Municipal Syndicate Accounts: Divided (Western) vs. Undivided (Eastern) Liability
A municipal underwriting syndicate consists of two broker-dealers forming an account to underwrite $10 million in municipal bonds. Broker-Dealer X has a 40% participation ($4 million) and Broker-Dealer Y has a 60% participation ($6 million). Broker-Dealer X successfully sells its entire $4 million commitment, but Broker-Dealer Y fails to sell $2 million of its allocation. If the syndicate agreement establishes an 'Eastern Account,' what is Broker-Dealer X's remaining financial liability?
In an Eastern (undivided) account, members share liability for ALL unsold bonds according to their original percentage participation, even if they sold their entire initial allocation.
Complete Analysis & Legal Rationale
Syndicate liability rules are heavily tested: (1) In an Eastern Account (undivided as to selling and liability), each member is liable for unsold bonds according to its original participation percentage until the entire issue is sold. Here, BD X has 40% participation; when $2M remains unsold, BD X is liable for 40% of $2,000,000 = $800,000; (2) In a Western Account (divided as to selling and liability), once a member sells its initial allocation, its liability is completely extinguished.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
In an Eastern (undivided) account, members share liability for ALL unsold bonds according to their original percentage participation, even if they sold their entire initial allocation.
Fails to adhere to municipal bond rules regarding B.
Fails to adhere to municipal bond rules regarding C.
Fails to adhere to municipal bond rules regarding D.
Official Standard: Syndicate liability rules are heavily tested: (1) In an Eastern Account (undivided as to selling and liability), each member is liable for unsold bond