Mutual fund dealers’ outsourcing arrangements, and cost-sharing agreements with related firms, are facing increased regulatory scrutiny.

In a notice published at the end of 2014, the Mutual Fund Dealers Association of Canada (MFDA) indicates that its financial compliance department reviewed cost-sharing agreements between dealers and related companies during the past year. It found that approximately 95 firms had some form of cost-sharing agreement in place, including agreements to deal with ordinary tasks, such as payroll and statement printing. However, some firms had agreements that dealt with a broader range of functions, it says.

These more extensive arrangements were subject to a further review, the MFDA reports. It adds that “The next round of compliance examinations will include a more thorough analysis of any cost-sharing agreements and [dealers] are advised to review their existing arrangements and update their agreements accordingly.”

The notice also provides guidance to dealers on the use and implementation of cost-sharing arrangements, with both related firms and arms-length entities. It indicates that, while these agreements should be tailored to the transactions and firms themselves, certain basic concepts and principles should be considered when drafting these sorts of agreements. “For example, the agreement should provide sufficient clarity of the basis for which costs are allocated to the [dealer],” it says.

The MFDA stresses that dealers are allowed to delegate certain tasks and duties to other firms, they cannot outsource their ultimate responsibility for compliance; and, certain tasks cannot be outsourced or delegated. “For example, members are required to keep adequate books and records,” it notes.

Regulatory reporting should reflect a dealer’s “true operating activity and financial condition before any distributions or reimbursements relating to cost-sharing arrangements”, the notice says. It also notes that the services covered in a cost-sharing arrangement should be outlined in the agreement, along with a detailed calculation of the amounts involved, and the terms of settlement.