CFA Practice Question

CFA Practice Question

The allocation of shares in oversubscribed IPOs to investment managers for their personal account is a perk that is most clearly a violation of Standard ______.
A. I (B) - Independence and Objectivity.
B. VI (C) - Referral Fees.
C. III (B) Fair Dealing.
Explanation: External sources may try to influence the investment process by offering analysts and portfolio managers a variety of perks. Corporations may be seeking expanded research coverage; issuers and underwriters may wish to promote new securities offerings; brokers typically want to increase commission business. The perks may include gifts, invitations to lavish functions, tickets and so on. One type of perk that has gained particular notoriety is the allocation of shares in oversubscribed IPOs to investment managers for their personal accounts. This practice is a violation under Standard I (B) - Independence and Objectivity.

User Contributed Comments 14

User Comment
eddeb Do not get this one...

Allocation of a short-supply IPO for personnal accounts limits the potential of access by their own clients to the IPO..

Violation of of "Priority of transactions". How do we know these shares were given to promote the stock? I see no gifts here...

Is it because of the word "perk"?
armanaziz I believe it's more because of the word "to" as in "oversubscriber IPOs to Investment managers" - which implies that the allocation was not made by the investment manager.
wollogo Yes there is a violation of priority of transactions but it also a violation of independence and objectivity. (Actually come to think of it it could also be a violation of additional compensation arrangements!) B is the best answer.
Birdy101 in Q4 of this exam it is fair dealing, don't realy understand, why it is not the case for this question....
dbadidas8 I believe:

The perk is being granted to the investment managers, which will affect their objectivity and independence.

IF the investment manager was allocating the IPO shares, it would be fair dealing.
srhyland Analyst Notes is pretty good with a lot of questions like this. So I find it hard to disagree, but I don't get this one?
Genevieve the subject of the question is "the allocation" which to me refers to the broker who is doing the allocation...which means "Fair Dealing" is the violation.
u0302638 Why Fair Dealing is not violated?
jpducros probably because the IPO is OVERsubscribed. So no client is really hurt. I still think the Fair Dealing is violated, but the clearer violation is "Independance and Objectivity".
chandsingh I think its just because the investment mangager did not have the authority to allocate and was just a receipient of the shares. If they did have a say on the allocation then fair dealing clearly applies. Tricksy
ColonelCFA I believe Chandsingh is right. This is not a question of what the investment manager is doing, but rather what they are receiving. The words "to" and "perks" allude to this.

Just my $0.02
ezimokha Key words: "Personal" "perk".
chesschh perk: independence and objectivity. memorize
620079911 This is the second question that I selected the correct answer for and was graded incorrectly. Is there a glitch?
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