The Sudden Change in Instructions
A 79-year-old widow has a $600,000 non-registered portfolio that generates about $18,000 in dividends. She also receives a $45,000 annual pension plus OAS/GIS. She recently signed a power of attorney naming her nephew. She calls her registered representative and asks him to liquidate $500,000 of the diversified portfolio and buy a 3x leveraged NASDAQ ETF because a friend made money in it. During the call she repeats questions about the date, seems unsure which accounts she owns, and says her nephew 'handles things now' but is not present. The rep has met her twice and previously described her as cautious and income-focused. Her KYC file has not been updated in four years.
1. Identify the capacity, suitability, and conflict issues the rep must address before acting. What may the rep do, and what must he not do?
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Capacity and vulnerability: The client is 79, repeats questions about the date, is unsure which accounts she owns, and has recently granted a POA. These are red flags for diminished capacity or undue influence. The rep must not treat the call as a routine order. He should slow down, ask open-ended questions to test understanding, and document her exact words.
Suitability: A 3x leveraged NASDAQ ETF resets daily and can suffer severe volatility decay in a prolonged downturn. It is speculative, not income-producing, and unsuitable for a 79-year-old investor who relies on $18,000 of dividends and has a cautious, income-focused profile. Liquidating $500,000 would also trigger capital gains tax and eliminate much of her income. The order is inconsistent with her known objectives.
Conflict of interest: The liquidation and purchase would generate commissions and possibly other compensation. The rep must not let that influence the suitability analysis. The firm should review the compensation implications.
POA: The nephew is not present. The rep must verify the POA, its scope, and whether it is currently effective. He cannot disclose account information to the nephew without proper authority and consent.
What the rep may do: Place a temporary hold, ask clarifying questions, and escalate. What he must not do: execute the liquidation, execute the leveraged ETF purchase, or accept the instruction without a suitability and capacity review.
2. Outline the concrete steps the firm should take, including trusted-contact and POA considerations, documentation, and possible escalation.
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- Do not execute. Place the order on hold and tell the client the firm needs to review the request. Do not argue with her.
- Escalate to the branch manager and compliance immediately. Treat this as a vulnerable-client matter.
- Update the KYC. Meet in person if possible, ideally with a family member or the POA present if the client consents. Ask about income needs, liquidity, time horizon, and understanding of leveraged ETFs.
- Document everything. Record her statements, the repeated questions, her uncertainty about accounts, and the fact that the nephew was not present.
- Verify the POA. Have compliance or legal review the document, its scope, and whether it is springing or immediate. Confirm what authority the nephew actually has.
- Contact the trusted contact person. If a TCP is on file, the firm may contact that person to express concern, subject to privacy rules. If no TCP is on file, make reasonable efforts to obtain one.
- Consider adult protection. If the firm suspects financial abuse or undue influence, it should follow its escalation policy and consider contacting the appropriate adult protective authority.
- Do not disclose account details to the nephew or anyone else without proper authority.
3. If the client insists after the firm's review, what options does the firm have consistent with its obligations?
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The firm is not obliged to execute an unsuitable order merely because the client insists. Its options include:
- Decline the specific transaction and explain why it is unsuitable. The rep should offer a suitable alternative, such as a diversified income portfolio or a small, non-leveraged equity allocation.
- Require a capacity and authority review before any further trading. If the POA is effective, the firm may require the attorney to be involved in the instruction.
- Impose a temporary restriction on the account while compliance reviews the situation. Document the reasons and the client communication.
- Offer a supervised meeting with the client, the POA, and a compliance officer to confirm her wishes and understanding.
- Consider terminating the relationship if the firm cannot reconcile the client's instructions with its suitability and vulnerable-client obligations. Any termination must follow the firm's procedures, give proper notice, and avoid abandoning the client.
If the client has capacity and, after a proper review, still wants a small speculative position, the firm may allow it only if it is suitable in size and the client understands the risks. But a $500,000 liquidation into a 3x leveraged ETF is not a close call. The firm should document its decision and, if necessary, report the concern to the regulator.