Table of Contents
10b-10 SEC Rule requiring written confirmations for
securities transactions. Equivalent to FDIC Part 344.
12b-1 SEC Rule permitting mutual funds to use a portion of the mutual
fund's assets for promotional expenses. The fund must be specifically
registered as 12b-1 fund and disclose the existence and amount of such charges
against the fund.
13d SEC Rule requiring a filing by any person acquiring a direct or
indirect 5% interest in a registered stock.
13f-1 SEC Rule requiring quarterly Form 13F reports by
institutions holding more than $100 million in discretionary equities.
13g SEC Rule requiring an annual filing by persons holding a direct or
indirect 5% interest in a registered stock for passive investment purposes.
17f-1 SEC Rule covering lost, stolen, counterfeit and missing
securities certificates, and requiring banks and transfer agents to register
with the Securities Information Center.
114 Form 114 was an old designation for the Statement of Principles of
Trust Department Management.
156 SEC Rule governing mutual fund advertising and sales literature,
and prohibiting false and misleading materials.
401(a) Plan A savings plan in which contributions are made in after tax
401(h) Account A separate account of a pension plan that, under
Section 401(h) of the Internal Revenue Code, may be used to fund medical
benefits for retirees and dependents.
401(h) Plan An employee benefit that provides, through a pension or
annuity plan, for the payment of benefits for sickness, accident,
hospitalization and medical expenses for retirees, their spouses and
dependents, subject to certain restrictions.
401(k) Plan A defined contribution plan established by an employer
which enables employees to make pretax contributions by salary reductions
structured within the format of a cash or deferred plan.
403(b) Annuity An annuity that provides retirement income for employees
of certain tax-exempt organizations or public schools. Also known as a
403(b) Plan A defined contribution employee benefit plan established by
certain tax-exempt organizations (such as charities) and public schools for
their employees. Similar to a 401(k) plan.
457 Plan A deferred compensation plan for employees of state and local
governments. Named after the governing section of the Internal Revenue Code, a
portion of their income may be deferred and is not taxable until a distribution
501(c)(9) Trust (1) Used by employers and jointly administered welfare
funds to provide group employee benefits of the following types: medical,
disability, term life insurance, severance compensation, vacation benefits,
recreational facilities and unemployment compensation. These trusts are
governed by Section 501(c)(9) of the Internal Revenue Code. (2) A
type of self-insured or self-funded plan that is a tax exempt trust. Under its
terms, both employer and employee contributions are paid into the fund, with
claims and expenses paid out of it. Excess funds are invested as reserves by
the fund's trustees. In a tax-qualified fund, the employer's deductions are
immediately deductible, the trust's investment income is tax exempt, and
employee contributions are not currently taxed. See also VEBAs.
Abatement The reduction of a gift under a will because of insufficiency
of assets to satisfy the gifts after the legal obligations of the estate
(debts, taxes, charges, and claims) have been paid in full. The general rule is
that all gifts of the same class shall abate proportionately, unless otherwise
ACCELERATED DEATH BENEFIT (ADB) Provision in a life insurance policy
that permits a terminally ill person get a percentage of the life insurance
benefit from the life insurance company prior to death. See also
Accounting (1) The record of an account showing the transactions
therein. (2) The submission of such a record to the court or to the
beneficiaries of a trust or estate by the fiduciary.
Active Trust A trust regarding which the trustee has some active duty
to perform; opposed to bare, naked, or passive trust.
Actuary, Enrolled See Enrolled Actuary.
ADA Americans With Disabilities Act of 1990.
ADB See Accelerated Death Benefit.
Adequate Consideration (1) For a security with a generally
recognized market value: (a) the price of the security on a national
securities exchange, or (b) if not traded on a national securities
exchange, a price not less favorable to the plan than the offering price for
the security as established by current bid and asked prices quoted by persons
independent of the issuer and of any party in interest; (2) for other
assets, the fair market value of the asset as determined in good faith by a
Adjusted Gross Estate The value of an estate after all allowable
deductions have reduced the gross estate, but before Federal estate taxes.
Ad Litem For the purpose of the suit.
Administrator An individual or a trust institution appointed by a court
to settle the estate of a person who has died without leaving a valid will. If
the individual appointed is a woman, she is known as an administratrix.
Administrator Ad Litem An administrator appointed by the court to
supply a party to an action at law or in equity in which the decedent or his
representative was, or is, a necessary party.
Administrator Cum Testamento Annexo
(Administrator with the will annexed):
An individual or a trust institution appointed by a court to settle the estate
of a deceased person in accordance with the terms of his will when no executor
has been named in the will or when the one named has failed to qualify.
Administrator Cum Testamento
De Bonis Non (Administrator with the will annexed as to property not
yet distributed): An individual or a trust institution appointed by a court to
complete the settlement of the estate of a deceased person in accordance with
the terms of his will when the executor or the administrator with the will
annexed has failed to continue in office.
Administrator De Bonis Non (Administrator as to property not yet
distributed): An individual or a trust institution appointed by a court to
complete the settlement of the estate of a person who has died without leaving
a valid will when the administrator originally appointed has failed to continue
Administrator with the will annexed An individual or a trust
institution appointed by a court to settle the estate of a deceased person in
accordance with the terms of his will when no executor has been named in the
will or when the one named has failed to qualify.
Administratrix See Administrator.
ADR See American Depository Receipt.
Advance See Overdraft.
Agency An account in which the title to the property constituting the
agency does not pass to the trust institution but remains in the owner of the
property, who is known as the principal, and in which the agent is charged with
certain duties with respect to the property.
Agent A person who acts for another person by the latter's authority.
The distinguishing characteristics of an agent are (1) that he acts on
behalf and subject to the control of his principal, (2) that he does not
have title to the property of his principal, and (3) that he owes the duty
of obedience to his principal's orders.
Allocation (1) The crediting of a receipt in its entirety or the
charging of a disbursement in its entirety to one account, as to the principal
account or to the income account; to be distinguished from apportionment.
(2) A process that determines the optimum distribution of funds among
various types of assets that offer the highest probability of consistently
achieving investment objectives within a given risk tolerance. The process
often uses a computer model to aid in processing a myriad of data.
Allowance (1) The sum or sums awarded a fiduciary by a court as
compensation for its services; to be distinguished from charge, commission, and
fee. (2) See Widow's Allowance. (3) Waiver by a beneficiary or other
interested party of certain actions performed by the fiduciary which might not
conform with instrument terms, local statutes, prudent practices, etc.
Alpha A numerical investment measure sometimes used as a
performance indicator or to aid in selection of securities. Alpha is the
premium an investment would be expected to earn if the market rate of return
were equal to the Treasury bill rate, e.g., a premium of zero for the
market rate of return. A positive alpha indicates that you have earned on the
average a premium above that expected for the level of market variability. A
negative alpha indicates, on the average, a premium lower than that expected
for the level of market variability. See also Beta.
AMBAC American Municipal Bond Assurance Corporation.
American Depository Receipts (ADR) American certificates issued by an
approved New York bank or trust company against the original (foreign) shares
with a European branch of the New York institution. These receipts facilitate
the financing of foreign companies in the United States. As foreign shares are
deposited abroad, the equivalent ADR's change hands, not the certificates. This
eliminates the actual shipment of stock certificates between the U. S. and
American Option An option that can be exercised any time during an
AmortizationWith respect to bonds purchased at a premium, the process
by which a part of the income is set aside as received to reduce gradually the
amount by which the cost of the bond exceeds its face value.
Ancillary Subordinate or auxiliary to something or someone else; used
in such terms as ancillary administration, ancillary administrator, and
Annuity (1) A contract that provides an income for a specified period
of time or for life; (2) the periodic payments provided under an annuity
contract, (3) the specified monthly or periodic payment to a
Annuity Certain A contract the provides an income for a specified
number of years, regardless of life or death. If an annuitant dies, the
beneficiary will receive payments for the remaining number of specified years.
Also called period certain, term certain or dollar temporary annuity.
Annuity Contract A contract in which an insurance company
unconditionally undertakes a legal obligation to provide specified pension
benefits to specific individuals in return for a fixed fee or premium. An
annuity contract is irrevocable and involves the transfer of significant risk
from the employer to the insurance company. Also called allocated
Apportionment The division or distribution of a receipt or a
disbursement of property between or among two or more accounts, as between
principal and income; to be distinguished from allocation.
Approved List A list, statutory or otherwise, which contains the
authorized investments that a fiduciary may acquire.
Arbitrage A technique employed to take advantage of price differences
in separate markets. This is accomplished by purchasing in one market for
immediate sale at a better price in another market. Such transactions may be
executed in the same type or similar types of securities.
Assent Written agreement with or approval of actions of a fiduciary
which have already taken place.
Assurance (1) A pledge or guaranty of performance or protection from
loss. Generally, prohibited for banks to give such a surety or indemnification.
(2) A Canadian and British term for insurance.
At-The-Money Option An option whose exercise price equals the spot
price of the underlying instrument.
Attorney In Fact A person who, acting as agent, is given written
authorization by another person to transact business for him out of court; to
be distinguished from attorney at law. See also Power of
Authentication Applied to bonds, the signing, by the trustee, of a
certificate on a bond for the purpose of identifying it as being issued under a
certain indenture, thus validating the bond.
Back End Load A sales charge due upon the sale, transfer or disposition
of securities (usually mutual funds), partnership interests, annuities and life
Bankers Acceptance An irrevocable obligation of an issuing bank and the
borrower whereby both are liable for payment. Used in domestic and
international commerce to finance the shipment and storage of goods or to
facilitate dollar exchanges with foreign banks. Bankers acceptances are issued
in a wide variety of principal amounts. Maturities can be up to 180 days,
but usually are for 30-60-90 days.
Bank Investment Certificate See BIC.
Basis In futures and forwards, the difference between a futures
contract price for an item and the current spot price of the same item.
Basis Convergence In futures and forwards, the phenomenon where the
market value of a futures contract approaches the spot price for the underlying
item as the delivery date nears.
Basis Swap A variable-for-variable interest rate swap.
Beneficiary (1) The person for whose benefit a trust is created.
(2) The person to whom the amount of an insurance policy or annuity is
Bequeath To give personal property by will; to be distinguished from
Bequest A gift of personal property by will; a legacy.
Best Execution The principal whereby a trust department has a duty to
obtain the most favorable possible performance of securities purchases and
sales. This is generally done through the selection of a broker for a
particular transaction. Given the size and type of the transaction, its
complexity and where it is traded, the most favorable mix of at least the
following factors must be obtained: (1) most favorable price,
(2) lowest commission or equivalent, (3) prompt and accurate
execution of orders, (4) prompt and accurate confirmation of orders,
(5) prompt and accurate delivery of securities or proceeds. A broker's
special abilities, access to, or knowledge of a particular type of investment
or transaction could also impact on best execution.
Beta A numerical investment measure sometimes used as a performance
indicator or to aid in selection of securities. Beta measures market
sensitivity: the extent to which a portfolio fluctuates with the market as
represented by the S&P 500. Beta is calculated by measuring the sensitivity
of a fund's portfolio to market patterns. It is a statistical estimate of the
average change in a fund's rate of return corresponding to a one percent change
in the market. An investment with a Beta of 1 matched the market; a beta of 1.1
indicates 10% better performance than the market in up markets, 10% worse in
down markets. See also Alpha.
BIC A "BIC" is a bank investment certificate. This is a large
certificate of deposit sold to institutional investors, such as employee
benefit plans. There is a facts-and-circumstances test as to whether FDIC
insurance covers the instrument; if so, the first $100,000 of the BIC is
insured by FDIC, and pass-through deposit insurance coverage may also apply. A
BIC is the deposit industry's equivalent of a "GIC". See also "GIC",
"Bullets", and "Windows".
The difference between the quoted bid (broker will buys stock) and the
quoted ask or offer (broker will sell a stock).
Bifurcation The separation of gains and losses on investment
transactions involving foreign currencies. For instance, the amount of profit
attributable to the increase in the price of a German stock on the Frankfurt
DAX Stock Exchange, as opposed to the amount of profit attributable to the
change in the Deutsche Mark versus the dollar. Important for provisions of IRS
Any period of more than 3 consecutive business days during which the ability of
not fewer than 50 percent of the participants or beneficiaries under all
individual account plans maintained by the issuer to purchase, sell, or
otherwise acquire or transfer an interest in any plan is temporarily suspended
by the issuer or by a fiduciary of the plan.
Blue Sky Laws State securities laws that attempt to ensure that the
terms of securities offerings are fair, just and equitable and meet minimum
standards of quality. Generally, certain information must be filed with a
state's securities regulator before the security can be offered for sale within
Bond Anticipation Note Short-term notes sold in anticipation of a bond
issue and retired with the proceeds from the sale of the bonds.
Bond Power A form of assignment executed by the owner of registered
bonds which contains an irrevocable appointment of an attorney in fact to make
the actual transfer on the books of the corporation.
of Trust Violation of a duty of a trustee to a beneficiary.
Bullet A term used with BIC's and GIC's when a lump sum of money is
invested at a fixed interest rate, and repaid at maturity. Interest may be
compounded or paid out periodically.
Cafetaria Plan An approach to offering health benefits to employees
where the employee may select which benefits, and how much coverage within a
type of benefit, they elect to have. Such plans enable employees to tailor
benefits coverage to their own situation. Some plans require a common core of
benefits. Sometimes, employee contributions are permitted for additional
coverage. Also known as Flexible Benefit Plans and Flexible Compensation.
Callable A bond issue, all of part of which may be redeemed
("called") by the issuer prior to maturity. Specific terms in the
bond indenture ensure that the bonds may not be called prior to the call
date(s). Call provisions in the indenture also set the price at which the bond
may be called; to compensate for this privilege, a price above par is usually
Call Option Option to buy shares of a certain stock within a given
period of time at a specific price fixed in the contract.
Cap An option contract that protects the holder from a rise in interest
rates or some other underlying index beyond a certain point.
