Nonlegal Investment

A nonlegal investment is a security or investment that is not on a state's legal list. A legal list is a list of eligible investments that have been approved by a given state's regulators for purchase or investment by certain financial institutions within the state, such as insurance companies and pensions. Anything not on this list is considered a nonlegal investment.

Nonlegal investments are typically securities that are not in compliance with statutory regulations developed by state regulators, and therefore not on the state's legal list. Legal lists can vary from state to state, but are generally designed to be low risk in order to protect institutions where safety of principal is a primary concern. Mandatory legal list states provide a set list of investments in which a fiduciary of a regulated institution must invest; permissive legal list states provide a list of investments in which a fiduciary may invest.

Nonlegal investments are not the same as unauthorized investments. Unauthorized investments are legal investments that could, in theory, be held by the regulated financial institution, but may fail to meet the institution's investment objectives or not be allowed by the institution's governing body, such as its board of directors. Nonlegal investments are generally not allowed at all by the regulated institution, no matter the contribution to meeting investment objectives or approval of the governing body. However, if the institution chooses to invest in nonlegal property or securities, if allowed by their state, they must prove the proprietary of the investment. Additionally, some states will permit nonlegal securities if they were previously legal investments whose status was altered by a change in the law, or if conditions have arisen since the purchase that would make the investment not legal at the current time.