Chapter 10.4 Flashcards
What must a RR obtain prior to handling a discretionary account?
Prior written authorization from a customer. The RR must designate each order ticket as “discretionary” and cannot make transactions which are excessive in size or frequency in the account.
**The quality of the securities traded is not a factor. Churning can happen with penny stocks and blue chip stocks.
Limited Trading Authorization or Limited Power of Attorney
Gives a registered representative the right to make purchase and sale decisions for the account. However, the RR cannot withdraw any cash or securities from the account. Checks must be disbursed payable to the owner of the account.
**When a POA is granted, the RR must know essential facts about both the customer and the agent that is granted the POA.
Full trading authorization or full POA
This also allows a RR to make purchase and sale decisions for the account and also withdraw cash or securities from the account. However, an approved discretionary accounts does not mean the RR has unlimited trading privileges.
Decision to “Time and Price” only
Do not require written discretionary authority from a customer. Time & Price discretion orders are good for the day of entry only, for a definitive number of shares on a specific security.
**In order for a time and price discretionary order to be good for more than one day, written instructions would be required from the customer.
Supervision of Discretionary Accounts
- Each discretionary account must be approved in writing by the member or designated person such as an officer, manager, or partner.
- The member or a designated person must approve promptly in writing each discretionary order entered and must review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.
**If a supervisory person determines that a discretionary account is being “excessively” traded, the supervisory person should suspend any further trades until the supervisory person can discuss the matter with the RR.
Confirmations and monthly statements for discretionary accounts
Will be sent to only the agent, if the owner waives their right to receive them. Such waiver must be made in writing.
What happens if a customer guarantees a B/D that a power of attorney is in the mail?
The firm still cannot accept an order for the discretionary account.
Discretionary authorization reviews
Discretionary authorizations do not have to be renewed annually by the firm. They are good until revoked
Conflict of interest in discretionary accounts
No member firm that has as conflict of interest may sell to a discretionary account any security with respect to which the conflict exists, unless the member has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records. A conflict of interest would include transactions in an affiliated company’s shares and structured products issued by an affiliate of the firm.