Cash Balance Plansa defined benefit plan which defines benefits in
terms of a stated "account balance," as opposed to a specific monthly
benefit for life under traditional defined benefit pension plans. In this type
of plan, employers credit a participants account each year with a
"pay credit" (typically based on a percentage of compensation) plus
an "interest credit" (either a fixed rate, or a rate which is linked
to an index, such as the one year treasury bill rate). When a participant
retires under a cash balance plan, he or she is entitled to the balance of his
or her vested benefit (similar to a defined contribution plan), which may be
taken as an annuity or in a lump sum. This is opposed to retirements under
traditional defined benefit pension plans, where retirees are entitled to
lifetime monthly annuities based upon years of service and pay.
Cash Equivalents Short-term investments held in lieu of cash and
readily converted into cash within a short time-span (i.e. Certificates of
Deposit, commercial paper, Treasury bills, etc.).
Cede and Company The name of the nominee partnership for securities
held at Depository Trust Company, New York.
Cemetry Trust A trust which has as its purpose the upkeep of a grave,
burial plot, or cemetery.
Cesop (Tax) Credit ESOP.
Cestui Que Trust (plural, cestuis que trust) A person for whose benefit
a trust is created; a beneficiary.
Charge The price fixed or demanded by a trust institution for service;
compensation which a trust institution has a legal right to fix (in the form of
either a commission of a fee), in contrast to an allowance which is granted by
a court. See also Allowance, Commission,
Chesop Charity ESOP.
Chinese Wall A policy barrier between the trust department and the rest
of the bank designed to stop the flow of non-public information for the purpose
of preventing use by the trust department of any material inside information,
which may come into the possession of other bank departments, in making
CIF See Collective
Clifford Trust See Short-Term Trust.
Cliff Vesting Full (100%) vesting after x years of
service. Benefits must be 100% vested after not more than 5 years of
service, except in collectively bargained plans, where the maximum period is
Closed End Mutual Fund A mutual fund which is limited in the number of
shares outstanding. The shares are traded on a securities exchange or the
over-the-counter market. The value is determined by bid and asked prices in the
COBRA The Consolidated Budget Reconciliation Act of 1985.
CODA Cash or Deferred Arrangements. A term associated with certain
employee benefit plans where the employee is given a choice of receiving an
employer contribution in cash or having it deferred under a plan and/or the
choice of making his or her own contribution to the plan from before-tax
income. Most CODA's are either cash or deferred profit sharing plans or thrift
and savings plans.
Codicil An amendment or supplement to a will executed with all the
formalities of the will itself.
Collar An upper and lower limit on the coupon of a floating rate
note. The issuer pays a premium for the collar.
Collateral Heir A person not in the direct line of the decedent from
whom he inherits real property, as, for example, a nephew of the decedent who
receives a share of his uncles estate.
Collective Investment Fund A pooled fund, operated by a bank or trust
company in conformity with Section 9.18 of OCC Regulation 9 or Revenue Ruling
81-100, for investment of the assets of separate trust accounts.
Commercial PaperNegotiable, short-term, unsecured promissory notes
issued in bearer form on a discount or coupon basis by a corporation to raise
working capital, for up to 270 days term. A direct obligation of the issuer, it
is sold in multiples of $25,000 and is rated by Standard & Poor's (A-1,
A-2, and A-3) and Moody's (Prime 1, Prime 2, and Prime 3). Interest is paid at
maturity. Payment is required in Federal Funds on settlement date (usually at
the buyer's option) and payment is required by Federal Funds on the maturity at
the issuer's bank. The principal types are Prime Finance Paper issued by sales
finance companies and certain large bank holding companies, Prime Industrial
Paper issued by leading industrial companies, and Finance Paper of
less-than-prime quality. For Prime Finance Paper, investors may specify both
the issue and maturity dates. For Prime Industrial Paper, only those maturities
listed on the market are available.
Commission A percentage of the principal or of the income or of both
which a fiduciary receives as compensation for its services; to be
distinguished from allowance, charge, and fee.
Committee for incompetent An individual or a trust institution
appointed by a court to care for the property or the person (or both) of an
incompetent; similar to a guardian, conservator, or curator.
Common Law The legal system prevailing in the English-speaking
countries - that is, the United States of American and the British Commonwealth
of Nations. It originated in England and its form of development was different
from that of Roman (civil) law. Compare Civil Law.
Common Trust Fund A fund maintained by a bank or a trust company
exclusively for the collective investment and reinvestment of money contributed
to the fund by the bank or trust company in its capacity as trustee, executor,
administrator, or guardian and in conformity with the rules and regulations of
the Comptroller of the Currency pertaining to the collective investment of
trust funds by national banks, as well as with the statutes and regulations (if
any) of the several states.
Community Property Property in which a husband and wife have each an
undivided one-half interest by reason of their marital status; recognized in
all civil law countries and in certain states of the Southwest and Pacific
Coast area of the United States.
Compliance RiskThe risk that non compliance with laws and regulations
can lead to financial loss and/or damage to the institutions reputation.
Compound Option One type of option contract. It is an option, such as a
put on a call, a call on a put, a put on a put, or a call on a call.
Conservator (1) Generally, an individual or a trust institution
appointed by a court to care for property. (2) Specifically, an individual
or a trust institution appointed by a court to care for and manage the property
of an incompetent person, in the same way as a guardian cares for an manages
the property of a minor.
Contingent Liability (1) For FDIC Trust Examinations: an estimate
by the examiner of the gross possible liability of the institution resulting
from the purchase of nonconforming investments for trust accounts, unwarranted
retention of nonconforming assets, self-dealing, questionable practices and
procedures, or other acts of omission or commission which appear not to comply
with the terms of governing trust instruments or provisions of law and on which
an accounting may be subject to objection by appropriate parties. Until
appropriate consents, waivers or releases of liability are obtained from
interested parties or nonliability is determined by a court of competent
jurisdiction, the liabilities are regarded as "contingent."
(2) A liability which is dependent upon certain events occurring before it
becomes an active liability.
Contractual Derivative These investment instruments represent a
one-of-a-kind arrangement between two parties and include swaps, floors,
collars, and swaptions. They are not standardized contracts nor do they trade
on a regulated exchange. While they offer enticing return potential, some carry
high degrees of both market risk and income risk. Because they are not
standardized or exchange traded, they are subject to valuation risk (the
potential for inaccurate pricing) and liquidity risk (the potential that it
cannot be sold at a reasonable price). See also Derivatives.
Conversion (1) In law, wrongful appropriation to one's own use of
the property of another. (2) In equity, the change of property from one
form to that of another (as from real property to personal property, or the
reverse) which is considered to have taken place even though no actual exchange
has been effected.
Corporate Depositary A trust institution serving as the depositary of
funds or other property. See also Depositary, and
Corporate Fiduciary A trust institution serving in a fiduciary
capacity, such as executor, administrator, trustee, or guardian.
Corporate Trust A trust created by a corporation, typical of which is a
trust to secure a bond issue.
Corpus (Body) The principal or capital of an estate, as distinguished
from the income.
Counterparty A principal party to a transaction, other than an
intermediary. When looked at from the buyer's viewpoint, the seller is the
counterparty and vice versa.
Court Account Accounts which require court accountings and approval in
their normal conduct. Probate, guardianship, conservatorship, and testamentary
trust accounts are the most common.
Covered Call A type of stock option in which a trust account sells to a
third party the right (the option) to purchase a specific stock (the call) at a
specific price until a specific expiration date. Possession of the stock by the
trust account (covered) is the final element for a covered call option. It is
different from a naked call option, in which the trust account does not own the
Covered Put A type of option on an instrument or commodity in which the
writer has a short position.
Credit RiskCredit risk is the possibility of loss due to a
counterpartys or an issuers default or inability to meet
contractual payment terms. Default exposes the holder of the instrument to the
cost of replacing the instrument under present market conditions. The amount of
credit risk equals the replacement cost (also known as current exposure) of an
identical instrument. The replacement cost is established by assessing the
instruments current market value rather than its value at its inception.
Crown Loan Refers to an interest-free or below-market-rate term or
demand loan, viewed by the IRS as a taxable gift to the borrower. Name stems
from the L. Crown case at the U.S. Court of Appeals for the Seventh
Circuit [84-1 USTC].
Current precedent is Supreme Court case involving E.C. Dickman [84-1
USTC]. Refer to
Section 7872 of the Internal Revenue Code and also to Revenue
Procedure 86-46 (8-26-85), IR 85-86, and Announcement 85-132.
Crummey Trust A type of unfunded insurance trust. The trust acts as
owner of a life insurance policy. The trust receives the donor's cash payments
on a periodic basis, from which the beneficiary of the trust has a specified
period to make a cash withdrawal. If this is not done, the cash paid by the
donor is used to pay the premiums due on the life insurance policy. The IRS has
ruled that such an arrangement represents a gift of present value interest has
been made by the donor. Since it is a gift of present value, the donor may
contribute up to $10,000 ($20,000 if two donors, such has husband and wife
contribute) per year in premium payments and enjoy the gift tax exclusion. When
the donor dies, the life insurance policy in the trust is effectively removed
from the donor's estate.
Curator An individual or a trust institution appointed by a court to
care for the property of a minor or an incompetent person. In some states a
curator is essentially the same as a temporary administrator or a temporary
Currency Coupon Swap A variation of a currency swap in which one
party's interest payments are variable-rate. Essentially a combination of a
currency swap and an interest rate swap.
Currency Swap A swap contract in which two counterparties agree to
exchange principal and interest denominated in different currencies based on an
agreed-upon currency exchange rate.
Cusip Acronym for Committee on Uniform Security Identification
Procedures. Standardized numbering system begun in 1968 for identifying
individual issues of equity and debt securities in the United States and Canada
to facilitate compatible automated processing by multiple organizations (banks,
brokers, etc.). Not all issues meet the criteria for issuance of a CUSIP
number. System operated by the CUSIP Service Bureau, a part of the Standard and
Poor's Corporation. See also FINS.
Custody Account An agency account concerning which the main duties of
the custodian (agent) are to keep safe and preserve the property and to perform
ministerial acts with respect to the property as directed by the principal. The
agent has no investment or managerial responsibilities. To be distinguished
from managing agency account and safekeeping account.
Cy-Pres Doctrine Cy-pres means "as nearly as may be." The
doctrine, applied in English and Scots law and in some of the states of the
United States, that, where a testator or settlor make a gift to or for a
charitable object that cannot be carried out to the letter, the court will
direct that the gift will be made as nearly as possible, in its judgment, in
conformity with the intention of the donor.
Daily Settlement In futures and forwards, the process where futures
participants are charged for their losses or credited for their gains at the
end of each trading day.
Debenture A general debt obligation backed only by the integrity and
net worth of the issuer. An obligation that is not secured by a specific lien
on property, as an unsecured note of a corporation.
Deed - A written instrument, signed, sealed, and delivered according to
applicable law, containing some transfer, bargain, or contract with respect to
property. The common term for an instrument transferring the ownership of
- A sealed instrument in writing duly
executed and delivered, conveying or transferring property to a trustee. This
is usually real property.
DefaultWith regard to a bond or promissory note, the failure to make a
payment either of principal or interest as or when due.
Defective Trust A trust
designed that income taxes are paid outside of the trust by the grantor.
The most commonly used provision allows the grantor the power to substitute
property he or she owns for equally valued trust property.
Defeasement A type of municipal debt financing which enables the
issuing government entity to reduce the amount of interest it pays on existing
outstanding bonds. As an example, an entity that has high-rate outstanding
bonds issues new debt at a lower rate. The proceeds are used to buy Treasuries,
which pay enough interest to pay the interest on the old outstanding bonds. The
Treasuries can be sold when the old bonds reach their call date, providing a
source of funds to retire the old debt. The net effect is the government entity
pays less on a current basis.
Deferred Payment Swap A swap that requires payments to be made at a
later date than the date at which the payments are determined.
Defined Benefit Plan A pension plan which guarantees the payment of a
specified benefit at retirement age and provides annual contributions equal to
an actuarially determined amount sufficient to produce the specified
Defined Contribution Plan
A pension plan which provides for an individual account for each participant
and for benefits based upon the amount contributed to the participant's account
including any income, expenses, gains, or losses. See also
Individual Account Plan, Money Purchase Plans,
Profit Sharing Plans, Target
Plans, and Employee Stock Ownership
DEFRA Deficit Reduction Act of 1984. One part of this act was the Tax
Reform Act of 1984. Another part was the Spending Reduction Act of 1984.
Depletion The consumption or exhaustion of wasting property - such as,
royalties, patent rights, mines, oil and gas wells, quarries, timberlands, and
other things that are consumed or worn out in the sing.
Deposit Administration Contract A funding contract with an insurance
company in which an unallocated account is kept for active participants.
Annuities are purchased for employees when they retire.
Depositary One who receives a deposit of money, securities,
instruments, or other property; to be distinguished from depository, which is
the place of deposit.
Depository A place where something is deposited, such as a safe deposit
vault. See Securities Depository.
Derivative A financial contract whose value is designed to track the
return on stocks, bonds, currencies, or some other benchmark. Generally,
derivatives fall into two broad categories: forward-type contracts and
option-type contracts. They may be traded on exchanges or traded privately. See
also Contractual Derivatives,
Security-Based Derivatives, and Synthetic
Determination Letter A letter issued by the District office of the
Internal Revenue Service which states whether a plan meets the qualification
requirements under the Internal Revenue Code. Requesting an IRS Determination
Letter is not an IRS requirement and is optional with the plan sponsor.
Devise A gift of real property by will; to be distinguished from
Devisee A person to whom a devise is given.
Direct Heir A person in the direct line of ascent or descent of the
decedent; as, father, mother, son, daughter.
Directed Trust One under which a trustee has less then full managerial
authority because another party or parties has the power to control some of the
trustee's actions. Normally, this involves the investments of an employee
benefit plan. Often, this direction is provided by an outside investment
manager, a "named fiduciary", or the individual participant.
