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Difficulty: HardMarket Participants and Investor Classifications

During a regulatory compliance audit, an examiner reviews several operational procedures and client classifications at a financial institution. Which of the following statements regarding market participant roles and investor classifications are CORRECT?

  1. A broker-dealer executing a customer trade by matching a buyer and a seller without taking the security into inventory acts in an agent capacity and charges a commission.Answer
  2. An investment adviser managing $120 million of securities owned by unaffiliated clients on a discretionary basis qualifies as a Qualified Institutional Buyer under SEC Rule 144A.Answer
  3. C
    A commercial bank qualifies as a Qualified Institutional Buyer under SEC Rule 144A solely by holding $100 million in unaffiliated securities, with no secondary financial threshold.
  4. D
    The National Securities Clearing Corporation serves as the primary central securities depository responsible for safekeeping and book-entry ownership recordkeeping.

Answer

The correct statements are that a broker-dealer matching buyers and sellers without taking inventory acts in an agent capacity charging a commission, and an investment adviser managing $120 million in securities on a discretionary basis qualifies as a Qualified Institutional Buyer.
The statements regarding agency trading and investment adviser QIB status are correct. When a firm matches orders without using inventory, it acts as an agent charging a commission. Furthermore, an investment adviser managing at least $100 million in securities on a discretionary basis satisfies Rule 144A QIB standards.

Step-by-Step Solution

1
Analyze the capacity and compensation of broker-dealers in agency trades.
When a firm acts as an agent (broker), it connects buyer and seller without committing inventory, receiving a commission.
This correctly distinguishes agent (commission) from principal (dealer markup/markdown) transactions.
2
Evaluate Qualified Institutional Buyer (QIB) thresholds for investment advisers under SEC Rule 144A.
Discretionary management of $100 million or more in securities of unaffiliated issuers meets the QIB threshold.
Rule 144A includes entities managing $100 million or more in securities on a discretionary basis.
3
Examine special QIB rules for banking institutions.
Banks must satisfy both the 100millionsecuritiesthresholdandaminimumauditednetworthof100 million securities threshold and a minimum audited net worth of 50 million.
Failing to recognize the $50 million net worth requirement for banks is a common threshold misconception.
4
Distinguish between clearing entity functions (NSCC vs DTC).
NSCC handles clearing and trade netting, while DTC handles depository and custody functions.
Attributing depository custody functions to NSCC conflates clearing and depository roles.

Key Concept

Market Participant Capacities, QIB Threshold Requirements, and Clearinghouse Roles
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Topics

Market Participants and Investor Classifications

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