Material Information, Allocation Pressure, and a Family Account
You are a portfolio manager at a boutique wealth firm. A long-standing client, who sits on the board of a supplier to a listed company, tells you in a private call that regulatory approval for an acquisition of that listed company is certain to be announced within two weeks. The client does not authorize trading and asks you to keep it confidential. Separately, your firm's syndicate desk offers 100,000 shares of a hot IPO in a sector you cover. The senior adviser asks you to allocate the shares to the five largest revenue-generating clients rather than pro rata across all eligible accounts. You also personally own 5,000 shares of the listed acquisition target in a family account. Firm policies prohibit personal trading in securities under coverage and require fair allocation.
1. What should you do with the board client's information?
Read the worked answer
Treat the information as potentially material and nonpublic. Do not buy or sell the target, the supplier, or related securities, and do not tip anyone, including colleagues or family. Do not use the information in client accounts. Report the conversation to compliance promptly and let compliance determine whether a restricted list is needed. The client's request for confidentiality does not override the duty to avoid trading on material nonpublic information. Preserve the confidentiality of the information within the firm, document the disclosure, and follow any wall-crossing or information-barrier procedure. If the information is ambiguous, compliance, not the portfolio manager, should decide whether it is material.
2. How should the IPO allocation be handled?
Read the worked answer
The allocation must be fair and equitable and should follow a predetermined objective method, such as pro rata across eligible accounts or a rotation that considers suitability and account capacity. Allocating only to the five largest revenue-generating clients is revenue-based favoritism, creates a conflict, and violates the firm's fair-allocation policy. Refuse the instruction, document the request, and escalate it to compliance or management. If the firm has a written allocation policy that permits differentiated treatment for documented suitability reasons, apply it consistently and retain the rationale. Do not allocate any IPO shares to your own or family accounts.
3. What should you do about your family account holding in the acquisition target?
Read the worked answer
Disclose the holding immediately and report the new information to compliance. Because you may now possess material nonpublic information, you cannot buy, sell, or hedge the shares until compliance clears the restriction. The holding itself may be permissible if it was acquired before the information and firm policy allows it, but it must be reviewed for conflicts and placed on any restricted list. Do not sell to 'lock in' a gain while in possession of the information, even if the family account is not a client account. Follow pre-clearance, blackout, and reporting requirements, and accept that compliance may require a stricter remedy.