Introduction

Welcome to Customer Funds, Custody, and Discretion. This unit covers how securities professionals handle client assets and make investment decisions on behalf of customers.

Exam Weight: Part of Ethical Practices and Obligations (25%, 15 questions)

What You'll Learn

In this unit, you'll cover:

• Custody of Customer Funds and Securities: What constitutes custody, qualified custodian requirements, and the North American Securities Administrators Association (NASAA) Model Rule 102(e)(1)-1 safeguards
• Safekeeping and Commingling Prohibitions: Why client assets must be segregated and the consequences of misuse
• Discretionary Authority: When written authorization is required and the time-and-price discretion exception
• Trading Authorization: Full vs. limited powers of attorney and fiduciary account obligations
• Applicable Standard of Care: How the standard differs for broker-dealers (Regulation Best Interest (Reg BI) and suitability), investment advisers (fiduciary duty), and trustees (Uniform Prudent Investor Act (UPIA))

Why This Matters

These rules protect customers from mishandling or misappropriation of their assets. The exam tests whether you understand:

• Who can hold client funds
• What safeguards must be in place
• When an agent needs written permission to trade
• Which standard of care applies to each type of securities professional

Let's start with the rules governing custody of customer funds and securities.