by Howard Haykin

The NYTimes posted an article on Tuesday on shared office space arrangement entitled, “Shared Work Spaces Spread, Mixing Styles and Services,” This got me thinking about how the popularity of shared working areas might operate in financial services and, more specifically, within the framework of FINRA’s rules and regulations.

The NYTimes article rightly points out that shared office space is no longer the province of just sole proprietors, start-ups and young professionals. Within that context, “companies like WeWork have capitalized on the popularity of shared working areas, in which people and companies rent office space by the hour, day or month. Now other types of professionals are also taking advantage of shared spaces, empowered by technology that can make changing offices as easy as carrying a laptop from one room to another.” In fact, Mitch Atkins, a broker-dealer consultant, raised the question back in 2014 about broker-dealers that maintain branch offices in executive suites and virtual offices.  [see BD Consultant]

What comes to mind, but is not mentioned above, is the case of a broker-dealer or a branch office with its own private office space that seeks to enter into a shared work space arrangement. Such a B/D or branch might lease or sub-lease unused rooms to unrelated individuals or small businesses, thereby defraying rental costs. Technology costs can also be reduced if the lessee or sub-lessee happens to be in financial services – e.g., an investment manager or hedge fund – who agrees to share and use Bloomberg terminals or other online market facilities.

That said, how does all this comport with FINRA rules?

HERE’S WHAT FINRA SAYS.    Frankly, online resources are rather underwhelming. The only FINRA pronouncements I found refer to space sharing arrangements within a registered branch office, as it petrtains to Section 4 of Form BR (“Branch Office Arrangements”). The question on the form specifically asks firms to disclose if the registered branch office occupies, shares space with, or jointly markets with any other investment-related entity. If the answer is “yes,” the firm must provide the name of the entity and identify the type of investment-related business in which the entity is engaged.

The term “investment-related” is a defined term and pertains to securities, commodities, banking, insurance, or real estate, according to Winston & Strawn’s “Amendments to Uniform Branch Office Registration Form (Form BR).” Accordingly, it would include, but not be limited to, acting or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association. This question seeks disclosure regarding “investment related” businesses that operate or jointly market services out of the same physical space as the registered branch office.

By way of example, the question is meant to capture instances where a registered representative operates an insurance business out of the registered branch office or where the registered branch office occupies the same physical space as an investment adviser or markets the location as providing services with other investment-related entities. The term “jointly market” is not, however, intended to require disclosure of the manufacturer of each insurance product that the branch office may be authorized to offer.

The SDDCO Group talked about a FINRA Sweep in 2014 involving expense-sharing agreements, in terms of a 2014 FINRA Sweep, and forewarned broker-dealers to review their ESA’s for compliance with industry rules and guidance. At that point in time, SEC guidance provided that …

“Each broker-dealer must make, keep current, and preserve a written expense-sharing agreement between the broker-dealer and a third party that has paid or agreed to pay an expense of the broker-dealer. The agreement must set out clearly which party is obligated to pay each expense, whether the broker-dealer has any obligation, direct or indirect, to reimburse or otherwise compensate any party for paying the expense, and, when the broker-dealer records the expense in an amount that is determined according to an allocation made by the third party, the method of allocation.”

FINRA TAKE AWAY.    Okay, so I couldn't find what I was looking for from FINRA - rules and guidance, something, that might indicate what the regulator expects of its member firms. Perhaps some suggested internal controls that could help safeguard broker-dealer records – and, particularly customer information – from the "prying eyes" of third parties who are jointly-sharing a broker-dealer's office. Maybe even the installation of so-called ‘Chinese Walls’ that establish formal bounds for prohibited or sensitive areas of the broker-dealer's operation.

Whether they're mandated or not, controls and safeguards for workspace and firm records make imminent sense and should be part of any business plan. And maybe even part of a firm's Written Supervisory Procedures, or WSPs.