A hearing panel of the Mutual Fund Dealers Association of Canada (MFDA) has permanently banned a former fund salesman and ordered him to pay $500,000 penalty for inappropriately promoting leverage and failing to carry out basic suitability assessments for his clients.

A hearing panel of the MFDA’s Atlantic regional council ordered the ban, fine and $20,000 in costs against Thomas Arseneau.

According to the panel’s decision, Arseneau disputes the allegations, but declined to participate in the hearing, informing the panel in a letter, “I strongly believe that another meeting with you people is not going to change anything; therefore, I am not interested in discussing this matter any further, as your statements and allegations are incorrect and do not reflect what I told you.”

Nevertheless, the hearing went ahead, and the panel notes that MFDA counsel pressed to push ahead with it as the case involves, “… leveraging strategies and suitability issues, relatively new issues for the securities industry.”

The allegations against Arseneau stem from conduct between 2004 and 2008.

He was registered in New Brunswick, Nova Scotia, Ontario and Quebec as a mutual fund salesperson with Investia Financial Services, Inc. (Investia) from 2005 to 2009, at which latter time he was terminated by Investia. He had previously been a mutual fund salesperson with Armstrong Financial Services Inc., which subsequently became Gateway Capital Growth.

The panel’s deciison states he moved firms after learning of a leverage strategy being used by an Investia rep, which involved borrowing from certain lenders (B2B Trust and AGF Trust) and investing in return of capital mutual funds, using the monthly distributions to fund the loan payments.

According to an MFDA investigator, Arnseneau had almost $13 million in assets under management with 240 clients, only 18 of whom were not using leverage, and 85% of his book was leveraged. The enforcement action relates to complaints from 20 clients, who collectively had approximately $2.15 million in investment loans.

The decision notes that, in one case, Arseneau overstated a client’s assets so that she could qualify for the loan, deceiving both the lender and the dealer; which, it concludes represented intentionally dishonest conduct sufficient to sustain one of the charges against him. It also found that Arseneau didn’t do individual suitability assessments, relying on the granting of the loan as evidence of suitability; and that clients didn’t understand the funds they were investing in, or the terms of their loans.

“His advice to the complainants was largely that there was no risk in this leveraged investment strategy,” the panel notes. “He may very well have believed that his leverage strategy could not fail and was, indeed a ‘no-brainer’. However, as an approved person in a securities related business, he was obligated to abide scrupulously within the MFDA rules in his dealings with clients.”

The panel also found that, “In his enthusiasm for his leverage strategy he failed in all his duties to his clients required by the rules governing his conduct in this regard.” And, it notes that each complainant’s $50,000 investment has fallen between 30% and 40% in value, “the outstanding balances greatly exceed the investment values, and the complainants face great hardship trying to cope with their situation.”

In terms of penalties, the panel notes that since this case is among “the first generation of MFDA cases addressing the suitability of leveraging and leveraging strategies”, MFDA staff called for penalties “sufficient to restore confidence in the public, in the capital markets, to show strong disapproval of the respondent’s conduct and to deter others from engaging in similar improper activity.”

MFDA staff suggested a fine of between $400,000 and $600,000. The panel chose $500,000, citing the number of claimants, the amounts borrowed, the amount of their losses, the amount of commissions Arseneau received as a result of the misconduct, and the need to deter others “from this type of conduct, so outrageously outside the bounds of the conduct required when promoting borrowing for leveraged investments and the very basic requirements to know-your-client and determinations of suitability.”

The panel adds that leveraging itself can be a legitimate strategy, and stresses that its decision is not intended to criticize the use of leveraging in appropriate circumstances. “Rather, this decision relates only to the obligations of approved persons when dealing with clients and establishing leveraging accounts,” it concludes.