ethics eoc Q

[derswap07]

In Jon Lock case eoc # 5 :
The para pertaining to the q :
Trade Allocation

1. Locke
   “Provide written trade allocation procedures consistent with the CFA Institute Standards of Professional Conduct.”
2. Black
   “I will mail you a copy of our new procedures stating that trade allocations must be reviewed at the end of each month against clients’ IPS. It also says that interest will be credited to accounts that have been incorrectly allocated shares and debited from those accounts that should have received shares.”

Q:
With regard to Locke’s condition regarding trade allocation, does Black’s response violate the CFA Institute Standards of Professional Conduct with respect to allocation reviews and interest adjustments, respectively?

1. Yes.
2. No, it violates the standards only with respect to allocation reviews.
3. No, it violates the standards only with respect to interest adjustments.

Their answer:
A is correct. Client suitability for an investment must be reviewed prior to allocation, not afterward. With respect to interest adjustments, clients who were incorrectly allocated shares must be paid for the use of their cash; however, in no instance should clients suffer a loss because of an allocation error by the manager (that is, have interest removed from their portfolio even though shares are put in their account on a back-dated basis).

I have a problem understanding this. Why yhe interest should not be deducted on back-dated basis when they got the shares?

 

[MrSmart]

Because it was an allocation error by the manager, their IPS did not specify a lower cash basis than what has occured, so you do not remove the interest earned/should have earned on that front.