What is a Trading Authorization Agreement?
A trading authorization agreement is a contract between a client and their financial institution granting someone other than the client the authority to trade or other wise manage the client’s account. These agreements are typical with brokerage accounts, including accounts held at online brokerages such as TD Ameritrade.
In the context of a TD Ameritrade account, a trading authorization agreement authorizes actions which may include: authorizing someone to place trades on behalf of an account owner , allowing the agent to remove funds from the account, and setting parameters on what an agent can do in the account, such as restricting certain types of trades or always requiring that certain company approvals be obtained prior to a trade being executed. The agreement does not create a fiduciary relationship, but rather defines what happens when certain transactions or events occur. This may seem subtle, but it is an important distinction.
Types of Trading Authorizations at TD Ameritrade
At TD Ameritrade, you can grant one of two types of trading authorizations to your agent: limited or full trading authorization.
With limited trading authorization, your agent can only exercise certain transactions and must abide by all your instructions with respect to all your accounts or your agent’s accounts. Examples of transactions permitted under a limited trading authorization are selling or purchasing a security, or exercising an option for the current, near-term expiration cycle, but not further out. A right to purchase or sell an option contract is a limited trading authorization. As such, your agent would not be permitted to change the number of contracts listed in your account unless you instructed your agent to do so. Authorizing your agent to sell only a limited amount of the securities in your account is another example of granting a limited trading authorization. With full trading authorization, your agent may affect any transaction in your account as well as all your accounts. You may, however, instruct us that your agent may not withdraw money from your account or place cash in your account unless you, the account owner, direct us to permit such withdrawals or deposits. If you authorize your agent trading privileges, limited or full, your agent is required to promptly send us the original documents necessitating such privilege(s) before your agent will be allowed to exercise any such privilege(s).
Establishing Trading Authorization
For existing parties and accounts, "Granting Trading Authorization" requires submission of the applicable TD Ameritrade Client Services forms. For a new account, once the initial paperwork is opened, you’ll be presented with questions similar to those you’d see in if you were trying to "add a third party or make a beneficiary on your account," so the process will be digital for new parties that need authorization and certificates will be mailed out.
Advantages of Granting Trading Authorization
Granting trading authorization provides the advisor with the ability and flexibility to deal with the account. As the circumstances of the account warrant, granting authorization will enable the advisor to operate either as an agent or as a discretionary investment manager, pursuant to his or her investment management contract with the investor. Another benefit is that the allocations in the account can be based on the credentials and experience of the financial advisor. The major benefit is that the advisor (and not the investor) will be able to assess available investment opportunities, including the possibility of investments in hard-to-access securities. The investor will be freed from the necessity of actively participating in an investment strategy.
Risks and Pitfalls to Consider
The TD Ameritrade Trading Authorization Agreement is a powerful tool to delegate discretionary investment authority over your brokerage account to a third-party investment manager or advisor. The power of a TD Ameritrade Trading Authorization Agreement is nothing to take casually, as it carries some potential risks and considerations.
Specifically, once you authorize a third-party to trade on your behalf, the funds in your TD Ameritrade account are exposed to that person’s investment decisions. Even if you trust your advisor or money manager with your money, there are two important issues regarding the management of funds that you must consider before signing a TD Ameritrade Trading Authorization Agreement.
Issue One: Is Your Advisor a Registered Investment Advisor? Under federal law, to give the public a certain degree of safeguard and security, all investment advisors who provide investment advice for profit must be registered with either the federal government or a state government. While an investment manager or advisor may not have to register with the federal government, they are always required to register with their home state and abide by Securities and Exchange Commission regulations. If you plan to give someone else the keys to your TD Ameritrade account, it is worth inquiring as to whether they are a Registered Investment Advisor. If they are not, you may be taking a larger risk than you realize .
