CFA Level IEthical and Professional StandardsMedium
A brokerage firm receives an allocation of 10,000 shares in a hot, oversubscribed IPO. Five institutional clients each requested 10,000 shares. The portfolio manager allocates all 10,000 shares to his largest, most profitable client relationship. This action most likely violates:
- AStandard III(B) Fair Dealing, because all eligible clients should share the allocation proportionately
- BStandard VI(B) Priority of Transactions, because client trades were not prioritized over personal trades
- CStandard III(A) Loyalty, Prudence, and Care, because the manager failed to act with reasonable care
- DStandard I(B) Independence and Objectivity, because the manager favored a personal relationship
Show answer & explanationAnswer & explanation
Correct answer: A. Standard III(B) Fair Dealing, because all eligible clients should share the allocation proportionately
Standard III(B) requires members to deal fairly with all clients when disseminating investment recommendations or taking investment action, including pro-rata allocation of oversubscribed IPO shares rather than favoring one client based on profitability.
Why the other options are wrong
- B. Priority of Transactions concerns personal vs. client trades, not client-to-client allocation.
- C. This is not primarily a prudence/care issue but a fairness-in-allocation issue.
- D. No personal benefit to the manager is indicated, so this is not an independence issue.
Fair Dealing (III(B))
Members must treat all clients fairly when providing investment advice, taking investment action, or allocating limited investment opportunities such as IPOs.
- Oversubscribed IPOs should be allocated pro-rata among suitable clients
- Favoring clients based on fee size or relationship violates fair dealing
- Fair does not mean equal treatment, but consistent and systematic treatment
Memory trick: Slice the IPO pie evenly among diners.