The Taping Rule

The Taping Rule is a heightened-supervision regime. It does not apply firm-wide; it targets the firms whose hiring patterns suggest elevated misconduct risk.

Purpose: Targeting "Cockroach Firms"

The Taping Rule is designed to prevent fraudulent and improper sales practices at firms that absorb registered persons from previously expelled or revoked firms. The regulatory concern: when a disciplined firm shuts down, its registered persons often migrate together to a new firm, bringing the same sales-practice culture with them. The taping requirement creates a paper trail that supervisors and FINRA can review for misconduct.

A firm is sometimes called a "cockroach firm" or taping firm when it crosses the rule's thresholds; both terms refer to the heightened-supervision status.

What Counts as a "Disciplined Firm"

A "disciplined firm" includes any FINRA member that has been:

• Expelled from FINRA, OR
• Had its registration revoked by the SEC for sales-practice violations, OR
• Otherwise been determined to have engaged in qualifying misconduct

FINRA publishes a current list of disciplined firms that triggers the Taping Rule. Members must check the list when making registered-person hiring decisions, because hiring from the list is what counts toward concentration thresholds.

The lookback window is 3 years: a registered person who left a disciplined firm more than 3 years before the hire does not count toward concentration.

The Concentration Thresholds

The rule's thresholds are tied to firm size:

The middle band uses an absolute count (4) instead of a percentage. The other two bands use percentages.

Threshold Examples

The thresholds are based on the percentage (or absolute count) of registered persons formerly associated with disciplined firms within the prior 3 years - not on the firm's total number of registered persons in absolute terms:

• A 7-person shop with 3 ex-disciplined-firm reps: 3/7 = 42.9% → triggers (above the 40% threshold for the 5-9 band)
• A 200-person shop with the same 3 ex-disciplined-firm reps: 3/200 = 1.5% → does not trigger (well below the 20% threshold for the 20+ band)
• A 12-person shop with 4 ex-disciplined-firm reps: 4 reps in absolute terms → triggers (the 10-19 band uses an absolute count of 4, regardless of percentage)

Exam Tip: Gotchas

• The middle band (10-19 registered persons) uses an absolute count of 4, not a percentage. A 19-person firm with 4 ex-disciplined-firm reps triggers (4 / 19 = 21%, but the absolute count of 4 controls). The exam may present a fact pattern with three reps in this size band and ask whether the rule triggers; it does not (3 reps, not 4).
• The thresholds use the firm's total registered-person count, not just the customer-facing reps. A firm with 30 registered persons (25 customer-facing reps and 5 back-office principals) is a 20+ firm and uses the 20% threshold against the full count of 30.
• The 3-year lookback is from the date of association. A person who left a disciplined firm 4 years before the hire does not count. A person who left 2 years before the hire does count.

Required Procedures

A firm subject to the Taping Rule must:

• Tape record all telephone conversations between the firm's registered persons and existing and potential customers
• Establish, maintain, and enforce written supervisory procedures (WSPs) for the taping system
• Conduct periodic review of recordings to confirm compliance with securities laws and FINRA rules
• Catalog retained tapes by registered person and date
• File quarterly reports with FINRA describing the firm's supervision of registered persons subject to the rule

The taping must be comprehensive, not selective:

• The firm cannot record only "high-risk" calls
• The firm cannot record only certain registered persons
• All registered-person-to-customer telephone conversations are subject to the rule

Exam Tip: Gotchas

• Recording all customer-facing telephone conversations is the rule's mandate. Taping firms cannot selectively record only "high-risk" calls or "certain" reps. The supervisory burden is intentionally heavy because the rule targets firms with elevated misconduct risk.

Tape Retention

The 3-year-with-2-easily-accessible pattern matches the SEC's records-retention rule for many records. The taping requirement does not extend retention; it adds the substantive obligation to record in the first place.

The One-Time 60-Day Reduction Option

A member that triggers the requirement because of new hires may reduce its registered-person count below the threshold within 60 days to avoid the taping obligation:

If the member uses the 60-day reduction once and later crosses the threshold again, the rule applies and the member cannot exercise the option a second time.

Think of it this way: The 60-day reduction is the "I didn't realize" exception. The rule lets a firm that accidentally crossed the threshold (perhaps by absorbing a competitor's reps, then realizing the concentration) cure the situation by adjusting headcount. But the cure is one-time. If the firm crosses the threshold a second time, it is taken to know what it is doing, and the taping obligation applies.

Exam Tip: Gotchas

• The 60-day reduction option applies ONCE. A firm that uses it and later crosses the threshold again must tape; there is no second cure window. The exam may present a multi-year fact pattern where a firm crossed the threshold twice; the second instance compels taping.
• Reduction means dropping BELOW the threshold, not just to it. A firm at 40% in the 5-9 band that reduces to 40% has not cured; it must reduce below 40%.

BrokerCheck Disclosure

A taping firm's status is disclosed on FINRA BrokerCheck - public investors can see that the firm operates under heightened taping supervision. The reputational consequence is part of the rule's deterrent effect:

• BrokerCheck shows the firm's status to prospective customers and counterparties
• The reputational hit is in addition to the operational cost of taping and quarterly reporting
• The disclosure aligns customer protection (informed investor choice) with the regulatory purpose

Exam Tip: Gotchas

• Taping-firm status is publicly disclosed on BrokerCheck. The exam may ask whether taping-firm status is public or confidential; it is public. Customers can see the firm operates under heightened supervision before deciding to do business.

How the Rule Pieces Fit Together

A firm subject to the Taping Rule carries supervisory cost, reputational cost, and operational cost. The requirement is intentionally burdensome as a structural deterrent against absorbing the personnel of expelled firms.