Key Takeaways
- Discretionary accounts require written authorization and principal approval.
- Time and price discretion alone does not require special authorization.
- POA must be in writing and ends at death; durable POA survives incapacity.
- Rule 3210 requires employer consent for accounts of other FINRA member employees.
- Rule 2165 allows temporary holds for suspected senior exploitation.
- Death procedures require documentation and differ by account ownership type.
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?