Can Someone Trade on My Behalf? What You Need to Know

Letting someone trade on your behalf can be convenient, but it comes with significant risks and responsibilities. Whether you’re seeking professional management or allowing a trusted individual to handle trades, it’s essential to understand how trading authorization works before granting control over your account.

There are different levels of trading authority, each with varying degrees of access and decision-making power. Proper documentation is required, and tax implications and reporting obligations must be considered. Understanding these factors helps protect your investments while ensuring compliance with financial regulations.

Minimum Requirements to Grant Trading Authority

Before allowing another person to execute trades on your behalf, financial institutions impose eligibility criteria to protect account holders and comply with regulations. Brokerage firms require the account owner to be at least 18 years old in the United States. The individual receiving trading authority must also meet the firm’s internal policies, which may include background checks or financial suitability assessments, particularly for discretionary trading arrangements.

Regulatory bodies like the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) require broker-dealers to verify the identity and intent of both the account holder and the designated trader. This includes compliance with the Customer Identification Program (CIP) under the USA PATRIOT Act, which mandates collecting and verifying personal details such as Social Security numbers, government-issued identification, and financial background information.

Brokerage firms may also impose minimum account balance requirements, particularly for margin accounts. Under Regulation T of the Federal Reserve, a margin account must maintain a minimum equity of $2,000 before margin trading is permitted. Some firms set higher thresholds, especially for accounts engaging in options or futures trading, where financial risks are greater.

Types of Trading Authorization

Granting someone the ability to trade on your behalf can take different forms, depending on the level of control you wish to provide.

Limited Authority

Limited trading authorization allows a designated individual to place trades but does not permit fund withdrawals or other financial decisions. This arrangement is common for investors who want professional management while retaining control over their assets.

Brokerage firms typically require a Limited Power of Attorney (LPOA) to establish this type of authorization. Under SEC Rule 15c3-3, broker-dealers must maintain records of such agreements to ensure transparency and prevent unauthorized transactions. The Investment Advisers Act of 1940 also imposes fiduciary duties on registered investment advisers (RIAs) managing accounts under limited authority, requiring them to act in the client’s best interest.

The account holder remains responsible for all gains and losses. Capital gains taxes apply based on the holding period of securities, with short-term gains taxed at ordinary income rates (ranging from 10% to 37%) and long-term gains subject to lower rates (0%, 15%, or 20%). Since the authorized trader does not have ownership rights, they are not liable for tax reporting, but the account owner must maintain accurate records for IRS compliance.

Full Authority

Full trading authorization grants the designated individual the ability to execute trades, withdraw funds, and make other financial decisions. This level of control is typically granted through a Full Power of Attorney (FPOA) and is often used in managed accounts overseen by financial advisors or fiduciaries.

Because full authority allows fund transfers, brokerage firms impose stricter oversight to prevent fraud and mismanagement. Under FINRA Rule 4512, firms must maintain detailed records of all discretionary accounts, including signed agreements and periodic reviews. The SEC’s Custody Rule (Advisers Act Rule 206(4)-2) also requires RIAs with full authority over client funds to undergo annual surprise audits by an independent public accountant.

Tax responsibilities remain with the account owner. However, if the authorized trader is a professional money manager, their fees may be deductible as investment expenses under Internal Revenue Code (IRC) 212, subject to the 2% adjusted gross income (AGI) threshold for miscellaneous itemized deductions (which was suspended from 2018 to 2025 under the Tax Cuts and Jobs Act). Investors should also be aware of potential gift tax consequences if large withdrawals are made on their behalf, as the annual exclusion limit for gifts is $18,000 per recipient in 2024.

Third-Party Authorization

Third-party trading authorization allows an external entity, such as a financial advisor, hedge fund, or automated trading service, to execute trades on an investor’s behalf. This arrangement is common in managed portfolios, robo-advisory services, and algorithmic trading strategies.

