Discretionary Account

Trades made in a discretionary account must still be:

1. A.Executed regardless of suitabilityDiscretion changes who decides, not what standard the decision must meet. It authorizes the adviser to act without asking first; it does not authorize trades that do not fit the client.
2. B.Suitable for the clientCorrect - discretion does not waive suitability.
3. C.In the adviser's best interestThis inverts the fiduciary relationship. Discretionary authority increases the adviser's obligation precisely because the client is not reviewing each trade, so the client's interest, not the firm's, governs every decision.
4. D.Approved by the client one by oneTrade-by-trade approval is exactly what discretionary authority dispenses with; requiring it would leave the account non-discretionary. The client's consent is given once, in writing, when discretion is granted, and what survives is the substantive duty that each trade suit the client.

Why: Even with discretion, each recommendation/trade must be suitable for the client.

Aurelia Fitzsimon signs a limited trading authorization naming her nephew Piers on her brokerage account. Three weeks later Piers telephones the agent and asks that $30,000 be wired from the account to his own personal bank account, explaining that his aunt is content for him to manage the money as he sees fit. The agent should:

1. A.process the wire, because a trading authorization gives the named person the same powers over the account as the ownerA trading authorization confers trading power only, not the powers of ownership.
2. B.process the wire if Piers confirms his instruction in writingA writing from the authorised person cannot enlarge the authority the owner granted.
3. C.decline the wire, because a limited trading authorization permits trading but not the withdrawal of assets, still less a transfer to the authorised personCorrect. Disbursing account assets to a third party requires authority the owner never gave.
4. D.decline the wire unless the amount is reduced to a level consistent with the account's recent trading activityThe obstacle is the absence of authority, not the size of the request.

Why: A limited trading authorization empowers the named person to buy and sell securities in the account. It does NOT authorise the removal of cash or securities from the account, and it certainly does not authorise a transfer to the authorised person's own name. Moving assets out to a third party requires a full power of attorney or specific written instructions from the account owner, and a request to send account assets to the person holding the trading authority is also a serious red flag for exploitation. The correct step is to refuse the wire and go back to the account owner.

An adviser reviews a discretionary account consistent with its stated quarterly schedule. This is:

1. A.ProhibitedNo rule bars an adviser from looking at its own client accounts. The regulatory concern runs the other way, toward advisers that review less often than the frequency they advertised.
2. B.ExcessiveExcessive is a label for trading, not for oversight, and a quarterly cadence is modest in any case. Reviewing an account costs the client nothing and generates no commissions.
3. C.ProperCorrect - honor the stated review cadence.
4. D.A violationThe violation in this area is doing less than you told the client you would do. Matching the represented quarterly schedule is the adviser honoring its own disclosure.

Why: Reviewing accounts consistent with the represented frequency is proper.

All of the following are true of a discretionary account EXCEPT:

1. A.It requires written discretionary authorization from the customerThis is true of discretionary accounts, so it is not the exception.
2. B.Selecting only the time or price of a customer's order requires discretionary authorizationCorrect — this is the false statement (the EXCEPT). Time-and-price selection alone is not discretion and needs no authorization.
3. C.It requires principal approvalThis is true — discretionary accounts must be approved by a principal.
4. D.It must be monitored for excessive trading (churning)This is true — discretionary accounts must be watched for churning.

Why: The false statement is that time-and-price selection alone requires discretionary authorization. Choosing only the time or price of a customer-specified order is expressly not discretion. The other statements are all true.