Undivided Account

An undivided account, or eastern account, is an offering of a new issue in which underwriters are jointly and severally responsible for placing the total offering. Each underwriting firm is liable for placing unsold portions of the issue from other underwriters.

In an undivided account, for example, an underwriting firm could be responsible for placing 15 percent of an issue and does so. If the entire issue is not placed, the firm must assist in placing the remainder, even if it is greater than the original 15 percent. This contrasts with a divided, or western account, in which underwriters are liable for placing only their assigned percentage of the offering. The share of liability is divided among the underwriters by the size of their allotment of the investment vehicle.

Underwriters in investment brokerages assume considerable risk in new bond or security issues. The underwriter agrees to pay the issuer a certain amount of money regardless of the sale price at issue. To offset some of this risk, many firms will enter into syndication agreements, which spread the risks and rewards of underwriting a new issue. Most syndicates are administered by one of the participating firms, and the most frequent arrangement is the eastern account. Although the risks are fewer with western accounts, this form of agreement among underwriters also curtails the substantial profits made from the difference between the buying and selling prices of the issue. If an underwriter can participate in an eastern account with a consortium of prominent investment companies with expertise in market valuation and securities trading on the secondary market, it can share in a percentage of the profits while putting up a relatively small amount of money for the underwriting. Underwriters may include a market out clause in the agreement. This frees the underwriter from the purchase obligations in case of a development that impairs the quality of the securities or that adversely affects the issuer. However, poor market conditions or pricing do not qualify.

The terms are specified in the syndicate agreement, also called the underwriting agreement. The syndicate agreement is the contract between syndicate members in a bond or stock offering. It includes the fee structure. In addition to the proceeds the member receives when selling shares or bonds, the agreement specifies the amount of shares or bonds each syndicate member commits to sell. The syndicate manager can set up underwritings on a western or eastern account basis. Types of underwriting agreements include firm commitment agreement, best efforts agreement, mini-max agreement, all or none agreement and standby agreement.