FINRA Series 7Opens Accounts and Evaluates Customer ProfileMedium
A customer tells his registered representative, 'Buy me some blue-chip stock whenever you think the price is right, but don't spend more than $10,000.' The representative later executes a purchase without further contact from the customer. For this order to be handled properly as a discretionary order, the firm must have on file:
- APrior written authorization from the customer, along with prompt written acceptance of the account as discretionary by a principal
- BNothing additional, because the customer specified a dollar limit
- CA verbal authorization documented only in the representative's personal notes
- DA signed loan consent agreement covering the transaction
Show answer & explanationAnswer & explanation
Correct answer: A. Prior written authorization from the customer, along with prompt written acceptance of the account as discretionary by a principal
Because the customer did not specify the particular security, the order involves discretion over asset selection, requiring prior written discretionary authorization from the customer and prompt written approval/acceptance of the discretionary account by a principal, per FINRA rules.
Why the other options are wrong
- B. A dollar limit alone does not exempt the order from being discretionary since the security was not specified.
- C. Verbal authorization alone is insufficient; written authorization is required.
- D. A loan consent agreement relates to lending securities, not discretionary trading authority.
Discretionary Account Authorization
An account in which the representative may choose the asset, action, or amount without contacting the customer each time, requiring prior written authorization and principal approval.
- Time and price discretion alone (same day) does not require written authorization
- Choosing the security is always discretionary and requires written authorization
- A principal must promptly review and approve each discretionary order
Memory trick: Pick the STOCK yourself? Get it in WRITING first.