What does a pro rata distrbution exactly mean? Is it ok to give shares in accordance with the total assets value? Is it better to distrbute an equall number of shares to all account for which the investment is adequate?
If you went with the first option you would be disadvantaging small clients. A large trust/client could be a majority of a firms assets under management. A small client would end up getting pretty much nothing. Second option sounds accurate.
Prorata just means that everyone’s share is proportionate to the number of total shares they own. If I have 10,000 shares and you have 100, You are at an enormous disadvantage.
still not clear to me
I’ll do my best. I honestly lost money in a hedge fund fraud. The case has been going on for years, and finally the guy who stole my money is going to jail in the next couple months. When the accountants / lawyers divided the remaining $ to give back to investors, I mean what money was left 
it was done on a pro ratabasis, which I guess means : fair basis If you invested 250,000 you should get back more money than a guy who invested 25,000, right? They can’t just say “We have $5,000,000 to divided among 200 investors, we’ll give everybody the same amount and be done with it.” No no no ------ So, for trade allocation, it has to be fair. It can’t disadvantage clients. Standard IIIB - Fair Dealing states that members must deal fairly and objectively with all clients. ------ Off the top of my head, key things I’ve learned about trade allocation 1) I’m pretty sure it was on the exam last year, so it’s tricky and important stuff 2) trade allocation procedures must be disclosed 3) ALLOCATE NEW ISSUES BY CLIENT, NOT BY PORT MANAGERS, this means the firms don’t give big chunks of shares to PMs and say “divided it up among your clients” 4)Allocating hot IPOs to selected clients in the hopes of receiving additional business is a big violation 5)DISCLOSURE OF UNFAIR ALLOCATION PROCEDURES DOES NOT RELIEVE MEMBERS OF THEIR DUTIES OF FAIR DEALING
pro rata distribution based on assets under management is not a violation.
Which of the following statements is FALSE? It is permissible under the Standards to allocate trades: A) on a pro rata basis over all suitable accounts based upon account value. B) on a pro rata basis over all accounts. C) on a pro rata basis over all suitable accounts on the basis of an advance indication of interest and indicated order size. Your answer: A was incorrect. The correct answer was B) on a pro rata basis over all accounts. Allocating trades on a pro rata basis, pro rata based upon order size (when there are too few shares to fill all orders, e.g., filling 2/3 of all orders actually submitted), or pro rata based upon an advance indication of interest are all permissible. However, accounts must be checked for suitability.
Which of the following statements regarding allocating trades is CORRECT? It is: A) permissible under the standards to allocate trades on the basis of a predetermined formula that may deviate from a pro rata basis but is inherently fair. B) never permissible to deviate from a proportional account value weighting method of trade allocation, unless this is done on the basis of an advance indication of interest in the issue. C) never permissible to deviate from a pro rata basis, unless this is done on the basis of an advance indication of interest in the issue. Your answer: B was incorrect. The correct answer was A) permissible under the standards to allocate trades on the basis of a predetermined formula that may deviate from a pro rata basis but is inherently fair. If the firm has developed an allocation procedure that is formula-based, inherently fair, and the details are disclosed to clients, it is possible to deviate from a pro rata allocation basis.
******** In this case, does pro rate mean “fair” or “equal” I’m not sure *************** Pro rata allocation on the basis of an advance indication of interest means each account for which the shares are suitable: A) and which has expressed an advance indication of interest, shall receive m/n shares, where there are m shares available and n such accounts. B) shall receive m/n shares, where there are m shares available and n such accounts. C) and which has expressed an advance indication of interest, shall receive w*m shares, where w is the account’s proportional value of all such accounts and there are m shares available. Your answer: B was incorrect. The correct answer was A) and which has expressed an advance indication of interest, shall receive m/n shares, where there are m shares available and n such accounts. Pro rata allocation on the basis of an advance indication of interest means that all accounts that are suitable and that have expressed an interest in the issue shall receive m/n shares, where there are m shares available and n suitable accounts have expressed interest.
why does Schweser use this m/n formula. Does CFAi ever use a formula like this for trade allocation?
For the above posters that says pro rata by asset under management may deal unfairly to small clients, true it will be unfair to clients with very little sized assets under management, but how else to distribute the shares? Some say “pro rata by the orders.” What if there were no orders? Manager sees hot IPO stock and wants to allocate to all suitable portfolios. No orders were given, then can’t distribute by order size. What if no advanced interest were given?
I’m under the impression that it is by order size. The manager decides how many shares are appropriate for each client, then tries to fill all of those orders. If he can only get 80% of the total shares he’s asked for, each client receives 80% of the shares that were originally alloted to them
I think that if it is a principal trade (you manage the accounts) you would want to go pro-rata on account size, on the other hand if its an agency situation (clients are calling in order) you would want to go pro-rata on order size. It is pretty unclear in the curriculum, clearly a CFAI sucks moment…
If clients agree to an arrangement with the broker, they can do anything they like. But if broker conforms to the standards then he has to do it according to the standards, which unfortunately is not clear in my mind. If you say pro-rata, you have to indicate based on what! Pro-rata based on number of accounts? That’s not fair to large accounts. Pro-rata based on average account size over a year? That’s not fair to small accounts. Pro-rata based on expressed interest, which specifies number of shares wanted, sounds fair (especially with minimum allocation set). What’s the official standards answer?
I think its number 3. Something like… Pro rata based on advanced client indication
sbmarti2 Wrote: ------------------------------------------------------- > I’m under the impression that it is by order size. > The manager decides how many shares are > appropriate for each client, then tries to fill > all of those orders. If he can only get 80% of > the total shares he’s asked for, each client > receives 80% of the shares that were originally > alloted to them What sbmarti2 says makes sense. Assuming it is principal trade and not agency trade, the manager has already decided “how many shares are appropriate for each client” (like sbmarti2 said) based on suitability and allotting the appropriate number of shares to make an optimal risky portfolio (as covered in PM). And if the IPO share is oversubscribed he pro-rata’s based on his initial order allocation and not switch allocation strategy and fill certain accounts at the cost of filling partial orders for the others.