Table of Contents
SERIES 7 | SERIES 24 | SERIES 9/10 | FINANCIAL REGULATION COURSES
FINRA Rule 3260 governs discretionary accounts — customer accounts in which a member firm or registered representative has been granted the authority to make investment decisions and execute transactions without obtaining the customer's prior approval for each individual trade.
The rule does three distinct things simultaneously: it prohibits excessive trading in accounts where discretionary power exists, it establishes the conditions that must be satisfied before any discretionary power may be exercised, and it requires prompt written approval and frequent supervisory review of all discretionary transactions.
Together these three provisions form the regulatory architecture that distinguishes a legitimate discretionary account arrangement — built on documented customer consent and ongoing supervisory oversight — from the unauthorized trading and churning that represents one of the most persistent and damaging forms of registered representative misconduct in the securities industry.
Rule 3260 sits within the 3200 responsibilities relating to associated persons subsection of the 3000 series. It superseded NASD Rule 2510 — Discretionary Accounts — which contained substantively identical provisions, when the consolidated FINRA rulebook took effect.
The most recent amendment was SR-FINRA-2019-009, effective May 8, 2019, which refined the time-and-price discretion exception to clarify its application to institutional accounts acting on a not-held basis pursuant to valid Good-Till-Cancelled instructions. The rule's core provisions have remained stable across all amendments, reflecting the fundamental and enduring nature of the investor protection concerns they address.
Rule 3260(a) prohibits any member from effecting, in any account over which the member or any agent or employee is vested with discretionary power, transactions of purchase or sale that are excessive in size or frequency in view of the financial resources and character of the account. This provision is the rule's anti-churning mechanism, and it operates independently of whether the customer has consented to discretionary trading. A customer's grant of discretionary authority does not authorize a registered representative to trade excessively — the consent is to discretionary decision-making, not to a volume of transactions that exceeds what the account's financial resources and investment character can justify.
Churning — the practice of executing transactions in a customer's account primarily to generate commissions rather than to further the customer's investment objectives — is among the most serious and most frequently prosecuted forms of registered representative misconduct. It causes harm in two compounding ways: the commissions generated by excessive trading directly reduce account value, and the high turnover of positions may produce tax consequences and transaction costs that further erode the customer's returns. In a commission-based account, every transaction generates revenue for the registered representative regardless of whether it benefits the customer, creating a structural conflict of interest that Rule 3260(a)'s excessive transaction prohibition is specifically designed to constrain.
The standard for what constitutes excessiveness — in size or frequency in view of the financial resources and character of the account — is deliberately contextual rather than mechanical. A trading frequency that is entirely appropriate for a large, actively managed institutional account may be grossly excessive for a small retail account held by a retiree with conservative investment objectives. Examiners and arbitrators assessing excessive trading claims consider a range of quantitative and qualitative factors, including the account's annual turnover rate, the cost-to-equity ratio representing the percentage return the account must generate simply to break even on trading costs, the customer's stated investment objectives, and the financial resources available in the account relative to the size of individual transactions. FINRA's sanction guidelines for churning reflect the severity of the violation, with sanctions ranging from significant fines and suspensions to industry bars in cases involving systematic exploitation of multiple customers.
The prohibition in Rule 3260(a) operates alongside — and is reinforced by — the suitability and care obligation framework of FINRA Rule 2111 and Regulation Best Interest under SEC Rule 15l-1. Under Regulation Best Interest, a broker-dealer or associated person making a recommendation to a retail customer must act in that customer's best interest, which expressly requires considering the costs of recommended transactions and the reasonably available alternatives. An excessive trading pattern in a discretionary account violates both Rule 3260(a)'s direct prohibition and the care obligation of Regulation Best Interest applied to each individual discretionary investment decision. For institutional accounts, Rule 2111's quantitative suitability standard — requiring that a series of recommended transactions be suitable for the customer in light of their investment profile — provides the parallel framework.
Rule 3260(b) establishes the two conditions that must both be satisfied before any member or registered representative may exercise discretionary power in a customer's account. The first condition is prior written authorization from the customer to a stated individual or individuals. The second is written acceptance of the account by the member, evidenced by the member or a designated partner, officer, or manager acting in accordance with FINRA Rule 3110.
The prior written authorization requirement is strict and unambiguous. Verbal authorization — however clearly expressed, however well documented through notes or recordings, however undisputed by the customer — does not satisfy Rule 3260(b). FINRA enforcement actions have resulted in fines and suspensions in cases where registered representatives exercised discretion with the customer's full knowledge and apparent approval but without the required written authorization. The reasoning reflects the rule's prophylactic design: written authorization creates an unambiguous record that protects both the customer and the firm. Without it, disputes about the scope and existence of authority become factual contests that the written requirement is designed to eliminate.
