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Question

Difficulty: HardCustomer Account Types and Ownership Structures

A client grants her brother a Limited Power of Attorney (LPOA) over her individual cash brokerage account. Shortly after the firm approves the documentation, the brother calls the registered representative, places an order to liquidate $20,000 worth of stock, and instructs the firm to wire the sale proceeds directly to his personal bank account. Which of the following actions should the broker-dealer take regarding these instructions?

  1. Execute the trade order as instructed, but refuse the request to wire funds to the brother's personal bank account.Answer
  2. B
    Execute both the trade order and the wire transfer as requested, because an LPOA conveys full operational authority over account assets.
  3. C
    Reject both the trade order and the wire transfer until a corporate resolution or court order is submitted.
  4. D
    Process the wire transfer immediately, but place a temporary hold on the trade order pending principal approval.

Answer

The broker-dealer should execute the trade order as instructed, but refuse the request to wire funds to the brother's personal bank account.
Under FINRA rules and standard industry practice, a Limited Power of Attorney (LPOA) confers trading discretion or authority to place buy/sell orders on behalf of the account holder, but does NOT permit the authorized agent to withdraw money or securities from the account. Therefore, the firm must accept the trade order but reject the wire transfer request to the third-party account.

Step-by-Step Solution

1
Analyze the scope of authority granted by a Limited Power of Attorney (LPOA).
An LPOA grants trading authority (the ability to buy and sell securities on behalf of the account holder) to a third party.
Brokerage account authorization rules distinguish between trading authority and asset disbursement privileges.
2
Evaluate the disbursement request against LPOA restrictions.
An LPOA explicitly denies the third party the right to withdraw or disburse funds/securities from the account.
Only a Full Power of Attorney (FPOA) allows a third party to enter trades AND request withdrawals or transfers of funds to third parties.
3
Determine the appropriate broker-dealer response for each part of the customer request.
The trade execution is permissible under the LPOA, whereas the wire transfer to the brother's personal account is impermissible and must be denied.
Firm compliance procedures mandate adhering strictly to the legal parameters of the approved power of attorney.

Key Concept

Limited Power of Attorney vs. Full Power of Attorney Account Controls
Estimated Time:1m 30s
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Topics

Customer Account Types and Ownership Structures