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Question

Difficulty: HardCustomer Account Types and Ownership Structures

A registered representative receives a trade instruction from a client who holds a valid Limited Power of Attorney (LPOA) on his elderly mother's individual brokerage account. The client directs the representative to liquidate $50,000 worth of equity securities and transfer the cash proceeds directly into the client's personal bank account to cover his mother's medical expenses. Which of the following actions must the broker-dealer take regarding this request?

  1. Execute the trade order to liquidate the securities, but refuse the request to transfer the cash proceeds to the client's personal account.Answer
  2. B
    Execute both the sell order and the funds transfer, provided the client signs an affidavit stating the funds are used solely for the account owner's care.
  3. C
    Reject both the liquidation order and the funds transfer request until a Joint Tenants with Rights of Survivorship (JTWROS) agreement is established.
  4. D
    Refuse to process the liquidation order because any exercise of trading discretion requires a Full Power of Attorney (FPOA).

Answer

The broker-dealer must execute the trade order to liquidate the securities, but refuse the request to transfer the cash proceeds to the client's personal account.
Under FINRA rules and standard industry practices, a Limited Power of Attorney (LPOA) grants a designated third party the legal authority to enter trading instructions (buy and sell securities) in the account, but it does NOT grant authority to withdraw or transfer cash or securities from the account. To withdraw funds or transfer them to a third-party bank account, the authorized person must hold a Full Power of Attorney (FPOA). Therefore, the broker-dealer must honor the trade liquidation request but refuse the third-party fund transfer.

Step-by-Step Solution

1
Analyze the account ownership and third-party authorization type
The account is an individual account owned by the mother, with the son designated as a third-party agent under a Limited Power of Attorney (LPOA).
Determining the specific scope of authority granted by the account authorization type is required to evaluate allowed actions.
2
Evaluate the scope of trading authority under a Limited Power of Attorney
The son has legal authority to enter buy and sell orders on behalf of the account holder.
LPOA explicitly permits investment decision-making and order entry.
3
Evaluate the scope of asset withdrawal authority under a Limited Power of Attorney
The son does NOT have authority to withdraw cash or securities, or transfer assets out of the account into a third party's name.
Disbursement of funds or securities to a third party requires Full Power of Attorney (FPOA) authorization.
4
Formulate the correct broker-dealer response
Accept and execute the liquidation trade order, but deny the requested disbursement to the son's personal bank account.
Broker-dealers must honor valid trade instructions while strictly enforcing asset protection controls regarding third-party disbursements.

Key Concept

Limited Power of Attorney vs. Full Power of Attorney
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Topics

Customer Account Types and Ownership Structures