9.5 Fiduciary & Institutional Accounts
Fiduciary and institutional accounts carry heightened legal obligations. The distinction between full discretion and time/price execution discretion is tested frequently.
Key FINRA Exam Takeaways
- Fiduciary: A person legally appointed to act for the benefit of another (trustee, executor, guardian).
- Uniform Prudent Investor Act (UPIA): Fiduciaries must manage portfolio risk holistically rather than evaluating individual investments in isolation.
- Discretionary Accounts: Require written customer power of attorney AND written registered principal approval before trading.
- Time/Price Exception: A rep can choose time and price on an order without discretionary authorization (valid for that trading day only).
- Institutional Suitability: Institutional accounts (> $50M assets) are evaluated based on their ability to assess risk independently.
The 3 A's of Discretionary Trading
If the representative decides: 1. Asset (which security); 2. Amount (how many shares/dollars); or 3. Action (buy or sell) -> DISCRETIONARY AUTHORIZATION IS REQUIRED. If the customer specifies Asset, Amount, and Action, and lets the rep choose Time and Price -> NOT discretionary (valid for that trading day only).
Knowledge Checkpoint • Section 9.5
A client instructs their registered representative: 'Buy 500 shares of Microsoft (MSFT) whenever you think the price looks best today.' Does this transaction require written discretionary authority?