Institutional Investor

A communication distributed only to institutional investors is best described as...

1. A.A retail communicationRetail communications go to retail investors; this one goes only to institutions.
2. B.CorrespondenceCorrespondence is defined by a small retail audience, not by an institutional-only audience.
3. C.An institutional communication, supervised but not requiring principal pre-approvalCorrect — institutional communications are supervised and reviewed but do not need principal pre-approval of each piece.
4. D.A public appearanceA distributed message is not a live public appearance.

Why: A communication sent solely to institutional investors is an institutional communication, which is subject to supervision and review but not to the principal pre-approval required for retail communications.

Bexhill Grange Corporation sells $2 million of its unregistered, non-exempt debentures to Ambervale Mutual Insurance Company, an insurer organised in another state and not authorised to do business in the state where the sale occurs. Ambervale buys for its own general account. Under the Uniform Securities Act, the sale is:

1. A.Not exempt, because the debentures are unregistered and non-exempt securities.Incorrect. That is precisely the situation a transaction exemption addresses.
2. B.An exempt transaction only if the insurer purchases in a fiduciary capacity for policyholders.Incorrect. The exemption applies whether the institution buys for itself or as a fiduciary.
3. C.An exempt transaction, because the purchaser is an insurance company and therefore an institutional buyer.Correct. The institutional counterparty list does not require the insurer to be authorised locally.
4. D.Not exempt, because the insurer is not authorised to do business in the state.Incorrect. That qualifier applies to securities ISSUED by an insurer, not to insurers as purchasers.

Why: A sale to an insurance company is an exempt transaction because the purchaser is an institutional buyer. The counterparty exemption asks only what kind of buyer this is; it does not ask whether the insurer is authorised to do business in the state. That authorisation test belongs to a different provision, the exempt SECURITY status of securities issued by an insurer.

Kingsbarrow Securities has no office, telephone listing or advertising in State L. During the past year its only State L business consisted of transactions with two commercial banks, one insurance company, a corporate pension trust, and one individual resident who has $40 million of net worth and who sought the firm out. Regarding registration in State L, Kingsbarrow:

1. A.Must register, because the exclusion requires that its clients in the state be exclusively institutional and one is a natural personCorrect. The exclusion is all-or-nothing; a single individual client takes the firm outside it.
2. B.Need not register, because the individual approached the firm rather than being solicitedUnsolicited orders can make a transaction exempt from securities registration. They do not change whether the firm itself must be registered.
3. C.Need not register, because it has no place of business in State LNo place of business is only the first of two conditions. The clientele test must be satisfied as well.
4. D.Need not register, because the individual qualifies as an institutional buyer by virtue of his $40 million net worthNet worth can make an individual an accredited investor for offering purposes, but it does not convert a natural person into an institutional buyer under the state exclusion.

Why: The broker-dealer exclusion for a firm with no place of business in a state depends on the state clientele being exclusively of the listed kinds - issuers, other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts and similar institutional buyers. The word is exclusively. A single natural person breaks it, however wealthy. Personal wealth is not a category in the list, and it makes no difference that the individual initiated the contact.

Under FINRA Rule 2210, an institutional communication is one distributed exclusively to:

1. A.Existing customers of the firm onlyWrong. Customer status does not make an investor institutional.
2. B.Accredited investors under Regulation DWrong. Accredited status is a private-placement concept, not the 2210 institutional definition.
3. C.Any audience of more than 25 investorsWrong. The more-than-25 test distinguishes retail communications from correspondence.
4. D.Institutional investors, with no retail investors receiving itCorrect. Exclusivity to institutional investors defines the category.

Why: Institutional communications are written communications distributed exclusively to institutional investors such as banks, insurance companies, investment companies, advisers, government entities, employee benefit plans, and entities with $50 million or more in assets. They require supervision but not principal pre-approval. Citation: FINRA Rule 2210(a)(3),(4). Takeaway: institutional-only audience; one retail recipient breaks the category.