Legal List

What Is a Legal List?

A legal list is a selection of eligible companies and investments, determined by local state governments, for institutions such as insurance companies and pension plans. Legal lists are also known as approved lists.

How a Legal List Works

Legal lists are generally low-risk, low-volatility investments that ensure the well-being of investors in institutions where the safety of the principal is of concern. They can be considered relatively safe investments, from both the financial institution’s perspective and the client’s perspective, as there is not a large amount of risk involved on either side.

Financial institutions or mutual fund organizations such as state-chartered banks, insurance companies, and pensions use legal lists to outline which investments they are allowed to invest in. The exact requirements of a legal list can vary from state to state, but in general, any investments within the list must be low-risk, low-return investments that protect the organization’s interest.

Qualifying for Inclusion

In order to qualify for inclusion on a legal list, the securities must be very high quality and meet certain specifications set by the state. In some instances, a legal list may be called up on to adhere to the Prudent Man Rule.

Clients of investment firms or financial organizations can request and should be able to easily access the legal list, or approved list of the investments that they may have as customers in the firm.

Limitations of a Legal List

Legal lists were first enacted when it was identified that there needed to be a way to protect from the risk of surcharge for trustors, who may not have been able to confront trustees with potential issues with their investments. The legal list ensured that the investments that were being added would not financially bankrupt them.

However, while working from a legal or approved list sounds like an ideal way to protect a customer, there are some critics of using a legal list. By limiting the number of investments for the entire firm, one is also limiting the opportunity for a truly customized and personalized investment option that may arise.

This practice may also favor the firm’s financial bottom line, as it can support the use of utilizing an inexperienced broker who can choose from reputed safe investments off the legal list instead of taking their client’s full financial portfolio, assets, and risk tolerance into account.

Article Sources
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  1. The Yale Law Journal. "Legal Lists in Trust Investment," Page 891. Accessed Nov. 19, 2020.

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