FINRA Imposes Fines on Investment Network, Inc. and CEO Gary Arnold for Multiple Violations

The Financial Industry Regulatory Authority (FINRA) has issued fines 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 to retail customers. These violations occurred between October 2020 and May 2021.

INI misled investors by falsely stating that it would only receive a 10% sales commission from the sale of the offerings. In reality, INI had an agreement with the issuer of the offerings to receive an additional 5% in selling compensation, along with half of any carried interest. This extra compensation and the agreement itself were not disclosed to investors, resulting in violations of FINRA Rule 2010 and Section 17(a)(3) of the Securities Act of 1933. Furthermore, INI was found to have willfully violated Regulation Best Interest (Reg BI) by failing to meet the Disclosure Obligation under Exchange Act Rule 15l-1(a)(2)(i)(B).

Additionally, INI did not have a reasonable basis to believe that the offerings were in the best interests of certain retail customers. The firm failed to verify that the issuer held or had access to the pre-IPO shares mentioned in the offering documents and did not confirm that the prices and markups were reasonable. This lack of due diligence led to another willful violation of Reg BI, specifically its Care Obligation, along with breaches of FINRA Rule 2010.

INI also 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 information to verify customer identities, resulting in violations of FINRA Rules 3310(b) and 2010. Furthermore, INI did not make the necessary filings with FINRA regarding the offerings, violating FINRA Rules 5123 and 2010.

Moreover, both INI and Arnold failed to establish, maintain, and enforce a reasonable supervisory system, including written supervisory procedures (WSPs), to ensure compliance with Reg BI’s Care Obligation concerning the firm’s private placement recommendations. The firm lacked WSPs specifically related to private placements, Reg BI compliance, and the supervision of these offerings. It also failed to conduct adequate due diligence on the offerings or ensure that recommendations were in the customers’ best interest. This resulted in willful violations of Reg BI’s Compliance Obligation under Exchange Act Rule 15l-1(a)(2)(iv) and further breaches of FINRA Rules 3110 and 2010.

Since February 2019, INI and Arnold have 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, INI and Arnold have not implemented written supervisory procedures concerning Reg BI, further exacerbating their failure to comply with the rules’ obligations.

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