Trade call recording rules: MiFID II, the CFTC and FINRA

A trader’s call to a client about a bond is recorded almost everywhere, but the legal reason for the recording differs by jurisdiction and by product. In the European Union the obligation is broad and set for every investment firm. In the United States it depends on whether the trade is in futures and swaps or in securities, and in securities the direct taping duty is narrow.

MiFID II, Article 16(7)

The Markets in Financial Instruments Directive (2014/65/EU), which has applied since 3 January 2018, sets the European rule in Article 16(7). Records must include telephone conversations and electronic communications relating to, at least, transactions concluded when dealing on own account and client order services that relate to the reception, transmission and execution of client orders.

It covers attempts as well as trades. The recorded conversations include those “intended to result” in such transactions, even if they never do. A call in which a salesperson pitches a trade the client declines is in scope.

It also follows the equipment. A firm must take all reasonable steps to record relevant conversations made with, sent from or received by equipment it provided to an employee or contractor, or whose use it accepted or permitted, and to prevent staff from using privately owned devices that it cannot record or copy.

And it reaches into the client relationship. Clients must be told in advance that calls which result or may result in transactions will be recorded, and a firm may not provide order-related services by telephone to a client who has not been told. Orders can still arrive by other channels, such as email or a meeting, provided they are captured in a durable medium; face-to-face conversations can be recorded in written minutes or notes.

The article ends with the retention rule: records go to the client on request and are kept for five years, and up to seven where the competent authority asks.

The detail sits in Article 76 of Commission Delegated Regulation (EU) 2017/565. Its first paragraph makes clear that relevant internal conversations count too, so a call between a salesperson and a trader about a client order belongs in the recorded set alongside the call with the client. Firms need a written recording policy overseen by the management body, arrangements that are technology neutral, a list of the people with approved devices, staff training and periodic, risk-based monitoring of the recordings. Minutes of client meetings must record at least the date, time, place, attendees, who initiated the meeting and the relevant order details.

CFTC Rule 1.35

For futures and the other commodity interests the CFTC oversees in the United States, the rule is CFTC Regulation 1.35. Paragraph (a)(1)(iii) requires futures commission merchants, retail foreign exchange dealers and introducing brokers above a revenue threshold to keep all oral and written communications about quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest. The introducing broker threshold is more than $5 million in aggregate gross revenue from introducing broker activity over the preceding three years.

The CFTC’s version is narrower than Europe’s in one respect: it covers communications that lead to execution, not those that were merely intended to. It also reaches fewer firms. Smaller introducing brokers, and members of exchanges registered in other capacities such as commodity trading advisors, must keep written pre-trade communications but not oral ones. Floor brokers keep oral communications that lead to trades for other people’s accounts.

Swap dealers and major swap participants fall under a parallel rule, Regulation 23.202, which requires records of oral and written communications that lead to the execution of a swap.

FINRA Rule 3170

U.S. broker-dealers must preserve their business communications under SEC Rule 17a-4, but no general rule makes them tape their phone lines, although many do so for their own protection. The one direct taping mandate is FINRA Rule 3170, and it is aimed at a specific risk.

A firm becomes a “taping firm” when a set share of its registered staff has, within the last three years, worked in a registered capacity at a disciplined firm, meaning one expelled from a securities self-regulatory organization or whose broker-dealer registration the SEC revoked in connection with sales practices. For a firm with at least 20 registered persons, the trigger is 20 percent or more. For smaller firms the thresholds are 40 percent (five to nine registered persons) and four people (10 to 19).

A taping firm must record all telephone conversations between its registered persons and existing and potential customers, keep its special written procedures in place for three years, review the tapes for compliance and report to FINRA on its supervision of telemarketing each quarter.

Where the regimes part ways

The practical gap is scope. A European investment firm records its client and trading conversations as a matter of course. A U.S. futures firm records them if it is of a certain type and size. A U.S. securities firm records them because it chooses to, or because FINRA has made it a taping firm. What every regime shares is the expectation that business stays on channels the firm can capture, which is why so many of the enforcement cases in recent years have been about personal phones rather than recorded lines.