A hearing panel of the Mutual Fund Dealers Association has terminated the membership of Farm Mutual Financial Services Inc. and has fined the company more than $2.5 million for the sale of certain securities to unaccredited and inappropriate investors.

The MFDA found that between June 2003 and April 2007, Farm Mutual Financial Services approved and allowed the sale of debentures issued by FactorCorp Financial Inc. to approximately 680 clients without having conducted reasonable due diligence on the product and without having made reasonable inquiries to determine whether the product was suitable for sale to its clients.

In particular, Farm Mutual — a company that has since gone bankrupt — failed to obtain and review the financial statements of FactorCorp on an ongoing basis in order to assess its financial viability and any financial risk this may have created for clients. Members are expected to have “a complete understanding of any products they propose to sell,” according to the MFDA.

“The Respondent fell woefully short of complying, in even a minimal way, with this due diligence review process.”

In May 2007, FactorCorp suspended redemptions, and two months later, the Ontario Securities Commission issued a temporary Cease Trade Order against the company. At the time, roughly $49 million of Farm Mutual clients’ debentures remained outstanding and unredeemed. In March 2008, FactorCorp went into bankruptcy.

The MFDA also found that Farm Mutual failed to develop guidelines or investor profiles to identify clients for whom the debentures might have been a suitable investment.

A review of the transactions revealed that only 22 of the 680 clients of the Respondent who purchased had a risk tolerance of “high” recorded on their Know Your Client information at the time of their initial purchases. Fifty-two clients had no risk tolerance information recorded.

In addition, only 44 of the 680 clients met the necessary thresholds to qualify for the accredited investor exemption. The remaining 636 clients should not have been sold the debentures, according to the MFDA.

Farm Mutual also failed to maintain adequate compliance staff to ensure adherence to regulations, the MFDA said.

The company faces fines totaling $2,641,113.93 and costs in the amount of $50,000.

Since Farm Mutual is bankrupt, the MFDA said it would not be filing a proof of claim in the bankrupt estate, which would compete with the distribution of funds by the trustee in bankruptcy to any other creditors.

IE