Reading 8: Trade Allocation: Fair Dealing and Disclosure -

style, white, black, accounts, class

Q1. A firm has three accounts for which shares of an IPO are suitable. These three accounts have asset size of $2,500,000.00 (A), $3,500,000.00 (B), and $4,000,000.00 (C), and have given advance indications of interest for 2,000 shares, 1,000 shares, and 1,000 shares respectively. There are 1,000 shares available. All of the following allocations are acceptable EXCEPT:

A) 500 shares to A, 250 shares to B, and 250 shares to C.

B) 250 shares to A, 350 shares to B, and 400 shares to C.

C) 333 shares to A, 333 shares to B, and 333 shares to C.

Q2. Which of the following statements is FALSE? It is permissible under the Standards to allocate trades:

A) on a pro rata basis over all suitable accounts.

B) on a pro rata basis over all suitable accounts on the basis of an advance indication of interest and indicated order size.

C) on a pro rata basis over all suitable accounts based upon account value.

Q3. When a firm seeks to allocate a disproportionate number of shares of a hot IPO to performance-based fee accounts this constitutes a violation of the Standard concerning:

A) additional compensation arrangements.

B) priority of transactions.

C) fiduciary duty.

Q4. Alba Vasquez allocates trades of hot new IPOs as follows: m*p/(p+s) shares to performance-based fee accounts, m*s/(p+s) shares to standard fee accounts, where there are p suitable performance based fee accounts, s suitable standard fee accounts, and m shares available. This action is:

A) not permissible since it effectively favors the performance-based fee accounts.

B) permissible since it effectively amounts to a strict pro rata basis of allocation.

C) not permissible since it is based upon a formula that is not inherently fair.

Q5. Concerning Standard III(B), Fair Dealing, which of the following statements is TRUE? The Standard:

A) concerns the dissemination of investment recommendations and the taking of investment action.

B) concerns the dissemination of investment recommendations but is not concerned with the taking of investment action.

C) is not concerned with the dissemination of investment recommendations so long as the taking of investment action is inherently fair.