Institutional Clients
Client classification drives everything
Institutional client rules begin with classification. Firms must determine whether a client is an individual or an entity, and whether it qualifies for treatment as an institutional, permitted, or accredited client. Classification determines the level of suitability assessment, the documentation required, the appropriateness of certain products, and the availability of exemptions from prospectus or disclosure requirements.
Concepts to master
Know the categories typically used: regulated entities such as banks, insurers and investment dealers; large entities meeting financial thresholds; and sophisticated individuals. Understand that classification is not permanent - it must be reviewed when circumstances change, and clients may be reclassified. Understand the difference between an execution-only relationship and an advisory relationship, and what must be agreed in writing. Know the rules on client assets, custody, and the prohibition on commingling.
Traps
A common trap is assuming that a client described as a corporation automatically qualifies as institutional. Qualification depends on the entity's regulated status or its financial thresholds, not on its legal form. Another trap is treating a client's self-certification as conclusive; the firm must have reasonable grounds. Watch for scenarios where a client's classification lapses because the firm failed to reconfirm it, and for questions testing whether a client can opt back into retail protections.
Worked example
A pension fund with assets of several hundred million requests an execution-only relationship and waives suitability. The correct analysis is not simply that the client is large: the firm must confirm the client meets the institutional or permitted client definition, obtain a documented waiver, and record the basis for classification. The size of the fund supports the classification but does not replace the documentation.
Rule of thumb
Classify, document, review. Every institutional relationship should be traceable to a documented classification decision.