1.4 Heightened Supervision, Interim Plans, and the Taping Rule
Key Takeaways
FINRA Regulatory Notice 18-15 expects firms to adopt tailored heightened supervisory procedures for associated persons with a history of misconduct, even when no rule specifically requires a plan.
A firm that applies to associate with a statutorily disqualified person must keep an interim plan of heightened supervision in place while FINRA reviews the application (Rule 9522).
Under Rule 9285, a firm must adopt a written heightened supervision plan for an associated person found to have violated a rule while that disciplinary decision is on appeal or under NAC review.
A firm with 20 or more registered persons becomes a taping firm under Rule 3170 when 20% or more of them came from disciplined firms within the last three years, and must then record all calls with existing and potential customers.
Taping-firm recordings must be kept for at least three years, the first two in an easily accessible place, and the firm reports to FINRA by the 30th day after each calendar quarter.
The outline lists "requirements for heightened supervision" as a separate knowledge item under Task 1.1. The idea is simple: when a person's history or a firm's staffing creates elevated risk, ordinary supervision is not reasonable. FINRA's framework has several layers.
Heightened Supervision as a Rule 3110 Expectation
Regulatory Notice 18-15 reminds firms that Rule 3110 requires supervision reasonably designed for the risks each person presents. When a firm hires or retains someone with a history of customer complaints, regulatory actions, terminations for cause or similar red flags, it should consider a tailored heightened supervision plan. Effective plans, according to FINRA, typically include:
- a designated, qualified supervisor with the time and authority to carry out the plan, who has acknowledged the plan in writing;
- controls tailored to the specific misconduct. For example, a person with switching complaints might need principal pre-approval of every exchange, while a person with misrepresentation complaints might need closer correspondence review;
- restrictions on activities where appropriate, such as no discretionary authority, no handling of customer funds, or limits on product types;
- regular documented reviews and a defined duration with criteria for ending the plan; and
- consequences if the plan is not followed.
The plan is the firm's own control, not a FINRA filing in ordinary cases. Its quality will be judged after the fact if the person causes customer harm.
Required Plans
Three situations require a written plan by rule rather than by expectation:
| Situation | Requirement |
|---|---|
| Firm seeks approval to associate with a statutorily disqualified person | The Form MC-400 application proposes a heightened supervision plan, and Rule 9522 requires an interim plan of heightened supervision while FINRA reviews it |
| A Hearing Panel or Hearing Officer finds a person violated a rule, and the decision is appealed or called for NAC review | Rule 9285 requires the firm to adopt a written heightened supervision plan tailored to the violations found, with a designated principal, until FINRA's final decision takes effect |
| Same appeal period | Rule 9285 also allows the Hearing Officer to impose conditions and restrictions on the respondent's activities to prevent customer harm, because sanctions are generally stayed on appeal (Section 3.3) |
FINRA approvals of disqualified persons usually require supervision such as an on-site supervisor in the same office, pre-approval of transactions or correspondence, and periodic certifications. These are conditions of the particular approval, so a principal must follow the approved plan's exact terms.
Hiring People with Significant Disclosure Histories
Rule 1017(a)(7) requires a member to request a materiality consultation with FINRA's Membership Application Program staff before it brings on a natural person as an owner, control person, principal or registered person when that person has, in the prior five years, one or more final criminal matters or two or more "specified risk events" (such as certain final arbitration awards or settlements, or regulatory actions). FINRA then decides whether a Continuing Membership Application is required before the hire can proceed. This consultation does not apply when the firm must instead file an eligibility application under Rule 9522 for the same association.
The Taping Rule (FINRA Rule 3170)
The taping rule addresses firms that hire many people from disciplined firms, meaning firms expelled by an SRO or whose registration the SEC revoked for sales practice violations. A member is a taping firm if, among its registered persons who were associated in a registered capacity with a disciplined firm within the last three years:
| Firm size | Taping threshold |
|---|---|
| At least 5 but fewer than 10 registered persons | 40% or more |
| At least 10 but fewer than 20 registered persons | 4 or more persons |
| 20 or more registered persons | 20% or more |
People who spent 90 days or less in total at disciplined firms within the past three years and have no disciplinary history are excluded from the count.
A taping firm must, within 60 days of being notified or learning that it qualifies, establish special written procedures to supervise the telemarketing activities of all its registered persons. Those procedures include tape recording all telephone conversations between registered persons and existing and potential customers and reviewing the recordings. Taping firms must:
- keep the procedures in place for three years;
- retain recordings for at least three years, the first two in an easily accessible place, catalogued by registered person and date; and
- report to FINRA on their supervision of telemarketing by the 30th day after each calendar quarter.
A firm that becomes a taping firm for the first time may avoid the rule by reducing staff below the threshold within a short window (Rule 3170(c)). FINRA also discloses a firm's taping-firm status on BrokerCheck.
Supervisory Application for a Series 26 Principal
Suppose a branch hires a variable annuity specialist whose U4 shows three exchange-related complaints in four years. No rule bars the hire. Two of those complaints may still be "specified risk events" that trigger a Rule 1017(a)(7) materiality consultation before the hire is final. Even without one, Regulatory Notice 18-15 points toward a written plan with these elements:
- pre-approval by the principal of every annuity exchange;
- a documented comparison of old and new contract features for each exchange;
- monthly review of the representative's exchange rates against the firm's surveillance thresholds under Rule 2330(d); and
- quarterly sign-off by the supervisor.
A member files a Form MC-400 application to continue employing a mutual fund representative who has just become statutorily disqualified. What does FINRA require while the application is under review?
An interim plan of heightened supervision that remains in effect throughout the review
SEC approval under Rule 19h-1 before the firm may file the application
A taping plan under Rule 3170 covering every registered person at the firm
Nothing, because the representative is automatically suspended until FINRA decides
A FINRA Hearing Panel finds that a registered representative made unsuitable variable annuity recommendations, and the representative appeals to the National Adjudicatory Council. What does Rule 9285 require of the representative's firm during the appeal?
The firm must place the representative on the taping rule's quarterly reporting schedule
The firm must terminate the representative because a finding of violation is final when issued
The firm must adopt a written heightened supervision plan tailored to the violations found, with a designated principal responsible for it
The firm may continue ordinary supervision because sanctions are stayed on appeal
A member has 30 registered persons. Seven of them were registered with disciplined firms within the last three years, and none falls within the 90-day exclusion. Is the member a taping firm under Rule 3170?
No, because the threshold for a firm of this size is four persons and seven exceeds it only after rounding
Yes, because seven of 30 is about 23%, which meets the 20% threshold for firms with 20 or more registered persons
Yes, because any firm that hires even one person from a disciplined firm must tape all customer calls
No, because the threshold for firms with 20 or more registered persons is 40%
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