Account Authorizations: Discretionary Accounts (FINRA Rule 3260)
Quick Answer
FINRA Rule 3260 governs discretionary 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. FINRA Rule 3260 governs when discretion is allowed, what paperwork is required, and how the firm must supervise it.
What counts as discretion under FINRA Rule 3260?
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 Rule 3260 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 FINRA Rule 3110) | Accepts the account as a discretionary account for the firm |
Verbal authorization is NEVER sufficient under Rule 3260.
Exam Tip: Gotchas
- Verbal discretion is never enough under Rule 3260. 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?
- Rule 3260 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 Rule 3260
How do full discretion and time and price discretion differ?
| Feature | Full Discretion (Rule 3260) | 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).