Final answer:
In a best efforts underwriting, when an issue of common stock is oversubscribed, a Broker-Dealer (BD) will allocate shares based on a fair and predetermined procedure, ensuring compliance with FINRA rules and equitable treatment of clients.
Step-by-step explanation:
When a Broker-Dealer (BD) is a syndicate member in a best efforts underwriting agreement for an issue of ABC common stock that becomes oversubscribed, they are faced with the challenge of allocating the limited stock among investors. Since it is a best efforts agreement, the BD is under no obligation to sell a set number of shares, so allocation must be handled fairly and in accordance with Financial Industry Regulatory Authority (FINRA) rules and the BD's own policies.
In the event of an oversubscribed issue, the BD may allocate shares based on a predetermined allocation procedure, which might prioritize certain groups such as existing clients or those who show long-term investment intentions. They should also be mindful to comply with the anti-discrimination and fair practice rules that FINRA enforces. Any allocation should avoid the appearance of favoritism or discrimination. Depending on the BD's allocation procedures, factors like the size of a client's account, previous relationship, and the timeliness and size of the client's indication of interest might influence how shares are allocated.
Ultimately, the BD's goal in best efforts underwriting is to distribute the shares in a manner that is equitable, meets regulatory requirements and maintains the integrity of the market and its client relationships. The specific methodology of allocation varies by firm but will often involve a mix of pro-rata distribution and discretionary judgment by the BD.