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
- Any exercise of time and price discretion must be reflected on the order ticket
- The end-of-day limit does not apply to time and price discretion in an institutional account under valid Good-Till-Cancelled instructions issued on a not-held basis
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.
- The end-of-day clock is not universal. An institutional account with a Good-Till-Cancelled, not-held instruction is outside it. A question that applies the end-of-day limit to that fact pattern is applying the wrong rule.
- Time and price discretion still leaves a record. It must appear on the order ticket, so "no written authorization" does not mean "no documentation."
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.
How Must the Firm Approve 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
How Must the Firm Review Accounts 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 promptly in writing by the member or a designated partner, officer, or manager. Failure to have that sign-off in writing is a recurring enforcement theme, even when the trades themselves are appropriate.
When does the money market bulk exchange exception apply?
Time and price discretion is not the only carve-out. The discretionary-accounts rule also does not apply to bulk exchanges at net asset value of money market funds made with negative response letters, but only when all four of these conditions hold:
- The bulk exchange is limited to fund mergers and acquisitions, changes of clearing members, or exchanges of funds used in sweep accounts
- The letter contains a tabular comparison of the fees each fund charges
- The letter contains a comparative description of the investment objectives of each fund, plus a prospectus of the fund to be purchased
- The negative response feature does not activate until at least 30 days after the letter was mailed
A negative response letter treats silence as consent. The customer is exchanged unless they object.
Exam Tip: Gotchas
- All four conditions must hold. A letter that compares objectives but omits the fee table, or that gives the customer only two weeks, does not qualify. The exchange then needs real discretionary authority.
- This is not a general permission to act on silence. The carve-out is limited to money market bulk exchanges in the three listed situations. Silence never substitutes for authorization anywhere else.
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 (except an institutional account under a Good-Till-Cancelled, not-held instruction) |
| 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).
What Should You Check on Exam Day?
- Can you list the three A's that define discretion: Action (buy or sell), Asset (which security), and Amount (how many shares)?
- Do you know time and price discretion on a specific named order expires at the end of the business day, unless the account is institutional with a Good-Till-Cancelled, not-held instruction?
- Can you state that verbal authorization is never sufficient for a full discretionary account, and that written authorization must name a stated individual?
- Do you know a principal must approve promptly in writing each discretionary order, and review accounts at frequent intervals for excessive size or churning?
- Can you name all four conditions the money market bulk exchange exception requires, including the fee table and 30-day negative response window?