Handling Client Funds - Discretion
As with registered representatives of broker-dealers, an IA must not exercise discretionary power over securities transactions without obtaining the proper discretionary authority from the client.
- Only oral discretionary orders are permitted in the 10 days following the first transaction in a client account.
- Thereafter, specific written discretionary authority is required.
- As with registered representatives of broker-dealers, an IA may use their discretion as to the time and price of an execution - discretionary authority is not required for these details.
A question on time and price is sure to be tested and is easy to recognize.
However, you can expect additional questions on discretionary powers, particularly regarding scenarios in which a client is unavailable and the client\'s spouse is placing orders or giving approval to an IA\'s suggestion of a buy or sell order.
Exam Tips and Tricks
Custody questions tend to focus on the standards of the Investment Advisers Act. Consider this sample question:
The following statements about IAs that take custody of client funds are true, EXCEPT:
- Each client must receive a statement of transactions in the account at least quarterly
- The IA must be audited at least annually
- Each client's funds must be segregated from other client's funds
- Client funds must not be commingled from the IA's funds
Restrictions on IA Recommendations
The correct answer is "c" - while the funds must not be commingled with the IA's funds, there is no requirement that they not be commingled with other clients' funds.