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Question

Difficulty: MediumMarket Participants and Investor Classifications

A compliance officer is conducting a regulatory review of investor classifications and market participant functions under federal securities laws. Which of the following statements are correct?

  1. An institution that owns and invests at least $100 million in securities of non-affiliated issuers qualifies as a Qualified Institutional Buyer (QIB) under Rule 144A.Answer
  2. B
    A broker-dealer acting in a principal capacity executes customer trades as an agent and receives a commission.
  3. A natural person with an individual net worth exceeding $1 million, excluding the value of their primary residence, qualifies as an accredited investor under Regulation D.Answer
  4. D
    The Depository Trust Company (DTC) clearinghouse performs trade netting and clearance, while the National Securities Clearing Corporation (NSCC) holds central custody of physical certificates.

Answer

The correct statements are that an institution owning and investing at least 100millioninsecuritiesofnon−affiliatedissuersqualifiesasaQualifiedInstitutionalBuyer(QIB)underRule144A,andanaturalpersonwithanetworthexceeding100 million in securities of non-affiliated issuers qualifies as a Qualified Institutional Buyer (QIB) under Rule 144A, and a natural person with a net worth exceeding 1 million (excluding primary residence) qualifies as an accredited investor under Regulation D.
The correct options accurately reflect federal investor qualification criteria. Under SEC Rule 144A, institutional investors managing 100millionormoreinnon−affiliatedsecuritiesareQualifiedInstitutionalBuyers(QIBs).UnderRegulationD,anaturalpersonwithanetworthover100 million or more in non-affiliated securities are Qualified Institutional Buyers (QIBs). Under Regulation D, a natural person with a net worth over 1 million (excluding primary residence equity) meets the accredited investor requirement.

Step-by-Step Solution

1
Analyze the QIB threshold statement under Rule 144A.
The statement is correct because institutional entities managing at least $100 million in eligible non-affiliated securities qualify as QIBs.
Rule 144A establishes the $100 million securities ownership and investment threshold for institutions.
2
Evaluate the broker-dealer capacity definition.
The statement is incorrect because principal transactions involve trading from inventory for a mark-up/mark-down, not acting as an agent charging commissions.
Conflating broker (agent) and dealer (principal) roles violates core securities trading definitions.
3
Analyze the accredited investor definition under Regulation D.
The statement is correct because a net worth over $1 million excluding primary residence equity satisfies the natural person accredited investor test.
The Dodd-Frank Act modified Regulation D to explicitly exclude primary residence value from the $1 million net worth calculation.
4
Evaluate clearing and depository functional duties.
The statement is incorrect because DTC handles central custody and book-entry ownership, whereas NSCC provides trade clearing and netting.
Reversing DTC and NSCC roles misidentifies the clearing versus depository functions within the DTCC ecosystem.

Key Concept

Market Participant & Investor Classifications
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Topics

Market Participants and Investor Classifications

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