Taping Rule refers to disciplinary measure, which was approved by the National Association of Securities Dealers (NASD). This was to be applied to companies that have surpassed the specified hiring percentage of their employees, from companies whose registration has been revoked for having gone against the trading regulations. Taping rule is used to address the situations as well as special oversight requirements where a large number of individuals who are disciplined and also former employees of a firm whose registration have been revoked. More formally known as Financial Industry Regulatory Authority Rule, Tape Recording of Registered Persons by Certain Firms, the taping rule is meant to help meet an overall need for greater oversight of certain registered representatives with troubled regulatory and compliance records.
History of taping rule
The taping rule went into effect Dec. 1, 2014, and was adopted into the consolidated FINRA Rulebook replacing NASD Rule, though the taping rule provisions went into effect in 1990 when the Securities and Exchange Commission (SEC) approved amendments to the NASD rule. FINRA recently has emphasized their intention to make call monitoring compliance even more imperative for broker-dealers that they consider high-risk companies under the taping rule. The SEC approved a requirement that members establish, enforce and maintain special written supervisory procedures, including the tape recording of conversations, when they have hired more than a specified percentage of registered persons from certain firms that have been expelled or that have had their broker registrations revoked for violations of sales practice rules.
Firm Supervision in Practice
If a broker dealer hires a certain number of employees that have come from disciplined firms is required to tape all calls with existing and potential clients.
Once a firm crosses the threshold, it has 60 days to begin taping. However, it can avoid the requirement if, within 30 days, it reduces head count of disciplined reps so it is back below the threshold. If the firm is unable to reduce head-count within 30 days, it will now need to implement taping within 30 days, as the first 30 days of the 60 day period were spent trying to reduce headcount.
Also, as to whether or not the supervisory procedures require to be enacted, the percentage to be used to determine this will depend on the firm's size. The percentage range for a small-sized firm is 40% while that of a large firm is 20%. The procedures for supervisory include recording of telephone conversations between registered employees and prospective/existing customers for a period of three years.
Generally, it is important for the firms to do a regular tape recording of each means of telecommunication of its registered employees. This should be done whenever they are communicating with the customers using landlines as well as cellular phones. Where tape recording of cellular phone happens to be impossible, then communication with customers using cellular phones must be prohibited by the firm. Not unless their use is really necessary for other business-related reasons.
Taping rule - call monitoring and retention requirements
The taping procedures required in the rule include:
- recording of all telephone conversations, including mobile phone calls, between the taping firm's registered persons and both existing and potential customers
- monitoring and reviewing of the captured voice calls to ensure compliance with the applicable FINRA rules and securities laws and regulations
- all captured voice calls must be retained for a period of not less than three years from the date of creation, with the first two years in an easily accessible place pursuant to SEC Rule 17a-4
- policies and system must be appropriate for the firm's business, size, structure and customers
- the taping firm should organize the retained voice call recordings by registered representatives and date
- R. Romano 2009, s. 179
- FINRA/SEC Compliance... 2008, s. 148-264
- FINRA/SEC Compliance... 2008, s. 148-264
- J. Wiley 2017, s. 49-61
- FINRA/SEC Compliance and Enforcement: The Changing Broker-dealer and Adviser Regulatory Landscape (2008)., FINRA/SEC Compliance and Enforcement, American Law Institute, United States
- Romano R. M. (2009)., Coping with Broker-dealer Regulation and Enforcement, Practising Law Institute, United States
- Wiley J. (2017)., Wiley FINRA Series 10 Exam Review 2017: The General Securities Sales Supervisor Examination - General Module, John Wiley & Sons, Canada
Author: Anna Marczyk