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👥 Customer Accounts · Lesson 5 of 8 · 5 min

Cash, Margin and Who Decides the Trade

📞 A rep says, 'I bought you 200 shares of XYZ this morning, you'll love it.' The customer never asked. Without written discretion, that trade is a violation.

💡 Key idea

Discretion = Asset, Action or Amount, and it needs prior written authorization. Time-and-price only is not discretion and expires at the end of the business day.

🧠 Why it matters

In a CASH account the customer pays in full. A MARGIN account lets the customer borrow from the firm and requires a signed margin agreement: the credit agreement (loan terms), the hypothecation agreement (securities pledged as collateral, required), and the loan consent (lending securities, optional). DISCRETION means the rep chooses any of the 3 A's: Asset, Action (buy/sell) or Amount. FINRA 3260 requires the customer's prior WRITTEN authorization, written acceptance by the firm, prompt written approval of each discretionary order by a principal, and regular review for excessive trading. Choosing only TIME and PRICE is not discretion: the customer picked the security, side and size. That time-and-price authority lasts only until the end of the business day, unless the customer signs a dated written instruction saying otherwise.

📈 In the real world

⏱️ Jordan, a fictional customer, calls at 10 a.m.: 'Buy 300 shares of ABC today, get me a good price.' The rep may choose when and at what price, without written discretion, but only until the end of that business day. Tomorrow the rep needs fresh instructions.

📌 Takeaways

  • Margin agreement: credit agreement, hypothecation (required), loan consent (optional)
  • Discretion (3 A's) needs prior written authorization and principal approval
  • Time-and-price authority ends at the end of the business day

📖 Terms in this lesson

Discretionary account: An account where the rep may choose the security, amount or action without asking first; it needs the customer's prior written authorization and firm acceptance.

Time and price discretion: Customer chooses the security, amount and action, leaving only timing or price to the rep; not discretion, and good for that day unless authorized in writing.

✅ Test yourself

Which part of the margin agreement is optional for the customer?
  1. Loan consent
  2. Credit agreement
  3. Hypothecation agreement
  4. Account application

Answer: A · Loan consent

The loan consent lets the firm lend the customer's securities and is optional. The credit agreement and hypothecation agreement are required to borrow on margin.

A customer tells the rep, 'Sell my 500 shares of DEF today when you think the price is best.' This is:
  1. An unauthorized trade that is prohibited
  2. A good-till-cancelled order
  3. Time and price authority, not discretion
  4. Discretion that needs written authorization

Answer: C · Time and price authority, not discretion

The customer chose the asset, action and amount; the rep picks only time and price, which needs no written discretionary authority. It expires at the end of the business day, so it is not GTC.

Under FINRA 3260, when must written discretionary authority be in place?
  1. Only before the first options trade
  2. When the first statement is mailed
  3. Before the first discretionary trade
  4. Within 10 days after the first trade

Answer: C · Before the first discretionary trade

Rule 3260 requires the customer's prior written authorization. Getting it after the trade, or only for some products, does not satisfy the rule.

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