A fiduciary is a person other than the owner who is legally appointed and authorized to act in the stead of a beneficiary. In most cases, the fiduciary should provide documentation of his or her authority. The fiduciary initiates trades, manages the account, approves distributions and makes whatever other decisions may be necessary to maintain the fiduciary account. Investments are made in the owner's best interests, but the owner does not have legal control over them.
The fiduciary is bound by Prudent Man Rules (also known as Prudent Person Rules) - that is, he or she must make decisions that are compatible with the account's investment objectives and that are in the best interests of the beneficiary. The fiduciary may not use the account for his or her own benefit; he or she can charge a reasonable fee for services, but cannot share in the account's profits. In some states, fiduciaries are also bound by the legal list of investments permitted by the state.
Fiduciaries include but are not limited to people performing the following roles:
- Trustee - administers a trust
- Custodian - manages a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account (discussed below)
- Guardian - handles an incompetent person's affairs or a minor's affairs until the minor reaches the age of majority
- Executor - manages the affairs of an estate
- Administrator - liquidates the estate of a person who dies without a will
- Conservator - acts for an incompetent person
- Receiver - handles the details of bankruptcies
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.
Rule 2510 of the Investment Company Act of 1940 regulates discretionary accounts. 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 will be included in the transaction. 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 XYZ but doesn\'t specify a price, your actions are not considered discretionary if you choose only when to buy the shares and how much to pay per share.
Discretionary accounts are regulated by specific rules:
- All discretionary orders must be identified as such at the time that 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, FINRA requires the designated supervisor or manager to review all trading activity frequently to prevent excessive trading activity in the account.
Cash and Margin Accounts
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