Breaking The Syndicate

The term "breaking the syndicate" or "breaking syndicate" refers to the dissolution of a group of investment bankers that created a syndicate to underwrite -- or price, market and sell -- the issue of a particular security. Prior to termination of the agreement, the underwriters must sell the securities at the offering price. The syndicate usually terminates 30 days after the sale date, but can be broken earlier upon mutual agreement of the participants.

Syndicates are usually broken for one of two reasons: 1) the issue has been successfully distributed; or 2) the underwriters cannot place the securities at the offer price. If the syndication is dissolved prior to 30 days following the security sale date, group members are free to sell remaining holdings independent of original price restrictions. The breaking of a syndicate also leaves underwriters free to trade securities on the secondary market.

When a particular securities issue is too large for a single underwriter to manage, a group of underwriters will temporarily come together to form a syndicate. This is because underwriters are typically required to buy the shares or equity from the issuing company in order to sell them to investors. Underwriting syndicates are typically used to facilitate the bringing of initial public offerings (IPOs) to market.

Syndicates benefit all concerned because they allow companies to bring large issues of stock to the market while allowing investment banks to mitigate their own risk in underwriting the issue by sharing that risk with other institutions. Securities underwriters risk being stuck with securities they can’t sell because they are obligated to hold any securities that can’t be sold in an IPO or other offering. Syndication distributes this risk across multiple underwriters. Meanwhile, the issuer of the securities gets access to a large influx of cash, as well as the underwriting syndicates’ sales channels, contacts, and some level of insulation from market risk, since it will be the underwriter who absorbs losses if the issued security doesn’t sell.

Syndicate members will typically sign a contract that outlines the terms of the syndication, including how much stock is allotted to each underwriter, as well as other rights and obligations specific to each member. A lead underwriter will be placed at the head of the entire syndicate. This organization allocates shares, sets the offering price, organizes a timing schedule for the offering, and makes sure the syndicate is compliant with Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC) regulations. The lead underwriter may also deal with the SEC and FINRA if necessary.