Disbursement Money paid out in discharge of a debt or an expense; to be
distinguished from distribution.
Disqualified Person Term defined in Section 4975(e)(2) of the
Internal Revenue Code that is roughly equivalent to ERISA's party in interest,
but also includes highly-compensated employees. See Party
Distribution The apportionment of personal property (or its proceeds)
among those entitled to receive the property according to the applicable
statute of distribution or under the terms of the will or trust agreement; to
be distinguished from disbursement.
DOL Department of Labor.
Domicile The place which a person regards as his permanent home and
principal establishment; the place to which, whenever he is absent, he has the
intention of returning. A person's domicile may or may not be the same as his
residence at a given time. See also Residence.
Donor One who makes a gift.
DTC Depository Trust Company, New York City. A noninsured
limited-purpose state chartered trust company which is a member of the Federal
Reserve System. Securities certificates belonging to a variety of financial
institutions (banks, trust companies, broker-dealers, mutual funds, etc.) are
kept at DTC, with transfers between "depositors" accomplished by
bookkeeping entry. This greatly reduces the volume of physical transfers which
must be made within the securities industry.
DRP Dividend Reinvestment Plan.
Duration A numerical measure of the price change of a bond due to a
change in its yield to maturity. Duration summarizes the various
characteristics that cause bond prices to fluctuate in response to interest
rate changes. The lower the duration number, the less change that can be
expected in a bond's price.
Education IRA is not a retirement arrangement. It is a trust or
custodial account established for the purpose of paying "qualified higher
education expenses" of the designated beneficiary at an "eligible
educational institution." Up to $500 per year can be contributed to an
Education IRA. Contributions to the IRA are taxable. Investments grow tax free
until distributed. If withdrawals are less than the beneficiarys
"qualified higher education expenses," the withdrawals are tax free.
Any portion of a withdrawal that is greater than the beneficiarys
educational expenses is taxable to the beneficiary.
Eleemosynary Pertaining or devoted to legal charity; as an eleemosynary
Embedded Derivatives Derivatives that are part of another financial
instrument. For example, a callable bond consists of the bond and a call
option. The call option is the embedded derivative.
Benefit Security Administration This office was formerly known as
the Pension and Welfare Benefits Administration, PWBA, and is a part of the U.
S. Department of Labor.
Employee Benefit Plan A plan established or maintained by an employer
or employee organization, or both, for the purpose of providing employees a
certain benefit, such as pension profit-sharing, stock bonus, thrift medical,
sickness, accident, or disability benefits.
Employee Stock Ownership Plan An employee benefit account in which
employees may become stockholders of the employer. These plans are qualified
under the Internal Revenue Code and are not subject to the 10% ERISA
limits on holdings of employer stock. Typically, an employer's contributions to
an ESOP are used to purchase existing or new shares of the employer's stock,
thus providing a means for the employer to raise new capital while, at the same
time, getting a tax deduction for the annual contributions. When such purchases
are from insiders, the IRS has special requirements concerning the valuation of
the stock's price. Often, ESOP's involve borrowing funds by the ESOP with which
to purchase employer stock; such plans are termed "leveraged" ESOP's.
When speaking of the trust account, ESOP's are sometimes called ESOT's:
Employee Stock Ownership Trusts. See also CESOP,
CHESOP, PAYSOP, and TRASOP.
En Ventre Sa Mere "In mother's womb" - a child conceived but
not yet born.
Enrolled Actuary A person who performs actuarial services for an
employee benefit plan which is subject to ERISA and who is enrolled with the
federal Joint Board for Enrolling Actuaries. ERISA plans may use only Enrolled
Actuaries to perform services for the plan.
ERISA An acronym for the Employee Retirement Income Security Act of
1974 which set up federal minimum standards for employee benefit plans,
including standards regulating the conduct of plan fiduciaries and trustees.
The Act also established an insurance program designed to guarantee workers
receipt of pension benefits if their defined benefit pension plan should
ERTA Economic Recovery Tax Act of 1981. Expanded IRA and Keogh plan
availability. Covered specific areas of employee compensation, including
incentive stock options, deductible voluntary employee contributions, tax
credit ESOP's, and withdrawal provisions in savings/thrift plans.
Escheat The reversion of property to the state (in the United States)
in case there are no devisees, legatees, heirs, or next of kin; originally
applicable only to real property but now applicable to all kinds of
Escrow Money, securities, instruments, or other property or evidences
of property deposited by two or more persons with a third person, to be
delivered on a certain contingency or on the happening of a certain event. The
subject matter of the transaction (the money, securities, instruments, or other
property) is the escrow; the terms upon which it is deposited with the third
person constitute the escrow agreement; and the third person is termed the
Escrow Agent See Escrow.
ESOP See Employee Stock Ownership
ESOT See Employee Stock Ownership
Estate (1) The right, title, or interest which a person has in any
property; to be distinguished from the property itself, which is the subject
matter of the interest. (2) The property of a decedent.
Estate Tax A tax imposed on a decedent's estate as such and not on the
distributive shares of the estate or on the right to receive the shares; to be
distinguished from an inheritance tax.
Estimated Loss For FDIC Trust Examinations: an estimate by the examiner
of the amount of loss which appears certain to be sustained by the institution
as a result of its fiduciary activities.
ETI Acronym used by the Labor Department in ERISA Interpretive
Bulletin (IB) 94-1 for Economically Targeted Investment. See
Eurobond A bond denominated in U.S. dollars (or another currency) and
sold to investors outside the country whose currency is used. An example might
be a bond denominated in German Deutsche Mark but issued by a Dutch company and
sold to Swiss investors.
Eurodollar Certificate of Deposit A certificate of deposit issued by
banks outside the U.S., primarily in Europe, with interest and principal paid
in dollars. Such CDs usually have minimum denominations of $100,000 and
short-term maturities of less than two years. Interest rates are usually pegged
European Option An option that can only be exercised on the expiration
Event of Default The non-occurrence or non-performance of something
called for in a bond indenture. Examples of events of default are:
(1) nonpayment of interest, (2) nonpayment of principal,
(3) failure to make payments into a sinking fund, (4) filing of
bankruptcy or reorganization, (5) nonpayment of a prior lien obligation,
(6) failure to perform any obligation called for in the indenture (such as
provide financial statements, insurance, proof of tax payments, etc.).
Excess Benefit Plan A non-qualified plan maintained by an employer
solely for the purpose of providing benefits for certain employees in excess of
those which, because of Internal Revenue Code limitations on contributions and
benefits, can be provided by the employer's qualified plan.
Exculpatory Provision A provision in a will or trust instrument
relieving or attempting to relieve an executor or trustee from liability for
breach of trust; sometimes called an immunity provision.
Executor An individual or a trust institution nominated in a will and
appointed by a court to settle the estate of the testator. If a woman, she is
Executor De Bonis Non The individual or corporation named
in the will to take over and complete the settlement of an estate in those
cases in which the original executor, for one reason or another, has failed or
been unable to do so. Unless the testator himself names such a successor
executor, the court appoints an administrator de bonis non.
Executrix See Executor.
Exercise Period The period of time during which an option may be
Expiration Date The last day an option can be exercised.
Express Trust A trust stated orally or in writing, with the terms of
the trust definitely prescribed; to be distinguished from a resulting trust and
a constructive trust.
Family Incentive Trust Twist on an irrevocable family trust.
Assets enter the trust in the normal fashion. However, there is specific
language as to how funds may be taken out of the trust. The purpose of the
trust is to provide an incentive for the beneficiary to lead a productive life.
The trusts also contain a safety-net so a beneficiary will not become
destitute. Examples of what distribution provisions include are (1) Matching
earnings dollar for dollar, (2) Paying a parent for staying home with the
children, (3) Paying an amount for completing a higher education, and (4)
Starting a new business.
FAS Financial Accounting Standard. Authoritative accounting
pronouncement on handling different specific accounting situations. Issued by
FAS 87 Statement issued by FASB covering employer accounting for
FAS 106 Statement issued by FASB requiring employers to record on their
balance sheets the future financial liability they incur by promising health
benefits to retirees.
FASB Financial Accounting Standards Board. Non-governmental authority
for establishing accounting standards in the United States.
Fee (1) Fixed amount which a trust institution receives as
compensation for its services; to be distinguished from allowance, charge, and
commission. (2) An estate of inheritance in real property, sometimes
referred to as an estate in fee or fee simple estate.
Fee Simple An estate of inheritance without limitation to any
particular class of heirs and with no restrictions upon alienation; sometimes
known as fee simple absolute; the largest interest or estate in real property a
person may own.
Fiduciary An individual or a trust institution charged with the duty of
acting for the benefit of another party as to matters coming within the scope
of the relationship between them. The relationship between a guardian and his
ward, an agent and his principal, an attorney and his client, one partner and
another partner, a trustee and a beneficiary, each is an example of fiduciary
relationship, See also ERISA Section 3(21)(A).
FINS Acronym for Financial Industry Number Standard. Standardized
numbering system for identifying individual institutions (brokers, banks,
transfer agents) in the securities industry in the United States and Canada to
facilitate compatible automated processing in multiple organizations. FINS
Numbers issued by Depository Trust Company, New York City. See also
Fiscal Agent (1) An agent for a corporation to handle specified
matters relating to taxes in connection with an issue of bonds. (2) An
agent for a national, state, or municipal government or government body to pay
its bonds and coupons or to perform certain other duties related to financial
Flexible Benefit Plan/Flexible Compensation See Cafeteria
Flexible Spending Accounts or Arrangements Employee benefit which gives
employees a choice between taxable cash and nontaxable compensation in the form
of payment or reimbursement of eligible, tax-favored benefits. FSAs can be
funded through salary reduction, employer contributions, or a combination of
the two. Employees can purchase additional benefits, pay health insurance
deductibles, and copayments, or pay for child care benefits with FSAs.
Floater A floating rate instrument that pays interest at a rate that
adjusts periodically, relative to a spread over a specific benchmark or
Floor An option contract that protects the holder against a decline in
interest rates or some other underlying below a certain point.
Form Adv Form used to apply for registration as an investment advisor
or to amend a registration. It consists of two parts. Part I contains general
and personal information about the applicant. Part II contains information
relating to the nature of the applicants business, including basic
operations, services offered, fees charged, types of clients advised,
educational and business backgrounds of associates and other business
activities of the applicant.
Forward Contract A cash market transaction in which two parties agree
to the purchase and sale of a commodity at some future time under such
conditions as the two agree. In contrast to futures contracts, the terms of
forward contracts are not standardized. A forward contract is not transferable
and usually can be cancelled only with the consent of the other party, which
often must be obtained for consideration and under penalty. Forward contracts
are not traded in federally designated contract markets.
Forward-Start Swaps An agreement that includes a deferred start date
before the swaps' interest payments are exchanged.
Fourth Market The trading of securities directly from one institutional
investor to another without the services of a brokerage firm.
Fractional Share BequestA bequest of property, often made in connection
with the establishment of a marital deduction trust, that is expressed in terms
of a proportion of the assets involved rather than in terms of a specific
Freddie Mac Trade name for the Federal Home Loan Mortgage
Front-End Receipt Swaps Also known as off-market swaps. A swap in which
one party receives an amount equal to the present value of a future fixed rate
swap payment now rather than at the respective periodic payment dates.
Front Running A practice where an investment manager purchases
securities for his/her own personal interest prior to an anticipated purchase
of the same securities by the accounts for which he/she acts as investment
Funded Insurance Trust An insurance trust in which, in addition to life
insurance policies, cash and securities have been placed in trust to provide
sufficient income for the payment of premiums and other charges on or
assessments against the insurance policies.
Futures Contract A transferable agreement to make or take delivery of
standardized minimum quality grades, during a specific month, under terms and
conditions established by a federally designated contract market upon which
trading is conducted.
General Account An undivided fund maintained by an insurance company
that commingles plan assets with other assets of the insurance company for
investment purposes. Funds held by an insurance company that are not maintained
in a separate account are in its general account.
General Obligation (GO) Bond A type of municipal bond that is backed by
the full faith, credit and taxing power of the issuer for payment of interest
and principal. Its sale finances public improvements. It is repaid by
General Partner A person who usually is actively engaged in the trade
or business of the partnership and has unlimited personal liability in the
General Partnership A form of business whose partners include only
general partners. Profits, losses and deductions are passed through to the
individual partners involved in the business.
Generally Accepted Accounting Principles(GAAP) Uniform minimum
standards of and guidelines to financial accounting and reporting, which govern
the form and content of financial statements. GAAP encompass principles
necessary to define accepted accounting practice at a particular time and
include detailed procedures as well as broad guidelines.
Generation-Skipping Tax A tax imposed on any testamentary
generation-skipping transfer, with the intention that this tax be substantially
equal to the transfer tax which would have been payable if the property had
actually been transferred outright to each generation.
Generation-Skipping Trust Any trust having beneficiaries who belong to
two or more generations younger than the grantor.
GIC A "GIC" is a guaranteed investment contract, normally
offered by insurance companies. It is similar to a financial institution's
certificate of deposit in that it provides a guaranteed rate of return over a
specified period. GIC's are normally used by institutional investors, such as
employee benefit plans. GIC's are dependent upon the financial soundness of the
issuing insurance company for their repayment. See also "BIC",
"SLIC", "Synthetic GIC",
"Bullets", and "Windows".
Gift Causa Mortis A gift of personal property made by a person in
expectation of death, completed by actual delivery of the property, and
effective only if the donor dies; to be distinguished from gift inter
Gift Tax A tax imposed by the Federal Government since 1932 and by some
states on transfers of property by gift during the donor's lifetime. Gifts,
under this law, may include irrevocable living trusts.
Ginnie Mae Colloquial for Government National Mortgage Association.
Going Concern Value A valuation approach used by appraisers. It implies
that a company is actively and profitably in business and, therefore, should be
valued on that basis rather than on the liquidation of its assets.
Government National Mortgage Association (GNMA) A wholly-owned
government corporation within the Department of Housing and Urban Development
(HUD). Also known colloquially as Ginnie Mae.
