3.i Flashcards
(7 cards)
What is a discretionary account? What is required to open one?
An account where the customer gives a registered representative (RR) written authority to make trading decisions for them.
To set this up, the customer must sign a discretionary trading authorization. A principal of the firm must also sign it before any discretionary trading begins.
What are the ‘Three A’s’ that define a discretionary trade?
A trade is discretionary if the Registered Representative chooses one or more of the following without the customer’s specific consent for that trade:
- Action (Buy or Sell)
- Amount (Number of shares or dollar amount)
- Asset (Which specific security)
(Note: The RR choosing the Time or Price of execution does NOT require discretionary authority.)
Name two key rules that apply to handling discretionary accounts.
Each discretionary order must be identified as such when entered.
A principal must approve each order promptly (but not necessarily before entry).
The account must be reviewed frequently for churning (excessive trading).
How does a Power of Attorney (POA) differ from discretionary authority?
A POA is when a customer gives trading authority to a third party, who is typically not an RR at the firm. Discretion is granted specifically to an RR.
A POA can also grant broader powers than just trading. All POAs must be in writing.
What is the difference between a Full Power of Attorney (FPOA) and a Limited Power of Attorney (LPOA)?
Full Power of Attorney (FPOA): Allows the third party to make investment decisions AND deposit or withdraw cash/securities from the account.
Limited Power of Attorney (LPOA): Allows the third party to make investment decisions (buy and sell) but CANNOT withdraw assets. This is also called ‘limited trading authorization.’
What is a ‘durable’ power of attorney?
A durable POA remains in effect even if the grantor (the customer) becomes mentally incapacitated.
A non-durable POA is terminated if the grantor becomes incapacitated. All POAs are terminated upon the death of either the grantor or the appointed third party.
When are different types of third-party authorizations put in place? (Discretion, POA, Trustee, Guardian)
Discretion & Power of Attorney (POA): These are ‘add-ons’ to an existing account. They can be added when the account is opened or any time after.
Trustee, Guardian, Custodian: These fiduciary roles exist before the account is opened. The account is opened specifically for the trust, the ward (person needing a guardian), or the minor.
