Caution on CFTC Requirement on Tape Recording

On December 17, 2012, the Commodity Futures Trading Commission voted to amend Rules 1.31 and 1.35 to require recording of certain oral communications that lead to the execution of a transaction in a “commodity interest” by certain CEA-registered persons.  See News Item:  CFTC Announces Approval of Final Rule on Recordkeeping.

Although recording is being mandated by the CFTC for both these registered entities under Rule 1.31 and 1.35, as well as for swap dealers and major swap participants under Part 23, firms should be aware that the electronic recording of conversations is separately and expressly regulated both by federal law and by the criminal laws of all the states (other than Vermont), and that the failure to comply with these laws can result in substantial civil and criminal penalties.  While an argument could be made that these state recording laws are implicitly preempted by the CEA (at least with respect to swap dealers and major swap participants), this would be a matter of first impression for the courts.  Thus, when implementing recording programs to comply with CFTC regulations, clients should ensure that these recording programs comply with federal and state telephone recording laws.  While federal law and the criminal law of most states require consent of only one party to the recording (such as the employee), twelve states require the consent of both parties to the call, i.e., including the counterparty’s employee.  Which state’s law governs the conversation will depend on the location of the individuals having the conversation.

When one or both parties to the telephone call are located in a “two-party consent” state, exceptional care should be exercised when recording.  It is a common belief that, in these “two-party consent” states, the playing of an “electronic beep” is sufficient to comply with state criminal law.  This is typically not the case.  It is also sometimes believed that consent by the caller’s employer – rather than by the individual employee participating in the call – is in all cases sufficient.  The law in this regard is not uniform or clear.  Conversely, it is clear that the giving of an appropriate prior notice – on both inbound and outbound calls – that the call may be recorded will constitute compliance in every state.  While providing an automated notice on inbound calls is relatively easy and is typically included as part of the initial “hold” music or message, providing notice on outbound calls is far more cumbersome.   Whether notice must be provided on outbound calls will depend on whether the individual being called reasonably has been made aware that call recording is occurring.

In addition to providing notice, in every state, registrants should seek written consent from their employees to ensure compliance with the one-party consent requirements of federal law and most states’ laws.

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