The Financial Industry Regulatory Authority (FINRA) has imposed fines on Investment Network, Inc (INI) and its CEO Gary L. Arnold.

INI engaged in various types of misconduct in connection with recommendations and sales to retail customers of private placement offerings of pre-initial public offering (pre-IPO) funds (the Offerings) that took place between October 2020 and May 2021.

INI engaged in a deceptive course of business by misrepresenting to investors that it would receive only a ten percent sales commission from its sale of the Offerings when, in fact, INI had an agreement with the Offerings’ issuer (the Issuer) to receive an additional five percent in selling compensation as well as half of any carried interest. INI never disclosed this agreement or the additional compensation it would receive to investors.

As a result, INI violated FINRA Rule 2010, both independently and by virtue of contravening Section 17(a)(3) of the Securities Act of 1933. INI also willfully violated Regulation Best Interest (Reg BI), set forth at Exchange Act Rule 15l-1(a)(1), by failing to comply with Reg BI’s Disclosure Obligation, set forth at Rule 15l-1(a)(2)(i)(B), and violated FINRA Rule 2010.

INI 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, INI 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.

As a result, INI willfully violated Reg BI by failing to comply with Reg BI’s Care Obligation, set forth at Exchange Act Rule 15l-1(a)(2)(ii)(A), and violated FINRA Rule 2010.

In contravention of the Bank Secrecy Act and its implementing regulations, INI failed to implement a reasonable Customer Identification Program (CIP) for customer accounts that were opened by the representatives who sold the Offerings. INI approved the opening of these accounts without receiving sufficient information to verify customer identity. As a result, INI violated FINRA Rules 3310(b) and 2010.

INI failed to make required filings with FINRA in connection with the Offerings. As a result, INI violated FINRA Rules 5123 and 2010.

In addition, INI and Arnold failed to establish, maintain, and enforce a reasonable supervisory system, including written supervisory procedures (WSPs).

Between October 2020 and May 2021, INI and Arnold failed to establish, maintain, and enforce a reasonable supervisory system, including WSPs, to achieve compliance with Reg BI’s Care Obligation with respect to the firm’s recommendations of private placement offerings. The firm had no WSPs related to private placement offerings, including compliance with Reg BI’s Care Obligation and did not designate a supervisor with responsibility for supervising such offerings.

In practice, the firm failed to conduct reasonable due diligence on the Offerings and failed to supervise recommendations of the Offerings to ensure that those recommendations were in customers’ best interest.

Finally, the firm had no WSPs related to making private placement filings with FINRA pursuant to FINRA Rule 5123.

As a result, INI willfully violated Reg BI by failing to comply with Reg BI’s Compliance Obligation, set forth at Exchange Act Rule 15l- 1(a)(2)(iv), and INI and Arnold violated FINRA Rules 3110 and 2010.

From at least February 2019 to the present, INI and Arnold failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 and, as of June 30, 2020, Reg BI’s Care Obligation, regarding excessive trading.

As a result, INI violated Reg BI by failing to comply with Reg BI’s Compliance Obligation, set forth at Exchange Act Rule 15l-1(a)(2)(iv), and INI and Arnold violated FINRA Rules 3110 and 2010.

From June 30, 2020, to the present, INI and Arnold failed to establish any written supervisory procedures concerning Reg BI, and therefore failed to establish, maintain, and enforce WSPs reasonably designed to achieve compliance with Reg BI.

As a result, INI willfully violated Reg BI by failing to comply with Reg BI’s Compliance Obligation, and INI and Arnold violated FINRA Rules 3110 and 2010.

To settle the matter with FINRA, Investment Network, Inc has agreed to:

• a censure;
• a 60-day suspension from conducting any private placement activities;
• a $210,000 fine;
• disgorgement of $63,769.60 plus interest as described below; and
• an undertaking requiring certification of the firm’s supervisory system.

Gary Arnold has agreed to:

• a three-month suspension from associating with any FINRA member firm in all principal capacities;
• a $10,000 fine; and
• a requirement that he requalify as a general securities principal by passing the requisite examination prior to acting in that capacity with any FINRA member.