FINRA Rule 3170, also known as the Taping Rule, is a regulation that requires certain firms to record and review the phone conversations of their registered persons with existing and potential customers. The rule is designed to supervise the telemarketing activities of the firms and to prevent fraudulent and improper practices in the sale or marketing of financial products. The rule also requires the firms to file reports with FINRA.
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In this article, we will explain the following aspects of FINRA Rule 3170:
- What is the purpose and scope of FINRA Rule 3170?
- Which firms are subject to FINRA Rule 3170 and how are they notified by FINRA?
- What are the requirements and procedures for complying with FINRA Rule 3170?
- How can a firm request an exemption from FINRA Rule 3170?
- What are the benefits and challenges of FINRA Rule 3170 for firms and customers?
What is the purpose and scope of FINRA Rule 3170?
FINRA Rule 3170 was adopted by FINRA in 2014, replacing the previous NASD Rule 3010(b)(2). The rule is based on the premise that registered persons who have a history of working for disciplined firms may pose a higher risk of engaging in fraudulent and improper sales practices, such as misrepresentation, churning, unauthorized trading, or unsuitable recommendations.
A disciplined firm is a firm that has been expelled or had its registration revoked for violating securities laws or regulations, or a firm that failed to adequately supervise or train its registered persons. FINRA maintains a list of disciplined firms on its website.
FINRA Rule 3170 aims to deter misconduct by registered persons who have a track record of working for problematic firms and to enable FINRA to monitor and enforce compliance with applicable rules and laws. The rule also helps customers to make informed decisions and avoid potential fraud or abuse by unscrupulous brokers.
Which firms are subject to FINRA Rule 3170 and how are they notified by FINRA?
FINRA Rule 3170 applies to firms that have a specified percentage of registered persons who were previously associated with one or more disciplined firms within the last three years. The percentage threshold for triggering FINRA Rule 3170 depends on the size of the firm. For firms with 10 or fewer registered persons, the threshold is 40%. For firms with 11 to 20 registered persons, the threshold is 20%. For firms with 21 or more registered persons, the threshold is 10%.
FINRA notifies a firm that it has become subject to FINRA Rule 3170 by sending a letter to the firm’s executive representative. The letter informs the firm of its obligations under the rule and provides a list of its registered persons who have been associated with disciplined firms in the past three years. The letter also specifies the date by which the firm must comply with the requirements of the rule.
What are the requirements and procedures for complying with FINRA Rule 3170?
A firm that becomes subject to FINRA Rule 3170 must establish, maintain and enforce special written supervisory procedures for the telemarketing activities of its registered persons. The procedures must include:
- Installing and maintaining a system to record all telephone conversations between registered persons and existing or potential customers
- Reviewing the recordings on a regular basis to ensure compliance with applicable rules and laws
- Retaining the recordings for a period of not less than three years from the date of the conversation
- Submitting quarterly reports to FINRA on the supervision of telemarketing activities
- Notifying all registered persons that their conversations will be recorded
A firm must comply with these requirements within 60 days of receiving notice from FINRA. A firm may use any reasonable method of recording telephone conversations, such as tape recorders, digital recorders, or third-party services. A firm must review at least two conversations per month per registered person who has been associated with a disciplined firm in the past three years. A firm must also document its review process and maintain records of its findings and corrective actions.
A firm must submit quarterly reports to FINRA on Form TCR (Tape Recording Report) within 15 days after each calendar quarter. The reports must include information such as:
- The number of registered persons who were required to be tape-recorded
- The number of conversations that were reviewed
- The number of violations detected
- The actions were taken by the firm
A firm must notify all registered persons who are subject to recording that their conversations will be recorded. The notification must be in writing and must be given before the recording begins. The notification must also inform the registered persons of the purpose and scope of the recording, and their right to access and review the recordings.
How can a firm request an exemption from FINRA Rule 3170?
A firm that becomes subject to FINRA Rule 3170 may request an exemption from the rule if it can demonstrate that it has implemented other supervisory procedures that are reasonably designed to achieve compliance with applicable rules and laws. A firm may also request an exemption if it can show that complying with the rule would create an undue hardship or burden.
A firm must submit a written request for an exemption to FINRA within 30 days of receiving notice from FINRA. The request must include:
- A detailed description of the alternative supervisory procedures or the reasons for the undue hardship or burden
- A statement of why the exemption is consistent with the protection of investors and the public interest
- Any supporting documents or evidence
FINRA will review the request and grant or deny the exemption in writing. FINRA may impose conditions or limitations on the exemption as it deems appropriate. FINRA may also revoke or modify the exemption at any time.
What are the benefits and challenges of FINRA Rule 3170 for firms and customers?
FINRA Rule 3170 can have both positive and negative effects on firms and customers. Some of the benefits of the rule are:
- It can deter misconduct by registered persons who have a history of working for disciplined firms, and reduce the risk of customer harm
- It can enable FINRA to monitor and enforce compliance with applicable rules and laws and take disciplinary actions against violators
- It can help customers to make informed decisions and avoid potential fraud or abuse by unscrupulous brokers
- It can enhance the reputation and credibility of firms that comply with the rule, and increase customer trust and loyalty
Some of the challenges of the rule are:
- It can impose additional costs and burdens on firms that have to install, maintain, and review recording systems, and submit reports to FINRA
- It can create privacy and confidentiality issues for registered persons and customers who may not want their conversations to be recorded or accessed by others
- It can affect the quality and effectiveness of communication between registered persons and customers who may feel uncomfortable or inhibited by being recorded
- It can create legal and regulatory risks for firms that fail to comply with the rule or misuse or mishandle the recordings
In conclusion, FINRA Rule 3170 is an important tool for FINRA to monitor and deter misconduct by registered persons who have a track record of working for problematic firms. The rule also helps customers to make informed decisions and avoid potential fraud or abuse by unscrupulous brokers. By recording and reviewing telephone conversations, firms can identify and correct any violations or deficiencies in their sales practices and ensure that they act in the best interest of their customers.
Frequently Asked Questions (F&Qs)
What is FINRA rule 3110?
FINRA Rule 3110, also known as the Supervision Rule, requires firms to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with applicable securities laws and regulations. The rule details requirements for a firm to have reasonably designed written supervisory procedures (WSPs) to supervise the activities of its associated persons and the types of businesses in which it engages.
What is the FINRA rule?
FINRA rules are a set of regulations that govern the activities of securities firms and their associated persons. The rules are designed to protect investors and ensure the fairness and integrity of the securities markets.
What is the FINRA rule 3210?
FINRA Rule 3210, also known as the Accounts At Other Broker-Dealers and Financial Institutions rule, requires all employees of a FINRA member firm to obtain the prior written consent of their employer before opening or maintaining an investment account at any other financial institution. This rule applies to all accounts, including accounts in which the employee has a beneficial interest, such as an account for a spouse or child.
What is FINRA rule 606?
FINRA Rule 606, also known as the Disclosure of Order Routing Information rule, requires broker-dealers to disclose information about how they route customer orders to trading venues. The rule is designed to help investors understand how their orders are being routed and to ensure that they are receiving the best possible execution.