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

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In a firm commitment underwriting, unsold securities are retained by ________________.

Broker-dealers
The syndicate
The issuer
Investors

The correct answer is: The issuer

In a firm commitment underwriting, the underwriters agree to purchase the entire issue of securities from the issuer, taking on the risk of any unsold shares. This means that if the underwriters are unable to sell all of the securities to investors, they are required to retain those unsold securities themselves. The issuer has received its funds upfront for the full amount of the securities regardless of whether those securities are sold, which is why the correct answer identifies the issuer as the entity retaining unsold securities. The other choices represent parties involved in the underwriting process but do not take on the responsibility of unsold securities in a firm commitment underwriting. Broker-dealers primarily facilitate the sale of the securities but do not retain the unsold portion in this type of underwriting. The syndicate, which consists of a group of underwriters that may work together on the offering, allows for shared responsibilities but ultimately, it is the issuer that receives the guaranteed funds. Investors are the end buyers of the securities and have no connection to unsold issues from the underwriting standpoint.