IPO allocation, dealing commission and a personal offer

Four separate issues are bundled here and should be separated:

1. Inducement / conflicted allocation. An allocation conditional on routing commission is a benefit given to the firm in exchange for order flow. It taints both the allocation and any subsequent execution decision: Hollis is now chosen partly because it pays in allocations, not solely on best execution. The firm cannot show it is acting in clients' best interests unless the arrangement is prohibited or strictly controlled and disclosed.
2. Personal account dealing. A 20,000-share allocation to Priya personally, in an issue she is allocating to clients, is 'spinning'. It creates a direct financial incentive to favour Hollis with client orders, and it is precisely the conflict personal-account-dealing rules exist to prevent. Pre-clearance would almost certainly be refused.
3. Outside interest. The brother-in-law's 8% stake is a declarable personal interest in an issuer she is pricing and allocating. It requires disclosure on the conflicts register and probably recusal from the allocation decision.
4. Hospitality. The tennis tickets are a modest but registerable benefit; the problem is not the value in isolation, but that it sits alongside the allocation and commission pressure.

Note what is not the issue: taking an IPO allocation for clients is legitimate; the problem is the price attached to it.

Allocation. Apply the firm's written allocation policy before knowing how the stock performs, and allocate pro rata to order size across all 14 portfolios:

• 500,000 ÷ 2,400,000 = 20.83% fill.
• Priya's fund therefore receives 300,000 × 20.83% ≈ 62,500 shares - not 500,000, and not a discretionary top-up.

Conditions: no preferential allocation to performance-fee accounts, to the manager's own fund or to any client who might reciprocate; no allocation to accounts that did not order; the policy and the fill recorded before the debut; the fund's investment case documented independently of the allocation's size.

The temptation to concentrate 500,000 shares in the flagship fund is exactly the behaviour the policy exists to stop - it would flatter the fund's performance and the manager's remuneration at other clients' expense.

Personal offer. Decline it. Accepting shares in an issue she is allocating creates a conflict that cannot be managed by disclosure alone, and it is likely prohibited outright. Record the offer and the refusal, declare the brother-in-law's stake, and step out of the allocation decision for this issue. Refer the commission arrangement to compliance and to the firm's best-execution review.

Firm response:

• Suspend routing new commission to Hollis pending review; the arrangement cannot be shown to serve clients.
• Test the existing flow against best execution: were Hollis's executions and total cost competitive on their own merits? If not, the commission may need to be reallocated and clients remediated.
• Record the conflict, the decision and the rationale; report internally; consider whether the broker's conduct is a market-conduct matter for escalation.

On 'everyone does this': prevalence is not a defence and is the weakest possible test of conduct. The test is whether the client can be shown to have received the benefit of the arrangement - here, the inducement accrued to the firm and its manager, while the cost was borne by client commissions. A practice that requires clients to subsidise the firm's access to allocations is a conflict to be eliminated, not a market norm to be matched. If competitors are doing it, that is a reason to check whether the firm's own controls are strong enough, not a reason to relax them.