Special Account Situations
Certain account situations require additional documentation, approvals, or handling procedures. Understanding these special situations is essential for compliance and customer protection.
Discretionary Accounts
A discretionary account allows the representative to make trades without prior customer approval for each transaction.
Requirements for Discretion
| Requirement | Description |
|---|---|
| Written Authorization | Customer must sign discretionary authorization |
| Principal Approval | Firm principal must approve the arrangement |
| Frequent Review | Account must be supervised more closely |
| No Unauthorized Discretion | Cannot exercise discretion without written authorization |
What Constitutes Discretion?
IS Discretion (requires authorization):
- Choosing which security to buy/sell
- Deciding whether to buy or sell
- Determining the quantity
NOT Discretion (no special authorization needed):
- Time of execution
- Price of execution
Example: Customer says "Buy 100 shares of XYZ when you think the price is right." This is NOT discretion because the security and quantity are specified. Only time/price is left to the rep.
Prohibited Practices
- Excessive trading (churning)
- Trading primarily for commissions
- Unsuitable investments
Power of Attorney
Types of POA
| Type | Authority |
|---|---|
| Limited POA | Specific powers (e.g., trading only) |
| Full/General POA | Broad powers including withdrawals |
| Durable POA | Survives incapacity of principal |
| Springing POA | Takes effect upon specific event (e.g., incapacity) |
POA Requirements
- Must be in writing
- Must specify scope of authority
- Must be kept on file
- Ends upon death of principal (unless durable)
Third-Party Trading Authorization
When someone other than the owner can direct trades:
- Written authorization required
- Specifies scope (trading, withdrawals, etc.)
- Must verify identity of third party
- Subject to supervision
Corporate Insider Accounts
Who Is an Insider?
- Officers
- Directors
- 10% or greater shareholders
Special Requirements
- May need pre-clearance for trades
- Subject to Section 16 reporting
- Short-swing profit rules (6-month holding period)
- Restricted securities may have limitations
Broker-Dealer Employee Accounts
Accounts for Employees of the Firm
- Requires disclosure to employer
- Subject to firm policies
- May require pre-clearance
- Often subject to restricted lists
Accounts for Employees of OTHER FINRA Members
FINRA Rule 3210 requires:
- Written consent from employer firm
- Duplicate confirmations/statements to employer
- Notification of account opening
Key Point: Before opening an account for someone associated with another FINRA member, you must get written consent from their employer firm.
ERISA Accounts (Retirement Plans)
Employee Retirement Income Security Act governs:
- 401(k) plans
- Pension plans
- Profit-sharing plans
Fiduciary Requirements
- Act solely in participants' interests
- Diversification requirements
- Prudent expert standard
- Prohibited transactions
Prohibited Transactions
- Self-dealing
- Conflicts of interest
- Excessive fees
- Loans to fiduciaries
Death of Account Holder
Immediate Steps
- Mark account "deceased" - No further transactions
- Cancel open orders
- Request death certificate
- Obtain legal documentation
Required Documentation
| Document | Purpose |
|---|---|
| Death Certificate | Proof of death |
| Letters Testamentary | Authority for executor (with will) |
| Letters of Administration | Authority for administrator (no will) |
| Affidavit of Domicile | Establishes residence for tax purposes |
| Estate Tax Waiver | May be required depending on state |
Joint Account Procedures
JTWROS: Surviving owner provides death certificate; assets transfer automatically
TIC: Deceased's share goes to estate; executor must manage that portion
Senior Investors
Heightened Obligations
- Greater scrutiny of transactions
- Watch for signs of exploitation
- May place temporary holds on suspicious disbursements
FINRA Rule 2165 - Financial Exploitation of Seniors
Allows firms to:
- Place temporary hold on disbursements (up to 25 business days)
- Extended up to 30 additional days if reported
- Contact trusted contact person
- Must notify customer of hold
Signs of Exploitation
- Sudden changes in beneficiaries
- Uncharacteristic withdrawals
- New "friends" or advisors
- Confusion about account activity
- Reluctance to discuss finances
Incapacitated Customers
When a customer can no longer manage their affairs:
- Look for durable POA
- May need court-appointed guardian/conservator
- Document concerns
- Contact trusted contact person
- Do NOT take instructions from unauthorized persons
Key Exam Points
- Discretionary accounts - Require written authorization and principal approval
- Time/price only - NOT discretion
- POA ends at death - Unless durable POA
- FINRA member employees - Require employer consent and duplicate statements
- Corporate insiders - Officers, directors, 10%+ shareholders
- Death procedures - Cancel orders, mark deceased, get death certificate
- Senior protection - Temporary holds allowed under Rule 2165
- Trusted contact - Resource for concerns about customers
A customer tells their representative: "Buy some technology stocks when you think it's a good time." This instruction gives the representative:
Before opening a brokerage account for an employee of another FINRA member firm, what must be obtained?
Under FINRA Rule 2165, how long can a firm place a temporary hold on a suspicious disbursement from a senior investor's account?
5.1 Suitability Obligations
Chapter 5: Suitability & Recommendations