Trading Authorization

A customer calls the firm and clearly states that she is revoking a trading authorization previously granted to a family member, effective immediately. The formal paperwork updating the account has not yet been processed, and two days later the family member places another trade in the account. What is the concern?

1. A.There is no concern, since the family member's authority remains valid until the formal paperwork updating the account is fully processed.Wrong. This treats unprocessed paperwork as controlling rather than the customer's clear notice of revocation.
2. B.The concern is limited to updating the account record promptly; the trade placed before the paperwork was processed does not itself raise any issue.Wrong. This understates the concern by ignoring that a trade occurred after clear notice of revocation.
3. C.The concern only applies if the trade placed by the family member resulted in a loss for the customer; a profitable trade after revocation is not a supervisory issue.Wrong. This makes the concern contingent on outcome rather than the standing timing issue of trading after revocation.
4. D.A trading authorization should be treated as revoked from the point the firm receives clear notice of revocation, regardless of whether the formal paperwork has been processed; a trade placed after that notice by the previously authorized person is a concern even though the account record had not yet been updated.Correct. Clear notice of revocation cuts off authority immediately, independent of when the paperwork is processed.

Why: A trading authorization should be treated as revoked from the point the firm receives clear notice of revocation, regardless of whether the formal paperwork has been processed. A trade placed after that notice by the previously authorized person is a concern even though the account record had not yet been updated.

A customer's adult son calls in and begins placing trades in his mother's account, stating that she gave him permission to do so. No power of attorney or trading authorization document is on file. What must the principal require before allowing the son's orders to continue?

1. A.Nothing further is required, since the son's verbal statement that his mother gave permission is sufficient authorization for a family member.Wrong. This dismisses the documentation requirement for third-party trading authorization.
2. B.Documented, valid trading authorization, such as a power of attorney executed by the account owner, specifying the scope of the son's authority, before permitting him to continue placing trades in the account.Correct. A documented power of attorney or similar authorization defining the scope of authority is required.
3. C.The account should be immediately closed, since any third-party trading request from a family member is automatically prohibited regardless of documentation.Wrong. Third-party trading is permitted with proper documented authorization; it is not automatically prohibited.
4. D.The principal should require the mother to place each order herself going forward, since trading authorization can never be delegated to a family member under any circumstances.Wrong. Authorization can be delegated through proper documentation, which is exactly the permitted mechanism here.

Why: Documented, valid trading authorization, such as a power of attorney executed by the account owner, specifying the scope of the son's authority, before permitting him to continue placing trades in the account.

A principal notices that a representative's discretionary account activity consistently favors trades that generate higher commissions for the representative over comparable lower-cost alternatives, even though the account has discretionary trading authorization on file. Does the existence of discretionary authorization resolve the concern?

1. A.No, a pattern favoring the representative's own compensation over comparable lower-cost options remains a red flag requiring reviewCorrect. Discretionary authorization does not exempt trading decisions from suitability and conflict-of-interest scrutiny.
2. B.Yes, but only if the discretionary authorization was granted more than one year agoWrong. The age of the discretionary authorization is not relevant to whether the resulting trading pattern requires scrutiny.
3. C.No, but only because discretionary accounts are prohibited for retail customersWrong. Discretionary accounts are not categorically prohibited; the concern here is the trading pattern's substance, not the account type's permissibility.
4. D.Yes, discretionary authorization means the representative's trading decisions are not subject to further suitability reviewWrong. This is the exact trap the question describes; discretion changes who decides trades, not whether decisions remain subject to suitability scrutiny.

Why: No. Discretionary authorization permits the representative to make trading decisions without prior customer approval for each trade, but it does not exempt those decisions from suitability and best-interest scrutiny. A consistent pattern favoring the representative's own compensation over comparable lower-cost options remains a red flag requiring review.