Networking Arrangements and Taping Rule

Two FINRA rules cover special supervisory situations that the Series 6 exam tests. The bank-networking rule governs what happens when a broker-dealer (BD) operates on bank or credit union premises. The taping rule forces certain firms to record phone calls because of their employees' prior disciplinary history.

What does the FINRA bank-networking rule require for networking arrangements with banks?

A networking arrangement is a written contract under which a BD offers securities services on or off the premises of a financial institution (a bank, credit union, or savings association). The arrangement is what triggers the rule, not the address where the rep happens to sit.

What Must the Written Networking Agreement Cover?

The networking arrangement must be in a written agreement between the BD and the financial institution, specifying:

• Division of responsibilities between the two entities
• Compensation arrangements
• Compliance with SEC Regulation R networking-arrangement requirements

How Must the BD's Space Be Physically Separated from the Bank?

The BD's operation must be physically distinguished from the financial institution's banking operations:

• Securities services must be conducted in an area clearly identified as the BD's
• BD personnel must be clearly distinguished from bank employees (usually through signage, name tags, or separate desks)

What Must the BD Disclose to Networking Customers?

At or prior to the time a customer account is opened, the BD must disclose in writing that the securities products purchased or sold:

• Are NOT insured by the Federal Deposit Insurance Corporation (FDIC)
• Are NOT deposits or obligations of the financial institution, and are NOT guaranteed by the financial institution
• Are subject to investment risk, including possible loss of principal

Oral disclosure is also required if the account is opened on the premises of the financial institution.

What Do the Confirmation, Statement, and Inspection Rules Require?

• Confirmations and account statements must identify the BD as the service provider (not the bank)
• BD supervisory personnel and SEC/FINRA representatives must have access to the FI's premises for inspections

Exam Tip: Gotchas

• A networking arrangement customer must be told three things at account opening: securities products are NOT FDIC-insured, NOT deposits/guaranteed by the bank, and subject to investment risk including possible loss of principal. Missing any one of these three disclosures violates the bank-networking rule. The exam often lists four or five items and asks which are required; all three must be present.

What does the FINRA taping rule require?

The FINRA taping rule requires certain "taping firms" to tape record all telephone conversations between registered persons and existing or potential customers. The rule exists because firms that hire many representatives from disciplined firms pose a heightened sales-practice risk.

When Does a Firm Become a Taping Firm?

A member becomes a taping firm if a threshold percentage of its registered persons were previously associated with a "disciplined firm" in a registered capacity within the last 3 years:

What Is a Disciplined Firm?

A disciplined firm is a member that was:

• Expelled from an SRO (self-regulatory organization), or
• Had its broker-dealer registration revoked by the SEC in connection with sales practice violations

What Must a Taping Firm Do?

Once a firm crosses a threshold, it must:

• Establish, enforce, and maintain special written supervisory procedures
• Tape record all conversations between registered persons and customers (existing or potential)
• Retain recordings for a minimum of 3 years, with the first 2 years in readily accessible form
• Review the recordings for compliance
• File a report with FINRA on that review by the 30th day of the month following the end of each calendar quarter

How Long Does a New Taping Firm Have?

Two different clocks run here, and the exam swaps them.

• A firm has 60 days from crossing the threshold to establish and implement the taping procedures
• A first-time taping firm has two alternatives instead, and it may not use both:
  • Reduce staffing below the threshold within 30 days of notice or actual knowledge. It may then not rehire a person terminated for that purpose for 180 days
  • Apply to FINRA for an exemption within 30 days of notice or actual knowledge

Exam Tip: Gotchas

• The middle-size firm threshold (10-19 reps) is 4 REGISTERED PERSONS, not a percentage. The Series 6 exam loves to swap this for "40%" to trap candidates. The thresholds are: 40% (small), 4 reps (middle), 20% (large).
• A "disciplined firm" under the taping rule means a firm that was EXPELLED from an SRO or had its SEC registration REVOKED for sales practice violations, not just fined or censured. The threshold is reserved for the most serious enforcement outcomes.

Think of it this way: The Taping Rule is a structural supervision requirement, not a punishment for the individual reps. It assumes that a firm stacked with people from expelled firms needs extra oversight, so the SRO imposes it automatically instead of waiting for a violation.

What Should You Check on Exam Day?

• Can you list the three disclosures a bank-networking customer must receive at account opening: not FDIC-insured, not a deposit or guaranteed, and subject to investment risk?
• Do you know the taping-firm threshold for a 10-to-19-person firm is 4 registered persons, a fixed number, not a percentage?
• Can you state that a disciplined firm means one expelled from an SRO or that had its SEC registration revoked, not merely fined?
• Do you know a taping firm must retain recordings for at least 3 years, with the first 2 years readily accessible?
• Can you state the two alternatives a first-time taping firm has instead of taping: reduce staffing within 30 days, or apply to FINRA for an exemption?