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companies that have surpassed the specified hiring percentage of their employees, from companies whose registration has been revoked for having gone against the trading regulations.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where a large number of individuals who are disciplined and also former employees of a firm whose registration have been revoked.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
Examples of Taping Rule
- Under the taping rule, firms that have had their registrations revoked due to a violation of trading regulations must employ a certain percentage of their employees from the firms whose registrations have been revoked. This percentage is determined by the NASD and typically ranges from 10-15%.
- The taping rule also requires that firms maintain a written policy regarding the taping of customer conversations, which includes an explanation of why the recordings are necessary, how the recordings will be used, and how the recordings will be retained.
- In addition, the taping rule requires a firm to establish a process to review customer complaints and to document the resolution of such complaints. The process must include a review of the customer’s account and the customer’s conversations with the firm’s representatives.
- The taping rule also requires a firm to maintain records of all customer complaints and to provide customers with copies of the complaints upon request. The records must be maintained for at least five years.
- Finally, the taping rule requires firms to designate a compliance officer who is responsible for overseeing the firm’s compliance with the rule. The compliance officer must be available to answer customer questions regarding the firm’s compliance with the taping rule.
Advantages of Taping Rule
The Taping Rule provides several advantages to the companies, their employees and the regulatory authorities. These include:
- Increased oversight: The Taping Rule enables the regulatory authorities to have greater oversight over the activities of the representatives with troubled regulatory and compliance records. This helps to ensure that the representatives are in compliance with the regulations and to prevent any unethical or illegal activities.
- Improved transparency: The Taping Rule also helps to improve transparency among the companies and employees. The rule requires companies to record the conversations of their employees, which can help to ensure that all conversations are ethical and compliant with regulations.
- Increased accountability: The Taping Rule also helps to increase the accountability of the employees. As the conversations are recorded, employees are more aware of the consequences of their actions and are more likely to act in a responsible manner.
- Improved compliance: The Taping Rule helps to improve the compliance of companies and the representatives. By having greater oversight and transparency, companies and employees are more likely to follow the regulations and act in an ethical manner.
Limitations of Taping Rule
The Taping Rule has several limitations, including:
- Lack of clarity on the scope of recording: The Taping Rule does not provide explicit guidance on which conversations must be recorded. As a result, firms are required to make their own judgment regarding which conversations should be recorded.
- Potential for privacy violations: The Taping Rule does not provide for any safeguards for the privacy of the individuals involved in the conversations that are recorded.
- No legal protection: The Taping Rule does not provide any legal protection to firms or individuals in the event of a dispute over the recordings.
- Cost of implementation: The implementation of the Taping Rule can be expensive and time-consuming, as firms must invest in the necessary equipment and software to record conversations. Additionally, firms must ensure that the recordings are securely stored and are accessible when needed.
- Potential for misuse: The recordings made under the Taping Rule could be used by firms or individuals to target or harass individuals. As a result, firms must ensure that the recordings are used only for legitimate purposes.
In addition to the Taping Rule, there are other approaches which can be used to address the need for increased oversight of certain registered representatives with troubled regulatory and compliance records, including:
- Enhanced customer complaint monitoring: This is the process of closely monitoring customer complaints, which can provide valuable information on the quality of services offered by firms and their registered representatives.
- Regular background checks: This involves conducting regular background checks on registered representatives, in order to ensure they meet the necessary professional qualifications and requirements.
- Increased compliance oversight: This involves increasing oversight of firms and their registered representatives’ compliance with applicable regulations and internal policies.
- Training and education: This involves providing registered representatives with regular training and education in order to help them stay up-to-date with their responsibilities and the applicable regulations.
In conclusion, the Taping Rule is an important measure for addressing the need for greater oversight of certain registered representatives with troubled regulatory and compliance records. However, there are other approaches which can be used in order to ensure firms and their registered representatives are compliant with applicable regulations and internal policies.
- R. Romano 2009, p. 179
- FINRA/SEC Compliance... 2008, p. 148-264
- FINRA/SEC Compliance... 2008, p. 148-264
- J. Wiley 2017, p. 49-61
|Taping Rule — recommended articles
|Fidelity guarantee — Compliance test — Internal audit — Certificate of approval — Share register — Commitment letter — Legal risk — Minute book — Organizational costs
- 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