Finance Investment Issues: Institutional Investors (2002)


Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.

Typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person’s pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund’s investment.

An institutional investor can have some influence in the management of corporations because it will be entitled to exercise the voting rights in a company. Thus, it can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placement under Rule 506 of Regulation D may be made to an “accredited investor” without registering the offering of securities with the U.S. Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:

a bank, insurance company, registered investment company (generally speaking, a mutual fund), business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of million;
a charitable organization, corporation, or partnership with assets exceeding million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds million at the time of the purchase;
a natural person with income exceeding 0,000 in each of the two most recent years or joint income with a spouse exceeding 0,000 for those years and a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Roman law ignored the concept of juristic person, yet at the time the practice of private evergetism (which dates to, at least, the 4th century BC in Greece) sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the city’s entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor.[1] In the South of Gaul, aqueducts were sometimes financed in a similar fashion.[2]

The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. The waqf (charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments.[3] Alongside some Christian monasteries[4] the waqfs created in the 10th century AD are amongst the longest standing charities in the world (see for instance the Imam Reza shrine).

http://en.wikipedia.org/wiki/Institutional_investor
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