IPO Allocation, a Family Account, and a Box at the Tennis
Daniel Okafor, CFA, manages client accounts at a mid-sized asset manager. His firm's written IPO policy requires shares to be allocated pro rata across all eligible accounts in proportion to order size. An oversubscribed offering is eight times covered; Okafor's book totals 300,000 shares and he is allocated 120,000. He gives 90,000 to his three largest accounts, which together represent 60% of the book, and spreads 30,000 across everyone else. Three days before the deal he opened an account for his father-in-law and allocated 5,000 shares to it, without telling his employer about the relationship. He also accepted two corporate-box tickets to a tennis final from the lead underwriter's sales representative and did not report the gift.
1. Which CFA Institute Standards are engaged by Okafor's conduct, and what is the specific reasoning for each?
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Standard III(B) – Fair Dealing. The firm has a written pro rata policy; 60% of the book received 75% of the shares. Fair dealing does not require identical treatment, but any differentiation must rest on objective, pre-disclosed criteria applied consistently. Rewarding order size or tenure is not such a criterion here because the policy says pro rata.
Standard VI(A) – Disclosure of Conflicts. A discretionary account for a family member is a conflict. It must be disclosed to the employer so the account can be monitored or restricted; the failure to disclose is itself the violation, independent of whether the allocation was small.
Standard I(B) – Independence and Objectivity. The tickets come from the underwriter, i.e. a party whose allocations and future business Okafor influences. Gifts that could reasonably impair objectivity must be disclosed to the employer and generally declined; unreported acceptance is the problem.
Standard III(A) – Loyalty, Prudence and Care. If the father-in-law's 5,000 shares came out of the pool available to other clients, other clients were disadvantaged to benefit a related party.
2. Okafor's defence: 'The three big accounts pay the highest fees and have been with us for a decade; favouring them is in the firm's best interest.' Evaluate this argument.
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The argument conflates the firm's commercial interest with the client's interest, which is precisely the conflict the Standards address.
- Fair dealing is not the same as equal dealing, but preferential treatment must be justified by objective, client-relevant criteria disclosed in advance (e.g. a documented minimum account size for IPO eligibility) and applied consistently to all accounts that meet them.
- A written policy was in place and was not followed. Once a firm publishes an allocation method, departing from it case-by-case converts a neutral process into a discretionary reward system - the classic unfair-dealing fact pattern.
- Revenue-based preference is the wrong criterion because it is measured on the wrong party's benefit. The best-interest test runs to each client, and the smaller accounts are harmed in a way they cannot detect.
- Proportion matters. Splitting 120,000 shares pro rata (60% / 40%) would have been defensible; the actual 75% / 25% split has no stated rationale on file.
The appropriate route if he believes the policy is commercially suboptimal is to propose a formal, prospective policy change - not to override it on a live deal.
3. What should Okafor do now about the family account and the tickets, and what should the firm do about the deal?
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Family account:
- Disclose the relationship to compliance in writing immediately; a family account held by a portfolio manager is normally placed on a restricted or monitored list and is often excluded from new-issue allocations altogether.
- Do not participate in the decision to allocate to it; if the allocation has already been made, it should be reversed or reallocated under compliance supervision.
Tickets:
- Report the gift under the firm's gift-and-entertainment policy; acceptance of anything from an underwriter requires prior approval.
- Given the value and the source, the safest course is to decline or reimburse. Accepting again in future should be conditioned on written approval and on there being no pending or expected allocation decision.
The deal:
- Re-run the allocation under the written pro rata policy and disclose the correction to affected clients.
- Document the review; repeated deviation from an allocation policy is a supervisory failure, not just an individual one.
- Note that the CFA Standards are not satisfied by 'fixing' the allocation silently - the disclosure to clients and to the employer is part of the remedy.