A customer trusts your judgment and asks you to handle everything. That request alone gives you neither permission to choose trades nor permission to safeguard the customer's securities personally.
Customers need their investments protected while someone else processes their transactions. A broker-dealer (BD) is the securities firm that conducts transactions for customers or for its own account. An agent is an individual who represents the firm in securities business. Your authority as an agent differs from the firm's responsibility for holding customer assets.
Custody means holding or safeguarding customer money, securities, or transfer documents. A custodian performs that safekeeping function. Under the North American Securities Administrators Association (NASAA) model rule on dishonest or unethical business practices, an agent may not serve as the customer's custodian. The prohibition covers money, securities, and an executed stock power. NASAA model rules bind a jurisdiction only when and as that jurisdiction adopts them.
An executed stock power is a signed document used to transfer ownership of stock separately from the stock certificate. Holding it can give someone practical control over a transfer.
Common mistakes
- Treating one trade as an exception. “Choose one security today; I will sign tomorrow” still requires prior written discretion. One transaction is not an oral-discretion allowance.
- Reading one day as 24 hours. Monday's 2 p.m. grant does not ordinarily last until Tuesday at 2 p.m. The relevant endpoint is Monday's business-day end.
- Using the customer's signature alone. A signed discretionary agreement does not replace the firm's written account acceptance. Both must precede the first exercise of substantive discretion.
Bottom line
- An agent may not act as custodian for customer money, securities, or an executed stock power.
- Firms must segregate customer free securities and safekeeping securities; improper asset use and patterns of unjustifiable delivery or payment delays are prohibited.
- Substantive discretion requires prior written customer authority and written firm acceptance, followed by prompt written order approval and frequent account review.
- Noninstitutional time-and-price authority ends that business day unless extended by signed, dated customer writing; its exercise belongs on the order ticket.
Exam shortcut
Underline the action verb: hold, choose, execute, or recommend. It identifies the first rule to test. For a trading instruction, fill three blanks: security, amount, buy or sell. A blank left for you signals substantive discretion. When only timing or price remains, circle the business day and look for a signed, dated extension before allowing later execution.
The full lesson (about 3,653 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- H20
Browse all free Series 63 lessons or jump into free Series 63 practice questions.