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Difficulty: HardCustomer Account Types and Ownership Structures

An individual investor opens a cash account at a FINRA member broker-dealer and executes a standard non-durable Limited Power of Attorney (LPOA) naming their sibling as an authorized trader. Two years later, the broker-dealer receives formal legal documentation confirming that the account owner has been judicially declared mentally incapacitated. Shortly thereafter, the sibling contacts the registered representative to place a sell order for equities in the account to raise cash for the owner's medical care. What action must the broker-dealer take regarding this transaction request?

  1. Refuse to execute the order because a non-durable power of attorney terminates immediately upon the account owner's legal incapacity.Answer
  2. B
    Execute the sell order as requested, provided the sibling submits written proof that all transaction proceeds will be used exclusively for the owner's benefit.
  3. C
    Execute the order because limited trading authority remains valid and legally binding until the grantor's death.
  4. D
    Re-register the account as Joint Tenants with Rights of Survivorship (JTWROS) so the sibling can maintain continuous management authority.

Answer

Refuse to execute the order because a non-durable power of attorney terminates immediately upon the account owner's legal incapacity.
Under standard industry rules, a non-durable power of attorney (whether limited or full) terminates immediately upon the legal incapacity or death of the account owner. Once the broker-dealer is notified of the judicial declaration of mental incompetence, third-party trading authority under the non-durable LPOA is void, and no further orders may be accepted from the agent. Account management can only resume once a court-appointed guardian or holder of a Durable Power of Attorney presents appropriate legal documentation.

Step-by-Step Solution

1
Analyze the account authorization type granted to the third party.
The client executed a standard non-durable Limited Power of Attorney (LPOA).
Determining whether trading authority is durable or non-durable dictates how legal incapacity affects the agent's authority.
2
Evaluate the legal effect of the account owner's judicial declaration of mental incapacity.
A non-durable power of attorney is revoked automatically by operation of law upon the grantor's incompetence.
Only a Durable Power of Attorney (DPOA) remains effective after the grantor becomes incapacitated.
3
Determine the proper broker-dealer protocol for handling the trading request.
The broker-dealer must cancel/refuse third-party trading instructions from the sibling until a legally appointed guardian or court-designated fiduciary assumes account control.
Executing orders under an invalidated power of attorney violates account control rules and FINRA standards.

Key Concept

Third-Party Account Authorization and Power of Attorney Termination Rules
Estimated Time:1m 30s
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Topics

Customer Account Types and Ownership Structures