Prudent Person Rule


Also found in: Financial.

Prudent Person Rule

A standard that requires that a fiduciary entrusted with funds for investment may invest such funds only in Securities that any reasonable individual interested in receiving a good return of income while preserving his or her capital would purchase.

Historically known as the prudent or reasonable man rule, this standard does not mandate an individual to possess exceptional or uncanny investment skill. It requires only that a fiduciary exercise discretion and average intelligence in making investments that would be generally acceptable as sound.

References in periodicals archive ?
The European Insurance and Occupational Pensions Authority (EIOPA) published the findings of its peer review examining how national competent authorities (NCAs) ensure that institutions for occupational retirement provision (IORPs) comply with the Prudent Person Rule.
(4) This standard is more stringent than the previously used prudent person rule, which required a trustee to invest funds as a person of prudence, with discretion, care, and intelligence.
Specifically, ERISA requires a plan's fiduciary to "act with the care, prudence, skill and diligence that a prudent person acting in like capacity under similar circumstances would act" -- also known as the "prudent person rule."
Under the Uniform Prudent Investor Act of 1994, the prudent investor rule replaced the prudent person rule (the prudent person rule is also known as the prudent man rule).
However, other strategies such as appropriately applying the prudent person rule could still be used, though taxpayers should note the increasing difficulty of challenging the proposed regulations when they are finalized.
Investment duties of trustees were defined by the Prudent Person Rule.[3] Under the Prudent Person Rule the trustee had a duty "to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived."[4] (Emphasis added)
The duty of care is often referred to as the prudent person rule because directors and officers are expected to act with the care of a reasonably prudent person in a similar position under like circumstances.