5.3 New Accounts, Customer Authority, Discretion, and Order Handling
Key Takeaways
Rule 4512 requires identifying information, associated-person approval, trusted-contact efforts for non-institutional accounts, and records of who may transact.
Rule 3260 requires prior written customer authorization and written acceptance of a discretionary account, prompt written approval of each discretionary order, and frequent review for excessive trading.
Time-and-price discretion over a definite amount of a specified security expires at the end of the business day unless the customer signs and dates a written instruction extending it.
Representatives may not exercise authority for an incapacitated or deceased customer without valid legal authority from the appropriate fiduciary.
Rule 3250 permits a numbered account only with a signed customer statement attesting ownership, and Rule 4514 requires express written authorization before drafting a customer's bank account.
Required Account Information
FINRA Rule 4512 requires each account record to preserve the customer's name and residence; whether the customer is of legal age; the names of associated persons responsible for the account; and the signature of the partner, officer or manager who accepted the account. For a corporation, partnership, trust or other legal entity, the firm must know the entity's legal existence and the authority of each person acting for it. Tax identification, employment and investment-profile information arise from tax, SEC record-making, AML, KYC and recommendation rules.
For each non-institutional account, the member must make reasonable efforts to obtain the name and contact information of a trusted contact person age 18 or older. The customer may decline. A trusted contact is not a power of attorney: the firm may contact the person about possible exploitation, the customer's health status, identity of a legal representative or current contact details, but the trusted contact cannot trade or withdraw funds merely because listed.
Under Rule 2165, a qualified person may place a temporary hold on certain disbursements or transactions when the firm reasonably believes an older or otherwise specified adult is being financially exploited, after following the rule's notice, review and record requirements. The existence of a trusted contact supports that process but is not required for the hold.
Who May Act
| Account | Evidence of authority |
|---|---|
| Individual | The owner, or an agent under a valid power of attorney |
| Joint | Each owner's rights depend on the registration and agreement; one owner generally cannot change ownership unilaterally |
| Corporation or partnership | Resolution, agreement or other governing document naming authorized persons |
| Trust | Trust instrument and trustee certification; transactions must fit trustee powers |
| Estate | Court appointment of executor or administrator |
| Custodial account | Custodian acts under the governing statute for the minor's benefit |
A power of attorney generally ends at death and may end at incapacity unless durable. When death is reported, the firm should restrict activity, verify the death, identify the estate representative and follow transfer procedures. A representative must not “help” by accepting a pre-signed form or logging in as the customer.
Discretionary Accounts
FINRA Rule 3260 and Exchange Act Rule 15c1-7 govern discretion over the security, quantity, or buy/sell decision. Under Rule 3260(b), no one may exercise discretion unless the customer has given prior written authorization to a stated individual or individuals and the member, or a partner, officer or manager it designates, has accepted the account in writing. Rule 3260(c) requires the designated person to approve each discretionary order promptly in writing and to review all discretionary accounts at frequent intervals to detect transactions that are excessive in size or frequency in view of the account's financial resources and character, which Rule 3260(a) prohibits. Rule 15c1-7 adds that a record of each discretionary transaction, showing the customer, the security, the amount, the price and the date and time, must be made immediately after the trade.
Time-and-price discretion is narrower. If the customer decides the security, the definite amount and whether to buy or sell, the representative may choose time and price without a discretionary-account agreement. That authority expires at the end of the business day on which it was granted unless the customer gives a specific written instruction, signed and dated by the customer, extending it; the one-day limit does not apply to good-till-cancelled, not-held orders in an institutional account. Any exercise of time-and-price discretion must be noted on the order ticket. Choosing the quantity or changing from one fund to another is not time-and-price discretion.
Orders, Designations, and Confirmations
Orders should identify the account, security, side, quantity, order terms, time received and time entered. Rule 4515 requires account-name or designation changes to be authorized by a qualified registered principal and documented with the essential facts. Post-execution changes deserve heightened review because they can hide trade allocation or favor one account.
Mutual fund and variable contract orders also require prompt transmission. A representative may not hold several customer fund orders to see which NAV is favorable. Customer checks should be payable to the product sponsor or clearing firm under the firm's procedures, not to the representative. An incomplete variable annuity application must be resolved promptly without treating customer funds as the firm's working capital.
Numbered Accounts and Negotiable Instruments
Two short operational rules from the outline often appear as exam details:
- Rule 3250 (Designation of Accounts) prohibits carrying an account in the name of anyone other than the customer, except that an account may be designated by a number or symbol if the member has on file a written statement signed by the customer attesting to ownership. A numbered account keeps the name off routine records; it does not hide the owner from the firm or excuse CIP.
- Rule 4514 (Authorization Records for Negotiable Instruments) forbids obtaining or submitting for payment a check, draft or other negotiable paper drawn on a customer's checking, savings, share or similar account without the customer's express written authorization, which may be the customer's signature on the instrument. A separate written authorization must be kept for three years after it expires. A representative who drafts a customer's bank account on telephone instructions alone violates the rule.
Principal New-Account Review
The review should reconcile the registration, customer identity, beneficial owners, authority, essential facts, tax status, trusted contact effort and product eligibility. Red flags include a third party funding an unrelated person's account, an elderly customer abruptly granting broad authority to a new acquaintance, a trust transaction outside the trustee's powers, or a representative repeatedly requesting after-the-fact designation changes.
Approval is not permanent. Rule 2090 and SEC Rules 17a-3 and 17a-4 require account information to remain accurate and accessible. Section 7.1 covers periodic updates, statements and confirmations after the account is open.
A customer tells a representative to buy 500 shares of a named fund during the day at the representative’s judgment as to time and price. No trade occurs that day. May the representative use the instruction the next morning without written authority?
Yes. Mutual fund orders are exempt from the discretionary-account rules.
Yes. Any oral time-and-price instruction remains valid for 30 calendar days.
No. Time-and-price discretion always requires principal acceptance before the order is entered.
No. Time-and-price discretion expires at the end of the business day unless the customer signed and dated a specific written instruction extending it.
A customer lists her adult son as the trusted contact on a brokerage account. What authority does that designation give the son?
It gives him full trading authority whenever the firm cannot reach the customer.
It creates a durable power of attorney over the account.
It lets the firm contact him for limited protective and contact-information purposes; it does not authorize trades or withdrawals.
It makes him the account beneficiary at the customer’s death.
Sections you finish are checked off in the contents.