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Series 65

Handling Client Funds - Discretion

Discretionary Powers
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.
Look Out!
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.
  • Remember: If the spouse has not been given written power of attorney on the account, it is always incorrect to choose an answer involving the spouse.
  • In particular, watch out for a multiple-choice option stating the spouse can give approval as long as the client signs a power of attorney within 10 days after the trade: the 10-day rule above only applies following the first transaction to occur in a new account.

Exam Tips and Tricks
Custody questions tend to focus on the standards of the Investment Advisers Act. Consider this sample question:
  1. The following statements about IAs that take custody of client funds are true, EXCEPT:
    1. Each client must receive a statement of transactions in the account at least quarterly
    2. The IA must be audited at least annually
    3. Each client's funds must be segregated from other client's funds
    4. Client funds must not be commingled from the IA's funds
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.

Next: Restrictions on IA Recommendations »


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