Discretionary vs. Non-Discretionary Orders

Now that you understand the types of orders, the next question is: who decides the details? When a customer gives their rep some decision-making power, the rules change significantly.

What Makes an Order Discretionary?

A discretionary order gives the registered representative authority to decide one or more of three key elements:

1. Asset - which security to buy or sell
2. Action - whether to buy or sell
3. Amount - how many shares or how much money

If the rep is choosing any of these three elements, the order is discretionary and triggers additional requirements.

A non-discretionary order is one where the customer makes all decisions on asset, action, and amount. The rep simply executes what the customer has specified.

Requirements for Discretionary Accounts

Discretionary authority comes with strict regulatory obligations:

• Written authorization from the customer is required (a trading authorization or power of attorney)
• Each discretionary trade must be approved by a principal promptly
• The account is subject to heightened supervision and review for excessive trading (churning)

Exam Tip: Gotchas

• Written authorization must come BEFORE the first discretionary trade. Verbal agreements are not sufficient.
• A principal must approve each discretionary trade promptly. This is a separate requirement from the written authorization.

The Time and Price Exception

This is the single most important distinction for the exam:

• Choosing only time (when to execute) or price (at what price to execute) does NOT make an order discretionary
• This exception lasts only until the end of the business day on which the customer granted the discretion
• The customer must have already specified the asset, action, and amount

Exam Tip: Gotchas

• "Buy 100 shares of Apple whenever you think the price is right" is NOT discretionary. The customer specified the asset (Apple), the action (buy), and the amount (100 shares). The rep is only deciding time and price.
• "Invest $10,000 in something good" IS discretionary. The rep is choosing the asset.
• The time/price exception expires at the end of the business day. If the rep waits until the next day, it becomes an unauthorized trade.

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