The authorization must name stated individuals — it cannot be a generic grant of authority to the firm as a whole or to whoever happens to manage the account at any given time. The customer is authorizing specific identified persons to make trading decisions in their account, and the authorization must be specific enough to identify who those persons are. When a registered representative who holds a customer's discretionary authorization leaves the firm or is reassigned, the original authorization does not automatically transfer to the replacement representative — a new written authorization naming the new individual is required before that person may exercise discretionary power.
The member's written acceptance of the account — the second condition — reflects the firm's independent obligation to evaluate and approve discretionary account arrangements before they commence. This is not a ministerial signature requirement. The firm's acceptance, evidenced in writing by the member or a designated principal acting in accordance with Rule 3110, represents the firm's affirmative determination that the discretionary arrangement is appropriate for this customer, that the designated individual is qualified and supervised to exercise the authority being granted, and that the firm's supervisory systems are adequate to monitor the discretionary trading that will follow. A firm that accepts discretionary accounts without genuine supervisory review of their appropriateness has failed both the Rule 3260(b) acceptance requirement and its broader supervisory obligations under Rule 3110.
Rule 3260(c) imposes the ongoing operational obligations that apply once a discretionary account is established. The member or duly designated person must approve in writing each discretionary order promptly after it is entered, and must review all discretionary accounts at frequent intervals to detect and prevent transactions that are excessive in size or frequency relative to the financial resources and character of the account.
The prompt written approval requirement for each discretionary order is distinct from the account-level acceptance required by Rule 3260(b). Account acceptance is a one-time event at account opening; order-by-order written approval is an ongoing obligation that applies to every discretionary transaction executed in the account. This means that the supervisory principal or designated reviewer must specifically approve each discretionary order — not merely receive a periodic report of discretionary activity after the fact, and not merely conduct periodic account reviews that happen to cover a batch of transactions executed weeks earlier. The approval must be prompt and it must be reflected in writing, whether through an electronic approval workflow, a principal's initialing of the order ticket, or another contemporaneous written record.
The frequent intervals review requirement gives firms some flexibility in determining review frequency but establishes an unambiguous supervisory obligation: discretionary accounts cannot simply be approved at opening and then left to run without ongoing supervisory attention. FINRA's examination program focuses on whether firms' written supervisory procedures under Rule 3110 specify a review frequency for discretionary accounts, whether that frequency constitutes a genuinely meaningful supervisory mechanism given the volume and nature of discretionary activity in those accounts, and whether the reviews being conducted are substantive evaluations of trading patterns rather than nominal sign-offs. Firms that review discretionary accounts quarterly while permitting high-frequency trading within those accounts have likely failed the frequent intervals standard, as the review mechanism is too infrequent to detect the excessive trading that Rule 3260(c)'s review obligation is specifically designed to identify and prevent.
The explicit connection of the Rule 3260(c) review obligation to detecting and preventing excessive transactions links the ongoing supervisory requirement directly back to the substantive prohibition in Rule 3260(a). The review is not merely an administrative exercise — its purpose is to identify churning before it has caused the full extent of damage it would cause without intervention, and to give supervisory principals the information they need to take corrective action when a registered representative's discretionary trading pattern shows signs of becoming excessive.
Rule 3260(d)(1) establishes an important practical exception that affects how the rule applies to a common form of short-term registered representative judgment. The rule does not apply to discretion limited to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed. When a customer tells their registered representative to buy 500 shares of a particular stock today at the best available price, and the registered representative uses their judgment about the optimal moment within the trading day to place that order, they are exercising time-and-price discretion — not the full discretionary authority that Rule 3260(b)'s written authorization requirement addresses.
The time-and-price exception is, however, narrowly bounded. The authority to exercise time-and-price discretion is considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific written contrary indication signed and dated by the customer. If a customer gives a time-and-price instruction at 10 a.m. and the registered representative has not executed the order by market close, the authority lapses — the representative cannot carry the time-and-price discretion forward to the following day without a new specific written instruction from the customer extending it. Any exercise of time-and-price discretion must also be reflected on the order ticket, creating a contemporaneous record that the discretion being exercised was limited to time and price rather than constituting full security-selection discretion that would require written authorization under Rule 3260(b).
The time-and-price limitation does not apply to institutional accounts as defined in FINRA Rule 4512(c) acting pursuant to valid Good-Till-Cancelled instructions issued on a not-held basis. An institutional customer who issues a GTC not-held order is directing the firm to execute the trade at any time, without holding the firm to a specific price, effectively granting ongoing time-and-price authority for the duration of the GTC instruction. FINRA recognized that imposing an end-of-day expiration on time-and-price discretion in this institutional context would be inconsistent with the operational reality and legitimate business practice of institutional GTC not-held order management.
