Discretion ... a definition

Recall that GIPS(R) (Global Investment Performance Standards) has a fundamental rule that states "all actual, fee paying, discretionary portfolios must be included in at least one composite." Much of this is pretty simple:

• "actual": a real account; exclude back-tested results, model portfolios, and hypothetical portfolios (you can show non-actual as supplemental information)
• "fee paying": an advisory fee is paid to the manager (you can include non-fee paying, with additional disclosures)

"Discretionary" is a difficult and oft confusing term.

Since we typically think of it in light of legal discretion, this is often where firms stop. However, we're talking beyond the realm of legal; legal is assumed (that is, the firm has the ability to execute trades on behalf of the client). We're talking "GIPS" discretion. And so, WHAT DOES THIS MEAN?

I am preparing for The Spaulding Group's upcoming GIPS Fundamentals workshops and have come up with the following:

• Portfolios for which the firm is able to execute their strategy
• Portfolios whose composition and returns are representative of the composite’s strategy
• Portfolios for which the clients have not imposed restrictions or requirements that impede the manager from fully executing their strategy, such that the results will be representative of the strategy

I think nondiscretion is easier to define:

• Portfolios that have restrictions such that the manager isn't able to fully execute their strategy
• Portfolios whose composition and returns are not representative of the given strategy.

They're essentially mirror images of one another, though I tend to feel more comfortable defining nondiscretion, though I think what I have offered here works. What do you think? Please comment below.