Networking Arrangements and Taping Rule

Two FINRA rules cover special supervisory situations that the Series 6 exam tests. Rule 3160 governs what happens when a broker-dealer (BD) operates on bank or credit union premises. Rule 3170 forces certain firms to record phone calls because of their employees' prior disciplinary history.

What does FINRA Rule 3160 require for networking arrangements with banks?

A networking arrangement is a contract under which a BD offers securities services on the premises of a financial institution (a bank, credit union, or savings association).

Written Agreement Requirement

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, Rule 701

Physical Setting Requirements

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)

Required Customer Disclosures

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.

Confirmations, Statements, and Inspection

• 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 Rule 3160. The exam often lists four or five items and asks which are required; all three must be present.

What does the FINRA Rule 3170 Taping Rule require?

FINRA Rule 3170, commonly called the 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 a Firm Becomes 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:

Disciplined Firm Defined

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

Taping Firm Obligations

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 periodic reports with FINRA

60-Day Grace Period

A firm has 60 days from the date it crosses the threshold to comply, OR it may reduce personnel to fall below the threshold.

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 Rule 3170 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.