The Tuesday Trade: When Verbal Authority Expires

Marcus Reed

So picture this. It is ten AM on a Monday morning. Sarah Jenkins, a registered rep at Redwood Securities, gets a phone call from Kevin Miller, one of her retail clients. Kevin wants in on SolarGen Technologies, ticker SGEN, which is currently trading at fifty dollars a share. He tells her, look, buy five hundred shares of SolarGen, but buy it, you know, whenever you think the price is right today or tomorrow. Now, Sarah does not have written discretionary authority over Kevin's account. But she knows the market, she thinks SGEN is on a downward trend, so she decides to hold the order. She waits. Sure enough, Tuesday morning, the stock drops to forty-six dollars a share. Sarah pulls the trigger, executes the purchase of five hundred shares, and boom, she just saved Kevin two thousand dollars. Sounds like a great day at the office, right? She did her job, used her expertise, saved the client money.

Marcus Reed

Well, let us look at this through the lens of securities regulations. Here is the question you might face on an exam. Which of the following statements best describes the regulatory status of the purchase executed on Tuesday? Let us go through the options. Option A, the purchase is compliant because Kevin specified the asset, action, and amount, meaning no written discretionary authority was required. Option B, the purchase is non-compliant because any form of discretion over price or timing requires prior written discretionary authorization from the customer and firm approval. Option C, the purchase is compliant because the customer's instructions created a verbal not held order that remains in effect until cancelled by the client. Or Option D, the purchase is non-compliant because verbal time and price discretion is only valid for the business day on which it was granted. I want you to actually pause for a second, think about Sarah, think about Kevin's instruction, and choose the answer you think holds up under the rules.

Marcus Reed

Okay, let us reveal the answer. The correct option is D. The trade is non-compliant because verbal time and price discretion is only valid for the business day on which it was granted. Now, why is that? To understand this, we have to look at what we call the Three A's. When an auditor or an exam question asks if a trade is discretionary, they look at three things: Asset, Action, and Amount. Did the client tell you the specific asset, which is SGEN? Yes. Did they tell you the action, to buy? Yes. And did they tell you the amount, five hundred shares? Yes. Because Kevin gave Sarah all Three A's, this is not a fully discretionary trade. She did not need a written power of attorney on file just to execute this. She was only given what we call time and price discretion. She got to choose when to buy and at what price.

Marcus Reed

But here is the catch, and this is where FINRA Rule thirty-two hundred and sixty comes down hard. Verbal authority to exercise time and price discretion will be considered to be in effect only on the business day on which it was granted. It is a one-day pass. That is it. The clock resets when the market closes on Monday. By holding that order over to Tuesday morning without getting a fresh verbal instruction from Kevin or having written discretionary authority, Sarah committed an unauthorized trade. It does not matter one bit that SGEN dropped to forty-six and she saved him two thousand dollars. In the eyes of the regulators, she broke the rules the moment Tuesday morning arrived and she still held that unexecuted order.

Marcus Reed

Let us look at why those other options fail. Option A is tempting because it correctly notes that she had the Three A's, but it completely ignores the calendar. Verbal authority does not roll over. Option B is too restrictive, claiming you always need written authority for price and timing. That is false; you can do it verbally, but only for that single day. And Option C suggests a verbal not held order can just hover out there indefinitely for a retail client, which is simply not true under the rules. Here is a quick memory aid to keep this straight on your exam: Time and price? Only today is nice. If they want it to go beyond today, they have to put it in writing.

Marcus Reed

Now, let us throw in a quick twist because exams love exceptions. What if Kevin was not a regular retail investor? What if he was representing a massive institutional account, like a mutual fund with tens of millions of dollars? Well, under the rules, if it is an institutional account, a verbal, not-held instruction actually can legally extend beyond a single day without written authorization. But for retail accounts like Kevin's, that clock is ticking, and at the end of the day, the authority is gone. Remember, time and price, only today is nice. Alright, that is a wrap for today. Keep focusing on the specifics, and I will talk to you next time.