Which of the following statements is FALSE? It is permissible under the Standards to allocate trades: A) on a pro rata basis over all suitable accounts based upon account value. B) on a pro rata basis over all suitable accounts on the basis of an advance indication of interest and indicated order size. C) on a pro rata basis over all suitable accounts. D) on a pro rata basis over all suitable accounts that have given an advance indication of interest.
A?
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A)
Ahh…damn PC!! I’ll go with C
A
B, indicated order size shouldn’t play into it.
I’ll go with C My second guess would be D
B) Pro rata implies distributing based on account size. Distributing based on Indicated order size is incorrect.
I am going with B
Another taker for B. I think that suitability and indication interest are one of the same, and pro rata basis is based on account value. Only “indicated order size” doesn’t belong in there since all clients would of course want a larger slice of the hot IPO pie.
I can’t remember!!! How did I forget this already? C) on a pro rata basis over all suitable accounts. you buy 100,000 shares and have 100 suitable accounts, divide up and each account gets 1,000 shares… OK, that’s fair D) on a pro rata basis over all suitable accounts that have given an advance indication of interest. you buy 100,000 shares and have 100 suitable accounts, 50 suitable accounts indicate that they want to own this stock, divide up and each account that wants it gets 2,000 shares… OK, that’s fair B) on a pro rata basis over all suitable accounts on the basis of an advance indication of interest and indicated order size. you buy 100,000 shares and have 100 suitable accounts, 50 suitable accounts want to own total 200,000 shares of this stock, divide up and each account gets half the shares they indicated they wanted… OK, that’s fair A) on a pro rata basis over all suitable accounts based upon account value. you buy 100,000 shares and have 100 suitable accounts, 2 $150 million accounts and 98 $1,000 accounts, divide up based on size and the two big clients each get 37,750 shares and the 98 other clients each get 250 shares … the big accounts each get 37.75% of the shares purchased and the other 98 each get 0.25%. that doesn’t sound fair.
its b
Very simply, its not what sounds fair, its what is according to the standards, they are all acceptable based on the standards accept B, the reason being that if it were on order size, the distribution on over prescribed IPO’s could be manipulated by large accounts placing outlandishly high orders falsly inflated to gauruntee a higher allocation.
pro rata means that each suitable account should receive a/b shares, where there are a shares available and b suitable accounts. it has nothing to do with size. basing the allocation on account size favors the largest clients, violation! indication of interest can include an order size. I still say A
Slouiscar is correct. It should be A. The order size is part of the client’s indication of interest. If they want 100 shares but the pro rata distribution cals for giving them 500 shares, you are still only going to give them 100 shares. The curriculum specifically states an many examples and in the reading that you can NOT allocate shares based on account value.
The curriculum states you cannot prioritize based on account value, however, you CAN allocate pro rata on account value.
umm yeah Black Swan check pg 57 of ethics, it says “consider following procedures… when full amount of block order is not executed, allocating partially executed orders among participating client accounts pro rata ON THE BASIS OF ORDER SIZE” so it is acceptable,
Pro rata is allocating the same amount to each client, not on the basis of account value