Quick Answer
The FINRA selling-agreement disclosure rule governs what every Agreement Among Underwriters (AAU) and Selected Dealers' Agreement must include in writing. Each agreement must state the public offering price (POP) (or a formula by which the price can be ascertained), and clearly state to whom and under what circumstances concessions may be allowed. This is disclosure INSIDE the dealer agreements, not disclosure to the public investor.
The syndicate and selling-group documents bind a chain of broker-dealers to a single public offering. Every dealer in that chain needs to know exactly what price the security will sell for and exactly what compensation it earns per share. The FINRA selling-agreement disclosure rule makes those two facts mandatory contents of the AAU and the Selected Dealers' Agreement.
What the Rule Requires
Every selling syndicate agreement (AAU) and selling group agreement (Selected Dealers' Agreement) MUST set forth in writing:
- The price at which the securities will be sold to the public, OR a formula by which that price can be ascertained
- To whom and under what circumstances concessions (if any) may be allowed
The rule applies to member-firm participation in a syndicate or selling group for a securities offering. The purpose is to ensure that non-syndicate dealers, selected dealers, and other distribution participants know exactly what they earn and at what price they can sell.
Think of it this way: The rule treats the dealer agreement as a binding price-and-compensation disclosure. A dealer who signs an AAU or a Selected Dealers' Agreement is committing to participate in a distribution; the rule guarantees that the dealer knows the POP and the concession terms in writing before participating. There is no "we will figure out the concession later" provision; the terms have to be in the agreement.
Exam Tip: Gotchas
- The rule requires either a fixed price OR a formula, not a fixed price only. Variable-pricing offerings (e.g., book-built deals where pricing depends on demand) can satisfy the rule by including a formula or pricing methodology in the agreement.
- The rule covers BOTH the AAU and the Selected Dealers' Agreement. Syndicate agreements and selling-group agreements are both governed by the same disclosure requirement; the rule does not distinguish between syndicate-level and selling-group-level contracts.
Disclosure Inside the Agreements vs Disclosure to the Public
The most common exam confusion on this rule is mistaking dealer-agreement disclosure for prospectus disclosure. They are different streams.
| Disclosure Stream | Where It Goes | What It Covers |
|---|---|---|
| Prospectus disclosure | Final prospectus filed with the SEC, delivered to public investors | Public offering price (POP), underwriting discount, use of proceeds, risk factors, lock-up terms |
| Selling-agreement disclosure (this rule) | Inside the AAU and the Selected Dealers' Agreement, between syndicate and dealer firms | Price (or formula), concession structure, circumstances under which concessions are allowed |
Think of it this way: The prospectus tells the public investor what the security costs and what the underwriter earns in aggregate. The dealer-level disclosure rule tells each individual selling dealer what its specific concession is. The public investor never sees the inter-dealer concession table; that information lives inside the dealer agreement.
Exam Tip: Gotchas
- The rule is about disclosure INSIDE the dealer agreements, NOT about disclosure to the public investor. The POP is disclosed to the public in the prospectus; the concession structure paid to selling-group dealers is disclosed in the selling agreements.
- A dealer cannot rely on the prospectus to learn its own concession, because the prospectus does not show per-dealer compensation. The selling-agreement disclosure is the dealer's source of truth on its own economics.
Why Concession Disclosure Matters
The concession is the per-share compensation a selling-group dealer earns when it sells a unit of the offering to a public customer. Without a clear written concession structure in the agreement, two practical problems arise:
- The dealer cannot price its sales effort; it has no way to know what margin it is working for
- The lead manager cannot enforce consistency across dealers; one dealer might claim a different concession than another, and disputes would have no contractual anchor
The rule eliminates that ambiguity by requiring both the amount and the conditions (e.g., concession applies on sales of N shares or more, concession adjusts on partially filled allocations, concession is forfeited on a flip caught by a penalty bid).
Think of it this way: The concession is the carrot that gets dealers to put effort into placing the issue. The rule makes sure that carrot is described in writing, not promised by phone. Every dealer in the chain works off the same documented terms.
Exam Tip: Gotchas
- The rule requires WHO gets the concession AND under what CIRCUMSTANCES, not just the dollar amount. A blanket "concessions may be allowed" clause does not satisfy the rule; the conditions have to be specified.
- The rule applies even when no concession is being offered. If the agreement does not contemplate a concession, that absence still has to be reflected; the rule's "if any" wording means the absence is itself a disclosed fact.