Handling Client Funds - Discretion
As is the case with registered representatives of broker-dealers, an IA must not exercise discretionary power over securities transactions without first obtaining the proper discretionary authority from the client. Only oral discretionary orders are required 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 discretion as to time and price of an execution without having discretionary authority.
The time and price question is sure to be tested and is easy to recognize. But expect additional questions on discretionary powers, particularly regarding situations where a client is unavailable and the client\'s spouse may want to place orders or give approval to an IA\'s suggestion of a buy or sell order. 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 an answer stating the spouse can give approval as long as the client signs a power of attorney within 10 days following the trade: the 10-day rule only applies following the first transaction to occur in a new account.
|Exam Tips and Tricks
Custody questions tend to focus on the Investment Advisers Act standards. 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 with 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 client's funds.