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Question

Difficulty: HardMarket Participants and Investor Classifications

A compliance officer at a managing underwriter is reviewing potential purchasers for a proposed private placement of unregistered debt securities conducted under SEC Rule 144A. Which of the following prospective buyers meets the requirements to qualify as a Qualified Institutional Buyer (QIB)?

  1. A state employee retirement fund that owns and invests $115 million in securities of issuers not affiliated with the fundAnswer
  2. B
    A natural person who holds a personal investment portfolio valued at $120 million in liquid equity and debt securities
  3. C
    A registered broker-dealer acting strictly in an agency capacity that includes $105 million of customer account assets to meet investment thresholds
  4. D
    A national clearing corporation performing trade execution netting that counts $300 million of securities held in central depository safekeeping toward its institutional requirement

Answer

A state employee retirement fund that owns and invests $115 million in securities of issuers not affiliated with the fund.
Under SEC Rule 144A, an institutional investor such as a state employee retirement fund qualifies as a Qualified Institutional Buyer (QIB) if it owns and invests at least $100 million in securities of non-affiliated issuers on a discretionary basis.

Step-by-Step Solution

1
Identify the primary criteria for Qualified Institutional Buyer (QIB) status under SEC Rule 144A.
QIB status requires an institutional entity to own and invest at least 100millioninsecuritiesofnon−affiliatedissuersonadiscretionarybasis.Registeredbroker−dealershavealowerthresholdof100 million in securities of non-affiliated issuers on a discretionary basis. Registered broker-dealers have a lower threshold of 10 million.
Rule 144A allows restricted securities to be traded among qualified institutions without registration.
2
Evaluate the eligibility of individual (natural person) investors.
Natural persons are explicitly excluded from QIB status under Rule 144A, regardless of wealth.
High-net-worth individuals may qualify as Accredited Investors under Regulation D, but QIB status is strictly reserved for qualifying institutions.
3
Analyze capacity distinctions for broker-dealers and clearing/custodial intermediaries.
Assets held in custody for customers or member firms (agency capacity or central depository function) cannot be claimed as proprietary securities owned by the intermediary.
A firm acting as an agent (broker) or custody handler does not have beneficial ownership of customer/member assets.
4
Select the entity that satisfies all QIB criteria.
The state employee retirement fund is an eligible institutional entity and exceeds the required $100 million threshold of non-affiliated securities.
Public pension plans qualify as institutional entities under Rule 144A when meeting the minimum $100 million securities investment test.

Key Concept

Qualified Institutional Buyer (QIB) Criteria under Rule 144A
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Topics

Market Participants and Investor Classifications

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