Trust preferred securities, commonly referred to as TruPS, are debt-like securities with features of both debt and stock. They were popular before the 2008-09 financial crisis, but legal and regulatory action taken since then has caused them to be largely phased out from the marketplace.

Trust Preferred Securities are issued by banks or bank holding companies, who create a trust and issue shares of preferred stock of that trust. The trust typically pays a higher periodic payment than traditional preferred stock, with a maturity of up to 30 years. They are generally viewed as having a debt-like structure, since the issuer makes regular payments to investors and the investors do not have ownership rights in the issuer.

TruPS are similar to bonds, but they don’t need to be registered with the SEC. They also provide a higher yield than preferred stock and senior debt, which makes them attractive to investors. However, TruPS can be expensive for issuers, since investors usually demand higher returns for investments with provisions like early redemption or delayed payments.

In response to the financial crisis of 2008-09, the Federal Reserve Board issued rules that discouraged the use of TruPS. This was done to prevent their use as a type of “shadow banking”, a system where institutions can gain easy access to credit without any formal regulation. This, in turn, can create uncertainties and deeper systemic risk.

Overall, Trust Preferred Securities were a unique security that have largely been phased out in recent years. The high yields, lack of SEC registration, and long maturities made them attractive, but the higher cost of issuances and increased risks associated with “shadow banking” prompted the Federal Reserve Board to restrict them. Investors who still hold TruPS should look at the securities carefully to assess the risks and benefits associated with them.