Account Authorizations: Discretionary Accounts
Quick Answer
The discretionary-accounts rule governs accounts where a rep can trade without customer approval for each transaction. Discretion covers the three A's: Action, Asset, and Amount. Full discretion requires prior written customer authorization plus written principal acceptance. Time-and-price discretion on a specific named-security order is not full discretion and expires at the end of the business day.
Everything so far has assumed the customer is driving. A discretionary account flips that: the registered representative (rep) can place trades without calling the customer for each one. The discretionary-accounts rule governs when discretion is allowed, what paperwork is required, and how the firm must supervise it.
What counts as discretion under the discretionary-accounts rule?
Discretion is the authority to decide, without the customer's specific prior approval, at least one of the "three A's":
- Action: whether to buy or sell
- Asset: which security to buy or sell
- Amount: number of shares or units
If the rep chooses any of the three without contacting the customer for that specific trade, the trade is discretionary.
Think of it this way: If the customer has not told you the A, A, A for today's trade, and you make the call yourself, you are exercising discretion. The rule does not care whether you guess right; it cares whether you had written authority to guess.
What is the time and price exception to discretion?
A customer instruction like "buy 500 shares of XYZ Fund today" leaves only the time or price of execution to the rep. That is not full discretion.
Time and price discretion:
- Rep chooses only when or at what price to execute a specific named-security order
- Effective only until the end of the business day on which the customer granted it
- Absent a specific, written contrary indication signed and dated by the customer
Because time-and-price authority expires at the close of business, it does not require the prior written authorization that the discretionary-accounts rule demands for full discretionary accounts.
Exam Tip: Gotchas
- Time and price discretion (deciding only when or at what price to execute a specific named-security order) is NOT full discretion and does NOT require written authorization. But the authority expires at the end of the business day unless the customer signs and dates a written extension.
What prior written authorization does a discretionary account require?
Before exercising discretionary power, the firm must have two written items in place:
| Document | Who Signs | What It Does |
|---|---|---|
| Prior written authorization | Customer | Grants discretion to a stated individual or individuals (not "the firm" in general) |
| Written acceptance of the account | Principal (partner, officer, or designated principal under the supervision rule) | Accepts the account as a discretionary account for the firm |
Verbal authorization is NEVER sufficient under the discretionary-accounts rule.
Exam Tip: Gotchas
- Verbal discretion is never enough under the discretionary-accounts rule. A rep who trades on a customer's verbal "do what you think is best" without written authorization has committed unauthorized trading, which is exam-testable as a violation.
How must a firm supervise and review discretionary accounts?
Once the account is open, the firm has two ongoing obligations.
Written Approval of Each Discretionary Order
- The member or designated principal must approve promptly in writing each discretionary order entered
- "Promptly" does not require approval before execution, but the principal must sign off as part of the firm's frequent-interval supervisory review
Frequent Review for Excessive Activity
The member must review discretionary accounts at frequent intervals to detect and prevent:
| Red Flag | What It Means |
|---|---|
| Excessive in size | Trades that overcommit the customer's resources |
| Excessive in frequency | Churning: trading to generate commissions rather than serve the customer |
Exam Tip: Gotchas
- Every discretionary order must be approved in writing promptly by a principal. Failure to have the principal's sign-off in writing is a recurring enforcement theme, even when the trades themselves are appropriate.
How can a firm impose stricter discretionary account policies?
- The discretionary-accounts rule is the FINRA floor; individual firms may impose stricter internal policies (for example, requiring same-day principal sign-off, additional forms, or desk-manager approval)
- Investment adviser discretion is governed separately under the Investment Advisers Act of 1940
- A Series 6 rep does not exercise advisory discretion: Series 6 discretion is solely the broker-dealer (BD) brokerage discretion under the discretionary-accounts rule
How do full discretion and time and price discretion differ?
| Feature | Full Discretion (Discretionary-Accounts Rule) | Time and Price Discretion |
|---|---|---|
| Rep chooses action, asset, or amount | Yes | No (customer already specified) |
| Rep chooses time or price of execution | Yes | Yes |
| Prior written authorization required | Yes | No |
| Principal must accept the account in writing | Yes | No |
| Duration | Until revoked in writing | End of the business day |
| Principal must approve each order in writing | Yes | No (ordinary order-ticket approval applies) |
What are the key discretionary account rules on the Series 6 exam?
Exam Tip: Gotchas
- Three A's = Action, Asset, Amount. Choosing any of them without customer contact = discretion.
- Time and price = not full discretion, but expires at end of business day.
- Verbal authorization = never sufficient for full discretion.
- Principal must approve each discretionary order in writing, and must review the account at frequent intervals for excessive size or frequency (churning).