According to finra, which of the following is not considered an institutional account?

What Is an Institutional Investor?

An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.

The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.

Key Takeaways

• An institutional investor is a company or organization that invests money on behalf of clients or members.
• Hedge funds, mutual funds, and endowments are examples of institutional investors.
• Institutional investors are considered savvier than the average investor and are often subject to less regulatory oversight.
• The buying and selling of large positions by institutional investors can create supply and demand imbalances that result in sudden price moves in stocks, bonds, or other assets.
• Institutional investors are the big fish on Wall Street.

Institutional Investors

Understanding Institutional Investors

An institutional investor buys, sells, and manages stocks, bonds, and other investment securities on behalf of its clients, customers, members, or shareholders. Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies. Institutional investors face fewer protective regulations compared to average investors because it is assumed the institutional crowd is more knowledgeable and better able to protect themselves. 

Institutional investors have the resources and specialized knowledge for extensively researching a variety of investment opportunities not open to retail investors. Because institutions are moving the biggest positions and are the largest force behind supply and demand in securities markets, they perform a high percentage of transactions on major exchanges and greatly influence the prices of securities. In fact, institutional investors today make up more than 90% of all stock trading activity.

Since institutional investors can move markets, retail investors often research institutional investors’ regulatory filings with the Securities and Exchange Commission (SEC) to determine which securities the retail investors should buy personally. In other words, some investors attempt to mimic the buying of the institutional crowd by taking the same positions as the so-called "smart money."

Retail Investors vs. Institutional Investors

Retail and institutional investors are active in a variety of markets like bonds, options, commodities, forex, futures contracts, and stocks. However, because of the nature of the securities and the manner in which transactions occur, some markets are primarily for institutional investors rather than retail investors. Examples of markets primarily for institutional investors include the swaps and forward markets. 

Retail investors typically buy and sell stocks in round lots of 100 shares or more; institutional investors are known to buy and sell in block trades of 10,000 shares or more. Because of the larger trade volumes and sizes, institutional investors sometimes avoid buying stocks of smaller companies for two reasons. First, the act of buying or selling large blocks of a small, thinly-traded stock can create sudden supply and demand imbalances that move share prices higher and lower.

In addition, institutional investors typically avoid acquiring a high percentage of company ownership because performing such an act may violate securities laws. For example, mutual funds, closed-end funds, and exchange-traded funds (ETFs) that are registered as diversified funds are restricted as to the percentage of a company’s voting securities that the funds can own.

What’s The Difference Between Institutional and Non-Institutional Investors?

The Bottom Line

Institutional investors are the big fish on Wall Street and can move markets with their large block trades. The group is generally considered more sophisticated than the retail crowd and often subject to less regulatory oversight. Institutional investors are usually not investing their own money, but making investment decisions on behalf of clients, shareholders, or customers.

What Is a Qualified Institutional Buyer (QIB)?

A qualified institutional buyer (QIB) is a class of investor that can safely be assumed to be a sophisticated investor and hence does not require the regulatory protection that the Securities Act's registration provisions give to investors. In broad terms, QIBs are institutional investors that own or manage on a discretionary basis at least $100 million worth of securities.

The SEC allows only QIBs to trade Rule 144A securities, which are certain securities deemed to be restricted or control securities, such as private placement securities for example.

Key Takeaways

• A qualified institutional buyer (QIB) is a class of investor that by virtue of being a sophisticated investor, does not require the regulatory protection that the Securities Act's registration provisions gives to investors.
• Typically, a QIB is a company that manages a minimum investment of $100 million in securities on a discretionary basis or is a registered broker-dealer with at least a $10 million investment in non-affiliated securities.
• On Aug. 26, 2020, the SEC adopted amendments to the QIB and accredited investor definitions that broadened the list of entities eligible to qualify in these categories.
• Under Rule 144A, QIB's are allowed to trade restricted and control securities on the market, which increases the liquidity for these securities.

What is a Qualified Institutional Buyer (QIB)?

Understanding Qualified Institutional Buyers (QIBs)

The qualified institutional buyer designation is often conferred upon entities comprised of sophisticated investors. Essentially these individuals or entities, due to their experience, assets under management (AUM), and/or net worth, are considered not to require the type of regulatory oversight needed by regular retail investors when purchasing securities.

Typically, a QIB is a company that manages a minimum investment of $100 million in securities on a discretionary basis or is a registered broker-dealer with at least $10 million invested in non-affiliated securities. The range of entities who are deemed to be qualified institutional buyers also includes banks, savings, and loans associations (which must have a net worth of $25 million), investment and insurance companies, employee benefit plans, and entities completely owned by QIBs.

The definition of QIB is generally narrower than the list of entities in the broader accredited investor definition. The formerly rigid QIB definition had resulted in some sophisticated investors that had met the $100 million securities ownership threshold being technically excluded from achieving QIB status and hence ineligible to participate in Rule 144A offerings.

To remedy these technical deficiencies, and to better identify institutional and individual investors that have the knowledge and expertise to participate in the U.S. private capital markets, on Aug. 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the QIB and "accredited investors" definitions.

The QIB amendments added a provision to the QIB definition to include any institution not already specifically listed in the definition of qualified institutional buyer but that qualifies as an accredited investor and meets the $100 million securities ownership threshold. The amendments also permitted these entities to be formed as QIBs specifically for the purpose of acquiring the securities offered.

QIBs and Rule 144A

Under Rule 144A, QIB's are allowed to trade restricted and control securities on the market, which increases the liquidity for these securities. This rule provides a safe harbor exemption against the SEC's registration requirements for securities.

Rule 144A applies only to resales of securities and not when they are initially issued; in a typical underwritten security offering, only the resale of the security from underwriter to investor constitutes a Rule 144A transaction, not the initial sale from issuer to underwriter.

Typically, transactions conducted under Rule 144A include offerings by foreign investors looking to avoid U.S. reporting requirements, private placements of debt and preferred securities of public issuers, and common stock offerings from issuers that do not report.

These securities have a degree of complexity that may make them difficult to evaluate for retail investors, and may thus only be suitable for institutional investors that have the research capability and risk management expertise to make an informed decision about investing in them.

Securities Act Rule 144 and Exempt Offerings

This rule governs the sales of controlled and restricted securities in the marketplace. This rule protects the interests of issuing companies because the sales are so close to their interests. Section 5 of the Securities Act of 1933 governs all offers and sales and requires them to be registered with the SEC or to qualify for an exemption from registration requirements.

Rule 144 offers an exemption, allowing the public resale of controlled and restricted securities, if certain conditions are met. This includes the length of time securities are held, the method used to sell them, and the number that are sold in any one sale. Even if all requirements have been met, sellers are not permitted to conduct sales of restricted securities to the public until a transfer agent has been secured.

The significance of exempt offerings has increased both in terms of the total amount raised and relative to capital raised in public registered markets. According to the SEC, in 2019, an estimated $2.7 trillion (or 69.2% of the total) was raised through exempt offerings, compared to $1.2 trillion (30.8%) from registered offerings.

What is an institutional account FINRA?

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