What is an Approved List

An Approved List is a pre-selected list of investment assets that a broker, mutual fund manager or similar agent may purchase. Such lists are also sometimes called legal lists.

BREAKING DOWN Approved List

Approved Lists exist as protective measures for investors, insuring a degree of safety from the perspective of both the investor and the financial institution managing the investment.

Within brokerages and mutual funds, the intent behind an approved list is to limit the array of choices for account managers and brokers. In most circumstances, the approved list of an investment firm will consist of a relatively large set of options, usually much larger than any single client’s portfolio. While the field is limited to those securities that the firm has approved for inclusion, this approved list will still allow room for choice and flexibility in the building and evolution of client’s portfolio.

Limiting a broker or manager who has little market experience with an approved list can serve as a way to minimize risk, and to serve as a way of establishing investment strategies. As the use of roboadvisors becomes more popular in the financial markets, approved lists serve as effective guidelines to control the algorithms of these digital financial advisors.

Investment companies will periodically publish their approved lists with buy and sell target prices, based on data collected by the firm’s research team. Current published approved lists are usually made available to clients through their brokers or fund managers.

While approved lists can provide a certain security buffer for investors concerned about risk management, the approved list model is not always effective for every investor. Investors who desire a more flexible approach tailored to their own investment and risk management strategies may wish to investigate brokerages and funds which provide a wider range of options in constructing their investment portfolio.

Approved lists emerged as a protective strategy in the 1940s designed to protect trustees from the risk of surcharge from trustors, effectively promising that the investment strategies of trustors would not lead to bankruptcy.

Approved Lists in the Public Sector

Approved lists are also implemented by local and state government agencies to identify eligible investments for pension plans, insurance policies and the like.

The requirements for inclusion on an approved list vary from state to state, but in most cases included investments designed to protect the interest of the agency. Approved investments are usually both low risk and low return, focusing on stability and steady growth for the funds.

Securities which qualify for a state approved list are usually of a high quality and meet standards specified by the state. In many cases, the approved list will be required to adhere to the Prudent Person Rule, an idea which restricts the discretion in managing the investments in a client account to the types of investments that a prudent person might purchase when seeking reasonable income and preservation of capital.