From the answer in Ethics: “in no instance should client suffer a loss because of an allocation error by the manager (that is, have interest removed from their portfolio even though shares are put in their account on a back-dated basis)”.
Does this mean interest should not be removed from the account if shares are put back to the account after correction?
The fund allocated X shares on an IPO to the client. Later found it was not a right investment, overallocation error. They REMOVED the shares on the account on a backdated basis - this is INCORRECT - because they did an Allocation REVIEW after the fact. Investment suitability should be DONE BEFORE not AFTER.
Fund credited back interest to the client’s account for the use of Cash for the allocation. This was CORRECT. If they had not credited back the interest - it would have been incorrect.
Thanks cpk123. This makes sense if the correction is made to remove previously wrongly allocation shares.
But what about allocate shares to account at T1 to correct the error made at T0? i.e. the shares should be allocated to account at T0, but was not due to error.
that too would be a violation… you should have determined that the shares were suitable BEFORE at T0, and allocated to the client if available then. Trying to determine at T1 - that the shares should have been suitable - IS wrong.
The allocation was originally determined at T0, although incorrectly. Then the manager notices the error at T1 and makes the correction at T1 by adding the shares to the account.
this is from a question in the CFA cirriculum, 1) to correct a previous wrong allocation by removing the over-allocated shares, also to credit back interest to the account; 2) to correct a previous missed-allocation by adding back the shares.
I am just not sure about 2). Should interest be debited from the account as part of the correction of allocation?
I do not believe correction of allocation can be done back dated. it can be done going forward… and now you would take cash from the account and charge the interest going forward. It would not be a backdated transaction.
for the wrong allocation - you are making the correction backdated - so you credit the interest back.
but in either case - not doing the suitability test up ahead - was a violation.
On this ancient topic - say there was an incorrect allocation and a client who didn’t get their pro rata determined share on T0 but say T1 (which may have been a month later as per this sample) would suffer from a potential opportunity cost. Is the client eligible to demand that loss in potential gain from the Manager?
Thanks.