The Financial Industry Regulatory Authority announced that it has fined, censured, and suspended the general securities broker-dealer, Investment Network Inc., and Gary L. Arnold, its chief executive officer, for various misconduct and supervisory failures related to the recommendations and sales to retail customers of private placement offerings of pre-initial public offering funds.
Investment Network was fined $210,000, along with disgorgement of $63,769.60 plus interest. Arnold was fined $10,000.
According to FINRA, between October 2020 and May 2021, Investment Network engaged in a deceptive course of business by misrepresenting to investors that it would receive only a 10% sales commission from the sale of pre-IPO offerings when it had an agreement with the issuer to receive an additional 5% in selling compensation, as well as half of any carried interest. Investment Network never disclosed this agreement or the additional compensation it would receive to investors.
FINRA also found that the company lacked a reasonable basis to believe that the offerings were in the best interests of at least some retail customers. Prior to recommending and selling the offerings, Investment Network failed to confirm that the issuer had possession of or access to the pre-IPO shares identified in the offering documents, or that the issuer’s prices and markups were reasonable and not excessive.
The company also failed to implement a reasonable customer identification program for customer accounts that were opened by the representatives who sold the offerings and failed to make required filings with FINRA in connection with the offerings.
Finally, FINRA found that Investment Network and Arnold failed to establish, maintain, and enforce a reasonable supervisory system, including written supervisory procedures in several respects.
These actions violate several FINRA rules, various aspects of Regulation Best Interest, or Reg BI, and the Bank Secrecy Act.
In addition to the fine, Investment Network has been censured and suspended from conducting any private placement activities for 60 days. The firm has also been ordered to certify that it has remediated the identified issues and implemented a supervisory system reasonably designed to achieve compliance with Reg BI.
Similarly, along with his fine, Arnold has been suspended from associating with any FINRA member firm in all principal capacities for three months and ordered to requalify as a general securities principal by passing the requisite examination prior to acting in that capacity with any FINRA member.
Investment Network Inc. is headquartered in Canton, Ohio, and conducts a general securities business. The firm has approximately 20 registered representatives and five branch offices. From at least February 2019 to the present, Arnold has served as the company’s president, CEO, and chief compliance officer.
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