Series 62

AAA

Customer Accounts - Trading Authorization

From time to time, people other than the beneficial owner of the account may be authorized to enter orders for the account. All discretionary authority must be evidenced in writing for the following accounts:

  • Discretionary account
  • Custodial account
  • Fiduciary account

Operating a Discretionary Account

A discretionary account allows the registered representative to determine the following, without consulting the client first:

  • The asset to be purchased or sold
  • The amount of the securities to be purchased or sold
  • The action to be taken in the account, whether to buy or sell

The principal of the firm must accept the account and review it more frequently to ensure against abuses. The customer is required sign a limited power of attorney that awards discretion to the registered representative. The limited power of attorney is good for up to three years and the customer is bound by the decisions of the representative, but may still enter orders for themselves. Once discretion is given to the representative, they may not in turn give discretion to another party. If the representative leaves the firm or stops managing the customer’s account, the discretionary authority is automatically terminated. A full power of attorney allows an individual to deposit and withdraw cash and securities from the account. A full power of attorney is usually not given to a registered representative. A full power of attorney is more appropriate for fiduciaries such as a trustee, custodian, or a guardian. The power of attorney will be revoked upon the death or incapacitation of the grantor. A durable power of attorney will survive the incapacitation of the grantor. If a FINRA or MSRB broker dealer has a control relationship with an issuer of securities, the customer must be informed of the relationship and must give specific authorization for the purchase of the securities.

Managing Discretionary Accounts

All discretionary accounts must have the proper paperwork kept in the account file and must have:

  • Every order entered marked discretionary, if discretion was exercised by the representative
  • Every order approved promptly by a principal
  • A designated principal to review the account
  • A record of all transactions

Third Party and Fiduciary Accounts

A fiduciary account is one that is managed by a third party for the benefit of the account holder. The party managing the account has responsibility for making all of the investments and other decisions relating to the account. The individual with this responsibility must do as a prudent person would do for their self and may not speculate. This is known as the “prudent man rule”. Many states have an approved list of securities known as the “legal list” that may be purchased by fiduciaries. The authority to transact business for the account must be evidenced in writing by a power of attorney. The fiduciary may have full power of attorney, also known as full discretion, under which they may purchase and sell securities, as well as withdraw cash and securities from the account. Under a limited power of attorney or limited discretion, they may only buy and sell securities and may not withdraw assets. The fiduciary has been legally appointed to represent the account holder and may not use the assets in the account for their own benefit. They may, however, be reimbursed for expenses incurred in connection with the management of the account. Examples of fiduciaries include:

  • Administrators
  • Custodians
  • Receivers
  • Trustees
  • Conservator
  • Executors
  • Guardians
  • Sheriffs / Marshals

When opening a third party or fiduciary account, the registered representative is required to obtain documentation of the individual’s appointment and authority to act on behalf of the account holder. Trust accounts require that the representative obtain a copy of the trust agreement. The trust agreement will state who has been appointed as the trustee and any limitations on the trust’s operation. Most trusts may only open cash accounts and may not purchase securities on margin, unless specifically authorized to do so in the agreement. When opening an account for a guardian, the representative must obtain a copy of the court order appointing the guardian. The court order must be dated within 60 days of the opening of the account. If the court order is more than 60 days old, the representative may not open the account until a new court order is obtained. Guardians are usually appointed in cases of mentally incompetent adults and orphaned children.

Introduction
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