1. Fair treatment of clients requires that IPO shares are distributed on a pro rata basisthe

number of shares allocated to the investment manager are allocated to appropriate client

portfolios in proportion to the size of the clients portfolio. Client portfolios are deemed

appropriate if the IPO fits the risk-return and other investment characteristics specified

in each clients investment policy statement.

An alternative allocation could be equal distribution. The following questions allow

you to think about the ethical issues in allocating IPOs to client accounts Suppose a manager is allocated 4,000 shares of an IPO offered at $20 a share but closes at $25 a share on the first day of trading. The manager identifies three client accounts that are appropriate for the IPO allocation. These accounts are in the amount of $1 million,

$5 million, and $10 million. The manager plans to take whatever amount is needed out of

the account to provide the client with the IPO allocation at the IPO offer price. Assume

that all of the assets remaining in all three accounts earn 10 percent. Calculate the return

to each account depending on whether the shares are allocated equally or on a pro rata

basis. Which method do you think is most equitable, and why?