allocation. It discloses the allocation policy to clients. it allocates first to institutional clients and then pro rata… What was the anwser? i said it is ok because there was a allocation policy
I said wrong, not fair.
Violation of fair dealing.
Not fair:-)
don’t remember Q… probably bad sign, lol
not fair. there’s a similar thing in handbook.
I don’t know about “not fair,” as I recall that all clients had been informed of the allocation policy and had agreed to it in writing . . .
Can’t do it. Even if disclosed.
CFAI Handbook, Standard III (B), p.65: “Trade allocation procedures must be fair and equitable, and disclosure of inequitable allocation methods does not relieve this obligation.” Damn, it feels good to be a gangster.
Yeah, disclosure is fine – but then, in typical CFA fashion, they added the twist of “agreed to in writing. . .” Thus, disclosure in one thing – fair enough – but contracts are another. Please find me the citation in the handbook that references not only disclosure, but also written agreements (I don’t know if there is any). If what you are saying is correct, it would mean that written agreements between willing parties agreeing to “inequitable allocation” are inherently unethical and that, morally, no one is bound to honor them. How can an allocation policy be “inequitable” if the parties allegedly subject to the inequity have themselves approved, in writing, being subject to the policy? At that point, one would logically think that there is no inequity, as there is no harm.
Auburn Wrote: ------------------------------------------------------- > How can an allocation policy > be “inequitable” if the parties allegedly subject > to the inequity have themselves approved, in > writing, being subject to the policy? The answer to this question is covered (indirectly) in the L3 curriculum. The reason that a inequitable policy is unethical even though agreed to in writing is that the investment advisor occupies a special position of trust. In many cases, clients may not fully understand the policies that are set forth, or they may be buried under pages and pages of disclosures. Therefore, you have an obligation not to allow the client to agree to an unfair policy. Pretty simple to me.
i thought the question just said that once the fund decided to buy or sell something, that it had to fill entirely before any other fill can take place and that if a security was illiquid, that the fund would fill before any other order is filled. i think this is fine as if the full order isn’t filled for the fund before other order are front-fun, it would be inequitable to the fund. it wasn’t talking about new issues, it was talking about illiquid stocks. picture it. if the fund was going to purchase 5% of a company that only has a mkt cap of $50 million, it may take days or even months to fill that order as you will have to wait for liquidity to show up on the other side. its only fair that the fund gets filled in its entirety before any fill is made for customer x as it made the trade decision on day 1, while customer x made his trade decision on say day 3. from my perspective, the question wasn’t pertaining to new issues (in fact it never said new issues, just illiquid stocks), but to the completion of a fill on behalf of the fund before any subsequent orders are filled. after the fill, available liquidity will be allocated pro rata. the only thing that may be unfair is following the fund trade where all clients get pro rata fills instead of fills in order of trade decision. my conclusion: it is fair because any other policy would be unfair to the fund and would allow other customers to front-run fund decisions.
ps. in the real world, this is how it works and it is unethical for me to place a new order at a higher price to demand liquidity if i’m providing the same service to both clients. the client who places the second order gets placed at the same price as the previous order and gets filled subsequent to the first order. if i’m going to switch my pricing, the one who placed the order first, gets moved first and has access to the first opposing liquidity we come across. i don’t see any other solution for the firm in question but to fill a fund order completely before allowing any other trades. when it comes to consensus answers i trust this board, except when it pertains to ethics questions. i’d say the majority of cfaers fail or get less than 70 on ethics. so i’ll trust myself who has gotten 70+ for two years in a row. that said, i’m likely going to fail based on my grades on other areas of the exam.