How does Standard III(B) Fair Dealing apply to IPO allocations and simultaneous trade dissemination?

Standard III(B) — Fair Dealing requires that members deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, or taking investment action. It does not require identical treatment, but it does require that no client is systematically disadvantaged.

IPO Allocation — Pro Rata Method

When a firm receives a limited IPO allocation, the fairest approach is pro-rata allocation based on each client's indicated interest, adjusted for suitability.

Example — Northwell Securities IPO of Cascade Robotics

Northwell Securities receives 10,000 IPO shares of Cascade Robotics at $28 per share. Five clients have expressed interest:

Total requested (suitable clients): 5,000 + 3,000 + 2,000 + 4,000 = 14,000

Available: 10,000

Pro-rata factor: 10,000 / 14,000 = 71.4%

Garza Foundation is excluded because the IPO is unsuitable for their mandate — this is proper, not unfair.

Recommendation Dissemination — Simultaneous, Not Sequential

When you change a recommendation, all clients with an interest in the security must receive the update at approximately the same time. The key word is fair, not simultaneous to the microsecond.

What's Acceptable:

• Sending an email blast to all clients at 8:00 AM before the market opens
• Publishing the research note on the firm's platform accessible to all clients
• Brief delay for operational reasons (e.g., institutional desk gets the note 5 minutes before retail because of system architecture) — acceptable if unintentional

What Violates III(B):

• Calling your three largest clients to tell them about the upgrade, then emailing everyone else two hours later
• Giving preferred clients "advance notice" of recommendation changes
• Allowing proprietary trading desks to trade ahead of client notifications

Does Fee Level Matter?

Higher-fee clients may receive a different level of service (more detailed reports, more frequent meetings), but they should not receive earlier access to recommendation changes. You can differentiate the depth of service, not the timing of material information.

Exam Tip: Fair dealing questions often present a scenario where one group of clients gets information before another. Ask yourself: was the timing difference intentional and designed to benefit certain clients? If yes, it's likely a violation.

Practice more ethics scenarios in our CFA Level I question bank.