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

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When underwriters act in a firm commitment to an issuer, they are functioning in which capacity?

Agency/broker
Principal/dealer
Advisory capacity
Consulting role

The correct answer is: Principal/dealer

When underwriters operate in a firm commitment to an issuer, they take on the role of principal or dealer. This involves the underwriters purchasing the entire offering of securities from the issuer and then reselling them to the public or investors. In this capacity, the underwriters assume the financial risk associated with the offering because they guarantee the issuer a specific amount of capital, regardless of whether they can sell all of the securities. This commitment means the underwriters have a vested interest in the success of the offering and are incentivized to market the securities effectively. Other roles, such as agency/broker, would imply the underwriters are acting on behalf of the issuer without taking on the risk of purchasing the securities, which does not reflect the firm commitment structure. The advisory and consulting roles typically involve providing guidance and support to the issuer but do not include the financial risk of unsold securities or guaranteeing proceeds from the sale.