidance, oversight reports, ASC 606, ASC 842, and PCAOB inspection findings. Under examination, documentation is what matters most.

Firms should maintain consistent allocation methods, contemporaneous records, evidence of third-party resources, and current rule citations. Periodic review and testing, with legal counsel as needed, can help identify gaps before the next exam cycle. EisnerAmper can help broker-dealers address related audit requirements; use the form below to contact our team.