Refer Q 57 Page 168: Is Aikliri’s policy with respect to IPO allocations consistent with required and recommended CFA Institute Standards? The answer states: The firm violates Standard III(B)—Fair Dealing. Under Aiklin’s policy, some clients for whom an IPO is suitable may not receive their pro-rata share of the issue. CFA Standards recommend that firms allocate IPOs on a pro-rata basis to clients, not to portfolio managers. Now I would like you guys to consider this situation. Lets say that the number of units of the IPO suitable for a client (given his risk/return capabilities) is just 1 unit. Hence, the stock is suitable for him. Right? But to what extent? Only to the extent of 1 unit in his current portfolio. If we do not allow the portfolio manager to review and we go by simple pro-rata allocation, he will end up receiving (say) 20 units. I am not sure if pro-rata method would be appropriate in such a scenario. Your comments would be appreciated. Thanks.
your example is a little ridiculous no offense. “suitable” does not mean you get 1 share of stock and call it a day. The point is PRO-RATA allocation, not give this PM 20% and another PM 40% and so on.
Eh, I disagree with Andrew. I think that suitability is the first judgment you need to make. I’m not sure if the scenario is legit, but if I were given that problem, I would allocate just the one share since suitability and risk tolerance trumps the Fair Dealing here. The remaining shares then would be allocated pro-ratably thereafter.
SeesFA Wrote: ------------------------------------------------------- > Eh, I disagree with Andrew. I think that > suitability is the first judgment you need to > make. I’m not sure if the scenario is legit, but > if I were given that problem, I would allocate > just the one share since suitability and risk > tolerance trumps the Fair Dealing here. The > remaining shares then would be allocated > pro-ratably thereafter. I agree. Suitability trumps allocation procedure - only with a caveat. In the example, suitability was supposedly lower than a ‘good deal’ allocation. What if suitability for a client is 100 units and pro-rata calls for 58 units. Standards call for allocating 58 units - right?
you guys are missing the boat. They already said that the new issue WAS INDEED SUITABLE for those clients who are getting it. The issue isnt whether it is suitable or not, it is the allocation method, which is clearly wrong in the problem.
no boat was missed… by us. andrew, you are correct in regard to the original problem–no one debated suitability of IPOs–yet rather how much was too much; the clarification was with the scenario presented by the original poster, not the original problem. It was a hypothetical situation which you didn’t address in your response. The situation reminds me of when there is a trust, and while adding in IPO shares would bolster the expected return and meet diversifcation needs, the level of risk tolerance is lower and so perhaps a smaller number of allocations are necessary–even less that what would otherwise pro-ratable be allocated. When that occurs, the remaining should should be reallocated pro-ratably to the others, I stand by my first response. AMCC, it’s often the case that people want and can tolerate as many IPOs as possible. Since they are more scarce and have high expected returns, you will almost always be allocated fewer than desired; hence why you limit to a fair pro-rated amount.
thanks for the clarification, although your answer doesn’t really help solve the problem…all we needed to know was to use pro-rata allocation rather than PM-allocation
this is the last nice post i’ll give, since I dont’ find your posts to rarely ever be helpful to others. HERE is the question at hand: “Now I would like you guys to consider this situation. Lets say that the number of units of the IPO suitable for a client (given his risk/return capabilities) is just 1 unit. Hence, the stock is suitable for him. Right? But to what extent?” We’re not talking about the problem from the book. The discussion is about this scenario. kkthx!
First off how are my posts unhelpful to others? I seriously want to know. I didn’t mean offense toward you, I’m just being direct and trying to get to the root of the question itself, which is why we are arguing over this, sorry for misinterpreting you. Good luck & thanks for being patient- things get misinterpreted easily here.
Thanks all.