Ethically speaking: Grievous gifting?

(May 2006) We asked FCSI designees from coast-to-coast to respond to your ethical dilemmas — everything from culling clients, to specific fund recommendation and a host of suitability issues. In our second column, hear what FCSI Shelly Appleton-Benko suggests for an advisor who is concerned about offering new shares to select clients.

You Wanted To Know… I am an investment advisor who is often allotted shares in the initial public offerings my firm underwrites. My firm views this as an opportunity for its advisors to use the shares as either a marketing tool to attract new business or as a way to reward clients who do substantial business with us. My business has grown considerably during the past few years, and I’ve made it a practice to always distribute the shares among my five largest clients — even when other clients express an interest in certain new issues prior to their distribution. Aside from any suitability issues, am I fulfilling my duties to my clients by consistently rewarding my five biggest clients and never giving my other clients the opportunity to participate?

Shelly Appleton-Benko, FCSI, Vancouver, Responds:

The direct answer to your question is that you are not fulfilling your duties to your clients by always allocating new IPOs to your five largest clients. By consistently rewarding only certain clients you are simply not fulfilling your professional obligations as an advisor. Your fiduciary duty to your clients must always come first in your practice, and be at the forefront of your business plan.

Share allocations need to be fairly and appropriately allocated on all share offerings. To quote the Investment Dealers Association, "It is a well established principle that the interests of clients take priority over those of registrants." The issue of client priority has been the subject of much regulatory attention — something to which all Canadian regulators address routinely. Most certainly you should review these requirements.

In addition, firms should have written policies and procedures in place that disclose to clients what they can expect and how they can express their interest to participate in an initial public offering or private placement. Further, clients need to be aware of these regulations and they can also help you manage their expectations. Should your clients be interested in pursuing these opportunities in the future, it is paramount you are upfront about the limited availability of shares and provide them a copy of your firm’s general policy statement on share allocation.

By being honest about the limited availability of these shares and the restrictions that are imposed upon you when allocating them, you will be able to ensure that all your clients are treated fairly.

Shelly Appleton-Benko, B.Comm, CIM, FCSI is portfolio manager and director, Odlum Brown Limited

If you have an ethical dilemma that you’d like to ask one of our FCSIs, please e-mail your question to heidi.staseson@advisor.rogers.com

(05/26/06)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.