FINRA Imposes Fines on Investment Network, Inc. and CEO Gary Arnold for Multiple Regulatory Violations
Firm Faces Penalties for Misleading Compensation Disclosures, Inadequate Supervision, and Breaches of Regulation Best Interest
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Firm and CEO Face Sanctions Over Misleading Compensation Disclosures, Inadequate Supervision, and Violations of Regulation Best Interest
The Financial Industry Regulatory Authority (FINRA) has taken decisive action against Investment Network, Inc. (INI) and its CEO, Gary L. Arnold, following findings of misconduct related to the sale of private placement offerings of pre-initial public offering (pre-IPO) funds. The violations, which occurred between October 2020 and May 2021, involve misleading disclosures, inadequate due diligence, and multiple breaches of regulatory obligations.
Misleading Compensation and Undisclosed Agreements
INI misrepresented its compensation structure to investors by falsely stating that it would receive only a 10% sales commission from the sale of pre-IPO offerings. In reality, INI had an undisclosed arrangement with the issuer to receive an additional 5% in selling compensation, along with half of any carried interest. These undisclosed terms resulted in violations of FINRA Rule 2010, as well as Section 17(a)(3) of the Securities Act of 1933. By misleading investors about the true nature of its compensation, INI willfully violated Regulation Best Interest (Reg BI) by failing to meet the Disclosure Obligation outlined under Exchange Act Rule 15l-1(a)(2)(i)(B).
Lack of Due Diligence and Reg BI Violations
Further compounding the firm’s regulatory breaches, INI failed to conduct proper due diligence to verify that the issuer held or had access to the pre-IPO shares mentioned in the offering documents. The firm did not ensure that the prices and markups were reasonable, which contributed to another willful violation of Reg BI, specifically the Care Obligation, as well as breaches of FINRA Rule 2010. This failure to adequately assess the appropriateness of the offerings for certain retail customers demonstrates a disregard for the investor protection principles set forth in the Care Obligation of Reg BI.
Violations of the Bank Secrecy Act
In addition to these infractions, INI was found to have violated the Bank Secrecy Act by failing to implement a reasonable Customer Identification Program (CIP) for accounts opened in connection with the offerings. Accounts were approved without sufficient verification of customer identities, resulting in violations of FINRA Rules 3310(b) and 2010. The firm also failed to make necessary filings with FINRA regarding the offerings, further violating FINRA Rules 5123 and 2010.
Inadequate Supervision and Lack of Compliance with Reg BI
One of the most significant aspects of FINRA’s findings was the failure of both INI and Arnold to establish, maintain, and enforce a reasonable supervisory system, including the implementation of written supervisory procedures (WSPs). The firm lacked WSPs specific to private placements, Reg BI compliance, and the supervision of the offerings. Moreover, INI failed to ensure that its recommendations were in the customers’ best interests and to conduct adequate due diligence on the offerings. This lack of oversight led to willful violations of Reg BI’s Compliance Obligation under Exchange Act Rule 15l-1(a)(2)(iv), in addition to breaches of FINRA Rules 3110 and 2010.
Long-Standing Failure to Address Excessive Trading
Since February 2019, INI and Arnold have consistently failed to establish an adequate supervisory system designed to comply with FINRA Rule 2111’s suitability requirements and Reg BI’s Care Obligation, particularly regarding excessive trading. From June 30, 2020, to the present, the firm has not implemented written supervisory procedures concerning Reg BI, further exacerbating its failure to comply with the rules’ obligations.
Conclusion
The fines imposed on Investment Network, Inc. and CEO Gary Arnold underscore the importance of regulatory compliance and the severe consequences of failing to meet these obligations. By misleading investors, neglecting due diligence, and failing to implement proper supervisory measures, INI and Arnold have violated several key FINRA and SEC regulations, with the potential to harm retail investors. This case serves as a reminder that firms must uphold transparency, conduct thorough due diligence, and maintain strong supervisory systems to protect the interests of their clients and ensure the integrity of the financial markets.
