What is the principle of fair allocation in new-issue underwriting?

• A. Allocations should be based on the underwriter's preference.
• B. Allocations should be made on a fair, non-discriminatory basis, not to insiders or related parties.
• C. Allocations should favor insiders to maintain relationships.
• D. Allocations should be random with no consideration of investor type.

Answer: (B)

The main concept being tested is that allocations in a new-issue underwriting must be made on a fair, non-discriminatory basis and must not go to insiders or related parties. Underwriters are required to treat all investors equitably, using objective criteria to determine allotments and ensuring that retail investors have a fair opportunity to participate. This helps protect investors and preserve market integrity by preventing favoritism toward insiders or those linked to the underwriter. Saying that allocations should be based on the underwriter’s personal preference would undermine fairness, and directing them to insiders or related parties directly violates this principle. A scheme that is random with no regard to investor type would still fail to reflect demand and fairness; allocations should be made in a way that is non-discriminatory and based on legitimate, objective criteria to serve all allowed investor types.