Quick Answer
A power of attorney lets an agent trade (limited POA) or trade plus withdraw (full POA) for an account owner, and every POA dies with the owner. Trusts require a trust agreement and bind trustees to its terms; corporations require a board resolution; and trading authority becomes discretionary only when the third party can choose the security, action, or quantity without per-trade approval.
Now that you understand the screening, reporting, and privacy frameworks, the next step is documenting who has authority to act on an account. Different account types require different legal documents, and the type of authority granted determines what the authorized person can and cannot do.
What Are the Types of Power of Attorney?
A power of attorney is a legal document that grants one person (the agent or attorney-in-fact) the authority to act on behalf of another person (the principal or account owner).
What Are the Four POA Types?
| POA Type | Authority | Key Feature |
|---|---|---|
| Limited POA (also called trading authorization) | Buy and sell securities in the account | Cannot withdraw funds or securities |
| Full POA | Buy and sell securities, withdraw funds and securities | Complete control over account activity |
| Non-durable POA | Terminates if the account owner becomes incapacitated | Default unless specified otherwise |
| Durable POA | Remains in effect even if the account owner becomes incapacitated | Must be specifically designated as "durable" |
What Are the Critical POA Rules?
- All POAs terminate upon the death of the principal (the account owner), no exceptions, including durable POAs
- The person granted POA authority is called the agent (also called attorney-in-fact)
- Firms typically require their own proprietary POA forms with indemnification language
- A non-durable POA is the default: the POA must explicitly state it is "durable" to survive incapacity
Exam Tip: Gotchas
- A durable POA survives incapacity but NOT death. If a customer has died, all POA authority (durable or not) is terminated immediately.
- Non-durable is the default. A POA must explicitly state it is "durable" to survive incapacity.
What Documentation Do Trust Accounts Require?
- A trust account requires a copy of the trust agreement (or a certification of trust)
- The trust document identifies the trustee(s) authorized to act on behalf of the trust
- The firm must verify the trustee's authority to trade and any investment restrictions in the trust instrument
- Trustees have a fiduciary duty to act in the best interest of the trust beneficiaries
- The trust agreement defines the scope of the trustee's powers; the trustee cannot exceed what the document allows
- Trustees owe a duty of loyalty to the beneficiaries: they may not self-deal (for example, buy securities from or sell them to the trust through their own account), may not borrow from the trust, and must avoid or disclose conflicts of interest. A fair market price does not cure a self-dealing conflict
- When a trust has co-trustees, the trust agreement controls how they act. If it requires them to act jointly, one co-trustee cannot bind the trust alone
Exam Tip: Gotchas
- Trustees cannot invest however they want. They are bound by the trust agreement and must act within the powers it grants. If the trust restricts investments to fixed income, the trustee cannot buy equities.
What Does a Corporate Account Require?
- A corporation opening a brokerage account must provide a corporate resolution authorizing:
- The opening of the account
- The individuals authorized to trade on behalf of the corporation
- The resolution is typically adopted by the board of directors
- Must be accompanied by articles of incorporation or similar formation documents
- The resolution specifies exactly who can act and what actions they can take
When Does Trading Authority Become Discretionary?
- A customer may grant another person the authority to make trading decisions in their account
- Requires written authorization from the account owner
- The firm must document and accept the trading authority arrangement
- Trading authority does not automatically make an account "discretionary." It becomes discretionary if the third party can select any one of the security, the quantity, or whether to buy or sell without prior customer approval for each trade
- A person with trading authority who is given the security, action, and quantity by the customer may still choose only the time and price of execution. This time-and-price discretion is not full discretion, needs no separate written discretionary authorization, and expires at the end of the business day on which it was granted
- If the arrangement is discretionary (the authorized person chooses the security, the action, or the quantity without per-trade approval), it requires prior written authorization from the customer and written acceptance of the account as discretionary by a designated principal before any discretionary order is entered
Exam Tip: Gotchas
- Trading authority alone is NOT discretion. The third party need only be able to choose any one of the security, action (buy/sell), or quantity without prior approval for it to qualify as discretionary. Only when the customer specifies all three (leaving just time and price) is it not discretionary.
- Limited POA = trade only; Full POA = trade + withdraw. A limited power of attorney (also called trading authorization) never allows fund withdrawals.
What Should You Check on Exam Day?
- Non-durable is the default; a POA must say "durable" to survive incapacity, and every POA (durable or not) ends at the principal's death
- Trustees are locked into the trust agreement: no self-dealing (even at fair market price), no borrowing, and joint co-trustees cannot act alone unless the agreement allows it
- The discretion test is any one of security, action, or quantity chosen by the third party without per-trade approval; all three specified by the customer means it is not discretionary