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An effort to stay one step ahead of regulators. The reps would leave the firm just prior to FINRA expelling their broker dealer. The expelled or barred broker dealer becomes known as a sanctioned or disciplined firm. These representatives often engaged in high pressure sales tactics usually involving low priced penny stocks. Questionable broker dealers would higher these reps to continue the abusive sales practices. In an effort to combat this practice FINRA established the Taping Rule. A firm that is subject to the taping rule must implement special written procedures and begin taping the conversations of its registered personnel and customers within 60 days of being notified by FINRA that the firm has become subject to the taping rule. The firm also must implement written procedures to retain, review, and classify the recordings. Firms that fall into the following categories must tape their employees:
• Has more than five but fewer than 10 registered representatives and 40 percent or more have come from disciplinary firms within the last three years.
• Has at least 10 but fewer than 20 registered representatives and four or more have come from disciplinary firms within the last three years.
• Has 20 or more employees and at least 20 percent have come from disciplinary firms within the last three years.
A broker dealer that has been notified by FINRA that it is subject to the taping rule has a one- time option to reduce its number of registered representatives. If the firm elects to reduce a portion of the subject agents to eliminate the taping requirement, the firm may not rehire the subject agents who were eliminated for 180 days. Also, the firm may not hire additional agents to dilute the percentage of agents with disciplinary histories to avoid the taping requirement. All calls between Registered employees and customers or potential customers must be recorded. Exempt from the rule are internal calls and calls from employees who are not talking to customers.