Unallocated trades

From The Jolly Contrarian
Jump to navigation Jump to search

Where an investment manager acts as agent on behalf of a portfolio of clients, in placing transactions with its broker, dealer, or broker-dealer, it will usually do this in bulk before it notifies the dealer which transactions should be allocated to which client.

A legal conundrum that arises in the context of bulk agency orders placed by an asset manager with a broker-dealer on behalf of several clients. Typically the agent will place the order first without naming the principals, only to advise the broker to which principals it should allocate the securities later in the day.

Agents will often proudly declare that at no time, in no circumstances, can they ever be liable as a principal for transactions they instruct in this way on behalf of their clients.

This convenient outlook — I mean, they would say that, wouldn’t they? — provokes more questions that it answers: if the agent isn’t responsible for unallocated trades, then, until they’re allocated, who is? The broker doesn’t know who the principal is, so it can hardly take up matters with it directly. On the other hand, asset managers will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the broker's problem.

But denying principal responsibility, in the eyes of the common law, is a rather optimistic disposition. An agent who has not disclosed its principal must perform, unconditionally, on its principal’s behalf. This the agent might not characterise as a principal obligation, but against the rest of the world, it may as well be. The counterparty’s interest is to be paid; it does not care by whom. Nor, under the common law, can agent the shed that responsibility even by naming the principal: the counterparty now has a choice against whom to enforce —- though this the parties may vary by agreement.

So much bunk — all of these reasons. The manager, as agent, chose not to disclose its principal. By doing so it accepted unconditional responsibility for settling its client’s transactions.

See also