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Difficulty: EasyMarket Participants and Investor Classifications

Financial market participants operate under specific regulatory definitions and transaction capacities. Which of the following statements regarding investor classifications and market participant roles are correct?

  1. An accredited investor includes a natural person who has an individual net worth exceeding $1,000,000, excluding the value of their primary residence.Answer
  2. A broker-dealer acting as a dealer operates in a principal capacity, executing trades for its own inventory account.Answer
  3. C
    An institution qualifies as a Qualified Institutional Buyer (QIB) under Rule 144A if it owns and invests at least $1,000,000 in securities of unaffiliated issuers.
  4. D
    A securities firm acting as an agent (broker) trades directly from its own inventory and charges a markup on the trade.

Answer

The statements confirming that an accredited investor includes individuals with over $1,000,000 in net worth (excluding primary residence) and that a dealer acts in a principal capacity trading from its own account are correct.
The individual net worth threshold for an accredited investor is $1,000,000 excluding primary residence equity. In addition, a securities firm acting as a dealer operates in a principal capacity trading out of its own inventory.

Step-by-Step Solution

1
Evaluate the net worth qualification criteria for an accredited investor.
An individual net worth exceeding $1,000,000 (excluding primary residence) satisfies the Accredited Investor definition under Regulation D.
Federal securities rules exclude primary residence equity from the net worth calculation.
2
Analyze the operational capacity and function of a dealer.
A dealer acts as a principal, buying and selling securities for its own account and charging a markup or markdown.
Trading from inventory distinguishes dealer (principal) activity from broker (agency) activity.
3
Verify the Qualified Institutional Buyer (QIB) qualification threshold under Rule 144A.
The statement specifying a 1,000,000thresholdforQIBstatusisincorrectbecauseQIBstatusrequiresowningandinvestingatleast1,000,000 threshold for QIB status is incorrect because QIB status requires owning and investing at least 100 million in eligible securities.
Rule 144A sets the QIB asset threshold at $100 million for institutional investors.
4
Examine the distinction between broker (agent) and dealer (principal) roles.
The statement describing a broker as trading from its own inventory for a markup is incorrect.
A broker acts as an agent connecting buyers and sellers for a commission, whereas a dealer trades from inventory for a markup or markdown.

Key Concept

Distinction between investor qualification thresholds (Accredited vs. QIB) and broker-dealer transaction capacities (Agent vs. Principal).
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Topics

Market Participants and Investor Classifications

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