NASAA Series 63Ethical Practices and ObligationsHard
An agent has been managing a client's portfolio for five years. The client, a busy executive, has verbally given the agent full authority to make investment decisions without prior consultation. The agent frequently places trades for the client without obtaining specific approval for each transaction. However, the agent has never obtained written discretionary authority from the client or the broker-dealer. This practice most accurately describes:
- AA legitimate verbal agreement
- BChurning
- CUnauthorized trading
- DAuthorized discretionary trading
Show answer & explanationAnswer & explanation
Correct answer: C. Unauthorized trading
For an agent to have discretionary authority over a client's account, meaning they can make investment decisions without specific client approval for each trade, both the client and the broker-dealer must grant this authority in writing. Verbal authorization is insufficient. Therefore, even if the client verbally granted permission, the agent's actions constitute unauthorized trading because the proper written authorization was never obtained.
Why the other options are wrong
- A. Verbal agreements are generally not sufficient for discretionary trading authority in the securities industry due to regulatory requirements for written consent.
- B. Churning involves excessive trading, but the core issue here is the lack of proper authorization for any discretionary trade, regardless of frequency.
- D. This is incorrect because 'authorized' discretionary trading requires written consent, which is absent here.
Discretionary Authority
The power granted by a client to an agent to make investment decisions (asset, amount, action) without prior approval for each trade, requiring specific written authorization.
- Must be granted in writing by the client.
- Must be approved by a principal of the broker-dealer.
- Verbal authorization is not sufficient and leads to unauthorized trading.
Memory trick: Discretion needs a signed ticket, not just a spoken word.