Before going on to a brief description of the management of an account, we should mention one way in which joint-account syndicates commonly modify the effects of inequalities in selling. As we have seen, some members may sell bonds to an amount out of proportion to their participation.
Selling commissions afford some mitigation of these inequalities. If the account agree ment provides for a commission, as it ordi narily does, then the members actually sell ing bonds get the stipulated commission on the sales to augment their profits or lessen their losses. Suppose a half a point selling commission had been allowed in the trans action in which Brown & Company sold $200,000, Jones & Company, $300,000, Smith & Company, $900,000, and Robinson & Company, $600,000 at the price of 98.50 and all the rest of the bonds had been dis tributed. Then the $30,000 of net syndicate profits on the sale of the $2,000,000 at 98.50 would have been cut down by the half a point on the $2,000,000, or by $10,000. The result would change in this way: Such a statement sufficiently shows that the allowance of a selling commission may con siderably change the results in favor of the member which performs a disproportionate share of the work.
Many brokers and other dealers in securi ties may desire to sell some of the bonds of this issue. Regular clients of such brokers and dealers may wish to buy some of the bonds of the issue, but naturally prefer to purchase through their customary channel. To get the benefit of such possible extension of the market the syndicate may allow a broker's commission. If the syndicate allows its mem bers a selling commission, as just described, presumably the member which makes a sale through a broker entitled to a commission will have to pay the broker's commission. Since the selling member's commission we have assumed is one-half a point, that is, one-half per cent on the par of the securi ties, the broker's commission would be one eighth or a quarter, that is, that frac tion of one per cent on the par of the securi ties. Both the size of the member's commis sion and of the broker's commission would ordinarily have some relation to the differ ence between the price the syndicate paid for the securities and the price at which it is selling them. The syndicate established that difference between the purchase and the selling price on its estimate of probable diffi culty in selling the securities. Of course, by this we mean the difference originally estab lished. If a change in the market forces a lowering of the price, or permits an advance, that is quite another matter. A member must not share its selling commission, ex cept with a broker in accordance with the syndicate agreement, and a broker must not share his commission with any one. Fairness to all, both that the members may have an equal chance to sell and that purchasers may all receive the same treatment, demands a single price to all. A member or a broker discovered in "splitting commissions" would suffer an injury in reputation that would tend to make it difficult to participate in further business of this kind.
So far we have not considered the internal management of the account, but have stated simply its general form, liabilities, and inci dents. In the details of its management a joint account presents a somewhat intricate situation. Here are several independent sell ing organizations selling the same issue. All the bonds are deposited as collateral for a loan or several loans. To make delivery of any of the bonds to a purchaser on a sale, they must be released as collateral. The possi
bility of overselling the issue, that is "sell ing short" of the bonds, must be guarded against. Such matters all require careful attention.
The syndicate manager takes charge of all these details of the account, keeps the syndicate books, and generally performs the service of a clearing house for joint-account affairs. The largest amount of detail work comes in arranging for the delivery of the bonds. Members must promptly report to the manager all sales of the securities. Quick ness in reporting sales is essential in the busi ness of selling securities.
Consider the situation first in the case of undivided carrying, in which the manager has arranged the loan or loans to carry the entire issue. This offers the simplest state of affairs. Brown & Company are the man agers. A salesman of Robinson & Company telegraphs to the office of his house that he has sold ten of the bonds. On receiving the telegram Robinson & Company immediately telephone to Brown & Company the fact that they have sold ten bonds. In the course of the day Robinson & Company have occa sion, in a similar way, to telephone to the syndicate manager the successive further sales of three, two, and five bonds. Robin son & Company want these bonds the next day to deliver. But the bank which has loaned the syndicate the funds to carry the bonds has possession of all of them as secu rity for its loan. It will not give up any of the bonds unless the syndicate reduces pro portionately the amount of money it has borrowed. We have assumed that the bank loaned 85 per cent of the purchase price. Since the bonds cost the syndicate $955 per bond, the loan was at the rate of $811.75 for each bond. The manager must pay off this amount for each of the bonds it asks the bank to release. Since Robinson & Com pany want twenty bonds to deliver the next day they must supply the manager with suf ficient funds to pay for each bond. The amount Robinson and Company actually turn over may be anything between this and the full $985 which they will receive from their clients when they deliver the bonds. Robinson & Company had already paid out of their own capital 15 per cent of the pur chase price, to make up the difference be tween the $811.75 that the bank loaned and the $955 that the syndicate paid, or $143.25 for each bond on the amount of their partici pation. By one arrangement, perhaps one of the simplest, Robinson and Company, for each bond they want to deliver, pay over to the syndicate manager $841.75, which is the sum of $985 Robinson & Company will re ceive from their client less the $143.25 they have already paid. Obviously this would leave all the gross profits that is, the dif ference between the purchase and selling prices in the hands of the syndicate man ager for him to distribute at the close of the transaction. It would also return to the member capital it has tied up in the transac tion from time to time as the member sells bonds. If the transaction should prove to be a very quick one, the bonds all sold, and the syndicate dissolved in the course of a week or ten days, this releasing of capital would not be important; but if the syndicate should continue for a number of months it would be a matter of consequence. On the other hand, if Robinson & Company should sell more than the amount of their participa tion, they would, for each bond of this excess amount, have left in their hands $143.25 of syndicate capital which they would have to account for to the syndicate manager.