Quick Answer
Client assets stay separate from the firm's: commingling and conversion are always prohibited. An investment adviser needs written discretionary authorization in advance; a broker-dealer or agent may act on oral discretion but must get written authorization within 10 business days of the first discretionary trade. Time-and-price direction is not discretion, and trustees owe the prudent investor standard.
The whole unit on one sheet: how professionals hold client assets, when they may trade with discretion, and which standard of care applies.
Safekeeping and Commingling
- Commingling (mixing client assets with the firm's own assets in the same account) is a prohibited practice for broker-dealers (BDs) and investment advisers (IAs), even if nothing is stolen.
- Each client's assets sit in separate, identifiable accounts; customer securities in street name are held segregated from firm holdings.
- Free credit balances (uninvested cash) must be accounted for and available on demand.
- Conversion (taking client assets for personal use) is theft, the most severe misuse. Unauthorized borrowing from a client account, even temporarily, is also a violation.
- The Uniform Securities Act (USA) antifraud provisions cover misuse of customer funds, and no exemption shields the conduct.
The One-Liners That Win Points
- Discretion = the professional decides which security, how much, or whether to buy or sell without the client's prior approval on each trade.
- An IA needs written discretionary authorization before the first discretionary trade; a BD or agent may accept oral discretion and obtain written authorization within a short window afterward.
- Full trading authorization lets a third party trade and withdraw cash or securities; limited trading authorization allows trading only, no withdrawals.
- Trust, estate, custodial (Uniform Gifts / Transfers to Minors Act), and guardian accounts are all fiduciary: the person in control must act in the beneficiary's best interest.
- Churning (excessive trading) is the hallmark violation supervisors watch for in discretionary accounts.
Numbers to Lock In
| Item | Rule |
|---|---|
| IA discretionary authorization | Written, in advance, before the first discretionary trade |
| BD/agent discretionary authorization | May act on oral discretion, then get written authorization within 10 business days of the first discretionary trade |
| Time-and-price direction | Not discretion (client already named security, amount, and action) |
| Commingling / conversion | Always prohibited, no exemption |
Memory Aid: AAA Names the Missing Discretion
Memory Aid: AAA
An order is discretionary if any of these is missing:
- Asset (which security)
- Action (buy or sell)
- Amount (number of shares)
Time and price-only direction is NOT discretion.
Top Gotchas
- IA written-first vs BD oral-then-10-days. An IA must have written authorization before exercising discretion; a BD or agent may act on oral instructions but must secure written authorization within 10 business days.
- Time-and-price is not discretion. "Buy 100 shares of XYZ when the price is right" leaves the professional deciding only when and at what price, so no discretionary authorization is required. "Invest $10,000 in something appropriate" is discretion, because the professional chooses the security.
- Within scope matters. A discretionary grant for low-risk investments does not cover speculative trades; acting outside the scope is unauthorized trading even in a discretionary account.
- Commingling is always prohibited, separate from conversion. Commingling is mixing assets; conversion is taking them. Both are violations; conversion is more severe.
- Standard of care by role. BDs owe best interest (retail) or suitability (institutional) at the point of recommendation; IAs owe an ongoing fiduciary duty; trustees owe the prudent investor standard under the Uniform Prudent Investor Act.
One-Breath Recap
Client assets must stay separate from the firm's: commingling and conversion are always prohibited, with no exemption. Discretion means the professional picks the security, the amount, or the action, and an investment adviser needs written authorization in advance while a broker-dealer or agent may act on oral discretion but must obtain written authorization within 10 business days of the first discretionary trade. Time-and-price direction is not discretion. Full trading authorization adds withdrawal rights; limited does not. Broker-dealers owe best interest or suitability at recommendation, advisers owe a fiduciary duty, and trustees owe the prudent investor standard.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Customer Funds, Custody, and Discretion unit for the complete lesson.