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Question

Difficulty: MediumCustomer Account Types and Ownership Structures

A client calls a registered representative and gives verbal instructions to purchase $10,000 worth of an equity security whenever the representative feels the market price is favorable. The client has not signed a discretionary account agreement, and a principal has not granted discretionary authority. Three days later, believing the stock has reached an optimal entry point, the representative executes the trade. Which of the following statements correctly describes the regulatory status of this transaction?

  1. A
    The transaction is unauthorized because exercising discretion over price and time requires written trading authorization unless the order is executed on the same business day.
  2. B
    The transaction is fully permissible because verbal authorization is legally binding for up to 30 calendar days while written documentation is pending.
  3. The transaction is prohibited as an unauthorized discretionary trade because discretionary authority across multiple business days requires prior written authorization from the customer and written principal approval.Answer
  4. D
    The transaction is permissible only if the registered representative notifies the client by electronic communication prior to market close on the day of execution.

Answer

The transaction is prohibited as an unauthorized discretionary trade because exercising discretion across multiple business days requires prior written authorization from the customer and written approval from a designated principal.
Under FINRA rules, a registered representative may only exercise discretionary power (deciding action, asset, or quantity) after obtaining prior written authorization from the customer (Power of Attorney) and written acceptance of the account by a designated principal. An exception exists for time and price discretion, but verbal time and price authority is valid ONLY for the business day on which it was granted. Because the representative executed the trade three days later without written authorization, the trade is unauthorized.

Step-by-Step Solution

1
Identify the nature of the authority requested by the client.
The client attempted to give verbal discretion regarding time and price beyond a single business day.
Understanding the boundary of time and price discretion is necessary to evaluate compliance rules.
2
Apply FINRA rules governing discretionary account authorization.
Discretionary authority allows a representative to decide asset, action, or quantity. Time and price discretion without written authorization is limited strictly to the day the order is given.
Executing a trade three days later exceeds the single-day time/price exemption.
3
Determine the legal requirement for multi-day discretionary trading.
The trade is classified as an unauthorized transaction because written authorization from the customer and written principal acceptance were not obtained.
Regulatory standards prohibit discretionary trading without complete written approval on file prior to order entry.

Key Concept

Discretionary Account Requirements and Time/Price Exemption Rules
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Topics

Customer Account Types and Ownership Structures