Issue Two: A Power of Attorney is Not the Same Thing as a TD Ameritrade Trading Authorized Agreement A power of attorney (POA) is a document that appoints another person to act on your behalf, allowing you to confer to them a great deal of control over your affairs. Because of the inherent risk in giving someone a legacy of freedom, POA’s are legally required to be created according to the state’s power of attorney law to provide certain limits of discretion or authority over the amount and types of activities the POA can carry out. In essence, a POA provides a legal framework for the appointment of an agent to govern the affairs of another under certain conditions and limitations. A TD Ameritrade Trading Authorization Agreement, on the other hand, provides a very broad power of attorney over your brokerage account. It is "blank check" access and authority to trade on your behalf, subject only to the limitations imposed by Rule 15c3-3 of the SEC. A TD Ameritrade Trading Authorization Agreement is an open-ended contract that gives the trade-delegate free access to and use of your funds, unless otherwise restricted by your provisions or according to the rules of securities trading. Bottom line, a correctly written and executed TD Ameritrade Trading Authorization Agreement provides full and unfettered access to your assets, just short of withdrawing the funds outright. So before executing a TD Ameritrade Trading Authorization Agreement, carefully consider the full implications and ramifications of signing a contract that legally obligates you to allow the trade-delegate to carry out their duties without any oversight or restriction.
Legal and Regulatory Considerations
To what extent does the TD Ameritrade Trading Authorization Agreement comply with statutory requirements for financial institutions in the US? The requirement for investors to authorize a third party to manage their trading account is designed to protect investors from fraud. Financial institutions have statutory obligations to protect their clients through a range of measures, including Know Your Customer (KYC) obligations (in the US, Financial Industry Regulatory Authority (FINRA) Rule 2090). TD Ameritrade has clearly specified processes for this authorization and for their vetting of clients, third parties, and trades.
Firstly, account holders must complete KYC documentation. They are also required to confirm who is authorized to receive their account statement. In addition to a trusted third party, client could choose a trusted financial institution either in the US or Cayman Islands. This is to ensure that there is transparency, and that the account holder has authorized the intended person to receive their account statement and authorize the trades.
Secondly, there are strict KYC requirements for third parties who are to be authorized to make trades on behalf of a client. Third party authorizations may not be granted to individuals who are registered with FINRA or any federal or state regulatory authority. In addition, third parties must not be related by blood or marriage to the account holder, nor can they reside at the same address as the account holder. The third parties must either be registered and qualified as investment advisor representatives or financial advisors and possess a Series 3 registration, or be designated as persons in control of a branch office and registered as a placing representative. TD Ameritrade also requires that third party users must not be current or former directors, officers, employees or agents of TD Ameritrade and that they must provide information for a criminal background check.
The explicit limitations around the use of third party trading authorization specifies that third party permission cannot be granted to a spouse or relative of a client. The KYC process should prevent fraud, however it does not guarantee it as there is still an inherent risk of trading abuse by a third party.
Commonly Asked Questions
As this article is read, there are a number of common disputes that are generated in the brokerage industry – and specifically in the retirement account industry. In an effort to address the frequent concerns of clients and provide further clarification on the issues discussed, the following frequently asked questions have been gathered and answered:
Q: What is a "trading authorization" as described in this article?
A: A "trading authorization" helps define the roles and responsibilities of the various parties involved in a retirement account. The "advisor," which in most broker accounts is a registered investment advisor, is the entity that recommends the trades in the account. The "participant," which in the retirement account industry is the account owner, actually executes the trades by signing a "trading authorization" form, which directs the lender the account holder has opened with the IRS. On the form, the account owner authorizes that trades can be executed in his account by a listed third party as part of the investment strategy created by the advisor and authorized by the account owner. While it is likely the intent that the account owner would have granted "trading authorization" to the listed third party, it is possible that the account owner did not intend for the trades to be executed by the listed third party – therefore , it is recommended that the "trading authorization" form be amended to clearly specify who is entitled to execute the trades for the account holder.
Q: When opening an account with a new broker, is a "trading authorization" form necessary?
A: A "trading authorization" form is not strictly necessary. However, a "trading authorization" form is helpful in circumventing the usual problem that many encounter when trying to open a new brokerage account. In most cases, the broker will require that the account holder designate an investment advisor to manage the assets in the account. Providing the "trading authorization" at the outset will allow both the advisor and account holder to have a fast start in executing the investment strategy with the broker.
Q: Are there any other forms needed to open an account with a new broker and provide a "trading authorization" to an advisor?
A: While the requirements will differ broker to broker, the only other documentation that may be needed will be a check for the initial deposit amount. Most brokers will have additional forms that will need to be filled out by the account holder that relate to the broker’s policies, rules and regulations, but those are not specific to opening an account as a retirement account.