Governmental Plan An employee benefit plan established or maintained by
the employees of the U.S. government or any state or political subdivision
thereof or by any agency or instrumentality of the foregoing.
Grantor A person who transfers property by deed or who grants property
rights by means of a trust instrument or some other document. See also
Grantor TrustFor purposes of the income taxation of trusts and estates,
a trust in which the grantor or a third party, because of certain rights to
income or principal or certain power over the disposition of income and
principal, is treated as the owner of the trust and taxed on the income
thereof. Consequently, a grantor trust is not treated as a separate entity for
income tax purposes.
GRIT Acronym for a grantor retained income trust, which is an
irrevocable trust to which a residence is transferred for a term of years, with
the grantor retaining the use of the residence for that term. At the end of the
term, the residence becomes the property of the remainder beneficiary. The
present value of the retained interest is not taxed for transfer tax purposes.
The present value of the retained interest is the sum of: (1) the value of
an income interest for the specified term, and (2) the present value of
the contingent right to receive the value if the grantor dies during the
Guaranteed Investment Contract See "GIC"
individual or a trust institution appointed by a court to care for the property
or the person (or both) of a minor or an incompetent person. When the
guardian's duties are limited to the property, he is known as a guardian of the
property; when they are limited to the person, he is known as a guardian of the
person; when they apply both to property and to the person, he is known merely
as a guardian. In some states the term committee, conservator, curator, or
tutor is used to designate one who performs substantially the same duties as
those of a guardian.
Guardian Ad Litem A person appointed by a court to represent and defend
a minor or an incompetent person in connection with court proceedings;
sometimes called a special guardian.
Hard Dollars Goods or services purchased with cash are said to be
purchased with "hard" dollars. Purchases made with brokerage
commissions are said to be made with "soft" dollars.
Health Stock Ownership Plan (HSOP) Combination of an employee stock
ownership plan (ESOP) and a 401(h) account. HSOPs allow the sponsor to provide
for retiree medical benefits for its current employees without having to accrue
such future liabilities currently for financial accounting purposes.
Hedging The temporary purchase and sale of a contract calling for
future delivery of a specific quantity of a particular commodity at an
agreed-upon price to offset a present (or anticipated) position in the cash
market. An operation intended to protect against loss in another operation.
Heir A person who inherits real property; to be distinguished from next
of kin and from distributee. An heir of the body is an heir in the direct line
of the decedent. A son, for example, is the heir of the body of his father or
mother. See also Collateral Heir;
Direct Heir; Next of Kin.
Hereditament Any kind of property that is capable of being inherited.
If the property is visible and tangible, it is a corporeal hereditament; of it
is not, it is an incorporeal hereditament -- for example, a right to rent or a
promise to pay money.
HH Bonds Effective August 31, 2004. Series HH bonds are no longer
offered. HH bonds issued prior to that date pay a fixed rate of interest based
on market rates at the time of issuance. Interest is paid semi-annually and the
bonds have a maturity of 20 years after date of issuance.
Highly Compensated Employee (HCE) Any employee who, during the current
or preceding plan year: (1) owned more than 5% of the company; or (2) received
more than $80,000 (indexed) in annual compensation, and was in the top 20%
of employees ranked on the basis of annual compensation, under Section 414(q)
of the IRC; or, (3) was an officer of the company earning more than the defined
benefit limit under Section 415 of the IRC. Discrimination in favor of
this group is prohibited. For 2005, highly compensated employees are those
earning $95,000 or more.
Highly Compensated Individual For purposes of IRC § 105(h),
(1) one of the five highest paid officers, (2) a 10% owner or
(3) an employee who is among the highest 25% of all employees (other than
the 10% owners who are not participants).
Highly Compensation Participant Under IRC § 125(e), an
officer, a more-than-5% shareholder, a highly compensated employee, or a
spouse or dependent of one of the former.
Holographic Will A will entirely in the handwriting of the
Hours Worked Standard hours worked in a year is 2,080 (52 weeks x 40
hours per week).
HR 10 Plan See Keogh Plan.
HSOP See Health Stock Ownership Plan.
Hurdle Rate A minimum standard rate of return for acceptability as an
Hybrid Pension Plan A qualified retirement plan that has
characteristics typical of both defined benefit and defined contribution
Immunization The design of a bond portfolio to achieve a target level
of return in the face of changing reinvestment rates and price levels. It is
the combining of short- and long-term bonds in the same portfolio to produce a
predictable rate of return regardless of movements in interest rates.
Income The return from property, such as rent, interest, dividends,
profits, and royalties; opposed to principal or capital.
Income Beneficiary The beneficiary of a trust who is entitled to
receive the income from it.
Incorporeal Hereditament See Hereditament.
Indemnity Protection or exemption from loss or damage.
Indenture (1) A mutual agreement in writing between or among two or
more parties whereof usually each party has a counterpart or duplicate;
originally so called because the parts were indented by a notched cut or line
so that the two parts could be fitted together. (2) A legal document
prepared in connection with a bond issue describing the terms of the issue,
such as a security, maturity date, interest rate, and remedies in case of
Index Amortizing Swaps Swaps that operate as basic swaps for an initial
period, after which time the notional principal balance is amortized or
extended based on a schedule linked to interest rate changes or some other
index during the interim period.
Index Fund A collective investment fund or common trust fund which is
composed of securities which are intended to duplicate the returns of a
designated securities index, such as the Standard & Poor's 500 stock index.
Not all of the securities which make up the designated index need to be in an
Individual Account Plan A defined contribution plan that allows
participants to choose, from a broad range of investment options, how their own
accounts will be invested. See also Defined
Contributions Plan and Money Purchase Plan.
Individual Retirement Account (IRA) A retirement savings program for
individuals to which yearly tax deductible contributions up to a specified
limit can be made. The amounts contributed are not taxed until withdrawal.
Withdrawal is not permitted, without penalty, until the individual reaches age
Infant A person not of legal age, which at common law was 21 years but
which in some states has been changed by statue; the same as a minor.
Inheritance Tax A tax on the right to receive property by inheritance;
to be distinguished from an estate tax.
Initial Margin In futures and forwards, the amount of cash that must be
deposited with a broker when a futures position is initiated.
Initial Public Offering (IPO) The original sale of a company's
securities to the public.
- A distribution of property (e.g.,
stock, bond, partnership, etc.) from a trust or estate other than in cash.
Noncash contributions to a trust or estate are also "in-kind"
Insurance Guaranty Fund A fund maintained by a state guaranty
association which pay claims of insolvent insurance companies. The fund is
financed by contributions from insurance companies.
Insurance Trust A trust composed partly or wholly of life insurance
Insured Pension Plans Retirement and other employee benefit plans the
source of the benefits of which is life insurance paid for wholly or partially
by the employer.
Inter-Account Transaction Transactions in which a trust department
sells assets directly from one account to another, bypassing a non-affiliated
third party broker. This form of transaction should be permissible under local
law and the governing instrument, and it should be covered by written policy.
Fiduciaries engaging in this type of activity place themselves in an onerous
conflict of interest position. They must be capable of demonstrating to each
party to the transaction that it simultaneously sold an asset at the highest
fair market value, and purchased it at the lowest fair market value. Generally,
management should be cautioned against engaging in these transactions.
Interest Assumption The expected rate of investment return on a plan's
assets. It includes interest on debt securities, dividends on equity
securities, rentals on real estate, and gains or losses on fund
Interest Rate Futures A transferable agreement to make or take delivery
of a fixed income security at a specific time, under terms and conditions
established by the federally designated market upon which futures trading is
Interest Rate Risk One of the three types of investment risk. When
interest rates rise, the market value of fixed income contracts (such as bonds)
declines. Similarly, when interest rates decline, the market value of fixed
income contracts increases. Interest rate risk is the risk associated with
these fluctuations. See also Credit Risk and
Internal Revenue Code (IRC) This is the basic federal tax law.
Inter Vivos Between living persons.
Inter Vivos Trust A trust created during the settlor's lifetime; the
same as a living trust; to be distinguished from trust under will or
Intestacy The condition resulting from a person's dying without leaving
a valid will.
Intestate (Adjective): (1) Without having made and left a valid will.
(2) Not devised or bequeathed; not disposed of by will. (Noun): A person who
In The Money Option A call option whose exercise price is lower than
the spot price of the underlying or a put option whose exercise price is
greater than the spot price of the underlying instrument.
Intrinsic Value The value of an option were it to be exercised. Only
in-the-money options have intrinsic value.
Inverse Floater A floating rate instrument that adjusts inversely with
changes in the benchmark index.
Investment Adviser A person who advises the public concerning the
purchase or sale of securities. Such persons must generally register with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
Effective May 12, 2001, there is no longer a unilateral exemption afforded to
banks. However, banks will continue to be exempt provided that investment
advisory services is only made available to individuals and those other than
mutual funds. The category of other includes private equity issues and
unregistered mutual funds.
Investment Advisor Agent An agency account in which the trust
department provides investment recommendations on various types of assets,
without actually having custody or safekeeping of those assets.
Investment Management Agent An agency account in which the trust
department contracts to analyze and review the various assets, to make
recommendations for changes in existing investments, and to make
recommendations for new investments. The department also performs safekeeping
and custodial functions for the assets of the account.
Investment Company Legal term for a mutual fund. The Investment Company
Act of 1940 provides the framework for SEC regulatory authority over mutual
Investment Powers The powers of a fiduciary regarding the investments
in the account.
IO (Interest Only) The holder of this derivative instrument receives
interest payments from a specific regular interest class or from a piece of the
collateral. The holder receives no interest payments.
IPO See Initial Public Offering.
IRA See Individual Retirement
IRC Internal Revenue Code. This is the basic federal tax law.
Irrevocable Trust A trust which by its terms (1) cannot be revoked
by the settlor or (2) can be terminated by him only with the consent of
someone who has an adverse interest in the trust -- that is, someone to whose
interest it would be for the trust not to be terminated, such as a beneficiary;
to be distinguished from a revocable trust with consented approval.
ISN A securities identification numbering system similar to CUSIP but
used in some countries outside the United States.
Issue All persons who have descended from a common ancestor; a broader
term than children.
Item A Registered Transfer Agent term defined in SEC Rule 17Ad-1(a)(1),
as follows: (i) A certificate or certificates of the same issue of
securities covered by one ticket (or, if there is no ticket, presented by one
presentor) presented for transfer, or an instruction to a transfer agent which
holds securities registered in the name of the presentor to transfer or to make
available all or a portion of those securities; (ii) Each line on a
"deposit shipment control list" or a "withdrawal shipment
control list"; or (iii) In the case of an outside registrar, each
certificate to be countersigned.
Joint and Several Liability Used when compensation for liability may be
obtained from one or more parties either individually or jointly, whichever may
be most advantageous. Example: Partners are responsible for their own and other
Joint and Survivor Annuity A contract that provides income periodically
during the longer lifetime of two persons. The benefit amount may be adjusted
to account for the extended life expectancy of the couple, and the benefit
amount may decrease when one or the other dies. The contingent annuitant is
usually the spouse.
Joint Tenancy The holding of property by two or more persons in such a
manner that, upon the death of one joint owner, the survivor or survivors take
the entire property; to be distinguished from tenancy in common and tenancy by
Junk Bonds Bonds that are issued by organizations which
often are encountering financial setbacks. A junk bond may be issued as a low
quality security, or its issuer may encounter setbacks so that a quality bond
is reduced to junk level. They offer high interest and high risk. Assurance of
interest and principal payments in the future is limited; repayment often
depends on asset sales rather than the ongoing profitability of the business.
Junk bonds are often issued in conjunction with takeovers, leveraged buyouts
KEOGH Plan A retirement plan for self-employed persons and their
employees to which yearly tax deductible contributions up to a specified limit
can be made, if the plan meets certain requirements of the Internal Revenue
KSOP 401(k) Employee Stock Ownership Plan.
Laches Neglect to do a thing at the proper time; such as undue delay in
asserting a right or asking for a privilege.
Land Trust An unincorporated association for holding real property by
putting the title in one or more trustees for the benefit of the members whose
interests are evidenced by land-trust certificates. In general terms, it is a
trust created to effectuate a real estate ownership relationship in which the
trustee holds legal and equitable title to the property subject to the
provisions of a trust agreement setting out the rights of the beneficiaries
whose interests in the trust are declared to be personal property.
Last Will and Testament A legally enforceable declaration of a person's
wishes regarding matters to be attended to after his death and not operative
until his death; usually but not always relating to property; revocable (or
amendable by means of a codicil) up to the time of his death or loss of mental
capacity to make a valid will. Originally, "will" related to real
property; "testament", to personal property; but at the present time,
"will" is equally applicable to real and personal property.
Legacy A gift of personal property by will; the same as a bequest. A
person receiving such a gift is called a legatee.
Legal Common Trust Fund A common trust fund invested wholly in property
that is legal for the investment of trust funds in the state in which the
common trust is being administered. The term is employed most often in or with
respect to common trust funds in states that have a statutory or court-approved
list of authorized investments for trustees where the terms of the trust do not
Legal Investment An investment that conforms to the requirements of the
statutes. A term used principally with reference to investments by trustees and
other fiduciaries and by savings banks; often abbreviated to
"legals"; to be distinguished from an authorized investment.
Legal List A list of securities legal for fiduciary investments, as
compiled and promulgated by a state agency (such as the state banking
department) for the use and guidance of fiduciaries, lawyers, trustees, savings
banks. Used infrequently now, as most states have adopted either the Prudent
Man or Prudent Investor Rules.
Legatee See Legacy.
Letter of Attorney- A written instrument which evidences the authority
of an agent who is known as an attorney-in-fact.
Letters of Administration A certificate of authority to settle a
particular estate issued to an administrator by the appointing court; to be
distinguished from letters testamentary.
Letters of Conservatorship A certificate of authority issued by the
court to an individual or corporate fiduciary to serve as conservator of the
property of a person; corresponds with letters of guardianship.
