ExamsPracticeBlogGlossary

Key Takeaways

  • Discretionary accounts require written authorization from the client.
  • Power of attorney grants authority to act on client's behalf.
  • Margin accounts require separate disclosure and agreement.
  • Options accounts need additional approval and disclosures (OCC Characteristics and Risks).
  • Principal approval is required for new accounts and certain transactions.
  • Supervisory procedures must be reasonably designed to detect violations.
  • Client complaints must be investigated and responded to promptly.
  • Account activity must be reviewed periodically by supervisors.
Last updated: December 2025

Account Management and Supervision

Proper account management and supervision are essential for regulatory compliance and client protection.

Account Types and Authorization

Discretionary Authority

Discretionary authority allows the adviser to make investment decisions without prior client approval for each trade.

RequirementDetails
Written authorizationClient must authorize in writing
Scope definedWhat discretion covers
Trading authorizationUsually via limited power of attorney
Account agreementPart of advisory contract

Full vs. Limited Discretion

TypeAuthority
Full discretionAll investment decisions without consulting client
Limited discretionSpecific parameters (e.g., only certain securities)
Time/price discretionOnly timing and price of execution (NOT full discretion)

Power of Attorney

TypeAuthority Granted
Limited POATrading authority only
Full POATrading and withdrawal authority
Durable POAContinues during incapacity
Non-durable POAEnds if principal becomes incapacitated

Margin Accounts

Disclosure Requirements

Before opening a margin account:

DisclosureContent
Margin agreementTerms and conditions
Margin risk disclosureRisks of margin trading
Credit termsInterest rates and charges
Hypothecation agreementFirm's rights to client securities

Key Margin Rules

RuleRequirement
Regulation TInitial margin (50%)
FINRA minimumMaintenance margin (25%)
House requirementsFirm may require more
Margin callsMust be met promptly

Margin Suitability

Not all customers are suitable for margin:

  • Consider financial resources
  • Assess risk tolerance
  • Evaluate investment experience
  • Determine understanding of margin risks

Options Accounts

Approval Requirements

StepRequirement
Options agreementCustomer signature required
OCC disclosureCharacteristics and Risks of Options
Principal approvalROP must approve account
Options level assignmentBased on experience and resources

Options Trading Levels

LevelPermitted Strategies
Level 1Covered calls, protective puts
Level 2Long calls and puts
Level 3Spreads
Level 4Naked options (highest risk)

OCC Disclosure Document

Characteristics and Risks of Standardized Options must be:

  • Delivered at or before account approval
  • Updated when available
  • Acknowledged by customer

Supervisory Requirements

Principal Responsibilities

DutyDescription
Account approvalReview and approve new accounts
Transaction reviewMonitor trading activity
Correspondence reviewSupervise communications
Compliance oversightEnsure rule compliance

Written Supervisory Procedures (WSP)

Firms must maintain WSPs that are:

  • Reasonably designed to prevent violations
  • Updated for regulatory changes
  • Communicated to all employees
  • Enforced consistently

Required Reviews

ActivityReview Frequency
New accountsBefore trading begins
Options accountsBefore approval
TransactionsDaily exception-based
CorrespondencePeriodic sampling
AdvertisingPre-use approval

Complaint Handling

Complaint Definition

A complaint is any written grievance involving:

  • Sales practices
  • Account activity
  • Business conduct
  • Firm personnel

Response Requirements

ActionTimeline
Acknowledge receiptPromptly
InvestigateThoroughly and promptly
Respond in writingWithin 30 days recommended
Document resolutionMaintain records

Recordkeeping

RecordRetention
Complaint file4 years (FINRA)
Investigation notesPart of complaint file
Resolution documentationPart of complaint file
Customer correspondence3-6 years depending on type

Account Documentation

New Account Documentation

DocumentPurpose
New account formCustomer information
Account agreementTerms and conditions
Margin agreementIf margin authorized
Options agreementIf options authorized
Discretionary authorizationIf discretion granted

Ongoing Documentation

DocumentPurpose
Trade confirmationsRecord of each transaction
Account statementsMonthly/quarterly summaries
CorrespondenceClient communications
Suitability notesRationale for recommendations

Special Account Considerations

Joint Accounts

TypeOwnership
Joint Tenants with Rights of Survivorship (JTWROS)Survivor takes all at death
Tenants in Common (TIC)Each owns specified share
Community PropertyMarried couples in CP states

Trust Accounts

  • Open in trust's name
  • Require trust documents
  • Trustee has signing authority
  • Must act according to trust terms

Corporate Accounts

  • Corporate resolution required
  • Authorized signers identified
  • EIN/tax ID needed
  • May require certified articles

Exam Tip: Discretionary authority requires WRITTEN authorization. Options accounts need OCC disclosure delivered BEFORE account approval. Complaints must be in WRITING to be regulatory complaints. Margin accounts require special disclosures about risk.

Loading diagram...
Account Type Authorization Requirements
Options Trading Levels by Risk
Test Your Knowledge

Discretionary trading authority requires:

A
B
C
D
Test Your Knowledge

Before opening an options account, a customer must receive:

A
B
C
D
Test Your Knowledge

For FINRA regulatory purposes, a customer complaint must be:

A
B
C
D
Test Your Knowledge

Time and price discretion over an order:

A
B
C
D
Congratulations!

You've completed this course

Continue exploring other exams

Get free exam tips·