I came across the following when reviewing the ethics:
(…) AB ordered block trades of x shs for each firm. The firm’s compliance manual was vague on the proper allocation of shs from a block trade. AB decided to allocate shs based on the size of client’s account, the largest client gets shs first at the most favorable prices.
It was considered as a violation of S. III B. Fair Dealing due to the lack of clear procedures for allocating block trades to clients account.
What would be the proper allocation procedure of block trades?
Pro-rata basis across all the client accounts not taking size into consideration.
In addition, it should not allocate the good ones to specific clients.
You’ll want to pay even more close attention if they’re talking about muni bonds (which require even lots).
It IS okay to allocate slightly more on a pro Rata basis to a clients account than what they asked for if allocating to their account requires even lots. And it IS okay to allocate slightly less to other clients than what they asked for if allocation requires even lots.
I believe that the problem here is not the number of shares allocated to the various accounts; its the price per share.
To deal fairly with all clients, the shares should have been allocated all at the same price.
If it was described as follows (nothing mentioned about the price), would it be correct?
AB ordered block trades of x shs for each firm. The firm’s compliance manual was vague on the proper allocation of shs from a block trade. AB decided to allocate shs based on the size of client’s account.
Assuming that SB allocated shares only to accounts for which they were suitable, that looks OK to me.