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


Related Articles
  1. Economics

    What is a Fiduciary?

    A fiduciary is a person who acts on behalf of another person (or people) to manage assets.
  2. Professionals

    Meeting Your Fiduciary Responsibility

    Being a fiduciary comes with a certain level of responsibility. These four steps will reduce your liability when managing other people's money.
  3. Credit & Loans

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
  4. Savings

    Explaining Checking Accounts

    A checking account is an account at a financial institution, usually a bank, that allows for deposits and withdrawals.
  5. Options & Futures

    Brokers and Online Trading: Accounts And Orders

    Types of Accounts Depending on what type of securities you hold, there are four major choices you have when opening an account: Cash Account: The basic account where you deposit cash to buy ...
  6. Professionals

    Accounting Research Manager: Job Description & Average Salary

    Learn about the average salary of an accounting research manager as well as the necessary skills, experience and education, and licenses to hold this position.
  7. Professionals

    Why Realtors Have Fiduciary Responsibilities

    Find out why real estate agents are considered to have a legal fiduciary responsibility to uphold the best interests of their clients.
  8. Options & Futures

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  9. Executive Compensation

    Accounting Research Manager: Career Path & Qualifications

    Discover the basic responsibilities of an accounting research manager, the path this career usually takes and the qualifications needed for this career.
  10. Trading Systems & Software

    Broker Summary: Scottrade Online Trading Platform: Account Types And Minimum Deposits

    Scottrade offers investors and traders a variety of investment and banking account types from which to choose. Most accounts can be opened online, although some require completion of physical ...
RELATED TERMS
  1. Fiduciary Abuse

    Describes a situation in which an individual who is legally appointed ...
  2. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
  3. Account History

    All activity within an account, usually since inception. In a ...
  4. Full Trading Authorization

    A level of trading authorization that grants an agent or broker the ...
  5. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
  6. Savings Account

    A deposit account held at a bank or other financial institution ...
RELATED FAQS
  1. What are some examples of fiduciary duty?

    Understand what it means to be a fiduciary, under what circumstances fiduciary duties arise and some common examples of fiduciary ... Read Answer >>
  2. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
  3. Under the Uniform Securities Act, client information may not be disclosed to a third ...

    The correct answer is c. No authorization is needed from the client’s wife since it is a joint account. Also none is needed ... Read Answer >>
  4. How do I know how much of my income should be discretionary?

    Understand the difference between discretionary income and disposable income. Learn how much of a person's income should ... Read Answer >>
  5. When looking at my online broker account, I see an account value, cash value and ...

    When looking at some online brokerage accounts, there are a few figures that may be confusing, including account value, cash ... Read Answer >>
  6. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center