Discretionary Account

C is correct. Robert exercised discretion by choosing which specific securities to buy (Asset) and how many shares of each (Amount), even though Karen specified the dollar amount and investment type. Discretionary authority requires the "Three A's": Action (buy/sell), Asset (which security), and Amount (quantity). Robert controlled two of these elements without written authorization.

A is incorrect because specifying the investment amount and general type (dividend stocks) does NOT eliminate the need for written discretion. Karen did not specify which stocks or how many shares. B is incorrect because Robert exercised full discretion (choosing specific securities and amounts), not merely time and price discretion (which would be limited to choosing the exact moment to execute a specific order within the same day). D is incorrect because discretionary accounts, once properly authorized in writing, allow trades without prior approval for each transaction.

B is correct. Choosing which specific security to purchase (Tesla vs. Ford) without prior client approval constitutes discretion over the "Asset" component of the Three A's. This requires written discretionary authorization before execution.

A is incorrect because deciding when to execute during the trading day is time and price discretion, which does NOT require written authorization. The client has already specified what to trade. C is incorrect in most cases because selecting the optimal share class of the SAME mutual fund is typically considered acting in the client's best interest under fiduciary duty, not exercising discretion over different securities. D is incorrect because determining the best execution price is time and price discretion (when/at what price), not discretionary authority requiring written consent.

B is correct. The trading pattern (180 trades vs. 25 typical trades, $15,000 commissions, no account growth) raises red flags for churning. excessive trading primarily to generate commissions rather than benefit the client. Churning violates fiduciary duty because it prioritizes the adviser's interests (commission income) over the client's best interest. Discretionary authority increases the risk of churning because the adviser can trade without prior approval for each transaction.

A is incorrect because there is no regulatory maximum number of trades for discretionary accounts. the standard is whether trading is suitable and in the client's best interest. C is incorrect because excessive trading is a compliance violation requiring remediation and potential disciplinary action, not automatic conversion to non-discretionary status. D is incorrect because discretionary accounts can operate with commission-based compensation, though this creates conflicts requiring disclosure and careful monitoring to prevent churning.

C is correct (the EXCEPT answer). This scenario describes time and price discretion only. the client has specified the Action (buy), Asset (Amazon), and Amount (500 shares), leaving only the execution timing to the adviser. Time and price discretion does NOT require written authorization because the adviser is not choosing what to trade or how much.

A requires written authorization: the client specified the general category (large-cap tech) but the adviser must choose the specific Asset (Microsoft vs. Apple). B requires written authorization: the adviser is determining the Amount (200 vs. 100 shares) without client approval. D requires written authorization: the adviser is making multiple discretionary decisions. Action (sell bonds, buy equity), Asset (which equity ETF), and Amount (how much). all without prior client approval for this specific transaction.

B is correct. Statements 1, 2, and 4 are accurate requirements for discretionary accounts.

Statement 1 is TRUE: Written authorization is required for discretionary authority. For investment advisers under NASAA rules, oral authorization is acceptable for the first 10 business days after the initial discretionary trade, but written authorization must be obtained within that timeframe. For broker-dealers, written authorization is required BEFORE any discretionary trading. The statement acknowledges both approaches.

Statement 2 is TRUE: All trades in discretionary accounts must meet suitability requirements based on the client's investment objectives, risk tolerance, financial situation, and time horizon. Discretionary authority does not exempt the adviser from suitability obligations. in fact, it heightens them.

Statement 3 is FALSE: There is no requirement to notify FINRA when establishing discretionary authority. Investment advisers are regulated by the SEC or state regulators, not FINRA (which regulates broker-dealers). Additionally, discretionary authority is documented in the advisory agreement and Form ADV, not reported to regulators within specific timeframes.

Statement 4 is TRUE: Investment advisers owe fiduciary duty to all clients, and this duty is heightened in discretionary accounts where the adviser has full control over trading decisions. The adviser must demonstrate that each discretionary trade serves the client's best interest.