FINRA Enforcement Signals Higher Bar for Complex Product Supervision Under Reg BI

Recent FINRA enforcement activity underscores that investment recommendations involving alternative and/or complex financial instruments require heightened principal-level scrutiny under Regulation Best Interest. Firms should continuously review and update supervisory policies and procedures, as well as monitor principal compliance with established protocols, to detect and address investment recommendations that may run afoul of Reg BI’s Care Obligation.

In connection with two examinations, in March 2026, FINRA settled charges with a firm’s principal and chief compliance officer¹ arising from investment recommendations of products that were inconsistent with the respective retail customer’s investment profile. The first examination involved a representative’s recommendation of unrated, unsecured corporate bonds that were considered higher risk because of their speculative nature and lack of liquidity. The second examination involved a representative’s recommendation of complex underlying-linked investment products (leveraged ETPs) that are typically not designed to be held for more than one trading session.

In both cases, the principal failed to detect clear “red flags” signaling that the subject products were not appropriate given the customers’ investment profiles. The principal’s conduct violated FINRA Rule 3110, which requires broker-dealers to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and FINRA rules, as well as FINRA Rule 2010, relating to the maintenance of high standards of commercial honor and just and equitable principles of trade.

Importantly, the firm’s supervisory policies and procedures surfaced the critical investment-profile details that should have alerted the principal to the need for heightened scrutiny of the subject investment recommendations; yet the principal ultimately failed to act. In particular, the principal approved the relevant investment recommendations without taking any steps, in the case of the higher-risk corporate bonds, to ensure that the representative had a reasonable basis for recommending the particular product to the customers and, with respect to the underlying-linked investment products, to ensure that the representative had a reasonable basis for the recommendations, or that the representative understood the complex products and their intended holding periods. Accordingly, in both cases, the principal failed to supervise the representative and failed to evaluate whether the recommendation was in the customers’ best interest.

In reviewing supervisory policies and procedures under FINRA Rule 3110, broker-dealers should assess whether their supervisory frameworks ensure that principals are meaningfully evaluating investment recommendations for compliance with Regulation Best Interest—rather than merely approving transactions through a process susceptible to rubber-stamping recommendations that may be inconsistent with a retail customer’s investment profile. FINRA’s recent enforcement activity signals that supervisory principals are expected not only to review documentation for Reg BI compliance, but also to critically assess whether the substance of an investment recommendation aligns with a retail customer’s investment profile.