Time And Price Discretion

Exercising full discretion in a customer account requires:

1. A.Only verbal approvalOral authorization is enough for a broker to use discretion as to time or price on an order the customer has already specified, which is where this idea comes from. Full discretion over which security and how much requires prior written authorization, because the customer is handing over the investment decision itself.
2. B.Prior written authorization from the customerCorrect - written authority is required for discretion.
3. C.No approval at allTrading a customer's account without authority is unauthorized trading, one of the more serious conduct violations. The customer must affirmatively grant the power before it is exercised.
4. D.Approval only for option tradesOptions accounts do require their own approval process, so the association is understandable. Discretionary authority is a separate requirement that applies to all securities, and written authorization is needed whether the account trades options or plain equities.

Why: Full discretionary authority requires prior written authorization from the customer; choosing only the time or price of a specified order is not discretion.

On Monday a customer tells her agent, 'Buy 300 shares of XYZ for me whenever you think the price looks right this week.' The agent, holding no written authorization, buys the shares on Thursday. Under NASAA policy, the agent has:

1. A.Acted properly, because the customer chose the security and the amountTrue on Monday only — the asset/amount/action rule works for same-day execution, and the order lapsed at the end of that day.
2. B.Acted properly, because oral discretion is acceptable for one weekNo week-long oral window exists for broker-dealer agents; written authorization is required before ongoing discretion.
3. C.Committed churningChurning is excessive trading to generate commissions; a single late execution is a discretion violation, not churning.
4. D.Exercised unauthorized discretion, because a time-and-price order is valid only for the day it is receivedCorrect. By Thursday the Monday order had expired; completing it then required written discretionary authority.

Why: An order specifying the security, the amount, and the action lets the agent choose only time and price without written authority — but such an order is valid only for the day it is given. Executing on Thursday an order received Monday is exercising discretion without written authorization, a prohibited practice. Review: Discretion (time-and-price orders).

Sabine Wrottesley signed a written discretionary authorization for her agent at Thurlbeck Securities two years ago. On Wednesday morning she telephones the agent and says: "Stop trading my account - I am taking the discretion away as of right now, and I will confirm in writing." That afternoon, before any letter arrives, the agent buys 800 shares of a stock he had been researching for her. The purchase is:

1. A.permitted, because a written discretionary authorization remains effective until revoked in writingThe writing requirement attaches to granting discretion, not to withdrawing it.
2. B.permitted, because the agent had researched the position while the authority was still in forceAuthority is measured at the time the order is entered, not when the research was done.
3. C.permitted for ten business days after the oral revocation, during which the client must deliver written confirmationThe ten-business-day grace period concerns oral authority granted to an investment adviser, and it has no revocation counterpart.
4. D.an unauthorised transaction, because a client may revoke discretionary authority at any time and the revocation took effect when communicatedCorrect. Oral revocation is immediately effective, and any trade placed afterwards is unauthorised.

Why: A grant of discretionary authority is revocable by the client at any time, and revocation takes effect when it is communicated - it does not wait for a signed writing, for the firm to update its records, or for any notice period to run. The WRITING requirement in the rules governs the GRANT of discretion, which protects the client by making the scope of the authority provable. Nothing requires a client to observe formalities to take back authority over her own money. Once she revoked, the agent held no authority, so the trade is an unauthorised transaction regardless of how suitable or well researched it was.

On Monday morning client Perpetua Oyelaran telephones her agent and says: sell my 800 shares of Lindmark Rail sometime today, you choose the timing and the price. The agent holds no written discretionary authority over her account. He does not get to the order on Monday and executes the sale on Wednesday. Which statement is correct?

1. A.The instruction was invalid from the outset, because any form of discretion requires prior written authorization.Incorrect. Time and price discretion is the one form that does not require written authorization.
2. B.The instruction remained valid, because time and price discretion continues in force until the client revokes it.Incorrect. Unlike true discretionary authority, time and price discretion is limited to the day it is granted.
3. C.The sale was proper because the client named the security, the amount and the action, so no discretion was exercised.Incorrect. Choosing the moment and the price is time and price discretion, and by Wednesday even that had expired.
4. D.The client granted only time and price discretion, which is valid solely for the day given, so the instruction lapsed at Monday close and the Wednesday sale was unauthorized.Correct. Time and price discretion needs no written authority but expires at the end of the day it is given.

Why: When a client specifies the action, the security and the amount, and leaves only the timing and the execution price to the agent, that is time and price discretion, not true discretion, so no written authorization is needed. But it is good only for the day the client gives it. Monday instruction expired at Monday close, and by Wednesday the agent had no authority of any kind. Selling then was an unauthorized transaction, and the fact that the client wanted the stock sold at some point does not repair it.