Authorized investment has different meanings depending on the context and location. Laws in many countries require banks to invest deposited funds in low-risk securities. Trust agreements often include a list of authorized investment options, and investment brokers must obtain written statements from clients for fiduciary powers. Employees must follow general guidelines when investing funds on behalf of their employer.
The term “authorized investment” has different meanings in different parts of the world and can also mean different things depending on the context in which it is used. There are laws in many countries that only allow banks and other financial companies to invest client funds in certain types of authorized investment vehicles. In other cases, an investment is authorized if the owner of the funds actually sanctions the investment.
Banks generate income by investing deposit account funds in various types of securities. Some securities, such as stocks, expose investors to higher levels of principal risk than other types of securities, such as government bonds. In theory, bank customers could lose all their money if banking institutions invested customer funds in high-risk types of speculative securities. Consequently, there are laws in many countries that require banks to invest deposited funds in certain types of low-risk securities. In these cases, banking regulators must ensure that banks only use deposited funds to purchase securities that appear on the national or regional government’s list of authorized investments.
In addition to banks, certain other entities, such as trust funds, have fiduciary powers to legally manage sums of money that will eventually pass to other persons or entities. To prevent trust managers from taking unnecessary risk with client funds, trust agreements often include a list of authorized investment options. Beneficiaries of a trust can initiate civil or even criminal proceedings against a trust administrator who invests trust funds in unauthorized investment vehicles.
Investment brokers are licensed securities dealers who buy and sell stocks, bonds, and other securities on behalf of clients. In general, traders can only buy and sell securities when instructed to do so by their clients. However, in some countries, clients may assign fiduciary responsibilities to brokers, in which case brokers may make trades without client consent. When using such fiduciary powers, brokers must normally obtain a written statement from the client that sets forth the types of securities the broker may purchase on the client’s behalf. Unauthorized investments are operations that involve the acquisition of securities that are not on the client’s list.
Employees of businesses and government organizations can often make budget decisions and spend funds on behalf of their employer. However, most employers have general guidelines that limit how employees can invest funds. The manager of a trucking company may have the authority to purchase a truck on behalf of the company because the truck is considered an authorized investment that will help the company generate income. By contrast, the manager of a trucking company may not have the authority to invest the company’s funds in securities or other types of investments. Therefore, authorized investments involve someone making an investment decision that does not violate local laws or company policies.
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