Letter Ruling A private ruling issued by the IRS in response to a
request from a taxpayer about the tax consequences of a proposed or completed
transaction. Private letter rulings are not considered to be precedents for use
by taxpayers other than the one who requested the ruling, but they do give an
indication of the current IRS attitude towards the transaction in question.
Letters Testamentary A certificate of authority to settle a particular
estate issued by the appointing court to the executor named in the will; to be
distinguished from letters of administration.
Leveraged Buyout The purchase of assets or stock of a privately owned
company, a public company, or a subsidiary thereof, in which the acquirer uses
a significant amount of debt and very little (or no) capital. This is
accomplished primarily by utilizing the purchased assets for collateral and the
acquired earnings stream to amortize the debt.
Leveraged ESOP An employee stock ownership plan (ESOP) in which money
is borrowed by the ESOP trust for the purpose of buying stock of the employer.
The stock is normally held as security by the lender and is released for
allocation to participant accounts as the loan is paid off.
LIBOR London InterBank Offered Rate (of interest).
Life Beneficiary The beneficiary of a trust usually for the term of his
own life, but it may be for the life of some other person.
Life Estate Either an estate for the life of the life tenant alone or
an estate for the life or lives of some other person or persons. If the estate
is for the life of a person other than the life tenant, it is known as an
estate pour autre vie.
Life Insurance Trust See Insurance Trust.
Life Interest The estate or interest that a person has in property that
will endure only during his own or someone else's lifetime.
Limit Order An order to buy or sell a stock but only at a
specific price or better. It allows the individual initiating the trade to set
a ceiling on the purchase price they are willing to pay and a floor on the
sales price they are willing to accept.. However, because of the limits the
trade is not always executed.
Listed Stock The stock of a company that is traded on a recognized
securities exchange. The various stock exchanges have different standards for
listings. The New York Stock Exchange, for instance, includes national interest
in the company, at least 1 million shares publicly held by at least 2,000
round lot shareholders, $16 million in market value, more than
$2.5 million pre-tax income in the most recent year, and $2 million
in pre-tax income in each of the preceding two years.
Lives in Being Lives in existence at a given time. See
Rule Against Perpetuities.
Living Trust A trust that becomes operative during the lifetime of the
settlor; opposed to a trust under will. The same as an inter vivos trust.
Living Will A document that allows a person to state in advance his/her
wishes regarding the use or removal of life-sustaining or death-delaying
procedures in the event of illness or injury.
Load A sales charge paid when purchasing or selling mutual fund shares.
A "front end" load is assessed when money is initially invested. A
"back end" load is assessed when shares are sold or funds withdrawn,
and may be levied as a percentage of the withdrawn amount or at a flat rate.
Back end loads may also be known as a redemption or exit fee. Loads may also be
charged when dividends are reinvested.
Lookback Option One type of an option contract which confers the
retroactive right to buy a given financial instrument at its minimum price, or
sell at its maximum price, during a specific "lookback" period.
Lump Sum Distribution With respect to pension plans, the distribution
of an individual's benefits in the form of one payment rather than in equal
installments over a specified period of time or the individual's lifetime. The
Internal Revenue Code imposes certain requirements in order for the
distribution to qualify for special tax treatment.
LUST Acronym for leaking underground storage tank. Covered by Recourse
Conservation and Recovery Act (RCRA).
Maintenance Margin In futures and forwards, the level to which a margin
account may fall before the holder of the contract is required to bring the
balance back up to the initial margin level.
Managing Agency Accounts An agency account concerning which the agent
has managerial duties and responsibilities appropriate to the kind of property
and in conformity with the terms of the agency; to be distinguished from a
safekeeping or custody account.
Marital Deduction The portion of a decedent's estate that may be given
to the surviving wife or husband without its becoming subject to the Federal
estate tax levied against the decedent's estate; a term that came into general
use under the Internal Revenue Act of 1954.
Market Order An order to buy or sell shares at the prevailing
market price. This type of order will always be complete. The individual
initiating the purchase or sale has no control over the price, hence the name
MarketabilityThe degree of investment or speculative interest that
underlies any security; the ease with which it can be sold. Synonymous with
Market Maker A dealer that stands prepared to buy or sell at the bid
and offer prices that it quotes. The market is maintained when the dealer
continues to quote bids and offerings over a period of time. See also
Market Risk One of three types of investment risk. Deals with the
day-to-day fluctuations at which a security can be bought or sold. See also
Interest Rate Risk and Credit Risk.
Massachusetts Rule A term frequently applied to a rule for the
investment of trust funds enunciated by the Supreme Judicial Court of
Massachusetts in 1830; now commonly referred to as the prudent man rule. See
Prudent Man Rule.
Master-Feeder Mutual Fund A two-tiered mutual fund arrangement in which
one or more mutual funds (the feeder funds) invest solely in the securities of
another mutual fund (the master fund). Master-feeder funds are authorized,
without prior SEC approval, under SEC Rule 18f-3. A multiple-class fund is
different from a multiple-class mutual fund.
Master Plan A defined benefit or defined contribution employee benefit
plan that has been prepared by a sponsoring organization and provides a single
trust account in which all adopting employers must invest their plan
contributions; the sponsoring organization must have the plan approved by the
Internal Revenue Service. See also Prototype Plan.
Master Trust An arrangement designating the custodianship and
accounting for all employee benefit assets of a corporation or a controlled
group of corporations to a single trustee, facilitating uniform administration
of the assets of multiple plans and multiple investment managers.
Material Information Anything of material fact that could affect an
investor's decision to buy a certain security.
Matched Swap An interest rate swap in which an asset or liability of
the counterparty has interest payment terms similar to those of the swap.
MBIA Municipal Bond Insurance Association.
MEWA A Multiple Employer Welfare Arrangement. A means whereby small
employers can pool contributions to purchase health insurance at a lower cost.
Suppliers of MEWA's may offer insurance-like products, but normally are not
insurance companies. These suppliers generally are not subject to state
insurance regulation or reserve requirements.
Mezzanine FinancingG Use of preferred stock or convertible subordinated
debentures to finance a takeover. This type of financing expands the resulting
company's equity capital instead of its debt.
MGIC Mortgage Guaranty Insurance Corporation.
Modern Portfolio Theory The theoretical constructs that enable
investment managers to classify, estimate and control the sources of risk and
return. In popular terms, the term is applied to modern investment and
portfolio theory. Refer to Appendix C,
Uniform Prudent Investor Act for additional discussion.
Money Market Instruments Fixed income securities that mature in less
than one year. Also known as cash equivalents since their marketability and
characteristics provide easy liquidity. Included are U.S. government
securities, negotiable certificates of deposit, commercial paper, STIF
accounts, bankers acceptances and mutual funds.
Money Purchase Plan The basic type of a defined contribution employee
benefit plan. The employer or plan sponsor's contribution to the plan is
specified for each employee in terms of a flat dollar amount ($100 per month of
employment), or in terms of a percentage (10% of compensation), or on the
basis of a point system. Unlike a profit sharing plan, forfeitures are not
added to participants' accounts; they are used to reduce employer
contributions. See also Individual Account Plan.
Mortgage Banker An organization that originates mortgages and then
sells them to investors, usually retaining servicing rights. Income is derived
from origination and servicing fees. Funding for the mortgages is usually from
borrowings, which are paid off when the loan is sold.
Mortgage Pass-Through Securities A security consisting of a pool of
residential mortgages, with monthly distribution of 100% of the interest and
principal to the investor. There are both government (Freddie Mac and Ginnie
Mae) and commercial versions of these instruments.
MPPAA Multiemployer Pension Plan Amendments Act of 1980
Multi-Employer Plan For purposes of ERISA, a pension plan maintained
pursuant to one or more collective bargaining agreements to which more than one
employer is required to contribute.
Multiple-Class Mutual Fund A mutual fund which has multiple classes of
shares. Each class participates in the same portfolio of investments and is
identical to other classes of shares except that each class has different sales
charges and/or other expenses. In some cases, there may also be a difference in
the services rendered to different classes of the fund. Multiple-class funds
are authorized, without prior SEC approval, under SEC Rule 18f-3. A
multiple-class fund is different from a master-feeder mutual fund.
Multiple Employer Welfare Arrangement (MEWA) See MEWA.
Municipal Bonds Debt issues of state and local governments, and their
agencies. In general, interest paid on municipal bonds is exempt from federal
income taxes and from state and local income taxes within the state of
Negligence Failure, through omission or commission, to act as an
ordinary, reasonable and prudent person would act. Consideration must be given
to the particular situation, circumstances involved, and knowledge of the
Next of Kin The person or persons in the nearest degree of blood
relationship to the decedent. As the term is usually employed, those entitled
by law to the personal property of a person who has died without leaving a
valid will (such persons do not include the surviving spouse and wife except
where specifically so provided by statute); to be distinguished from the heirs,
who take the real property.
Nominee The partnership in whose name registered securities are held.
This facilitates the making of "good" delivery of securities to
brokers at the time of sale or exchange. Nominee names are usually registered
with the American Society of Corporate Secretaries, to preclude the possibility
of more than one nominee with the same name.
Non Compos Mentis (Not of sound mind): A term that includes all forms
of mental unsoundness.
Nonlegal Investment An investment that does not conform to the
requirements of the statutes; a term used principally with references to trust
investments; to be distinguished from unauthorized investment.
Notional Principal Amount In an interest rate swap, the contractual
amount on which interest payments are calculated.
Nuncupative Will An oral will made by a person on his deathbed or by
one who is conscious of the possibility of meeting death in the near future --
as by a person in active military service. It is declared in the presence of at
least two witnesses and later reduced to writing by someone other than the
testator and offered for probate in the manner prescribed by statute.
OBRA Omnibus Budget Reconciliation Acts of 1986, 1987, 1988 and 1989.
OBRA 1989 partially repealed the interest exclusion on ESOP loans, provided
Labor Department civil money penalties for fiduciary violations, and created a
tax penalty for overstatement of pension liabilities in determining
OCC Office of the Comptroller of the Currency.
Off-Market Swaps See Front-end receipt
Open End Mutual Funds These funds issue shares to investors
continuously and stand ready to repurchase them at any time based on Net Asset
Value. Both load and no-load funds are included.
Operating (Transactional) Risk The possibility that inadequate internal
controls or procedures, human error, system failure or fraud can cause loss.
Optimization The process of selecting a securities portfolio that
minimizes risk for a given level of risk. An example would be an aim that a
portfolio have no more than 5% of its value in a single stock and/or that the
current yield be at least 4%. Optimization includes expected return, variances
of expected return, and covariance of return with every other security under
Option A contract for which the buyer pays a fee in exchange for the
right, but not the obligation, to buy or sell, a fixed amount of a given
financial instrument at a set price within a specified time. Options are
considered a type of "price insurance" because they protect buyers
from adverse swings in the price of the underlying asset. The buyer can never
lose more than the price paid for the option, but the seller's losses are
potentially unlimited. See also Call Option,
Compound Option, Lookback Option, and
Optionee Buyer of the option. The person who received an option on
Optioner Seller of the option. The person who gives an option on
Option Overriding A type of options management where an options manager
writes options on stocks managed by another manager. The goal is to provide an
incremental return to the equity portfolio without interfering with the equity
Option Premiums The dollar amounts paid to the writer for the option.
The amount is determine generally by supply and demand, duration of the
contract and difference between the fluctuations, among various
Order Flow Practice whereby securities brokers agree to receive cash
payments in exchange for routine customer orders to specific dealers for
Ordinary Care Generally considered to be the prudent man standard,
subject to the facts and circumstances of a particular case.
Out of the Money An option whose exercise price is above the stock's
Overdraft- The amount by which a debit or charge against an account
exceeds the balance of the trust account.
PAC (Planned Amortization Class) A type of derivative instrument with
scheduled payments over a range of prepayment speeds (PAC bands or ranges).
Parol Evidence (Pronounced payroll) Legal proof based on oral
statements; with regard to a document, any evidence extrinsic to the document
Participant An employee or former employee who is (or may become)
eligible to receive a benefit of any type from an employee benefit plan. Also
includes eligible beneficiaries.
Party In Interest A person or other entity which has control or close
affinity to an employee benefit plan; an "insider". Defined by
Section 3(14) of ERISA to include fiduciaries, trustees, and custodians, the
plan administrator, the plan sponsor (employer and/or union), those who control
50% or more of these insiders, 10% or more stockholders of these
insiders. Also covered are the outside interests of such insiders. Certain
relatives of insiders are also included. See also Disqualified
Paying Agent An agent to receive funds from an obligor to pay maturing
bonds and coupons, or from a corporation for the payment of dividends.
PAYSOP An ESOP eligible for tax credits based on employee payroll.
PAYSOP's replaced TRASOP's in 1983. The tax credits were repealed by the Tax
Reform Act of 1986. See also Employee Stock
PBGC See Pension Benefit
Pecuniary Bequest A bequest of property, often made in connection with
the establishment of a marital deduction trust, that is expressed in terms of a
specific dollar amount rather than in terms of a proportion of the assets
Pennsylvania Rule A rule that requires credit of extraordinary
dividends received in trust on the basis of the source of such dividends; to
income if declared from earnings of the corporation during the life of the
trust, and to principal if from earnings accumulated before commencement of the
Pension Benefit Guaranty Corporation (PBGC) Congressionally-chartered
corporation responsible for guaranteeing private defined benefit pension plans.
Membership in PBGC is mandatory for all such plans. If a covered plan
terminates, retirees and beneficiaries are entitled to the benefit calculated
under the plan (subject to certain phase-in rules for new plans to preclude
abuse), up to a maximum monthly benefit payment. The maximum monthly payment is
based on the year a plan terminated and was set in 1974 at $750 per month,
indexed for inflation. Plans terminating in 2004 have a maximum monthly benefit
of $3,698 or $44,386 per year for those who have attained age 65. The guarantee
is increased for those over 65 and decreased for those under 65.
