Accounts for Minors
Member firms will not allow minors to open accounts in their own name, as they are not considered legally responsible and may void contracts at their discretion as a result. However, you will come across many accounts for minors as a registered representative, so you should understand them thoroughly.
There are two approaches to opening accounts for minors: UGMA/UTMA accounts and trust accounts. Accounts for minors are usually opened under the Uniform Gifts to Minors Act (UGMA) or the newer version of this law, the Uniform Transfers to Minors Act (UTMA), so we will focus on these.
Under the UGMA, an adult donor gifts an irrevocable sum of cash or securities to a minor and appoints an adult to act as custodian for the minor. There are no limitations to the amount of the gifts given; however, once they are assigned to the minor's account, they cannot be revoked and become the full property of the minor.
There can only be one custodian and one minor per UGMA or UTMA account. The donor may act as the custodian if he or she so chooses. In any case, the account is registered in the name of the custodian as custodian for the benefit of the minor, but the account is opened under the minor's Social Security number. As such, the minor is responsible for income taxes generated from the account. The custodian is responsible for maintaining prudent investment standards.
The custodial relationship is terminated when the minor reaches the age of majority - an age that is determined by individual state law. At that time, the custodian transfers the securities to the beneficial owner's individual name.
Exam Tips and Tricks
One of the most common types of accounts you will deal with as a registered rep is the UGMA/UTMA custodial account. Knowing the ins and outs of these accounts will go a long way on the Series 6 exam and beyond.
Power of Attorney
To allow a person not named on an account to have trading authority, the customer must file written authorization with the broker-dealer that gives the person access to the account. The degree of access will determine whether a full or limited power of attorney is necessary.
- Full Power of Attorney: Full power of attorney allows the non-owner of an account to make investment decisions for the account owner and to deposit and withdraw cash and securities. Trustees, guardians and custodians will often be given full power of attorney.
- Limited Power of Attorney: A limited power of attorney grants partial, not total, control over an account. The document itself will specify the level of access accorded to the non-owner of the account.
A discretionary account gives trading authority to the registered representative. For the purposes of this study guide, discretion is the authority to decide what security to buy or sell, and how many units or shares. This authority is granted only after the customer has assigned written authority or a limited power of attorney with the broker-dealer. Once authorization has been approved, the rep may enter trades without consulting the account owner. The customer is legally bound to any trading decisions made by the registered representative.
Discretion does not refer to the timing and price of investments. If a customer asks for 100 shares of Poohbonic Tigger Technology but doesn\'t specify a price, then your actions are not considered discretionary if you choose when to buy PTT and how much to pay per share.
- All discretionary orders must be identified as such at the time a trade is executed.
- A partner or officer of the broker-dealer must approve each discretionary trade in writing.
- The representative may not churn the account, which means that no excessive trading - relative to the account size and the client's investment objectives - may occur.
- With this in mind, the FINRA requires the designated supervisor or manager to review all trading activity frequently to prevent excessive trading activity in the account.
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