Rule 3260(d)(2) provides a second exception for bulk exchanges at net asset value of money market mutual funds using negative response letters. This exception addresses a specific operational scenario in the mutual fund context where a broker-dealer needs to move customer assets from one money market fund to another — for example, following a fund merger, a change of clearing members, or a change of fund used in a sweep account — without obtaining affirmative consent from every individual customer. The exception is available only under strict conditions: the bulk exchange must be limited to the specified qualifying scenarios, the negative response letter must contain a tabular comparison of fees charged by each fund, must include a comparative description of investment objectives and a prospectus of the fund to be purchased, and the negative response feature may not be activated until at least thirty days after the letter was mailed. The thirty-day window ensures customers have adequate time to review the proposed exchange and opt out if they prefer not to participate.
Rule 3260(b)'s written authorization and firm acceptance requirements define the boundary between legitimate discretionary trading and unauthorized trading. A registered representative who executes transactions in a customer's account without the customer's knowledge or consent, without written authorization naming the representative, or without the firm's written acceptance of a discretionary arrangement, is engaging in unauthorized trading — one of the most serious conduct violations in the FINRA rulebook, directly implicating FINRA Rule 2010's standards of commercial honor and FINRA Rule 2020's prohibition on manipulative and deceptive conduct.
FINRA enforcement cases involving unauthorized trading under Rule 3260 have consistently resulted in significant sanctions including suspension and bar. Cases have involved registered representatives who backdated written authorization documents to create the appearance of prior consent, representatives who traded in accounts after their authorization had effectively lapsed due to the customer's changed circumstances or explicit withdrawal of consent, and representatives who treated verbal or implied consent as sufficient to satisfy the written authorization requirement. The written authorization requirement's strictness is not a technicality — it reflects the fundamental principle that a customer's property may not be deployed in investment transactions without their unambiguous, documented consent.
FINRA Rule 3110's written supervisory procedures requirements apply with particular intensity to discretionary accounts. Firms must have WSPs that specifically address the authorization requirements of Rule 3260(b), the order-by-order approval process required by Rule 3260(c), the frequency and methodology of discretionary account reviews, the standards for identifying and responding to potentially excessive trading patterns, and the procedures for ensuring that time-and-price discretion is properly documented and appropriately limited. The supervisory control testing required by FINRA Rule 3120 must include periodic review of discretionary account compliance, including sampling of order approvals, review records, and authorization documentation.
FINRA's examination program consistently identifies discretionary account supervision as an area of focus, and the 2025 and 2026 Annual Regulatory Oversight Reports both highlighted excessive trading and unauthorized trading as ongoing examination priorities. Common examination findings in the discretionary account context include written supervisory procedures that describe a review process without implementing one in practice, review intervals that are too infrequent to detect emerging excessive trading patterns, order-by-order approval records that are nominal rather than substantive, and instances where time-and-price discretion has been applied beyond the end-of-day limit without a written customer extension. The fee-based account clarification noted in Regulatory Notice 15-22 — that the excessive trading prohibition in Rule 3260(a) does not apply to accounts charged only a flat fee or an asset-based fee rather than per-transaction commissions — reflects FINRA's recognition that the churning conflict of interest does not arise where the firm's compensation is not transaction-based, though all other Rule 3260 provisions continue to apply to fee-based discretionary accounts.
FINRA Rule 3260 is among the highest-frequency examination topics on the Series 7 General Securities Representative examination, where it appears in the context of account types, discretionary trading authority, unauthorized trading, and churning. The Series 24 General Securities Principal and Series 9 and Series 10 General Securities Sales Supervisor examinations test the rule in substantial depth, covering supervisory obligations, the order approval process, review frequency requirements, and the firm acceptance requirement. The rule is also tested on the Series 66 Uniform Combined State Law Examination in the context of broker-dealer conduct obligations.
The key points to retain are these: FINRA Rule 3260 prohibits excessive transactions — in size or frequency relative to the financial resources and character of the account — in any account where discretionary power exists, targeting the churning practice of generating commissions through excessive trading at the customer's expense; no member or registered representative may exercise discretionary power in a customer's account unless the customer has given prior written authorization naming the specific individual or individuals authorized, and the member has accepted the account in writing through a designated principal acting in accordance with Rule 3110 — verbal authorization does not satisfy this requirement under any circumstances; once a discretionary account is established, the designated principal must approve in writing each discretionary order promptly after entry and must review all discretionary accounts at frequent intervals to detect and prevent excessive trading; the time-and-price exception permits registered representatives to use judgment about the price and timing of execution for a customer-specified security and quantity without triggering the full written authorization requirement, but that authority expires at end of business day absent a specific written customer extension, except for institutional accounts acting pursuant to valid GTC not-held instructions; the bulk exchange exception permits negative-response-letter exchanges of money market funds in limited qualifying scenarios subject to strict content, comparison, and timing conditions; unauthorized trading — executing transactions without written authorization or firm acceptance — constitutes a direct Rule 3260 violation and also implicates FINRA Rules 2010 and 2020; and written supervisory procedures under Rule 3110 must specifically address all aspects of discretionary account management including authorization documentation, order approval, review frequency, excessive trading detection, and the time-and-price discretion limitations.