Pension Trust A trust established by an employer (commonly a
corporation) to provide benefits for incapacitated, retired, or superannuated
employees, with or without contributions by the employees.
PEPPRA Public Employee Pension Plan Reporting and Accountability
Per Capita (By the head): A term used in the distribution of property;
distribution to persons as individuals (per capita) and not as members of a
family (per stirpes). For example, "I give my estate in equal shares to my
son A and to my grandsons C, D, and E (the sons of my deceased son B) per
capita". C, D, and E take as individuals (not as the sons of B), each
taking the same share as A, namely, one-fourth of the estate.
Performance-Based Fees Investment management fees that are related to
investment results, not to the size of the assets managed. Also known as
Person An individual, partnership, joint venture, corporation, mutual
company, joint stock company, trust, estate, unincorporated organization,
association or employee organization.
Personal Property All property other than real property.
Personal Representative A general term applicable to both executor and
Personalty Personal property.
Per Stirpes (By the branch): A term used in the distribution of
property; distribution to persons as members of a family (per stirpes) and not
as individuals (per capita). Two or more children of the same parent take per
stirpes when together they take what the parent, if living, would take. For
example, "I give my estate to my son A and to my grandsons C, D, and E
(the sons of my deceased son B). My grandsons are to take per stirpes." C,
D, and E take as the sons of B (not as individuals), each receiving one-sixth
of the estate (one-third of the one-half to which B would be entitled if
living), while A receives one-half of the estate. Taking per stirpes is also
known as taking by right of representation.
Pink Sheets Quotation lists of various over-the-counter securities
published daily on pink paper by the National Quotation Bureau, Inc.
Plain Vanilla Interest Rate Swap A single-currency swap agreement in
which one counterparty agrees to pay a fixed rate of interest to the other
counterparty in exchange for a variable rate of interest on a fixed notional
principal amount over a specified period of time.
Plan Administrator See Administrator.
Plan Sponsor See Sponsor.
Plan Year The 12-month period on which employee benefit records are
kept. Normally a fiscal year, but may be a calendar year.
PO (Principal Only) The holder of this instrument receives principal
payments only and does not receive any interest. POs are offered at substantial
discounts to their original principal amounts.
Point (1) Bonds: A point means 1%. Since bonds are quoted based
on $1,000 face value, it also means $10. A bond that has increased by 3 points
has gone up $3% or $30. (2) Stocks: A point means $1. If XYZ stock
goes up 3 points, it has increased $3 per share. (3) Mortgages: A
point is 1% of the principal amount of the mortgage. For Truth in
Lending/Regulation Z purposes, a point is considered part of the Finance
Charge disclosure and is included when calculating the APR.
Potential Loss For FDIC Trust Examinations: the examiner's estimate of
the portion of a contingent liability which may develop into a loss to the
institution. The amount of the loss indicated is potential rather than definite
and fixed, pending settlement of the accounts. Also see
Pour-Over A term referring to the transfer of property from an estate
or trust to another estate or trust upon the happening of an event as provided
in the instrument.
Power of Attorney A document, witnessed and acknowledged, authorizing
the person named therein to act as his agent, called attorney-in-fact, for the
person signing the document. If the attorney-in-fact is authorized to act for
his principal in all matters, he has a general power of attorney; if he has
authority to do only certain specified things, he has a special power of
attorney. If the authority granted in the power of attorney survives
the disability of the principal, the attorney in fact has a durable power of
attorney. If the authority granted in the power of attorney commences
in the future only upon the occurrence of a specific event or contingency, the
power of attorney is known as a springing power. A power of attorney can
be limited to property concerns or to health care matters. See also
Bond Power; Letter of Attorney;
Power of Retention Power expressed or implied in will or trust
agreement permitting the trustee to retain certain or all of the investments
comprising the trust property at inception, even though they may not be of a
type suitable for new investments made by the trustee.
Precatory Words Expressions in a will praying or requesting (but not
directing) that a thing be done or not done.
Preemptive Right A right accorded present shareholders, before any new
shareholders, to subscribe to new shares in a company at a stipulated price on
or before a fixed date. See also Rights.
Principal (1) One who employs an agent to act for him.
(2) One who is primarily liable on an obligation. (3) The property of
an estate other than the income from the property; the same as capital.
Private Foundations In general, all charitable foundations except those
deriving substantial support from the public. They fall into two categories;
private operating foundations, those where substantially all of the assets and
income are used to carry on its exempt function, e.g., a museum; or private
nonoperating foundations, which include most family foundations.
Private Placement The sale of stocks, bonds, or other investments
directly to an institutional investor, such as an insurance company or employee
benefit plan. This precludes SEC registration requirements and may provide the
purchases with (for debt issues) a higher interest rate and a customized
Probate (Verb): To present a will to the court for appointment of the
executor or administrator c.t.a., which is the first step in the settlement of
Probate Court The court that has jurisdiction with respect to wills and
intestacies and sometimes guardianships and adoptions; also called court of
probate, surrogate's court, ordinary court, orphan's court, and prefect's
Profit Sharing Plan A defined contribution employee benefit plan
established by an employer (usually a corporation) as a means of having the
employees share in the profits of the enterprise.
Prototype Plan A standardized plan, approved and qualified as to its
concept by the Internal Revenue Service, that is made available by banks,
insurance companies and mutual funds for the use of employers. See also
Prudent Investor Rule The latest development in evaluating fiduciary
prudence. The current (1992) model uniform act differs from the traditional
Prudent Man Rule in that it indicates that: (1) no asset is automatically
imprudent, but must be suitable to the needs of the beneficiaries, (2) the
entire portfolio is viewed when evaluating the prudence of a fiduciary, and
(3) certain actions can be delegated to other agents and fiduciaries.
ERISA [ § 404(a)(1)(C) ]
generally follows the approach of the Prudent Investor Rule. The
Uniform Prudent Investor Rule is found in Appendix C. Caution: review
state statutes before applying to discretionary nonERISA trust accounts.
Prudent Man Rule A rule originally stated in 1830 by the Supreme
Judicial Court of Massachusetts in Harvard College v. Amory [ 9 Pick. (Mass.) 446 ],
that, in investing, all that can be required of a trustee is that he conduct
himself faithfully and exercise a sound discretion and observe how men of
prudence, discretion, and intelligence manage their own affairs not in regard
to speculation, but in regard to the permanent disposition of their funds
considering the probable income as well as the probable safety of the capital
to be invested. The current (1959) model uniform rule categorizes certain types
of assets as automatically imprudent, looks at each investment separately in
determining prudence, and prohibits the delegation of responsibilities. Most
states have adopted the Rule as a part of state fiduciary law, usually with
certain different specifics from state to state. The
Prudent Man Rule is found in Appendix C
Purchase-Money Mortgage A mortgage given by a purchaser of real
property to the seller in part payment of the purchase price.
Put Option Option to sell shares of a particular stock within a given
period of time at a specific price fixed in the contract.
PWBA Pension and Welfare Benefits Administration, U.S. Department of
Labor. This agency is now known as the Employee Benefit Security
QDRO (Pronounced "Cue-Dro") Qualified Domestic
Relations Order. Court order which may be issued upon a divorce, specifying a
spouse's share in certain employee benefit plans. IRA's, 401(k) plans, and
defined benefit pension plans are often covered by QDRO's.
QERP Acronym for Qualified Employee Real Property. Involves the
investment of ERISA plan assets in real property leased to the plan sponsor or
an affiliate thereof. See ERISA § 407(d)(4).
QPAM Qualified Professional Asset Manager. Term used in ERISA
Prohibited Transaction Class Exemption (PTE) 84-14 for a bank, thrift,
insurance company or registered investment adviser which meets certain minimum
capital, net worth, or total managed assets thresholds.
QTIP Qualified Terminable Interest Property Trust. A type of personal
trust which allows assets to be transferred between spouses. The grantor
directs income from the assets to his/her spouse for life, but has the poser to
distribute the trust's assets upon the death of the spouse. Such trusts qualify
for the unlimited marital deduction if the spouse should die first. A QTIP
trust is often used to provide for the welfare of a spouse while keeping the
assets out of the estate of another (such as a future marriage partner) if the
grantor dies first.
Qualified Domestic Relations Order See QDRO.
Qualified Plan or Trust An employer's trust or plan that qualifies
under the Internal Revenue Code of 1954 for the exclusive benefit of his
employees or their beneficiaries in such manner and form as to entitle the
payments made by the employer to the plan or trust to the deductions and income
tax benefits as set forth in the Code.
Rabbi Trust A form of employee benefit in which an employer establishes
a trust to provide non-qualified deferred compensation to certain key
employees. The trust usually contains restrictions on revocation and is subject
to claims of general creditors of the employer. Employer contributions are not
taxable as income to the employee at the time of contribution. Any income
earned prior to distribution to the employee is taxed to the employer. The term
"rabbi" arose because the first trust of this type approved by
the Internal Revenue Service involved a rabbi.
Rabbicular Trust A form of employee benefit which attempts to combine
the rabbi trust with a secular trust. The plan originates as a rabbi trust and
remains such as long as the sponsor company remains financially healthy. If
certain defined situations arise, the rabbi trust becomes a secular trust. The
covered employee then must pay any applicable tax, but is assured of receiving
what is held in the trust, instead of being just another unsecured
REA Retirement Equity Act of 1984. Provided for greater pension equity
for female workers and surviving spouses.
Real Estate Investment Trust See REIT.
Reciprocal Trust A trust created by one person in consideration of the
creation by the beneficiary of a similar trust for him.
Record Date The date on which a shareholder must be listed in a
company's shareholder records in order to receive a declared dividend or vote
on company matters.
Registrar (1) In connection with stock, the agent which affixes
its signature to each stock certificate issued, the object being the prevention
of over-issuance. (2) In connection with bonds, the agent which maintains
the records of who owns an issue of registered bonds, similar to a transfer
Regulation 9 A regulation issued by the Comptroller of the Currency
under authority of Section 1(j) of the Act of September 28, 1962 [ 76 Stat. 668,
12 USC 92a ]
relating to the conduct of fiduciary business by national banks. The full title
of the regulation is Regulation 9 - Fiduciary Powers of National
Banks and Collective Investment Funds.
Section 9.18 of the regulation, dealing with collective investment
funds, applies to collective investment funds operated by state-chartered banks
through Section 584 of the Internal Revenue Code, which requires
compliance with Regulation 9.
Real Estate Investment Trust. A trust which operates somewhat like a mutual
fund. REITs invest in real estate loans and/or equity interests in real estate.
Ninety-five percent of its income must be paid out to shareholders if the REIT
is to qualify for a tax exemption.
Remainder A future estate or interest in property which will become an
estate or interest in possession upon the termination of the prior estate or
interest created at the same time and by the same instrument. For example, A
conveys Blackacre to B for life and upon B's death to C in fee simple. C's
interest is a remainder. The term remainder over is sometimes used in such
phrases as "To A for life, with remainder over to B," calling
attention to the fact that there is a prior estate or interest. To be
distinguished from reversion.
Remainderman A person or entity entitled to a future interest in a
trust or estate. The rights to the property in the trust or estate are
typically transferred after the interests of the prior beneficiary (such as the
income beneficiary) have terminated.
REMIC Acronym for a real estate mortgage investment conduit. This is a
pass-through type of investment vehicle created by the Tax Reform Act
of 1986 to issue multi-class mortgage-backed securities. REMIC's may be
organized as corporations, partnerships or trusts. Those meeting certain
qualifications are not subject to double taxation. Interests in REMIC's may be
senior or junior, regular (debt instruments) or residual (equity interests).
REMIC's generally provide the issuer with more flexibility than a
collateralized mortgage obligation (CMO), as they permit mortgage pools to be
separated not only into maturity classes but also into risk classes. While
CMO's usually have AAA ratings, REMIC's represent a range of risk levels.
Reportable Event Serious situations involving a private defined benefit
employee benefit plan which require a notice to be filed with the PBGC. Events
covered include loss of tax qualification, 80% or more drop in participation
from the previous year, full or partial plan termination, inability to pay
benefits, merger with another plan, bankruptcy of the plan sponsor, etc.
Representative (1) A general term designating either an executor
or an administrator. (2) The person who acts or speaks for another under
Repurchase Agreement As applicable to trust departments, means a
"loan" by a trust account to a financial institution or securities
dealer. Normally, these loans are secured by U. S. Government or agency
securities, bear a fixed rate, are payable at a fixed maturity, and may be
subject to other terms. The regulatory agencies have generally taken the
position that repurchase agreements with the fiduciary bank are a conflict of
interest and self-dealing unless specifically authorized. Also sometimes called
reverse repurchase agreements, repo, asset repo, RP, and buy back.
Reputation Risk The possibility that negative publicity will expose the
institution to costly litigation, financial loss, or effect its ability to
establish new relationships, or to continue existing relationships.
ResidenceThe place where one resides, whether temporarily or
permanently. See also Domicile.
Residuary Trust A trust which is composed of the property of the
testator, remaining in the estate after the payment of all taxes, debts,
expenses, charges, and the satisfaction of all other gifts under the will.
Resulting Trust A trust which results in law from the acts of the
parties, regardless of whether they intend to create a trust, as when a person
disposes of property under circumstances which raise an inference that he does
not intend that the person taking or holding the property shall have the
beneficial interest in it; to be distinguished from an express trust and a
Revenue Anticipation Note A debt obligation issued by a state or
political subdivision to be repaid from the receipt of the anticipated
Revenue Bond A municipal bond payable, not from general tax
collections, but from revenue generated by either the operation of a public
facility or from a special source of revenue.
Reverse Repurchase Agreement An agreement in which Party A
purchases an asset (financial instrument) from Party B and agrees to sell
it back to Party B for a specified price at a specified date. See
Reverse Swap A swap that has terms opposite those of another swap,
therefore effectively canceling the former swap.
Reversion The interest in an estate remaining in the grantor after a
particular interest, less than the whole estate, has been granted by the owner
to another person; to be distinguished from remainder. The reversion remains in
the grantor; the remainder goes to some grantee.
