Can allocation be based on the relative size of the AUM of accounts? Or does each account receive n/m shares as noted in Schweser? You would think that an account of $100 million would not get the same number of shares as an accoutrements worth $10 million since such a high allocation in the smaller accoutrements would be inappropriate. Therefore, why not based on relative AUM?
If the accounts are suitable for that investment, then all shares should be distributed equally otherwise it will lead to violation of fair dealing.
I think the idea is you can’t favor a larger account over a smaller one.
according to Strictly Prorata = m/n where m is shares and n is accounts. Preferred over dollar weighted allocation , i.e. according to relative dollar holdigs by various clients
does the CFA textbook actually mention “strictly pro rata” or is that a Schweser word?
Schweser says its ok to allocate pro rata based on AUM. Exam 6, Q2. This fool got share of a hot IPO and after determining whch accts it was suitable for he allocated pro rata based on AUM in each acct.
CFAI is extremely vague here, hence all the confusion.
Strictly pro rata is from a QBank question . Also it should be “suitable accounts” not just accounts
If you read the SOPH, the text clearly states pro rata based on order size. Nowhere does it mention anything about account size. That would seem like preferential treatment being given to your largest clients.
one of the scheweser practice test questions said that you could distribute based on assets under management. I think it makes sense. Pro rata just means in proportion, not necessarily equal amounts.
bpdulug where does the SOPC say pro rata based on order size? I just read that block trades (that are not filled) are based on order size, and not first in, first out
“when the full amount of the block order is not executed, allocating partially executed orders among the participating client accounts pro rata on the basis of order size” Taken from the SOPH. If you want another pro rata reference, see Example 2.
Practice exam 3 in schweser book 2. number 2. “Fair dealing requires that all clients be dealt with fairly and objectively. Note that Standard IIIB does not state “equally”. Mason has a reasonable basis for allocating the shares he receives. i.e. assets under management…It appears that Mason has dealt fairly with his clients” In the case, he allocated shares in a oversubscribed IPO based on assets under management.
I’m going with advance indication of interest based on pro rata of order size seems the most fair. If there is one large client and one small client, large clients wants 100,000 shares small clients wants 10. But there is 50,00 shares based on order size large client would basically get 499,995, small client gets 5 Based on Assets, Large clients would get like 499,999.9999 small clients gets .0001 The large client will still get a huge amount of shares, but thats a big difference for the small client
I think the key is to look at the intention of the portfolio manager. If you have ever tried to get into an IPO, requesting 10 shares will not do the trick!
Also just did ethics for Exam 6. It does say it allows on an AUM basis, but an IOI, order size or other more objective method seems better. Ethics Q’s absolutely suck in book 2 btw.