Page 53 - FINAL CFA II SLIDES JUNE 2019 DAY 1

READING 4: TRADE ALLOCATION: FAIR DEALING AND DISCLOSURE
MODULE 4.1:

TRADE ALLOCATION

LOS 4.a: Evaluate trade allocation practices and determine whether they comply with the CFA Institute Standards of
Professional Conduct addressing fair dealing and client loyalty.

The allocation of client trades on an ad hoc basis lends itself to two fundamental fairness problems:

• The allocation of trades may be based on compensation arrangements.
• The allocation of trades may be based on client relationships with the firm.

As far as compensation arrangements are concerned, an ad hoc allocation procedure gives rise to the temptation to allocate a
1
disproportionate share of profitable trades to performance-based fee accounts. In addition to violating Standard III(B) Duties to
Clients: Fair Dealing, this is a clear violation of Standard III(A) Duties to Clients: Loyalty, Prudence, and Care because this has
the effect of increasing fees paid to the investment adviser at the expense of asset-based fee accounts.

As far as the client relationship with the firm is concerned, an ad hoc allocation procedure gives rise to the temptation to
allocate a disproportionate share of profitable trades to favored clients. In addition to violating the fair dealing standard, this is
again a clear violation of Standard III(A) Duties to Clients: Loyalty, Prudence, and Care, which states that members owe a duty
of loyalty to clients and requires them to put clients’ interests above their own. Conflicts of interest should be avoided. Giving
certain clients special access to attractive IPOs with the intent to receive future investment banking business or more fees
creates a conflict and breaches the duty to clients.