Revocable Trust A trust which may be terminated by the settlor or by
another person; opposed to an irrevocable trust.
RHO The rate at which the price of an option changes in response to a
given move in interest rates.
Rights A privilege granted to existing shareholders of a corporation to
purchase new shares of common stock at a discount from its market price. Rights
are offered under terms of a Rights Offering. The right must be exercised
within a short (30-60 day) timespan. Sometimes, rights are issued under state
law that requires existing shareholders be given an opportunity to maintain
their proportionate share of ownership. See Preemptive
Rollover The procedure of repeated investment of the proceeds of
short-term securities upon maturity. See Tax-Free
Roth IRA was introduced in 1998. Except for some special rules which
apply only to Roth IRAs, these individual retirement accounts are subject to
many of the same IRS rules as are traditional IRAs. Unlike traditional IRAs,
contributions are taxable, but distributions are not taxed. Also, no
distributions from Roth IRAs are ever required, and IRA owners may continue to
contribute to the IRA after the age of 70 ½.
Routine A Registered Transfer Agent term defined in SEC Rule 17Ad-1(i),
as follows: An item is "routine" if it does not:
(1) require requisitioning certificates of an issue for which
the transfer agent, under the terms of its agency, does not maintain a supply
(2) include a certificate as to which the transfer agent has
received notice of a stop order, adverse claim, or any other restriction on
(3) require any additional certificates, documentation,
instructions, assignments, guarantees, endorsements, explanations, or opinions
of counsel before transfer may be effected;
(4) require review of supporting documentation other than
assignments, endorsements or stock powers, certified corporate resolutions,
signature, or other common and ordinary guarantees, or appropriate tax, or tax
(5) involve a transfer in connection with a reorganization,
tender offer, exchange, redemption, or liquidation,
(6) include a warrant, right, or convertible security presented
for transfer of record ownership within five business days before any day upon
which exercise or conversion privileges lapse or change;
(7) include a warrant, right, or convertible security presented
for exercise or conversion; or
(8) include a security of an issue which within the previous 15
business days was offered to the public, pursuant to a registration statement
effective under the Securities Act of 1933, in an offering not of a continuing
RPM Trust - Remainder Purchase Marital Trust, is a special type of
trust for the benefit of the grantor's spouse that is designed to qualify for
the gift tax marital deduction, but will not be subject to estate tax at the
spouse's death. As a result, the trust property passes to the grantor's
children completely free of gift and estate tax. This can be a replacement for
a GRIT or a GRAT without their inherent drawbacks. Both RPM Income and RPM
Annuity Trusts provide benefits.
Rule Against Perpetuties A rule of common law that makes void any
estate or interest in property so limited that it will not take effect or vest
within a period measured by a life or lives in being at the time of the
creation of the estate plus 21 years and the period of gestation. In many
states the rule has been modified by statute. Sometimes it is known as the rule
against remoteness of vesting.
Safekeeping Account An agency account concerning which the duties of
the agent are to receipt for, keep safe, and deliver the property in the
account on demand of the principal or his order; to be distinguished from a
custody account and a managing agency account.
Samurai Bond A bond issued in the United States but denominated in
SAR Summary Annual Report for ERISA employee benefit plans.
SARSEP Acronym for Salary Reduction Simplified Employee Pension, a type
of defined contribution employee benefit plan first authorized in 1986.
Sometimes referred to as an elective deferral arrangement. SARSEPs are
available to employers with 25 or less employees, and at least 50% of eligible
employees must participate in the plan. Employees contribute a percentage of
their salary, thus reducing current income. SARSEPs could be adopted by
employers through 12-31-96. Beginning 1-1-97, SARSEPs were replaced by SIMPLE
Retirement Plans, and no more new SARSEPs could be started. SARSEPs adopted
prior to 1997 can be continued, however, with additional contributions made to
Scalping Trading for small gains over a short period of time, usually
within a day. In some cases, this may involve taking advantage of very narrow
spreads in volatile markets.
Secular Trust A form of employee benefit plan that operates differently
from a rabbi trust. In contrast to a rabbi trust, contributions to a secular
trust are taxable to the participant, but participants also have a vested
interest in plan assets. While the trust is taxable, the employee is ensured of
receiving the funds entrusted to the trust should the plan sponsor fail. See
also Rabbi Trust and Rabbicular
Security-Based Derivative These investment instruments are specially
tailored from other securities, such as municipal, corporate, or U.S.
Government agency bonds. While they offer enticing return potential, some carry
high degrees of both market risk and income risk. They range from the highly
predictable to the highly unpredictable. Examples of the highly unpredictable
include inverse floaters, interest-only or principal-only STRIPS. Also called
Synthetic Derivatives. See also Derivatives.
Securities Depository (Clearing Agency): A physical location or
organization where securities certificates are deposited and transferred by
Securities Lending A practice where owners of securities, either
directly or indirectly, lend their securities to (primarily) brokerage firms
for a fee. The borrower pledges either cash, securities or a letter of credit
to protect the lender. Securities are borrowed by cover fails of deliveries or
short sales, provide proper denominations, and enable brokerage firms to engage
in arbitrage trading activities.
Sedol A securities identification numbering system similar to CUSIP but
used in some countries outside the United States.
Self-Employed Retirement Plan See Keogh Plan.
Self-Settled Trust A
trust which is funded from assets which came from the beneficiary.
SEP Simplified Employee Pension (plan). Basically, an IRA (SEP-IRA)
established by an employer for the benefit of each covered employee. Both the
employer and employees may contribute to the SEP-IRA. Employer contributions
are excluded from an employee's income.
Separate Line of Business See SLOB.
SEPPAA Single Employer Pension Plan Amendments Act of 1986.
SERP Supplemental Executive Retirement Plan. A non-tax-qualified
pension plan that permits an employer to offer greater benefits to its highly
Settlement (1) The winding up and distribution of an estate by an
executor or an administrator; to be distinguished from the administration of an
estate by a trustee or a guardian. (2) A property arrangement, as between
a husband and wife or a parent and child, frequently involving a trust.
Settlor A person who creates a trust, such as a living trust, to become
operative during his lifetime; also called donor, grantor, and trustor. Compare
Short-Term Trust Also known as a Clifford Trust. An irrevocable trust
running for a period of ten years or longer, in which the income is payable to
a person other than the settlor, and established under the provisions of the
Revenue Act of 1954. The income from a trust of this kind is taxable to the
income beneficiary and not to the settlor. The agreement may provide that on
the date fixed for the termination of the trust, or on the prior death of the
income beneficiary, the assets of the trust shall be returned to the settlor.
The Tax Reform Act of 1986 eliminated the 10-year or Clifford trusts exception
from grantor-trust taxation rules. Income from 10 year and other grantor trusts
is taxed to the grantor, not the beneficiary if the trust property will revert
to the grantor or the grantors spouse. It applies to transfers in trusts
after March 1, 1986.
SICOVAM A securities identification numbering system similar to CUSIP
but used in some countries outside the United States.
Simple Acronym for Savings Incentive Match Plan for Employees, a type
of defined contribution employee benefit plan passed by Congress in 1996 and
effective beginning January 1, 1997. SIMPLE plans may be used by employers
with 100 or less employees at any time during a year with no other
employer-sponsored retirement plan. SIMPLE plans may take the form of an IRA or
a 401(k) plan.
Sinking Fund An accumulation of amounts set aside periodically by
municipalities or corporations, which will be sufficient to satisfy a debt,
such as a bond issue, at maturity. See also Amortization.
SIPC Securities Investor Protection Corporation.
Congressionally-chartered corporation that protects investor funds at
broker-dealers. In general, when a broker-dealer registers with the SEC, it
automatically becomes a member of SIPC. SIPC covers an investor's account for
an aggregate of $500,000 in cash and securities, with a maximum of $100,000
SLIC A guaranteed investment contract issued by a savings and loan
association or similar thrift institution. See also GIC.
SLOB IRS term for a "separate line of business," as used in
determining compliance with minimum coverage and participation requirements for
employee benefit plans. The concept permits businesses that are part of a
controlled group to ignore affiliates when testing for nondiscrimination in
retirement and dependent care plans.
Social Investing Socially-sensitive investments which, when compared to
normal fiduciary-quality investments, are considered to either (1) have a
greater social or moral quality, or (2) create employment opportunities
for plan participants. Social investing attempts to achieve the same investment
quality and rate of return as other investments. Criteria for social investing
may be expressed in positive and/or negative terms. Positive qualities might
include firms which are seen to be pollution-free, union or employee-friendly,
U.S. (or locally) based, providing housing or medical services, food
production, or producing safe and high-quality consumer products, etc. Negative
qualities might be heavy users of energy or polluters; firms moving jobs
overseas; alcohol, tobacco or weapons manufacturers, etc. At one time, a
"standard" negative quality was a firm doing business in South
Africa. Under some criteria, fossil and/or nuclear energy firms can be viewed
either positively or negatively. See also ETIs.
Soft Dollars The purchase of research materials from brokerage firms
and paid for by commissions (or part of the commissions) generated by
securities transactions of trust accounts. Covered by Section 28(e)(1) of the
Securities Exchange Act of 1934. Opposed to this is the purchase of materials
by "hard dollars", which is when payment is made by the trust
department itself, typically by issuing a check.
SPD Summary Plan Description for ERISA employee benefit plans.
SPTDM Statement of Principles of Trust Department Management.
Specialist A member of the New York Stock Exchange who has two
functions: (1) Maintain an orderly market, insofar as possible, in the
stocks for which he/she is registered as a specialist. This is done by buying
or selling, for the specialist's own account, when there is a disparity between
supply and demand. (2) Act as a broker's broker, to place
"limit" orders that cannot be immediately executed by the broker. A
limit order is one that says buy XYZ at $50, but it is now selling at $60; the
specialist holds the broker's order until the price drops to $50. There are
about 350 NYSE specialists. See also Market Maker.
Spendthrift Clause The provision in a will or trust instrument which
limits the right of the beneficiary to dispose of his interest, as by
assignment, and the right of his creditors to reach it, as by attachment.
Spillover Trust Type of trust which by its terms is merged with or
added to another trust or estate upon the happening of a certain event. See
SPIRA Spousal IRA.
Split Stock term. Division of a company's stock into a greater number
of shares. In the case of a four-for-one split, four new shares are issued for
each old share. The opposite of a split is a reverse split, where a
company shrinks its stock base by issuing fewer shares for each existing
Sponsor The party that establishes and maintains an employee benefit
plan. This is normally the employer or an employee organization (union).
Sprinkling Trusts Trusts in which the income or principal is
distributed among the members of a designated class in amounts and proportions
as may be determined in the discretion of the trustee. Also called spray
Step-up Swaps A swap that contains periodic increases (or step-ups) in
the fixed-rate side of the swap combined with an embedded option that gives the
fixed-rate payer the right to extend the swap to a predetermined maximum
STIF Acronym for a Short Term Investment Fund, a money-market
collective investment fund.
Stock Bonus Plan A defined contributions employee benefit plan similar
to a profit sharing plan, except that employer contributions are not
necessarily dependent upon profits and benefits are in the form of employer
Stock Option Right to purchase stock of employer, generally at a fixed
price for a fixed period of time.
Stock Power A form of assignment executed by the owner of stock which
contains an irrevocable appointment of an attorney in fact to make the actual
transfer on the books of the corporation.
Stock Purchase Trust A trust under which a surviving stockholder of a
close corporation may purchase the stock of a deceased stockholder; usually,
but not necessarily, an insurance trust.
Stock Transfer Agent The agent of a corporation appointed for the
purpose of effecting transfers of stock from one stockholder to another by the
actual cancellation of the surrendered certificates and the issuance of new
certificates in the name of the new stockholder. See also Transfer
Stop Order An order to buy or sell a stock once it reaches a
certain target price.
Stop-Limit Order Instructs a broker to buy or sell once a stock
hits the stop price but only at the limit price or better.
Strategic Risk The possibility that insufficient due diligence reviews
or infrastructure preparations were made on the introduction of new products
Street Name Shares of stock owned by a broker's customer but held in
the name of the broker.
Sub-Chapter S Corporation An election available to a corporation to be
treated as a partnership for income tax purposes. To be eligible to make the
election, a corporation must meet certain requirements as to kind and number of
shareholders, classes of stock, and sources of income.
Subordinated Debenture A debt obligation that has unsecured junior
claims to interest and principal, which are subordinated to ordinary debentures
or other debt of the issuing corporation.
Subrogation The substitution of one person for another with reference
to a lawful claim or right and frequently referred to as the doctrine of
substitution. It is a device adopted or invented by equity to compel the
ultimate discharge of a debt or obligation by him who in good conscience should
Successor Trustee A trustee following the original or a prior trustee
the appointment of whom is provided for in the trust instrument; to be
distinguished from a substituted trustee.
Surcharge (Noun): An amount which the fiduciary is required by court
decree to make good because of negligence or other failure of duty. The term is
also used as a verb; as the court surcharged the trustee.
Surety An individual or a company that, at the request of another,
usually called the principal, agrees to be responsible for the performance of
some act in favor of a third person in the event that the principal fails to
perform as agreed; as the surety on an administrator's or a guardian's
Swap A forward-type contract in which two parties agree to exchange
streams of payments over time according to a predetermined rule. In an interest
rate swap, one party agrees to pay a fixed interest rate in exchange
for receiving a floating interest rate from another party. An equity index swap
may involve swapping the returns on two different stock market indices, or
swapping the return on a stock index for a floating interest rate.
Swaption An option giving the holder the right, but not the obligation,
to enter into or cancel a swap agreement at a future date.
Synthetic Derivative A type of security dependent on other securities.
Includes inverse floaters and STRIPS. See Security-Based
Synthetic Forward An agreement to either (1) purchase a call and
write a put at the same strike price and expiration date, or (2) purchase
a put and write a call at the same strike price and expiration date.
