Meridian Wealth: An Oversubscribed IPO, a Threatening Client and a Round of Golf

Standard III(B), Fair Dealing. The firm's written policy is pro rata across suitable accounts, with a 5% cap. Dara's allocation departs from it in two directions: the largest client gets 60% of the shares (far above the 5% cap) and the small accounts get 3,000 shares in amounts below the minimum position size, which is not 'suitable' allocation but a token distribution. Fair dealing requires that no client receives preferential treatment; a client's size, fee arrangement or threat to leave are not legitimate grounds for preference.

Standard III(A), Loyalty, Prudence and Care. Placing 5,000 shares in the firm's proprietary account ahead of eligible client accounts subordinates client interests to the firm's own. Clients must not be disadvantaged by the firm taking a position it could have allocated to them.

Standard VI(A), Disclosure of Conflicts. Dara's compensation is tied to the largest client's performance, so she is personally rewarded for the allocation she gave that client. That conflict was not disclosed to affected clients or to the firm.

Standard VI(B), Priority of Transactions. Although written with personal transactions in mind, the principle - client and employer interests before the member's own - is directly relevant to the proprietary allocation taken ahead of client orders.

Standard IV(A), Loyalty to Employer. Deliberately overriding a written allocation policy is a breach of duty to the employer, not merely a judgement error.

Correct allocation.

• Define the eligible population first: all discretionary accounts for which the security is suitable under the IPS, excluding accounts below a documented minimum position size (that exclusion should be written into policy, not applied ad hoc).
• Allocate pro rata to the eligible accounts, respecting the 5% cap and any client-specific concentration limits.
• Do not allocate to the proprietary account while client demand exceeds supply; if the firm wishes to hold the security, it must buy in the secondary market after client orders are filled.
• Document the allocation, the eligible population and the rationale at the time, because the file will be reviewed.
• The largest client's threat to leave is a commercial matter for management, not a basis for breaching the allocation policy.

Brother-in-law's account.

• The account is a client account and should be treated exactly like any other: pro rata, no exclusion, no preference.
• The relationship is a conflict of interest that must be disclosed to the employer in writing and, where material, to clients. Dara should not make allocation decisions affecting that account; the allocation should be reviewed by a supervisor.
• If Dara is a beneficiary of the account or directs it, the personal-transaction rules apply, and pre-clearance and disclosure are required.

Remediation. Reverse or unwind the allocation where possible, reallocate consistent with policy, report the breach to compliance and the affected clients, and review whether other allocations were similarly handled.

Independence and objectivity (Standard I(B)). A gift or entertainment offered by a broker in exchange for order flow is an inducement that creates a conflict between the client's interest in best execution and the manager's interest in personal benefit. Modest entertainment may be acceptable; an offer explicitly conditioned on routing commissions is not, and accepting it would compromise the manager's objectivity.

Best execution and soft dollars (Standard III(A)). Client commissions are client assets. Routing them to Holt in exchange for a benefit to Dara - rather than to clients - is a misappropriation of client brokerage. If any part of the commission is directed to obtain research or services, those services must benefit clients, be documented, and be reviewed by the best-execution committee. Here the committee has not reviewed the arrangement, which is itself a control failure.

Disclosure and employer consent (Standards VI(A) and IV(A)/(B)). Dara must disclose the offer to her employer and obtain written permission before accepting anything of value from a broker. Any additional compensation arrangement connected with the firm's business requires employer consent.

Required actions.

• Decline the invitation or accept only if it is de minimis, disclosed and approved in writing under the firm's gift and entertainment policy.
• Escalate to compliance; the brokerage arrangement must go through the best-execution committee with documented evaluation of execution quality and commissions.
• Disclose to clients any conflict arising from broker relationships and from compensation tied to a single client's performance.
• Reconsider Dara's compensation design: tying pay to one client's account performance is the root cause of both the allocation and the commission conflict, and a control fix that does not address it will not hold.