Divided and Undivided Accounts
When the syndicate is formed, the underwriters agree to distribute the issue using one of two types of accounts. The Agreement Among Underwriters may distribute bonds under a divided account or an undivided account.
With an undivided account, also known as an Eastern account, each underwriter is given an initial allotment of the issue to sell. After the order period has ended, if some members have been unable to sell their full allotment, the remaining bonds will be redistributed to every underwriter according to their proportionate share of the total issue. An underwriter’s liability does not necessarily end with the successful sale of its own initial allocation.
With a divided account, or Western account, each underwriter is responsible only for its own allocated amount. If an underwriter is unable to sell its allotted amount of bonds during the order period, it is liable for any losses it may ultimately incur from its own unsold or discounted bonds.
Testing Tip: You can remember these different accounts through this mnemonic: Eastern Eats and Western Walks. Under an Eastern account, an underwriter must eat its allotted portion of the unsold shares, whether it has sold all its shares or not. In contrast, under a Western account, once an underwriter sells its allotted shares, it may walk away. If you are having trouble remembering which account is divided and which account is undivided, simply remember that divided and Western both begin with consonants and undivided and Eastern both begin with vowels.
Sample Question
Popperville is issuing 100,000