Finra's Reg BI Enforcement: Is it 'ineffective, costly'?

Is Finra up to its job? Is it, as the Heritage Foundation Project 25 says, “ineffective, costly”?

A Finra December disciplinary report offers a peek into Finra’s enforcement of Reg BI.

The eight actions reported include one case that revolves around Investment Network Inc of Canton, Ohio and Gary Lee Arnold of Akron, Ohio.

The firm and Arnold, without admitting or denying the findings, agreed to sanctions for violations of Reg BI that included, “Failing to disclose a conflict of interest by misrepresenting the amount of compensation the firm received from sales of private placement offerings”, and “the firm willfully violated Reg BI” by failing to comply with the Care Obligation by lacking a reasonable basis to recommend the offerings”. These violations were deemed “willful”. 

The action? The firm was suspended from conducting any private placements for 60 days, censured, fined $210,000. And ordered to pay disgorgement of commissions of $63,769. Arnold was fined $10,000, suspended from any association with a Finra member for three months, and “required to requalify by examination” before joining a Finra member in any principal capacity.   

Are these appropriate sanctions? Do these sanctions deter violators?  

Here’s another peek into Finra enforcement. Last month Finra released its 2025 oversight report, which revealed “findings from Finra’s regulatory operations programs”. In 1500 words, the report describes member examination results on Reg BI and Form CRS. 

The findings are remarkable. After being subject to Reg BI/CRS for four and a half years, firms fail to meet the most basic Reg BI/Form CRS requirements. “Failure” is the theme. The words “fail or “failing” are found 29 times. Take a look. 

On Reg BI “compliance” obligations, Finra found firms failing to:

• Adopt and implement written policies and procedures
• Consider costs and reasonably available alternatives
• Develop adequate controls
• Enforce Reg BI procedures or supervisory process
• Maintain sufficient systems
• Conduct adequate or ongoing training 

On “conflict of interest”, Finra determined firms were failing to:

• Identify conflicts
• Disclose, mitigate, or eliminate conflicts associated with securities recommendations or conflicts that create an incentive for a rep to recommend securities that put the rep or firm ahead of the retail customer; and
• Identifying and disclosing all material facts associated with material conflicts

On Form CRS, Finra saw basic failures in filings including misrepresenting disciplinary histories, “omitting material facts,” “inaccurately describing types of compensation,” and compensation-related conflicts, on top of wrongly stating that the firm does not “provide recommendations” .

These failings are elementary and the industry knows it. They can be easily fixed. No committees or rocket scientists needed; in fact, smart 12-year olds could figure it out. In the Investment Network case above, Finra deemed the Reg BI failures “willful.”

Many failures are “repeats," cited three years earlier in Finra’s 2022 report. Out of 785 words, Finra mentioned “fail” or “failing” 13 times. That includes failing to identify or address conflicts and failures to address how costs should be considered in recommendations.

These are “firm” failures. Does it matter if firms chose not to comply, calculating that the cost of complying is greater than the cost of not complying? Or, as Finra says, firms are willfully not compliant. When firms are willfully noncompliant, is lack of enforcement responsible?     

Section 27 of the Project 2025 playbook, which focuses on the SEC, declares in part that capital market regulation should “deter and punish fraud and other material misstatements to investors,” foster reasonable disclosure that is material to investor outcomes, and maintain “fair, orderly, and efficient” markets. 

Project 2025 says the SEC needs to be reformed and that Finra has proved to be “ineffective, costly ... and largely impervious to reform.” The conclusion: “Finra should be abolished and their regulatory functions should be merged into the SEC.”

It's worth noting that Paul Atkins, President Trump's favored nominee for SEC Chair, was one of the contributors to that chapter of Project 2025.

He'll have a full plate when he starts in March. Should Finra be on it?

Knut A Rostad is president of the Institute for the Fiduciary Standard.