Related Organizations

Management and Other Fees

Sound corporate governance practices covering related organizations include developing policies and controls addressing the payment of fees to related parties. Arrangements in which a subsidiary bank obtains goods and services from the parent holding company or other affiliate may benefit the bank since the supplier may offer lower costs because of economies of scale. Furthermore, banks may be able to purchase a package of services that otherwise might not be available. Fees paid by the bank to the parent or other affiliates should have a direct relationship to, and be based solely on, the fair value of goods and services provided. Fees should compensate the affiliated supplier only for providing goods and services that meet the legitimate needs of the bank. Affiliates should be qualified to provide those goods and services.

In general, the affiliated supplier will decide on the amount to be charged by using one of three methods:

In determining the cost of the goods or services, the parent or affiliate service provider may recover overhead expenses to the extent that they are a legitimate and integral part of the goods or services being provided. Overhead may include salaries and wages, occupancy cost, utilities, payroll taxes, supplies, and advertising.

Any of the three methods previously mentioned may be acceptable provided that the bank can substantiate that the fees paid are reasonable for the value received. Basing fees on costs may be the most common approach since market comparisons often are difficult to obtain. A bank holding company may be able to offer a number of services on a cost basis to a subsidiary bank, any one of which might be contracted elsewhere for less. The justification for such an arrangement would be that, in the aggregate, the services may be cost effective or may produce economies of scale for the entire organization. Nevertheless, having one or more subsidiary banks pay excessive fees for goods and services to subsidize other unprofitable operations is not an acceptable practice and may violate section 23B of the Federal Reserve Act.

Each bank should retain satisfactory records that substantiate the value of goods and services received, their benefit to the bank, and their cost efficiencies. Those records should be available for review by examiners.

If excessive management or other fees are paid to affiliated organizations, the board of directors is responsible for taking corrective action, which may include requiring restitution. Prepayment of fees for services not yet received may violate section 23A of the Federal Reserve Act.

Generally, a national bank may not enter into a written or oral contract with any person to provide products or services to or for the benefit of the bank if the performance of such contract would adversely affect the safety and soundness of the institution. See 12 USC 1831g

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