Guys, I said at market value and pay interest. Here is my thinking behind it, let me know your thoughts: Assume that you have 2 clients: - Client A, who should be allocated the oversubscribed IPO shares, - Client B who you mistakenly allocate the oversubscribed IPO shares to. The general principle is that you should correct the mistake in a manner that would penalise neither client A nor client B. Hence the best thing to do would be to remove the shares from B’s account at market value and give B interest for the cash used to buy the share. You would then give the shares to client A at cost (ie IPO share price), thus bear the cost of the increase in market value of the shares. If you take the shares from B at cost value and then give them to A again at cost value, you would be taking a hit twice. It would also be ridiculous to pay B an interest on the cash used to buy the shares in that case. Any thoughts?
Your company made the mistake twice, you take the hit twice. I put remove from client b at cost because he never should have gotten it - so why should he pay the cap gains if the mkt price went up? Lets say the other way, the IPO tanked, should you remove the shares at market or cost now? I think you’d credit client b the interest on cash because your misallocation is in essence like a loan from client b to client a. You used client b’s funds so he should get the interest. That’s how I see things in the working world, I don’t know about the CFAI world.
M0851 Wrote: ------------------------------------------------------- > Your company made the mistake twice, you take the > hit twice. > > I put remove from client b at cost because he > never should have gotten it - so why should he pay > the cap gains if the mkt price went up? Lets say > the other way, the IPO tanked, should you remove > the shares at market or cost now? > > I think you’d credit client b the interest on cash > because your misallocation is in essence like a > loan from client b to client a. You used client > b’s funds so he should get the interest. > > That’s how I see things in the working world, I > don’t know about the CFAI world. Totally agree. To rectify the errors the actions should be such as to reflect what should have happened. No clients should get any additional bonuses or negative effects because of errors.
M0851 Wrote: ------------------------------------------------------- > Your company made the mistake twice, you take the > hit twice. > > I put remove from client b at cost because he > never should have gotten it - so why should he pay > the cap gains if the mkt price went up? Lets say > the other way, the IPO tanked, should you remove > the shares at market or cost now? > > I think you’d credit client b the interest on cash > because your misallocation is in essence like a > loan from client b to client a. You used client > b’s funds so he should get the interest. > > That’s how I see things in the working world, I > don’t know about the CFAI world. I agree with paying interest to client B but I disagree with removing the oversubsribed shares at cost. By paying client B the interest, you have already compensated him for the cash used to buy the oversubscribed shares. Why pay him an extra bonus on top of the interest? If the opposite were true and the market value IPO shares were below cost, you would then remove the shares at cost and again pay the client interest. This is how I see it.