FINRA Releases 2026 Regulatory Oversight Report, Spotlighting Private Placement Compliance Risks
From the desk of Jim Eccleston at Eccleston Law
The Financial Industry Regulatory Authority (FINRA) released its 2026 Annual Regulatory Oversight Report, responding directly to member feedback and reinforcing its stated mission to protect investors and promote market integrity. FINRA positions the report as a core compliance-planning resource and emphasizes its role in sharing actionable intelligence drawn from oversight activities.
The 2026 report expands and updates guidance on several priority risk areas, including cyber-enabled fraud, senior investors, and emerging trends in generative artificial intelligence (GenAI). FINRA explains that these insights, combined with broader regulatory intelligence, aim to help member firms identify emerging risks and strengthen internal controls before compliance issues escalate.
Private Placements: Core Regulatory Obligations
Citing Regulatory Notice 23-08, FINRA reminds firms that recommendations of private placements trigger reasonable investigation requirements under Regulation Best Interest (Reg BI) for retail customers and FINRA Rule 2111 (Suitability) for non-retail customers. FINRA also notes that certain obligations apply even when a firm does not make a recommendation, including compliance with FINRA Rules 2210, 3110, 3280, 5122, and 5123.
Regulatory Notice 23-08 builds on earlier guidance from Regulatory Notice 10-22 and clarifies that a reasonable investigation must, at a minimum, evaluate the issuer and its management, business prospects, assets, claims made in the offering, and the intended use of proceeds.
FINRA further reminds firms that Rules 5122 and 5123 require the timely filing of offering documents and related information, including retail communications used to promote private placements, unless a valid filing exemption applies.
Key Examination and Enforcement Findings
FINRA reports recurring deficiencies in firms’ handling of private placements, including:
- Inadequate filing procedures: Failing to maintain supervisory systems that ensure timely filings, delays of up to six to twelve months, and improper reliance on exemptions that do not apply to sales to individual accredited investors.
- Failure to conduct reasonable investigations: Insufficient research into issuers with limited operating history, overreliance on prior offerings with the same issuer, failure to address red flags identified in due diligence, and inadequate review of issuers, management, or other covered persons under Regulation D.
- Lack of documented due diligence: Where firms could not evidence or reasonably explain their review of financial condition, operations, performance claims, litigation history, or identified red flags.
- Improper discharge of Reg BI obligations: Asserting that no recommendation occurred despite individualized “calls to action” to customers, and failing to identify, disclose, or mitigate conflicts of interest tied to private placements.
Effective Practices Identified by FINRA
FINRA also outlines practices it views as effective in mitigating private placement risks. These include tailoring due diligence checklists to specific offering types, using “Bad Actor” questionnaires at both issuer and placement-agent levels, and conducting independent reviews to verify issuer claims, to identify red flags, and to assess material investor risks such as liquidity constraints.
FINRA further encourages firms to scrutinize offering terms for regulatory compliance, particularly escrow and termination provisions in contingency offerings, and to assess whether projected returns align with the issuer’s financial structure. The report also emphasizes the importance of maintaining ongoing awareness of material changes to the offering or the issuer’s business, especially when those changes affect the intended use of proceeds.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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