About Pro rate allocation allocation

ruchita

When referring to pro rate allocation, we actually mean allocate by pro rate of order size instead of account size (account size is wrong!), right?

Also for IPO allocation, we allocate by the clients instead of portfolio managers.

Anything else about pro rate we need to know？ glad to see your thoughts!

Swanand

You're right about pro rata by order size, not account size. Also, you can have a pre-defined FAIR formula to allocated shares.

DSquaredSlim

I'm much confused on the pro rata allocation for IPO.

What if there were no orders given by the clients? A port manager sees a hot IPO stock that he thinks will benefit his clients. Assume that he has considered all suitability and has reasonable basis. Assume also that there weren't any clients that asked for the IPO so no orders are placed. There wouldn't be a pro-rata allocation based on order size as there were no orders. If so, how would you allocate the IPO shares amongst your suitable clients?

In Schweser Book 2, Exam 3am question 2 it asks if the portfolio manager violated the CFA standards by allocating IPO pro rata "based on the size of the asets under management in each account"

The answer was, "...Further, Mason has a reasonable basis of allocating the stock he receives; ie. assets under management"

The vignette doesn't say anything clients putting orders for the IPO in so I am assuming that the clients aren't aware of this IPO and no orders were placed.