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Question

Difficulty: HardCustomer Account Types and Ownership Structures

A wealth management client maintains an individual margin account and executes a written Limited Power of Attorney (LPOA) granting her sibling authorization to trade on her behalf. Subsequently, the client dies unexpectedly. The sibling immediately submits an order to sell positions in the account to lock in profits, asserting that the LPOA remains valid until revoked in writing by an executor. What action should the broker-dealer take regarding the sell order?

  1. A
    Execute the sell order because a limited power of attorney remains legally binding until formal written revocation is submitted by the appointed estate executor.
  2. B
    Execute the sell order only if the limited power of attorney document contained an explicit durability clause authorizing post-mortem portfolio management.
  3. Cancel the order and freeze the account, as any power of attorney automatically terminates upon the death of the account holder, requiring estate documentation for further activity.Answer
  4. D
    Allow the sibling to liquidate the positions, provided the sibling was designated as an authorized signatory on the original account application.

Answer

The broker-dealer must cancel the sell order and freeze the account because all third-party trading authority granted via a Power of Attorney terminates immediately upon the account owner's death.
Under FINRA rules and general legal principles, any Power of Attorney (LPOA or FPOA, standard or durable) terminates automatically upon the death of the account owner. When a firm learns of a client's death, it must immediately cancel open orders, mark the account as deceased, and freeze activity until proper legal estate documentation (such as a death certificate and letters testamentary) is provided by the executor or administrator.

Step-by-Step Solution

1
Evaluate the legal status of the Limited Power of Attorney (LPOA) upon the death of the account holder.
Recognize that any Power of Attorney—whether limited or full, standard or durable—is legally revoked at the exact moment of the grantor's death.
Third-party authorization acts solely on behalf of a living principal; death dissolves the legal agency relationship.
2
Determine the broker-dealer's operational requirement upon receiving notification of an individual account owner's death.
The firm must cancel all open orders and place a temporary freeze on the account to prevent unauthorized trades or disbursements.
Securities rules protect the assets of the decedent's estate from unauthorized third-party actions.
3
Identify the required authorization process for future account transactions.
Only a court-appointed executor or administrator presenting certified estate documentation (e.g., death certificate, letters testamentary) can manage or liquidate account assets.
Ownership transfers to the decedent's estate, stripping all former third-party agents of authority.

Key Concept

Termination of Power of Attorney and Account Disposition Upon Customer Death
Estimated Time:1m 30s
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Topics

Customer Account Types and Ownership Structures