Synthetic GIC A Guaranteed Investment Contract issued by other than an
insurance company. See "GIC", "BIC",
TAB U.S. Treasury Tax Anticipation Bill. These bills generally mature a
week after the corporate income tax dates and are acceptable at par on the tax
date. See also Treasury Bills.
TAC (Targeted Amortization Class) A type of derivative that provides
investors with a predefined payment schedule applicable to a single prepayment
speed. Prepayments in excess of the predefined prepayment speed are allocated
to companion, or support, classes and generally do not affect the TAC class. If
prepayments fall below the predefined speed, however, the TAC will have slower
principal repayment and its average life will extend.
TAMRA Technical and Miscellaneous Revenue Act of 1988.
Target Plan A type of employee benefit plan which combines elements of
both defined contribution and defined benefit plans. Levels of contributions
are established and a "target benefit" aimed for. An individual
account is established for each participant. Actual benefits are based on the
amount of the contributions, as affected by the individual's pro-rata share in
the profits and losses of the investment portfolio.
Tax Free Rollover Provision whereby an individual receiving a lump sum
distribution from a qualified pension or profit sharing plan can preserve the
tax deferred status of these funds by a "rollover" into an IRA or
another qualified plan if rolled over within sixty days of receipt.
Tax Reduction Act of 1975 Provided special investment tax incentives
for establishment of ESOP's (initially known as TRASOP's and changed to tax
credit ESOP's by the Technical Corrections Act of 1979). The Tax Reform Act of
1986 repealed these credits.
TEFRA Tax Equity and Fiscal Responsibility Act of 1982. Among other
things, this Act provides that (1) municipal bond issues had to be
registered, rather than bearer, as to ownership information and
(2) changed Section 72 of the Internal Revenue Code as to loans to
participants of employee benefit plans.
Tenancy By The Entirety Tenancy by a husband and wife in such a manner
that, except in concert with the other, neither husband nor wife has a
disposable interest in the property during the lifetime of the other. Upon the
death of either, the property goes to the survivor. To be distinguished from
joint tenancy and tenancy in common.
Tenancy In Common The holding of property by two or more persons in
such a manner that each has an undivided interest which, upon his death, passes
as such to his heirs or devisees and not to the survivor or survivors; the same
as an estate in common; to be distinguished from joint tenancy and tenancy by
Testamentary Trust A trust established by the terms of a will.
Testate (Adjective): Having made and left a valid will; opposed to
Testator A man who has made and left a valid will at his death. Compare
Settlor. See also Trustor.
Testatrix A woman who has made and left a valid will at her death.
Tickler Any record established to serve as a reminder of action to be
taken on a fixed future date. It is always arranged in the order dates on which
such action is to be taken.
Time Value The difference between the total value of an option and the
option's intrinsic value.
Top Hat Plan An unfunded plan maintained to provide deferred
compensation for a select group of management or highly compensated
Top Heavy Plan A plan that provides more than 60% of its aggregate
accrued benefits or account balances to key employees. Such plans must meet
certain additional qualification rules regarding vesting and contributions.
"Totten" Trust Trust created by deposit of one's own money in
his own name as trustee for another. Title is vested in the record owner
(trustee), who during his life holds it on a revocable trust for the named
beneficiary. At the death of the depositor a presumption arises that an
absolute trust was created as to the balance on hand at the death of the
Tracking Error For stock and bond index funds, the difference between
index return and the actual return of the fund.
Tranches (1) Risk maturity or other classes into which a
multi-class security, such as a collateralized mortgage obligation (CMO) or
real estate mortgage investment conduit (REMIC) is split. (2) Subunits of
a large ($10 - $30 million) Eurodollar certificate of deposit that are
marketed to smaller investors in $10,000 denominations. These are represented
by separate certificates, and have the same issue date, interest rate and
maturity as the original instrument.
Transfer Agent A corporate agency account whose duties are to transfer
stock from one owner to another. A transfer agent maintains records of
shareholders, and issues stock certificates. Transfer agents which transfer
stock of companies with, generally, 500 stockholders and $1 million in assets
must register with either the SEC or its banking agency (as appropriate) under
Section 17A of the Securities and Exchange Act of 1934. A transfer agent for
bonds usually is known as a registrar. See also Stock-Transfer
TRASOP An employee benefit account dealing with employee stock
ownership plans which meet certain qualifications under the Tax Reduction Acts
of 1975 and 1976. These Acts encouraged the use of TRASOP's by allowing a
special investment credit as an incentive for establishing such a plan. The
Technical Corrections Act of 1979 provided for further such incentives. The tax
credits were repealed by the Tax Reform Act of 1986. See also
Employee Stock Ownership Plan.
Treasury Bills Short-term direct obligations of the U.S. Government.
Often referred to as T-Bills. They are issued with maturities of three months,
six months or one year, in denominations of $10,000 and up in multiples of
$5,000. See also TABs.
Treasury Bonds Long-term direct obligations of the U.S. Government
issued with maturities of five to 30 years, paying interest
Treasury Notes Short- to intermediate-term direct obligations of the
U.S. Government issued with maturities of one to seven years, paying interest
TRESOP Tax Reduction (Act) ESOP. See TRASOP.
Triple Witching The last trading hour on the third Friday of March,
June, September and December when options and futures on stock indexes expire
concurrently. Massive trades in index futures, options and underlying stocks by
hedge strategists and arbitragers cause abnormal activity and volatility. See
Trust A fiduciary relationship in which one person (the trustee) is the
holder of the legal title to property (the trust property) subject to an
equitable obligation (an obligation enforceable in a court of equity) to keep
or use the property for the benefit of another person (the beneficiary).
Trust Agreement A written agreement between settlor and trustee setting
forth the terms of a trust. See also Deed of Trust.
Trust Committee A committee of directors or officers or both of a trust
institution charged with general or specific duties relating to its trust
Trustee An individual or a trust institution which holds the legal
title to property for the benefit of someone else.
Trusteed Pension Plan A pension plan in which the corporation's
contributions to the plan are placed in a trust for investment and
reinvestment, as distinguished from a plan in which the benefits are secured by
Trustor A person who creates a trust; a broad term which includes
settlor and testator.
Trust Under Agreement A trust evidenced by an agreement between the
settlor and the trustee.
Trust Under Deed A trust evidenced by a deed of conveyance, as
distinguished from an agreement; originally confined to real property but not
frequently applied to personal property as well.
Trust Under Will A trust created by a valid will, to become operative
only on the death of the testator; opposed to a living trust and the same as
Ultra Vires Term applied to acts of a corporation which exceed its
Undistributed Net Income (UNI) The amount by which the distributable
net income for the year exceeds the sum of any amount of income for the year
required to be distributed currently, any other amounts properly paid,
credited, or required to be distributed for such year, and the amount of taxes
properly allocable to the undistributed portion of the distributable net
Unfunded Insurance Trust An insurance trust in which the premiums on
the policies are to be paid by the insured or by some third person and not by
the trustee; to be distinguished from a funded insurance trust.
Unfunded Vested Pension Liability In a defined benefit pension plan,
the difference between the actuarially-determined value of the vested
(nonforfeitable) benefits under the plan, and the market value of the plan's
Unfunded Prior Service Pension Liability In a defined benefit pension
plan, the difference between the actuarially-determined value of the projected
future benefit costs (both vested and manifested) and administrative expenses,
as well as the unamortized portion of prior benefit costs, under the plan, and
the market value of the plan's assets.
Unified Credit A dollar amount allocated to each taxpayer which can be
applied against the gift tax, the estate tax and, under certain circumstances,
the generation-skipping tax.
Uniform Gifts To Minors Act An act adopted by most states providing for
a means of transferring property to a minor, wherein the designated custodian
of the property has the legal right to act on behalf of the minor without the
necessity of a guardianship.
Unit Investment Trust An investment vehicle registered with the SEC
under the Investment Company Act of 1940 that purchases a fixed portfolio of
securities. Units in the trust are sold to investors, who receive a
proportionate undivided interest in the principal and income of the portfolio.
The portfolio of securities remains fixed until the securities mature or,
unusually, are sold.
Unmatched Swap An interest rate swap that the counterparty has not
paired with an asset or liability with interest payment terms similar to those
of the swap.
Unwinding a Swap Terminating a swap agreement.
VAR Value at Risk. An alternative approach (supposedly more
sophisticated and accurate) to stress tests for measuring the risk in certain
securities activities, such as derivatives. A rudimentary probability analysis,
VAR measures the potential for fluctuation in securities prices. VAR is
designed to show probable risk, whereas stress tests show what is possible. In
the U.S., VAR calculations are usually based on the daily RiskMetrics data
issued by Morgan Guaranty Trust Company over Internet. The use of VAR to
measure risk is endorsed by the Group of 30; the Basel Committee of
international bank supervisors is leaning towards the use of VAR.
Variable Amount Note Note evidencing the amount the trust department
lends to a borrower from cash held in various fiduciary accounts; the amount of
the loan outstanding fluctuates depending on the amount of cash on hand.
VEBA Acronym for Voluntary Employees' Benefit Association. A tax exempt
fund that pays death, health, accident or other benefits to plan participants,
their dependents and/or beneficiaries. Generally covered under
Section 501(c)(9) of the Internal Revenue Code.
Vest (Verb): To confer an immediate, fixed right of immediate or future
possession and enjoyment of property.
Vesting As applied to pension and profit-sharing plans, vesting is a
term that indicates the attainment by a participant of a benefit right,
attributable to employer contributions, that is not contingent upon his
continued employment. Vesting may be total and immediate, graduated over a
period of years, or may occur on completion of stated service or participation
Viatical Settlement (From the Latin viaticum, for provisions for
a journey.) The sale or transfer (settlement) of ownership rights to a
life insurance policy prior to death by an insured individual with a terminal
illness. The insured person receives a percentage of the life insurance
policy's proceeds, with the amount paid is based on a number of factors, such
as the life expectancy of the insured person, the amount payable on death,
estimated future premiums, and any commissions or other costs. Purchasers may
be brokers who sell interests in the life insurance policy's proceeds to
investors, with the broker taking its own commission. Once the insurance policy
is sold to a broker, the insured is not responsible for paying premiums on the
policy. In a 6-8-95 letter to the Texas Department of Banking, the IRS stated
that IRA accounts could not "lend" funds to a "viatical
trust" for other than the IRA owner, as § 408(a)(3) of the Internal
Revenue Code and § 1.408-2(b)(3) of IRS Regulations prohibit investment of
IRA funds in insurance contracts. Beginning 1-1-97, funds received from
viatical settlements are not taxable for federal income tax purposes if the
insured has a life expectancy of less than 24 months or (under special
conditions) is chronically ill. See also Accelerated
Death Benefit (ADB).
Volatility The degree of price fluctuation for a given asset, rate, or
index. Usually expressed as variance or standard deviation.
Voting Authority The power to vote a stock. A trustee may have sole,
shared, or no authority to vote stock held in trust.
Vulture Fund A type of limited partnership that invests in depressed
properties, usually real estate, aiming to make a profit when prices
Waiver (1) The voluntary relinquishment of a right, privilege, or
advantage. (2) The document by which the relinquishment is evidenced.
Warrant A securities certificate which carries the privilege of buying
a certain number of shares of stock at a fixed price. They are sometimes
attached to securities, at other times they are issued in connection with
subscription privileges to holders of stock. See Right.
Wasting Assets Assets which are exhausted through use or lose their
value through the passage of time, such as oil wells, mining claims, and
Wearaway a device which may be offered to employees with long company
service when traditional defined benefit pension plans are converted to defined
benefit cash balance plans. Wearaway provides employees the option of receiving
the greater of their frozen benefit under the previous pension plan formula, or
their total benefit under the new cash balance formula.
Welfare Plans A term defined by Section 3(1) of ERISA as employee
benefit plans which provide the following types of benefits: medical, surgical,
hospital care or benefits, sickness, accident, disability, death or
unemployment, or vacation benefits. Also includes apprenticeship or other
training programs, day care centers, scholarship funds, prepaid legal services,
and similar types of benefits other than pensions.
Will A legally enforceable declaration of a person's wishes in writing
regarding matters to be attended to after his death and inoperative until his
death. A will usually, but not always, relates to the testator's property, is
revocable (or amendable by means of a codicil) up to the time of his death, and
is applicable to the situation which exists at the time of his death.
Window A term used with BIC's and GIC's for a contract where periodic
deposits may be made over an agreed-upon period, usually three months to a
Witching The final trading hour, usually on the third Friday of months
other than March, June, September and December, when index futures or options
expire. This may lead to abnormally high levels of stock trading and
volatility. See also Triple Witching.
When Issued (WI) Short form of "when, as, and if issued."
Refers to a transaction made conditionally because a security, while
authorized, has not yet been issued. New issues of stocks and bonds, stocks
that have split are traded on a when issued basis. Newspaper listings often
indicate such issues by a "WI."
Whoops Nickname for the Washington Public Power Supply System. In the
late 1970's and early 1980's, WHOOPS raised billions of dollars through
municipal bonds to finance construction of five nuclear power plants. WHOOPS
cancelled two of the plants and defaulted on the related bonds. It was the
largest municipal bond default in history.
WPPDA Welfare and Pension Plans Disclosure Act, also known as the
Landrum-Griffin Act. Pre-ERISA law now repealed and replaced by ERISA.
WRAP A wrap account is an account offered by a broker or investment
dealer where the investor is charged an annual management fee for all services,
usually based on the value of invested assets. Wrap fees are paid in lieu of
commissions in such an account. Refer to
Section 7, Subsection N.2, of the Trust Manual for a discussion of wrap
accounts offered by a trust department.
Writer (short) The seller of an option (financial instrument).
Yankee Certificate of Deposit A certificate of deposit issued by the
U.S. branch of a foreign bank.
Z Pac A derivatives term. Similar to a Z Tranche, but holders also
receive principal if prepayments fall within a specified range.
Z Tranche A derivatives term for a tranche with a stated interest, but
where the interest is not paid until certain other classes have been paid.