Ethics IPOs

CFA Level III
#1

#1 Can a member ever participate in a hot IPO, or must all of clients’ desired position be satisfied before member gets the first share?

#2 Among clients who are participating in IPOs, are shares supposed to be allocated in equal numbers across clients, or can they be allocated proportionately based on account size?

#2

#1

Member can not participate in oversubcribed IPO, so if that is what hot means here then no. If hot simply means it is wanted but not oversubscribed. I would say they can partisipate. Although I think CFAI would use the worl oversubscribed on the exam, the real think is well thought out unlike CFAI or Schweser mocks.

Now I have seen many questions that simply say answer with a NO NO for any IPO. I think those questions are wrrong, most the time they tend to be Schweser. CFAI has nothing against IPO’s, but it is about putting priority of clients first, if noone wants that IPO, and it is not suitable for anyone of yoru clients, and you want it, you can have it.

#2

I think they can be based on account size, the rule is to have a set allocation method that is disclosed and followed. You cant allocate 500 shares to a ten billion portfolio, the owner is going to look and say seriously…And you cant allocate 500 shares to a grandma, so it makes sense to me that you can allocate based on portfolio size.

I have never studied ethics beyond the first read for Level I. Since then I target each question, I would ask myself what would the pope do in this situation, seems to work about 70% of the time.

#3

Pg 72-73 III (B) Fair Dealing

Consequently, Standard III(B) requires that members or candidates treat all clients fairly in light of their investment objectives and circumstances. For example, when making investments in new offerings or in secondary financings, members and candidates should distribute the issues to all customers for whom the investments are appropriate in a manner consistent with the policies of the firm for allocating blocks of stock. If the issue is oversubscribed, then the issue should be prorated to all subscribers. This action should be taken on a round-lot basis to avoid odd-lot distributions. In addition, if the issue is oversubscribed, members and candidates should forgo any sales to themselves or their immedi-ate families in order to free up additional shares for clients. If the investment professional’s family-member accounts are managed similarly to the accounts of other clients of the firm, however, the family-member accounts should not be excluded from buying such shares.

#4

cpk, can you please explain your understanding of this.

So allocating ten times the amount to a huge account than to a grandmother is unethical ?

#5

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#6

yeh i am not sure if pro rata means

as a proportion of the IPO, or as a proportion of their account or stock IPO demand

#7

I guess prorata uses combination of both. # of shares available and size of account / total pool of accounts for whom the shares are suitable.

#8

So no participating alongside clients in oversubscribed IPOs, even given fairness of allocation and complete disclosure?

#9

oversubscribed means someone did not get the share they wanted i belive. so before you get any, everyone else has to get what they want

#10

Hey everyone. Quick refresher on this thread -

Are there circumstances under which the analyst can participate in the IPO of 1) a subject company, ie company under his/her coverage, and 2) a company not under their coverage but within that sector (for instance the analyst covers most stocks in Consumer Retail, but not JC Penney, can they participate in the offering for JC Penney?)