Account Authorizations and Legal Documents
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.
Power of Attorney (POA)
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).
Types of POA
| 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" |
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. This is one of the most frequently tested distinctions. If the exam says 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.
Trust Documents
- 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
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.
Corporate Resolutions
- 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
Trading Authority
- 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 only becomes discretionary if the third party can select the security, quantity, and whether to buy or sell without prior customer approval for each trade
Exam Tip: Gotchas
- Trading authority alone is NOT discretion. The third party must be able to choose the security, action (buy/sell), and quantity without prior approval for it to qualify as discretionary.
- Limited POA = trade only; Full POA = trade + withdraw. A limited power of attorney (also called trading authorization) never allows fund withdrawals.