CFA Practice Question

CFA Practice Question

Bruno Peltier is a portfolio manager and manages comingled funds. When allocating IPOs, he gives his largest clients the highest allocation and then allocates IPO shares to the rest of the clients.
A. Bruno has violated Standard III (B) - Fair Dealing by favoring the largest clients.
B. Bruno has not violated any standard since large clients have large portfolios.
C. Bruno has violated Standard III (C) - Suitability, and Standard III (B) - Fair Dealing.
Explanation: Bruno has violated both standards. The standard on fairness does not call for equal treatment, but fair treatment. By allocating larger number of shares to bigger clients he may have made their portfolios too risky based on their ability to tolerate risk. The same applies to smaller clients. Allocations should be fair, in proportion to portfolio values as well as their appropriateness for the client. IPOs are not appropriate for every portfolio as they are risky and usually pay no dividends.

User Contributed Comments 12

User Comment
CocaColas I took "allocationg IPOs" to mean making available as opposed to actually subscribing to these on his clients'behalf..So suitability didn't seem to be an issue..
wollogo Yes the question says nothing about risk tolerance or the relative size between the 'large' clients and the rest.
dimanyc If he allocated to his largest clients the highest portion of the IPO, that doesn't mean that he increased their risk. Since they are large clients, this larger allocation may as well be the same % of their large portfolios as the smaller allocation to the smaller clients.
xiong Bruno violatedsyutability as well. he cannot simply allocate IPO shares to all his clients. Some clients might not be suited to buy IPOs.
Birdy101 can anybody explain what "comingled funds" are ?
bikegeek Birdy101 - commingled funds are when everyone's money is mixed together. So if I am your money manager, and I run $100 million, with $1 million being yours, all the money is invested in one big account, and you just happen to own 1% of the account's worth (not necessarily 1% of every holding, but 1% of the dollar value of the account).
kellyyang why A is not right.
jsubhen Cheers bike geek for the explanation.
Borsh and this is why I will fail again
arudkov borsh - take it easy & dont give up)) a lost myself while trying to understand some of questions but we should go ahead.
tommyguard3 it does not mention suitability and makes it sound like he is making more available to his bigger clients than his smaller clients which would make sense based on fair dealing as his bigger clients would require more to create the same portfolio % as his smaller clients.

Even if it is the way the explanation is written doesn't sound like it violates fair dealing just suitability.
cbracho54 if it is a comingled fund.. shouldn't that take care of suitability? doesn't that mean that the whole fund (with its practices) is suitable to the investor?
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