The Mutual Fund Dealers Association (MFDA) has banned Ayokunnu Are for life, and ordered him to pay a fine of $725,000 after he conducted off-book business, selling clients promissory notes backed by an interest in dairy cattle.

In Decisions and Reasons issued on Oct. 16, the MFDA permanently prohibited Are from conducting any securities related business over which it has jurisdiction, and imposed a fine of $725,000 ($700,000 for misconduct and $25,000 for failure to cooperate) as well as costs in the amount of $20,000.

Between 2006 and 2008, while he was working as an advisor at Dundee Private Investors, FundEX Investments, and the limited market dealer ASG Financial, Are sold clients and other individuals about $4 million of promissory notes issued by an American farming business known variously as the Jenkins Dairy Farm, JYL Agribusiness, or JYL Dairy Partners (JYL). The notes paid 13% annual interest and were backed by a security interest in the dairy cows owned by JYL.

JYL paid interest to investors until about August 2009, when it started to miss payments or to pay less than the full amount due. "In June 2010, payments ceased. There has been some litigation and other proceedings intended to collect what is owing to the holders. Some of the proceedings are ongoing," reads the MFDA decision. "There has been some recovery but none of the holders has received a substantial return of the monies they provided."

These sales, which were not conducted through or disclosed to his mutual fund dealers, generated at least $528,000 (U.S.) in commissions and fees for Are. The MFDA began proceedings against Are in October 2012, on the grounds that he had acted contrary to MFDA Rule 1.1.1 (requiring that all securities-related business to be conducted through an advisor's dealer), Rule 2.4.2  (requiring referral arrangements to be disclosed and recorded on the dealer's books), and Rule 2.1.1. (which requires a professional standard of conduct).

Are's legal advisor Joseph C. Bird argued that the MFDA did not have authority to rule in the matter, as the JYL notes contained a provision stating that they are governed by the laws of the State of Delaware. The MFDA, however, found that Are had breached his professional obligations by selling the JYL notes while he was a registered salesperson in Ontario, and he was therefore within its jurisdiction.

The MFDA may indeed issue decisions but, as The Insurance and Investment Journal has reported previously, the regulator is unable to collect most of the fines it hands out.