What Is the Taping Rule?
The taping rule requires special monitoring of FINRA registered persons with a troubled history and firms that hire such individuals in large numbers. More formally known as Financial Industry Regulatory Authority Rule 3170, "Tape Recording of Registered Persons by Certain Firms", the so-called "taping rule" is meant to help meet an overall need for greater oversight of certain registered representatives with troubled regulatory and compliance records.
It also addresses the circumstances and special oversight needs when a firm hires a large number of disciplined individuals who formerly worked at a firm that has been expelled or has had its registration revoked and where they were inadequately supervised and trained.
- The taping rule is a FINRA order to grant additional oversight and surveillance in order to monitor firms who hire registered representatives that have had a history of compliance issues.
- The requirements for recording will vary depending on the size of the disciplined firm.
- All recordings made shall be retained for a period of not less than three years from the date it was created, the first two years in an easily accessible place.
- Each taping firm shall catalog the retained tapes by registered person and date.
Understanding the Taping Rule
The taping rule went into effect Dec. 1, 2014, and was adopted into the consolidated FINRA Rulebook replacing NASD Rule 3010(b)(2), though the taping rule provisions went into effect in 1990 when the Securities and Exchange Commission (SEC) approved amendments to the NASD rule. Specifically, 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/dealer registrations revoked for violations of sales practice rules (disciplined firms)."
For more, see FINRA's Regulatory Notice 14-10 Consolidate Supervision Rules.
Taping Rule Firm Supervision in Practice
According to FINRA, the taping rule "requires a firm to establish, enforce and maintain special written procedures supervising the telemarketing activities of all of its registered persons, including the tape recording of conversations, if the firm has hired more than a specified percentage of registered persons from firms that meet FINRA Rule 3170’s definition of “disciplined firm.” To assist firms in complying with FINRA Rule 3170, FINRA provides a “Disciplined Firms List,” identifying those firms that meet the definition of “disciplined firm.”
The percentage that is used to determine whether the supervisory procedures need to be enacted depends on the size of the firm. It ranges from 40% for a small firm to 20% for a large firm. The supervisory procedures involve recording all of the telephone conversations made between registered employees and both potential and existing customers for three years. As of May 2018, there were 11 firms that are recognized by FINRA as disciplined firms.
Firms must ensure that they tape record any means of telecommunication regularly used by registered persons in communicating with customers. This includes landlines and cellular phones. If cellular phone taping is not possible, the firm must prohibit their use when communicating with customers unless their use is warranted for other business reasons.