Around this time last year the Commodity Futures Trading Commission (“CFTC”) made major changes to Regulation 1.35(a) which will be taking effect on December 21, 2013. Perhaps the most widely discussed component of the CFTC’s recent amendments is the obligation of certain Futures Commission Merchants (“FCMs”), Registered Foreign Exchange Dealers (“RFEDs”) and Introducing Brokers (“IBs”) to tape record all oral communications concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a transaction in a commodity interest. The rule also includes an obligation to record oral communications related to cash or forward transactions (as defined by the CFTC).
The obligation to tape record oral communications is imposed on all oral discussions whether they are conducted by telephone, voicemail, mobile device, or other digital/electronic media for a period of at least one year. Conversations must be captured and recorded by registrants whether they occur over company owned equipment or staff owned equipment (ie personal mobile phones, tablets, computers, etc.). These recordings are then also required to be cataloged, maintained, and archived in a form and manner that is both identifiable and searchable by transaction. In person, face to face meetings are excluded from the tape recording obligation.
Who has to comply?
“Small” firm’s thinking the cost of this obligation will be prohibitive to conducting business in the future may be in luck. Thanks in large part to comments submitted by the National Introducing Brokers Association (“NIBA”), the CFTC has provided relief for certain firms the meet the following standards:
- Any IB that generates $5 million or less in aggregate gross revenues from its activities as an IB over the preceding three years (in total, not per year for three years) is not required to tape record oral communications. These firms will still be required to maintain all written order information as given or received (email, chat room, mobile device, telephone, digital/electronic media, instant messages etc).
Those registrants not meeting the aforementioned exemption standards are likely to be forced to tape record their oral communications. The only other option available to such firms as of the date of this publication will be to draft an exemption request and send it off to the CFTC. This request must express the good faith technological or economic impracticality of the firm’s compliance with the rule.
How to Comply
Turnkey Trading Partners (“TTP”) has been speaking with a variety of industry participants about the oral recording obligation over the last year. Throughout our discussions we have come up with a variety of “Best Practices,” several of which we will briefly identify below. If you would like to further discuss your compliance options please feel free to contact us at any time.
- Switch to Voice Over IP – While we haven’t independently verified the cost of all recording options, it appears for most firms, a cost effective and technologically feasible way to record all oral phone communications will be to switch your phone service to voice over IP (“VOIP”). VOIP allows for the technological capabilities to record, catalog, and archive phone calls in many instances. A simple Google search or call to your local ISP should get you pointed in the right direction. Remember if you make the switch to VOIP you will need to also consider disaster recovery contingencies as your phone system will be tied to your available internet connectivity.
- Don’t Break the Law – Each of the various states throughout the USA have their own wiretapping and voice recording statutes. While Turnkey Trading Partners is not a law firm we are aware of concerns related to the recording of customer calls within certain jurisdictions. The solutions to this problem are varied. One approach we have seen implemented is the development of a comprehensive “Customer Consent to Tape Record” form. Such a form would be provided to all customer accounts as of the day of the recording obligation as well as when any new account is opened in the future.
- Don’t Allow Mobile Phones – while practically frustrating most firms will likely be obligated to take mobile phones away from their brokers. Some smart phones may have the ability for brokers to speak with customers utilizing company VOIP technology should you choose to go this route. This can in some instances allow for calls to be placed through a firm’s VOIP network for recording. Firms may also consider consolidating calls to a single or several numbers when preparing to conduct commodity interest activity. While there are technologies available to record cell phone calls, from what we’ve seen thus far, this option may be technologically and cost prohibitive for many organizations.
- Update Policies and Procedures – Once your firm has made all of its decisions about how it will comply with the new standards, all applicable company policies and procedures will need to be updated. For example once all of a firm’s oral communications have been captured and recorded they will be required to be stored in accordance with the firms record retention policies. Similarly, policies such as a firm’s disaster recovery, supervision, and order handling procedures will need to be amended to reflect changes related to this rule.
Further Guidance
Affected firms should ensure that they have an appropriate plan of action in place as of December 21, 2013. Keep in mind the information set forth in this summary is not intended to be all-inclusive. Each FCM, RFED, and IB impacted by the CFTC’s regulatory changes must consider its unique operational circumstances to determine the best course of action for compliance. If you have any questions concerning the preparation or implementation of your oral communications tape recording program, we suggest you contact a regulatory professional like Turnkey Trading Partners.
