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 Staffing-Reduction Option (30 Days)

A member that becomes a taping firm for the first time may reduce its staffing levels below the threshold within 30 days of receiving notice from FINRA (or obtaining actual knowledge that it is a taping firm) to avoid the taping obligation:

If the member later qualifies as a taping firm again, the reduction option is no longer available and the taping obligation applies.

Think of it this way: The 30-day reduction is the "first-time cure." A firm that crosses the threshold (perhaps by absorbing a competitor's reps, then seeing the concentration) can drop back below it by trimming headcount, but only on its first time subject to the rule, and it cannot rehire those people for 180 days. A firm that qualifies as a taping firm a second time is taken to know what it is doing, and the taping obligation applies.

Exam Tip: Gotchas

• The reduction window is 30 days after FINRA notice (or actual knowledge), not 60 days. The 60-day figure in the taping rule is a different deadline: the time to establish and implement the special written taping procedures once a firm is subject to the rule. Do not confuse the two.
• A person terminated to accomplish the reduction cannot be rehired for 180 days. The cure is not a paper exercise; the headcount reduction has to stick.
• The reduction option is first-time only. A firm that qualifies as a taping firm again must tape; there is no second cure window, and a firm cannot both reduce staffing and seek an exemption.
• 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.