From time to time, PIA receives initial public offering (IPO) allocations from FTI. Danko allocates these IPOs to those discretionary accounts that normally participate in IPOs. If the IPO is oversubscribed, he excludes his wife’s discretionary non-fee-paying account so that he is not accused of bias when allocating the oversubscribed IPOs.
Does Danko violate the CFA Institute Standards when he allocates oversubscribed IPO issues?
No
Yes, because he should allocate the oversubscribed IPOs across all discretionary accounts
Yes, because he should treat his wife’s account the same as other discretionary accounts and include it in the oversubscribed IPO allocations
Correct Answer is A, but don’t you think by not allocating the IPO to his wife, he is disadvantaging his client, he even haven’t given disclosure about how IPO allocation will be made?
As his wife is not paying fees she is not treated the same as everyone else, if she paid fees (presumably as other clients do) then she should receive an allocation.
She is consider a beneificial connected account as she is not paying fees.
Does this imply that if the IPO was oversubscribed, he is completely allowed to allocate excess shares to his wife, despite the fact that she is not a fee-paying client of the firm?
While it might seem that Danko is disadvantaging his wife by excluding her from the oversubscribed IPO allocations, the critical issue is whether he’s acting according to the CFA Institute Standards of Professional Conduct, particularly Standard III(B) – Fair Dealing. The correct answer, No, is based on the principle that Danko avoids any potential conflict of interest by not allocating the IPO to his wife’s discretionary non-fee-paying account. This action helps prevent any perception of favoritism, which could violate fair dealing principles.
In situations like these, the CFA Institute emphasizes the importance of fair treatment of all clients. Since his wife’s account is non-fee-paying and could raise concerns about bias, excluding her from the allocation ensures that other discretionary clients receive equitable treatment, especially in oversubscribed IPOs with limited allocations.
That being said, you’re right to raise the point about disclosure. To fully comply with ethical standards, Danko should disclose his allocation methodology to all clients, including his wife, to maintain transparency and clarify how IPOs are allocated. This way, he avoids misunderstandings or perceptions of unfair treatment, even when making decisions to prevent bias.