Agreement Among Underwriters

Ardmore Securities joins the underwriting syndicate for a corporate offering by Brightwater Robotics. Two separate contracts govern the transaction: the underwriting agreement and the AGREEMENT AMONG UNDERWRITERS. Which statement correctly describes the agreement among underwriters?

1. A.It is the contract between the issuer and the syndicate under which the syndicate commits to purchase the securities.That is the underwriting agreement, signed between the issuer and the manager acting for the syndicate.
2. B.It is the contract between the syndicate and the selling group members who help distribute the shares.That relationship is documented by the selling group agreement, a separate contract.
3. C.It is the contract among the syndicate members themselves, appointing the manager, fixing each member's participation, allocating the spread, and setting how liability is shared.Correct. The agreement among underwriters governs the internal relationships of the syndicate.
4. D.It is a filing between the underwriters and the SEC disclosing the terms of the distribution.Wrong. It is a private contract among the syndicate members, not a regulatory filing.

Why: The agreement among underwriters, sometimes called the syndicate agreement, is the contract the syndicate members sign with one another. It appoints the syndicate manager and grants the manager authority to act for the group, fixes each member's participation, allocates the gross spread among the management fee, underwriting fee and selling concession, sets the duration of the syndicate, and specifies whether liability for unsold securities is divided (Western) or undivided (Eastern). The underwriting agreement is a different document entirely: it is signed between the syndicate manager, on behalf of the underwriters, and the issuer.

A syndicate member with a 10% participation in an EASTERN (undivided) account sells its entire allotment. At closing, $1 million of the issue remains unsold by other members. The member's liability for the unsold bonds is:

1. A.$1,000,000, as the last liable memberWrong. Liability is proportionate, never sequential.
2. B.$500,000 shared equally with the managerWrong. Percentage participation, not equal splits, governs.
3. C.$0, because it sold its full allotmentWrong-but-tempting. That escape belongs to WESTERN (divided) accounts.
4. D.$100,000 - 10% of the unsold balanceCorrect. Undivided liability follows the participation percentage to the last bond.

Why: In an undivided account, each member bears its participation percentage of any remaining unsold securities: 10% of $1 million = $100,000, even though the member sold everything it was allotted. Citation: syndicate account structures. Takeaway: Eastern = shared to the end; Western = sell yours and done.