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Difficulty: MediumMarket Participants and Investor Classifications

A regulatory compliance audit is evaluating how a firm categorizes various investor types and market infrastructure roles under federal securities laws. Which of the following statements correctly describe these market participant classifications or operational functions?

  1. An individual with a net worth exceeding $1,000,000, excluding the equity value of their primary residence, qualifies as an accredited investor under Regulation D.Answer
  2. B
    An institutional entity managing $50 million in unaffiliated securities on a discretionary basis meets the asset threshold required to qualify as a Qualified Institutional Buyer (QIB) under Rule 144A.
  3. When a broker-dealer fills a customer transaction using its own account inventory, it acts as a principal and charges a mark-up or mark-down.Answer
  4. D
    The Depository Trust Company (DTC) functions as the central counterparty clearing agency responsible for clearing and netting corporate equity trades.

Answer

The statements correctly asserting that accredited investor status includes individuals with over $1,000,000 in net worth (excluding primary residence equity) and that broker-dealers trading from inventory act as principals charging mark-ups or mark-downs are correct.
The correct options accurately reflect standard regulatory definitions: individuals with over $1,000,000 in net worth (excluding primary residence equity) meet accredited investor criteria, and broker-dealers selling out of their own inventory operate in a principal capacity charging mark-ups or mark-downs.

Step-by-Step Solution

1
Evaluate the net worth threshold criteria for accredited individual investors.
Confirm that an individual net worth > $1,000,000 (excluding primary residence) meets Regulation D accredited investor requirements.
Rule 501 of Regulation D specifies financial eligibility standards for accredited status.
2
Evaluate the institutional asset requirement for Qualified Institutional Buyers (QIBs).
Identify that the threshold for QIB qualification under Rule 144A is at least 100millionindiscretionarysecuritiesassets,makinga100 million in discretionary securities assets, making a 50 million figure incorrect.
QIB thresholds strictly require 100M+forgeneralinstitutionsand100M+ for general institutions and 10M+ for broker-dealers.
3
Review the operational distinction between broker (agent) and dealer (principal) roles.
Verify that trading from proprietary inventory means acting as a principal/dealer, compensated via mark-up/mark-down.
Brokers act as agents charging commissions, whereas dealers act as principals charging mark-ups/mark-downs.
4
Analyze clearing versus depository functions within DTCC subsidiaries.
Note that clearing and trade netting are performed by the NSCC, while custody/safekeeping is handled by the DTC.
Distinct subsidiaries of DTCC fulfill clearing (NSCC) vs. central depository/settlement (DTC) responsibilities.

Key Concept

Market Participants and Investor Classifications
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Topics

Market Participants and Investor Classifications

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