Can anyone confirm the CFA ethics ruling on whether or not it is a violation to allocate shares of an IPO to client accounts based on the size of the client account (i.e. 10,000 shares to allocate…5,000 shares to your client with $5,000,000 AUM, 3,000 shares to your client with $3,000,000, and 2,000 shares to your client with $2,000,000) I could have sworn that there was a question in QBank that stated this was a violation but I just came across a question in a practice exam that stated this was not…
I don’t think it is a violation. Isn’t that what pro-rata means? What Does Pro-Rata Mean? Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the whole.
One of the exams in Schweser Vol II right?
I think you can allocate IPO’s on a prorata basis according to client size - if you read Standard II B Fair Dealing in the handbook it just talks about “…blah blah blah…members or candidates should distribute the issues to all customers for whom the investments are appropriate in a manner consistent with the block-allocation policies of the firm. If the issue is oversubscribed, then the issue should be prorated to all subscribers…” on page 55 then it talks about developing written trade allocation procedures on page 57 and again it talks about “…allocating securities by client (rather than portfolio manager) and providing for a method for calculating allocations”. So if your method of allocation is according to account size, then it seems to be fine.
i dunno. to me, it seems that allocating by account size would be wrong. i do realize that more specialized services are ok to be given to bigger accounts, but giving 1 huge account say 60% of the IPO shares and the dividing the remaining 40% among the small fry sounds like a violation to me. to me, pro-rata would be m/n where m is the number of shares available and n is the total number of accounts.
niraj_a Wrote: ------------------------------------------------------- > to me, pro-rata would be m/n where m is the number > of shares available and n is the total number of > accounts. that is pro-rata and that is what they mean: you are allocating based on client size on a prorata allocation This would definitely be a violation: “but giving 1 huge account say 60% of the IPO shares and the dividing the remaining 40% among the small fry sounds like a violation to me.”
Shares cannot be allocated according to account size. That would be a clear violation , as it would imply that preference is given to big account holders or big clients. Pro-rata share means that suppose for an IPO, Clients A, B and C apply for 20000, 30000 and 50000 shares respectively, but only 10000 shares are available. Then those 10000 shares would be divided amongst A, B and C as 2000 , 3000 and 5000. This is a pro-rata share allocation. This is what is called proportionate allocation. I hope it helps.
niraj_a Wrote: ------------------------------------------------------- > to me, pro-rata would be m/n where m is the number > of shares available and n is the total number of > accounts. that is pro-rata and that is what they mean: you are allocating based on client size on a prorata allocation >> How is m/n based on client size? you manage 100 accounts and the IPO is suitable for 50 of them. so you divide the 1000 shares you have equally between the 50 accounts i.e. 20 shares per account i.e. the billion dollar account and the thousand dollar account both get 20 shares each. what am i missing?
r.agg Wrote: ------------------------------------------------------- > Shares cannot be allocated according to account > size. That would be a clear violation , as it > would imply that preference is given to big > account holders or big clients. > > Pro-rata share means that suppose for an IPO, > Clients A, B and C apply for 20000, 30000 and > 50000 shares respectively, but only 10000 shares > are available. Then those 10000 shares would be > divided amongst A, B and C as 2000 , 3000 and > 5000. This is a pro-rata share allocation. This > is what is called proportionate allocation. I hope > it helps. what would the pro-rata allocation be if you got only 5000 shares to distribute instead of 10,000 ?
pro-rata means you divide by the number of suitable accounts distributing by account weight is a violation because you are favoring the bigger accounts
niraj_a Wrote: ------------------------------------------------------- > r.agg Wrote: > -------------------------------------------------- > ----- > > Shares cannot be allocated according to account > > size. That would be a clear violation , as it > > would imply that preference is given to big > > account holders or big clients. > > > > Pro-rata share means that suppose for an IPO, > > Clients A, B and C apply for 20000, 30000 and > > 50000 shares respectively, but only 10000 > shares > > are available. Then those 10000 shares would be > > divided amongst A, B and C as 2000 , 3000 and > > 5000. This is a pro-rata share allocation. > This > > is what is called proportionate allocation. I > hope > > it helps. > > > what would the pro-rata allocation be if you got > only 5000 shares to distribute instead of 10,000 ? if there are only 5000 shares to proportionately distribute in that scenario then they each get half as much
im with ragg… How is it fair to the big client if there are 10000 shares, and everyone only gets 3,333? Then the big client would be getting screwed, because he wouldnt be getting diversified properly, and the smaller client may have too much weighting in the IPO making them hold too much risk. I think if you disclose that you are allocating by a pro-rate amount based on suitability and account size, you are not in violation. Stupid CFAI ethics. Guarentee we will see something like this on the test and argue about it until the results come out in august
Thats a good observation “CFAdreams”
Yes Newsuper, this was in Vol. 2, exam 3 AM. I guess the important thing to watch out for is whether or not it explicitly states that shares are allocated “based on account size” which I’m 99% sure is a violation. However, if it just so happens that the largest account had the largest applied subscription to the new issue, then when allocated pro-rata based on subscriptions applied for, they would still end up with the largest portion, however, for different reasoning than “because they are the biggest client.” Thanks to all for your input.
Email exchange with Schweser regarding the matter. I still don’t have a clear answer…You might want to start at the bottom of this post and read up. FROM PLANNER: Given your reply below regarding account size and allocation (see below email), is this question considering the indication of interest or something. What part am I missing…thanks for your help with this matter, you must be flooded right now. QBANK: A firm has three accounts for which shares of an IPO are suitable. These three accounts have asset size of $2,500,000.00 (A), $3,500,000.00 (B), and $4,000,000.00 ©, and have given advance indications of interest for 2,000 shares, 1,000 shares, and 1,000 shares respectively. There are 1,000 shares available. All of the following allocations are acceptable EXCEPT: A) 500 shares to A, 250 shares to B, and 250 shares to C. B) 333 shares to A, 333 shares to B, and 333 shares to C. C) 250 shares to A, 350 shares to B, and 400 shares to C. Answer C. Don’t allocate based on account size. -------------------------------------------------------------------------------- From: Premium Solution Questions 2 Sent: Saturday, May 23, 2009 2:55:08 PM Subject: RE: Kaplan Schweser - Online Tutorial Support Planner, Clearly account size is a valid factor to consider, and doing so will not violate the standard concerning fair dealing. The main issues are that all clients (for which the investment is suitable) have a fair opportunity to act, and that the firm has a sound trade allocation policy in place that is disclosed to clients. All the best. The Schweser Team -------------------------------------------------------------------------------- From: planner Sent: Thu 5/21/2009 9:47 AM To: Premium Solution Questions 2 Subject: Kaplan Schweser - Online Tutorial Support Message Information Name: planner Email: planner@world’sbestplanner Session/Products: Ethical and Professional Standards Message: With respect to Fair Dealing: I thought allocation of IPOs to clients could not be based on account size (I understand suitability). In practice exam 3am volume 2, question 2, says Mason does not violate CFAI standard for the allocation based on relative account size…IS THIS CORRECT?
So didn’t they just completely contradict themselves?
These two examples posted by planner are the EXACT examples which prompted me to start this thread. Glad that someone else caught this, too. In my opinion, yes, they did contradict themselves, but my interpretation above (posted at 11:21) is how I’m trying to make sense of it. Hopefully my reasoning is correct and it helps you guys out.