Institutional Investors: Description and the Standard Process for Bringing Them Onboard
In the world of finance, institutional investors stand out as major players, wielding significant influence over securities markets. These organizations, which include pension funds, commercial banks, endowment funds, hedge funds, insurance companies, and private equity investors, make investments and trade securities on behalf of their members, often in large quantities to qualify for privileged treatment and lower fees.
Their prominence is underpinned by access to various channels and resources for backing up investment decisions, such as opportunities for in-depth research using robust analytics tools. However, their status also comes with distinct regulations, reflecting a balance between protecting less sophisticated retail investors and allowing institutional investors greater privileges under the assumption of their greater financial sophistication and resources.
In the United States, institutional investors are governed by the Securities and Exchange Commission (SEC) and are defined as banks, insurance companies, registered investment companies, investment advisers registered with the SEC or state securities commissions, and entities with at least $50 million in assets under FINRA Rule 4512(c). The SEC's Regulation Best Interest (Reg BI) ensures retail investors receive sufficient information and protection, while institutional investors are granted more leeway in dealings.
In the European Economic Area (EEA), institutional investors, often classified as “professional investors” under the Markets in Financial Instruments Directive (MiFID) and the Alternative Investment Fund Managers Directive (AIFMD), are subject to rules for marketing, management, and investor protections within the EEA, including registration and authorization requirements for fund managers.
Hong Kong S.A.R. follows a similar pattern, identifying institutional investors as “professional investors” under Part 1 of Schedule 1 to the Securities and Futures Ordinance, governing eligibility for certain investment products and marketing activities towards institutional investors.
Despite these differences, all regimes focus on differentiation from retail investors by size, sophistication, and regulatory registration status. Institutional investors are subject to investor verification as part of Anti-Money Laundering policy, a process essential for maintaining market trust and complying with regulations.
The verification process for institutional investors is most efficiently carried out through an automated KYC/AML solution. This streamlines the verification process, providing fast and efficient verification without manual checks.
Retail investors, on the other hand, buy and sell investments through intermediaries like brokers, real estate agents, and banks. They pay higher trade fees, including marketing and commission, and are subject to less sophisticated investment opportunities due to the SEC's consideration of retail investors as unsophisticated and the imposition of restrictions on complex and risky investments.
Institutional investors, despite being market's big players, are subject to investor verification to eliminate any chance of fraudulent attacks. Their size gives them a tremendous influence on stock, moving entire blocks of shares while not using their own money and investing for others. This makes them major influencers of securities prices.
Moreover, due to their size, institutional investors get better fees on their investments and gain access to offers with bigger minimum buy-ins that normal investors cannot access. They are in a superior position over non-professional investors who have to use traditional or online brokerages to put securities deals through.
In conclusion, institutional investors play a crucial role in the financial market, with their size, resources, and regulatory status allowing them to influence securities prices and access investment opportunities unavailable to retail investors. The regulatory frameworks for institutional investors reflect a balance between protecting retail investors and allowing institutional investors greater privileges, with each jurisdiction having its unique set of rules and definitions.
Institutional investors leverage automated KYC/AML solutions for efficient investor verification, ensuring market trust and regulatory compliance. Their size and resources grant them access to lower fees and investment opportunities unavailable to retail investors, further bolstering their influence on securities prices.