Unlike individual authorizations, third-party arrangements often involve contractual agreements outlining the scope of trading activity, fee structures, and performance benchmarks. Firms managing pooled investment vehicles must register with the SEC under the Investment Company Act of 1940 and comply with reporting requirements, including Form ADV disclosures for RIAs. The Commodity Futures Trading Commission (CFTC) also regulates third-party trading in futures and commodities markets, requiring Commodity Trading Advisors (CTAs) to register and adhere to disclosure obligations under the Commodity Exchange Act.

Tax treatment for third-party-managed accounts depends on the structure of the arrangement. If the account is a separately managed account (SMA), the investor retains direct ownership of securities and reports gains and losses accordingly. In contrast, pooled investment vehicles, such as hedge funds, may issue Schedule K-1 forms to investors, detailing their share of income, deductions, and credits. Management fees may also be subject to performance-based compensation rules under IRC 475 for mark-to-market accounting in certain trading entities.

Documentation for Authorizing Another Trader

Establishing trading authority requires formal documentation to ensure legal recognition and compliance with brokerage policies. The process begins with a trading authorization form, a legally binding agreement specifying the designated trader’s powers. Brokerages typically provide standardized forms, but customized agreements may be necessary for complex arrangements, such as those involving fiduciary responsibilities or institutional accounts.

Notarization or witness requirements may apply depending on the jurisdiction and the type of authority granted. Some states mandate notarized signatures for powers of attorney to prevent fraud. Certain financial institutions also require in-person verification or video authentication to confirm the identity of both the account holder and the designated trader. This additional layer of security helps mitigate risks associated with identity theft and unauthorized account access, particularly in cases involving international trading relationships.

Regulatory filings may be required for specific trading arrangements, especially when granting authority to registered financial professionals. If an investment adviser is designated as the authorized trader, they may need to disclose this relationship in regulatory filings such as Form ADV, submitted to the SEC and state regulators. Similarly, if a corporate or institutional account grants trading authority to an internal employee, documentation such as board resolutions or partnership agreements may be necessary to confirm the delegation of trading power.

How to Revoke Trading Authorization

Terminating trading authorization requires a formal process to ensure that all rights granted to the designated trader are fully rescinded. Most brokerage firms mandate the submission of a revocation form, signed by the account holder and, in some cases, notarized. If the original authorization was granted through a power of attorney, a written notice of revocation should be provided to the brokerage and the individual or entity previously authorized to trade. Some firms may require a waiting period before the revocation takes effect, particularly if pending trades or margin positions are involved.

Beyond notifying the brokerage and the authorized trader, it is advisable to review all linked accounts, external trading platforms, and automated systems to ensure that no residual access remains. Certain trading arrangements involve third-party software or algorithmic strategies that may require separate revocation procedures. Failing to disable these systems could result in unintended trades even after formal authorization has been withdrawn. If the revoked trader had access to margin or derivative positions, a reassessment of risk exposure should be conducted to prevent unintended liquidations or margin calls.

Tax and Reporting Obligations

Granting trading authority does not transfer tax liability, meaning the account holder remains responsible for reporting all income, gains, and losses. The IRS requires individuals to report capital gains on Schedule D (Form 1040), with short-term gains taxed at ordinary income rates and long-term gains benefiting from reduced rates. If the authorized trader engages in frequent transactions, the account may qualify as a trader tax status (TTS) account, which allows for mark-to-market (MTM) accounting under IRC 475(f), potentially altering how gains and losses are reported.

Brokerage firms issue Form 1099-B, detailing proceeds from securities transactions, which must be reconciled with the account holder’s tax return. If the designated trader is a professional money manager, advisory fees may be deductible under IRC 162 if the account is classified as a business rather than an investment account. Additionally, if trading authority is granted to a non-U.S. person, withholding tax obligations under IRC 1441 may apply, requiring careful consideration of tax treaties and foreign reporting requirements.