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Bulletin #0154-E

Enforcement
MFDA imposes lifetime ban and $350,000 fine on Arnold Tonnies

Mutual Fund Dealers Association of Canada
Association canadienne des courtiers de fonds mutuels
121 King Street West, Suite 1000, Toronto, Ontario, M5H 3T9
TEL: 416-361-6332 FAX: 416-943-1218 WEBSITE: www.mfda.ca

Contact: Hugh Corbett
BULLETIN #0154-E
Director of Litigation
July 18, 2005
Phone: 416-943-4685
Email: hcorbett@mfda.ca

MFDA Bulletin

Enforcement

For Distribution to Relevant Parties Within your Firm

MFDA imposes lifetime ban and $350,000 fine on Arnold Tonnies

Nature of
A Hearing Panel of the Mutual Fund Dealers Association (“MFDA”) Prairie
Proceeding
Regional Council has imposed disciplinary penalties on Arnold Tonnies
(“Tonnies”), a former Approved Person of the MFDA.

By-Laws,
Following a hearing on May 16, 2005, the Hearing Panel found that Tonnies:
Rules, Policies
Violated
1. borrowed $250,000 from two clients to finance his outside

business activity as a cattle farmer, contrary to MFDA Rule
2.1.4
2. failed to abide by the policies and procedures set out by his
Member firm, contrary to MFDA Rule 2.1.1 (b); and
3. failed to produce for inspection and provide copies of
documents requested by the MFDA for the purpose of an
investigation, contrary to s. 22.1 of MFDA By-Law No. 1.

MFDA Rule 2.1.4 states:

(a) Each Member and Approved Person and other employee and agent of
a Member shall be aware of the possibility of conflicts of interest
arising in connection with business conducted by them for a client. In
the event that such a conflict or potential conflict of interest arises, the
Member shall ensure that it is addressed by the exercise of responsible
business judgment influenced only by the best interests of the client
and in compliance with Rules 2.1.4(b) and (c).

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(b) Any conflict of interest that arises or can reasonably be expected to
arise as referred to in Rule 2.1.4(a) shall be immediately disclosed in
writing by the Member to the client prior to the Member, or any
person acting on its behalf in connection with its business, conducting
business for the client.

(c) Each Member shall develop and maintain written policies and
procedures to ensure compliance with Rules 2.1.4(a) and (b).

MFDA Rule 2.1.1(b) states:

Each Member and each Approved Person of a Member shall:

(b) observe high standards of ethics and conduct in the transaction
of business;

Sections 22.1(b) of MFDA By-Law No. 1 states:

For the purpose of any examination or investigation pursuant to
this By-law, a Member, Approved Person of a Member or other
person under the jurisdiction of the Corporation pursuant to the
By-laws or the Rules may be required by the Corporation:

(b) to produce for inspection and provide copies of the books,
records and accounts of such person relevant to the matters being
investigated;

Penalty
The Hearing Panel imposed the following penalties on Tonnies:

1. Permanent prohibition of the authority of Tonnies to conduct
securities related business in any capacity;
2. A fine of $250,000 for borrowing from his clients;
3. A fine of $50,000 for failing to abide by the policies and
procedures set out by the Member;
4. A fine of $50,000 for failing to produce for inspection and
provide copies of documents requested by the MFDA; and
5. Costs in the amount of $7,500.00.

Summary of
From 1986 to April 2003, Tonnies was registered in Saskatchewan as a
Facts
mutual fund salesperson for TWC Financial Corporation (“TWC”) He
worked at a branch office of TWC in Swift Current, Saskatchewan. Tonnies
also owned and operated a cattle farming business. This business was
disclosed to and approved by TWC in March 2002, in accordance with
TWC’s Policies and Procedures Manual (the “PPM”) and MFDA Rule
1.2.1(d).
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In July 2002, Tonnies approached two elderly clients and asked if he could
borrow a total of $250,000 from them. The clients were sisters and had been
long-time clients of Tonnies. The first loan was for $200,000 and was
unsecured. The second loan was for $50,000 and was also unsecured. Tonnies
provided a promissory note to the client for the second loan but subsequently
retrieved it. Neither of these loans was disclosed to TWC. Tonnies used the
proceeds of the loans to repay an outstanding debt of the cattle farming
business to the Bank of Montreal. Tonnies subsequently declared bankruptcy
in April 2003 and the clients have been unable to recover their funds.

The Hearing Panel found that the borrowing placed Tonnies in a clear conflict
of interest and that he had failed to exercise responsible business judgment
influenced only by the best interest of his clients. Tonnies preyed on the
clients’ vulnerability, their age, and their lack of investment knowledge and
sophistication. He placed his own personal financial interests before the
interests of his clients.

The Hearing Panel noted that Approved Persons are required to exercise
reasonable precautions to ensure that any transaction performed on behalf of a
client is to the benefit of and in the best interests of the client. This goes to the
very essence and nature of the Approved Person-client relationship.

The PPM specifically referenced MFDA Rule 2.1.4 and provided examples of
conduct that would constitute a breach of the Rule, including asking a client
to invest in a personal business. Tonnies had signed an acknowledgement
indicating that he read the PPM and agreed to abide by it. The Hearing Panel
noted that the standards set out in the PPM could be used as a standard of
ethics and conduct against which the Hearing Panel could measure the
activities of Tonnies.

The Hearing Panel also noted that a failure to cooperate with an MFDA
investigation is serious misconduct. The responsibility to regulate mutual
fund sales has been granted to the MFDA and that responsibility can only be
carried out if the MFDA has the authority to investigate, which includes the
ability to obtain relevant documentation from Members and Approved
Persons.

For greater detail, see the Decision and Reasons posted on the MFDA
website.


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