Trade Allocation

Question 1

Relevant Standard

Answer 1

Standard III (B) Duties to Clients: Fair Dealing

“Members and candidate must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment actions, or engaging in other professional activities”

Question 2

Issues with ad hoc client trade allocation

Answer 2

• The allocation of trades may be based on compensation arrangements
• This can lead to the allocation of a disproportionate share of profitable trades to performance based fee accounts.
• The allocations of trades may be based on client relationships with the firm.
• This can lead to the allocation of a disproportionate share of profitable trades to favored clients.

Question 3

Steps to ensure appropriate trade allocation practices

Answer 3

• Get advanced indication of client interest regarding new issues
• Distribute new issues by client, not by portfolio manager
• Adopt a pro rata allocation method or similar objective method or formula for allocating trades
• Treat clients fairly regarding both execution of trades and price.
• Execute orders timely and efficiently
• Keep accurate records of trades and client accounts
• Periodically review all accounts to ensure that all clients are being treated fairly.

Question 4

Disclosure

Answer 4

• Disclose trade allocation procedures to clients and potential clients.
• Disclosure of unfair allocation procedures does not relieve CFA Institute members of their duties of fair dealing and fiduciary trust to all clients.