Let's Go to the Tape

Let's Go to the Tape

Some brokerage and RIA firms are on the hook, literally, for their advisors' telephone conversations in particular those with a certain number of reps who've previously worked at firms

If you see your sales force regularly going out to the nearby pay-phone with pockets filled with change, or a lot of hot shots seem to be in the hallway on their cellphones, you better act quickly before FINRA does.

Some brokerage and RIA firms are on the hook, literally, for their advisors' telephone conversations — in particular those with a certain number of reps who've previously worked at firms with disciplinary records. These firms have to comply with the so-called Taping Rule, keeping their phone lines under wraps or risking fines and other penalties.

Take Carlton Capital, which had been previously notified by FINRA that it was required to comply with the Taping Rule through 2009. In January of 2009, FINRA fined Carlton Capital $40,000 related to its failure to comply with the Taping Rule, in that it:

  • provided certain representatives with access to unrecorded telephone lines;
  • allowed representatives to accept customer orders on unrecorded telephone lines when the representatives were out of the office; and
  • failed to catalog tape recordings that registered persons had made.

During a later period, the firm installed a new system that recorded telephone calls to the hard drives of the computers on representatives' desks, which was not password protected and was backed up by the firm only once a year, and which allowed representatives to erase recorded telephone calls.

Carlton, which neither admitted nor denied FINRA's allegations, was required to comply with the Taping Rule for another three years, until February 17, 2012. In addition, it was required to retain an independent consultant to conduct a comprehensive review of its policies, systems, procedures and training related to compliance with the Taping Rule, and to adopt and implement the consultant's recommendations. See, Carlton Capital, Inc. (FINRA #2006003684702/AWC/January 2009).

The Taping Rule

Since 1998 when it first appeared on the books, the Taping Rule has been subject to a number of misconceptions. Let's clarify some basics. FINRA members employing certain numbers or percentages of registered persons who have their own disciplinary histories and have been associated with a disciplined firm in the previous three years, for at least 90 days, must implement a series of supervisory procedures governing the telemarketing activities of their registered persons.

Generally, a registered person with a disciplinary record is one who has violated industry rules in the past 5 years. But the definitions of disciplined firms and registered persons are quite detailed, so if you want to know more, check out 3010(b)(2)(J) and (K).

Testing…Testing…

Once a firm is notified by FINRA or has actual knowledge that its staffing composition subjects it to the Taping Rule, the member must implement within 60 days written procedures for supervising the telemarketing activities of all of its registered persons. If the firm has never been subject to the taping criteria before, it has 30 days to reduce the threshold levels provided prompt written notice has been transmitted to FINRA. All telephone conversations between registered persons and both existing and potential customers must be recorded for three years; and those recordings must be reviewed, cataloged according to registered person and date, and retained for not less than three years (the first two years in an easily accessible place).

For the record, I am not a fan of the rule. Not because the rule doesn't make sense — it does. But it has primarily been used against boiler-rooms and penny stock firms, when it should also have been used to punish the fraudulent practices of far larger firms. After all, we measure the harm from boiler-rooms in the millions. This last crop of bad guys at places like Lehman Brothers, Bear Stearns, AIG and Stanford resulted in hundreds of billions of dollars of damage. Seems to me we should have been listening in on a lot more calls over the years.

Writer's BIO:

Bill Singer
is the publisher of RRBDLAW.com and BrokeAndBroker.com

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