Overview
Small and mid-size broker-dealers increasingly rely on the institutional communication exemption under FINRA Rule 2210 to distribute marketing decks and performance-based marketing materials to clients and prospects. The exemption allows for communications that include hypothetical or projected returns, but only when distributed exclusively to institutional investors.
However, many firms misapply the institutional communication exemption when distributing materials to high-net-worth individuals or family offices they assume qualify as “institutional.” The issue is that, under FINRA’s definitions, and further supported by Regulation Best Interest (Reg BI), natural persons never qualify as institutional investors, regardless of wealth, sophistication, or net worth. As a result, a single “institutional individual” can convert what the firm believed was an institutional communication into a retail communication, triggering violations of Rule 2210(d)(1)(D)’s ban on performance and target return projections.
The Institutional Investor Definition Under Rule 2210
FINRA Rule 2210(a)(4) defines “institutional investor” to include:
- Banks, savings and loan associations, insurance companies, registered investment companies, or registered investment advisers.
- Any person (excluding natural persons) with total assets of at least $50 million.
- Certain employee benefit plans, government entities, and FINRA members.
Ultimately, the definition is entity-based, and not asset-based for individuals. As a result, the key limitation is clear – natural persons are never institutional investors under Rule 2210, even if they manage significant assets, qualify as accredited investors under Regulation D, or act through a personal trust or holding company.
To further exacerbate the situation, if a firm distributes an “institutional” communication to any natural person, the entire communication loses its institutional exemption. It must then comply with the retail communication standards, including the ban on hypothetical or projected performance.
The “Institutional Individual” Compliance Trap
Many broker-dealers, especially those engaged in private placements, maintain long-standing relationships with family offices, high-net-worth investors, and principals of institutional funds. These individuals often request detailed IRR models, pro forma projections, and forward-looking financial analyses. Firms may rationalize sending such materials by asserting that these individuals “behave like institutional investors.” But that assumption is dangerous. For example:
- Family offices structured as single-member LLCs or revocable trusts typically represent natural persons, not institutional entities.
- Fund principals or general partners acting in their personal capacity are retail investors, even if their affiliated entity qualifies as institutional.
- Accredited or qualified purchaser status under the Securities Act or Investment Company Act does not override FINRA’s institutional definition.
Thus, any marketing deck, summary, or pitchbook that includes IRR targets, modeled returns, or performance scenarios, when sent to such individuals, will constitute retail correspondence or retail communication, not an institutional communication.
Reg BI’s Definition of “Retail Customer” Reinforces the Risk
As noted in a 2022 Federal Register notice addressing FINRA Rule 2210, even a natural person who satisfies institutional-criteria under other regulatory frameworks may still be considered a “retail investor” under Rule 2210 if they do not meet the rule’s specific institutional-investor definition. This distinction becomes more complex under the SEC’s Reg BI, as it defines a retail customer as a natural person, or their legal representative, who receives a recommendation for personal, family, or household purposes, without regard to assets or sophistication. Thus, under Reg BI, a $50 million family office or fund principal investing personally, is still considered a retail customer. Consequently:
- Communications to such individuals are retail communications under FINRA’s interpretive approach.
- Projections and IRRs contained in those materials can be deemed misleading or promissory under Rule 2210(d)(1)(D).
- The broker-dealer’s care, disclosure, and conflict obligations under Reg BI attach to the recommendation, and the communication.
In short, Reg BI eliminates any practical argument that wealth transforms an individual into an institutional investor for communication purposes.
Practical Implications for Broker-Dealer Marketing and Supervision
- A Single Natural Person Voids the Institutional Exemption. Even if 99 recipients of a marketing communication qualify as institutional investors, a single natural-person recipient of that same communication triggers a retail classification for the communication. As noted above, the resulting impact of this classification is that, once a communication is deemed retail, it may not include projections or hypothetical performance information and must be reviewed and approved by a registered principal prior to use in accordance with FINRA Rule 2210(b).
- Marketing Decks and Offering Summaries Require Careful Segmentation. Firms should maintain two separate versions of all offering materials:
- Institutional version: may contain hypothetical projections, limited to true institutional entities, clearly labeled “Institutional Use Only.”
- Retail version: removes all performance modeling and includes robust risk and forward-looking disclaimers.
- Training and Controls Are Essential. Sales and marketing teams should receive training on the difference between institutional entities and institutional individuals. Firms should:
- Verify the entity status of recipients before distribution.
- Maintain documented distribution lists.
- Require compliance sign-off for any materials referencing IRR, ROI, or forecasted results.
- Family Offices and LP Principals Demand Extra Caution. Where a family office invests through an entity, it is important to confirm whether the entity, not the individual, is the signatory. Communications directed to the individual as decision-maker are retail, even if the investment vehicle qualifies as institutional.
Key Takeaways
Under FINRA Rule 2210, natural persons are never considered institutional investors, regardless of their financial status. Wealth, sophistication, or even accreditation does not change this classification. Reg BI reinforces this principle by treating all natural persons as retail customers, thereby subjecting communications with them to the more restrictive retail standards. As a result, if a firm distributes any material containing hypothetical or projected returns to even one individual who is a natural person, the institutional exemption no longer applies. To mitigate this risk, firms must implement robust compliance controls to ensure that institutional communications are not inadvertently shared with retail recipients.
Conclusion
The concept of an “institutional individual” may make sense in business conversations, but it has no regulatory validity under FINRA Rule 2210 or Reg BI. Broker-dealers that rely on this informal distinction expose themselves to advertising and suitability violations when they circulate IRR or projected return materials to natural persons. The compliance solution is straightforward – treat all individuals as retail, regardless of wealth or sophistication, and limit projections strictly to institutional entities.
For small firms operating under tight supervisory resources, this distinction can mean the difference between effective marketing and regulatory enforcement.