Approvals and Controls for a Discretionary Client Account

A discretionary account lets an intermediary make investment decisions for a client without asking for approval for every transaction. That authority must be clear, documented and controlled; a normal brokerage mandate is not automatically a discretionary mandate.

Obtain clear written authority

Paragraph 7.1 of the SFC Code of Conduct requires written authorization from the client before the licensed or registered person operates a discretionary account. The client agreement should clearly state the terms and conditions governing the discretion, including the scope of authority and any investment parameters. Oral consent or a broad account-opening form should not be treated as a substitute for the required written mandate.

Senior-management approval

The firm should ensure a discretionary account is approved by senior management. Approval should be meaningful and traceable to the firm's governance process, not merely an administrative signature without review. The firm should identify who approved the mandate and when, and retain the documentation required by its policies and applicable rules.

Ongoing supervision

• Keep the discretionary agreement and client instructions accessible to staff responsible for the account.
• Check that trades remain within the client's mandate and any stated restrictions.
• Monitor activity for conflicts, unusual transactions or activity inconsistent with the client's objectives.
• Provide confirmations and statements and arrange senior-management review as required by the Code.
• Review the account periodically and update authority when the client's circumstances or instructions change.

When authority changes

A client may change or revoke authority in accordance with the agreement and applicable rules. The firm should communicate the effect of the change to staff, prevent further trading outside authority and preserve a clear record. Discretion does not remove suitability, best-interest, conflict-management or recordkeeping responsibilities that otherwise apply.

Written authority defines the discretion

Before operating a discretionary account, the firm should obtain the client’s written authorization and a written agreement that identifies the scope and limits of the authority. The agreement should explain what may be traded, investment objectives and restrictions, who can give instructions, and how the client can revoke or vary authority. A broad phrase such as “manage my investments” may not resolve whether the firm can choose investments, timing, size or leverage.

Distinguish discretionary from advisory and execution-only service

In an advisory account, the client ordinarily decides whether to accept a recommendation; in an execution-only account, the client supplies the trade instruction; in a discretionary account, the firm may decide within its mandate without seeking trade-by-trade approval. The actual conduct controls, not the account label. If staff routinely place trades without specific instructions, the account may be discretionary even if documentation calls it “advisory.”

Senior management approval and designation

The Code calls for senior-management approval before a discretionary account is operated. The firm should record the approval and designate the account as discretionary in the client agreement and internal records. Approval should confirm that the mandate is understood, personnel are authorized and systems can monitor activity. A manager’s informal awareness after the account opens is not a substitute for the required approval process.

Suitability to mandate and client circumstances

The discretionary mandate should be consistent with the client’s objectives, financial position, investment experience, risk tolerance and stated restrictions. The portfolio manager should monitor concentration, liquidity, leverage and product risks against the mandate. A trade may be within the legal scope of discretion but still be unsuitable or unfair if it conflicts with the client’s agreed objectives. Review the profile when material facts change.

Conflicts, personal dealing and allocation

Discretion creates conflicts around commissions, affiliated products, proprietary positions, allocation among accounts and the manager’s personal transactions. Apply client-priority, conflict-disclosure and fair-allocation controls. Where several accounts receive a block trade, allocate under a method set in advance and document exceptions. Do not use discretionary authority to route business for the firm’s benefit at the client’s expense.

Ongoing monitoring and review

The firm should review transactions and portfolios against mandate limits and investigate exceptions promptly. Senior management or compliance should sample statements, order records, product concentration and performance patterns. Unusual turnover, repeated losses, frequent related-party products or inactivity inconsistent with the objective may signal control failures. Periodic client contact can confirm that objectives and restrictions remain current.

Changing or ending the authority

If the client changes the mandate, the firm should obtain and record the updated instructions before relying on them. If authority is revoked, stop discretionary trading promptly and communicate how open orders and unsettled transactions will be handled. Retain the effective date, notice, system changes and any remaining client instructions. Do not infer continuing discretion from the firm’s historic trading pattern.

Exam method

Check for written authorization, written discretionary agreement, senior-management approval, clear account designation, suitable mandate controls, ongoing monitoring and proper revocation. Determine whether the firm actually exercised discretion. Distinguish approval to operate the account from client consent to a specific transaction and from the firm’s separate suitability and conduct duties.

Obtain authority before exercising discretion

A discretionary mandate must make clear that the client has authorized the intermediary to make investment decisions without obtaining prior approval for each transaction. A general investment objective, risk questionnaire or permission to transmit orders is not automatically a discretionary mandate. The authority should identify the account and scope of discretion, the products or restrictions that matter, and who may exercise the authority for the firm.

Before the first discretionary transaction, the firm should complete the required client suitability and account-opening steps, explain the mandate and risks, and obtain the required written client consent under the applicable Code provisions. The client should receive a copy or confirmation of the terms. If the arrangement is changed materially, the firm should obtain and retain refreshed authority rather than rely on a broad clause that no longer describes the service.

Maintain a traceable investment rationale

Discretion does not mean unrecorded judgment. A firm should be able to reconstruct why an order was placed, who made the decision, which mandate limits were checked and what information was considered. Useful records include investment instructions, portfolio reviews, order tickets, communications, exception approvals and post-trade checks. Those records help demonstrate that the account was managed within its agreed objectives and not used to solve a firm inventory or staff trading problem.

Supervisory review should look for concentration, turnover, unexplained style drift, unsuitable products, excessive fees and transactions inconsistent with the client’s stated restrictions. A written exception process should specify who can approve an urgent departure, how it is recorded and how quickly it is reviewed.

Exam takeaway

Look for written client authorization, a written agreement that defines the mandate, senior-management approval and ongoing monitoring. The account's discretionary label alone does not establish proper authority.