Syndicate Agreement Architecture

A syndicate is a group of broker-dealers that share the underwriting work, the economics, and (in firm-commitment offerings) the inventory risk of a public offering. The lead/managing underwriter drafts and circulates the syndicate documents, and the layered contract structure controls who signs what, who is liable for what, and who gets paid what.

What Are the Three Roles in a Syndicate?

Every public offering distinguishes three categories of participants. The exam tests which category sits behind which document and which fee.

Think of it this way: The AAU is the partners' contract; everyone who signs it has skin in the game. The Selected Dealers' Agreement is a distribution contract with people who agreed to sell but did NOT agree to eat unsold inventory. Signing the AAU pays better but it puts capital at risk; signing the Selected Dealers' Agreement pays less but it is risk-free participation.

Exam Tip: Gotchas

• Selling group dealers are NOT syndicate members. They sign the Selected Dealers' Agreement, not the AAU, and they earn only the concession. If a question hides this distinction behind "broker-dealer participating in the offering," the right answer turns on which contract that dealer signed.
• The lead manager is also a syndicate member. Lead status adds management responsibilities and fees on top of the regular syndicate member share, but it does not exempt the lead from underwriting liability.

What Does the Agreement Among Underwriters (AAU) Cover?

The AAU is the master contract among syndicate members. It is sometimes called the syndicate letter or, when SIFMA's industry-standard form is used, the Master Agreement Among Underwriters (MAAU). SIFMA's MAAU is the template most large transactions follow.

The AAU covers six substantive points:

• Appoints the lead/managing underwriter as agent for the syndicate with authority to allocate the issue, set price, sign the underwriting agreement with the issuer, manage the syndicate pot, run stabilization, and submit FINRA notifications
• Allocates underwriting percentages assigning each syndicate member's pro-rata share of the offering
• Establishes liability as several, NOT joint so each underwriter is liable only for its own share of any unsold securities and one underwriter's failure does not bind the others
• Indemnification and contribution among underwriters and the lead manager for losses tied to misstatements in the offering documents; if indemnification fails, contribution is allocated in proportion to underwriting percentage
• Defines the lead manager's stabilization, syndicate-covering, and penalty-bid authority, though the substantive mechanics of those activities belong to the next unit
• Addresses default and termination: what happens if a syndicate member defaults on its allocation and the conditions under which the syndicate itself may be terminated

Think of it this way: The AAU is the lead manager's authority to act on behalf of all the underwriters. Without it, the lead could not sign the underwriting agreement with the issuer, allocate the deal, or run stabilization on the syndicate's behalf. The MAAU is just SIFMA's standardized version so that firms do not renegotiate the basic terms on every deal.

Exam Tip: Gotchas

• AAU liability is SEVERAL, not joint. If underwriter A fails to place its allotment, underwriters B and C are NOT automatically on the hook for A's share. When a member defaults, the AAU allocates the defaulted securities pro-rata among the non-defaulting underwriters and lets the manager arrange replacement purchases; that is a contractual term, not an automatic rule of law.
• The lead manager is the agent for the syndicate. Authority to price the deal, sign the underwriting agreement, allocate shares, and run stabilization flows from the AAU appointment, not from any standalone regulatory mandate.

What Does the Selected Dealers' Agreement (Selling Group Agreement) Cover?

The Selected Dealers' Agreement is signed between the lead/managing underwriter (acting for the syndicate) and broker-dealers who will help distribute the issue but are NOT syndicate members. SIFMA also publishes a Master Selected Dealer Agreement as the standard template.

Key features of the selling group structure:

• Selling group dealers buy from the syndicate as principal at the public offering price less the concession; they are principals in the shares they take down, not mere sales agents, but they take on no underwriting commitment for unsold securities
• No financial liability for unsold securities: if the dealer does not place its allocation, the unsold portion reverts and the dealer is not on the hook for the remainder
• Pricing: the dealer buys at the public offering price (POP) minus the concession (e.g., POP = $20, concession = $0.40, dealer buys at $19.60 per share). The concession is the dealer's gross profit per share sold
• Selling group dealers do NOT participate in the underwriting fee or the management fee. Those compensation buckets stay with the syndicate
• The agreement also addresses operational terms: how orders and allocations are handled, payment and delivery mechanics, and standards of dealer conduct, in addition to price and concessions

Think of it this way: Picture a restaurant with the syndicate as the kitchen and the selling group as a contracted delivery service. The kitchen takes the risk that the food gets made and sold; the delivery service only gets paid per order delivered and bears no risk on unordered inventory. The kitchen earns the cooking margin; the delivery service earns the delivery fee per order.

Exam Tip: Gotchas

• Selling group members eat NO inventory risk. Unsold shares revert to the syndicate, not the selling group. If a question describes a dealer that "had unsold shares revert to the lead manager," that dealer is in the selling group.
• The concession is the only compensation a selling group dealer earns. No underwriting fee, no management fee. Underwriting and management fees belong to the syndicate members listed in the AAU.

What Are Deal Wires?

The lead manager runs the syndicate as much by electronic notifications ("deal wires") as by contract. Wires are sent to syndicate members, selling group dealers, and FINRA throughout the offering. Each wire is identified by a Deal ID the lead manager establishes at the start.

Typical wires include:

• Registration effectiveness wire: an internal deal-flow notice confirming the SEC has declared the registration statement effective
• Pricing wire: an internal notice confirming the final public offering price and the allocation each member receives; also feeds the pricing information FINRA requires to be reported
• Restricted period wire: notifies syndicate members of the start of the Regulation M restricted period and doubles as the basis for the FINRA restricted-period notice the manager must file (covered later in this unit)
• Penalty bid / syndicate covering wire: notifies the syndicate of a reclaimed concession or an open-market covering purchase; for OTC Equity Securities this also has a corresponding FINRA notification requirement (mechanics in the next unit)
• Closing wire: an internal notice confirming settlement, release of funds, and end of the distribution

The wire system serves two purposes simultaneously: it gives every syndicate participant real-time confirmation of where the deal stands, and, for the specific events FINRA requires notice of, it doubles as the record supporting the required regulatory notification.

Exam Tip: Gotchas

• The Deal ID is established by the LEAD MANAGER, not by FINRA or by the syndicate as a body. The Deal ID then becomes the thread that ties every FINRA notification back to the same offering.
• Not every deal wire is itself a mandatory FINRA filing. Internal notices (registration effectiveness, closing) coordinate the syndicate; the restricted-period determination, pricing, cancellation/postponement, and OTC penalty-bid/syndicate-covering notices are the specific items FINRA requires the manager to report, each on its own deadline (detailed later in this unit).

What Should You Check on Exam Day?

• Confirm which document a broker-dealer signed before answering a liability or compensation question: the AAU (syndicate member) or the Selected Dealers' Agreement (selling group).
• Remember AAU liability is several, not joint; do not let a defaulted-allotment fact pattern imply automatic joint liability.
• Check that a "lead manager" fact pattern is not treated as exempt from underwriting liability just because it also holds agent authority.
• Verify who establishes the Deal ID (the lead manager) before answering a wire-attribution question.
• Distinguish a required regulatory wire from an internal courtesy notification when a question asks whether a filing was mandatory.