Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What type of agreement involves underwriters acting as brokers without taking on risk?

1. Best-efforts agreement

2. Firm commitment agreement

3. Syndicate agreement

4. Selling group agreement

The correct answer is: Best-efforts agreement

A best-efforts agreement is a type of underwriting arrangement where underwriters agree to sell as much of a new issue of securities as possible, but they do not guarantee the entire amount will be sold. This means they act more like brokers than traditional underwriters who assume financial risk for unsold shares. Underwriters in a best-efforts agreement will take actions to market and sell the securities; however, they do not commit their own capital to purchase them, thus avoiding the risk involved with taking on the entire issuance. Should the underwriters be unable to sell all of the offered securities, the issuer retains the unsold portion, minimizing the financial exposure for the underwriters. Other agreements, like a firm commitment agreement, involve underwriters taking on the risk by purchasing the entire issue and then reselling it, which does not align with the definition of acting merely as brokers. Similarly, syndicate and selling group agreements generally include broader partnerships and shared risks, deviating from the essence of a best-efforts arrangement. Therefore, the best-efforts agreement accurately reflects the specific scenario where underwriters act as brokers without the financial risk associated with guaranteeing sales.