Management Fee Contracts
Management or service fees and other payments assessed by the parent company to the bank subsidiary come under the broad heading of “diversion of bank income practices.” The Board of Governors issued a policy statement under this heading on March 19, 1979 (SR 79-533). Diversion of income practices include, but are not limited to:
- Management or service fees paid by the bank subsidiary which bear no reasonable relationship to their fair market value, cost, volume or quality of services rendered by the parent company to the bank subsidiary
- Correspondent bank balances maintained by the bank subsidiary primarily in support of parent company borrowings without appropriate compensation to the bank
- Payment of fees to the parent company or a nonbank affiliate for services that have not yet been rendered and
- Nonreimbursed expenses incurred by the bank subsidiary that primarily support a nonbank activity of the parent company
Assessment of fees to the bank may be for the following services:
- Management advice
- Personnel services
- Data Processing
- Marketing
- Supply administration
- Investment advice
- Trust services
- Internal loan review and audit services
Documentation must be maintained to support the type of service rendered (service not readily available through bank subsidiary), basis for pricing (comparable to fair market value), and timing of payment (after a service has been rendered). Pricing of services such as marketing, internal loan review and audit and investment advice should be based on an hourly rate that allows for payment of salary plus reasonable profit margin. Bank subsidiaries should then be billed monthly for these services through an invoice or statement detailing hours spent performing applicable tasks.
A contract is to be executed between the appropriate entities and approved by the directorate of each entity with appropriate notation included in the minutes of the respective boards. Annual reviews are then to be conducted to determine basis for pricing for the ensuing fiscal year. Fees should not be an excessive charge for services unrelated to value received in order to fund debt service, dividend payments by the parent company, or to support other subsidiaries of the parent company. In order to assess a fee, the parent company must be providing a specific service that cannot be provided by personnel of the bank subsidiary. The most appropriate way to provide cash funds to the holding company is through dividends. Debt servicing funds, as a general rule, are to be upstreamed to the parent company in the form of dividends from the bank subsidiary.