prudent man rule


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prudent man rule

n. the requirement that a trustee, investment manager of pension funds, treasurer of a city or county, or any fiduciary (a trusted agent) must only invest funds entrusted to him/her as would a person of prudence, i.e. with discretion, care and intelligence. Thus solid "blue chip" securities, secured loans, federally guaranteed mortgages, treasury certificates, and other conservative investments providing a reasonable return are within the prudent man rule. Some states have statutes which list the types of investments allowable under the rule. Unfortunately, the rule is subjective, and some financial managers have put funds into speculative investments to achieve higher rates of return, which has resulted in bankruptcy and disaster as in the case of Orange County, California (1994). (See: fiduciary, trustee)

References in periodicals archive ?
The adviser must adhere to the DOL's impartial conduct standards, including the best interest standard of care, which is a combination of the prudent man rule and the duty of loyalty.
That standard is, in its essence, a combination of the prudent man rule and the duty of loyalty," Reish continued.
When selecting and monitoring investment options, a plan’s committee members are held to a special fiduciary standard often referred to as the prudent man rule. This means committee members must act with the care and skill that a prudent person would if acting in a similar capacity and being familiar with such matters.
While I believe that focused 401(k) advisors understand ERISA's prudent man rule and duty of loyalty, I'm concerned that many advisors don't understand how the best interest standard of care will impact their advice to IRAs (once the new DOL rules apply on April 10, 2017).
Some fund managers who must follow a "prudent man rule" in investing appreciate the safe legal harbor of an investment- grade rating - one reason so little has been done, even though other critics have charged the agencies with having a cozy oligopoly.
Having the confidence that the fiduciaries are operating in your best interest, besides exercising the skill and discretion necessary, is a standard known in the industry as the "prudent man rule." The ERISA law clearly states that each fiduciary must use "the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."
The prudent man rule, (based on common law) generally instructs that a prudent person is one who exercises the degree of skill, care and diligence that a reasonably prudent person would exercise under the same or similar circumstances.
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).
Other websites tie the term to ERISA's prudent man rule regarding investing, or they link it to modern portfolio (investment) theory.
(51) The Prudent Investor Rule both extends and clarifies the older and outdated Prudent Man Rule, (52) the latter requiring a trustee to act in a prudent and cautious fashion with the overriding purpose to preserve the trust's principal.
The Sarbanes-Oxley legislation sweeps away decades of jurisprudence based on Delaware law and standards for corporate responsibility such as the Prudent Man rule. In 1830, Judge Samuel Putnam set down a general canon for corporate behavior: "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." Sarbanes-Oxley replaces the Prudent Man rule with strictures that violate our Constitutional freedoms and do little to actually prevent future scandals.
Investment management was mostly directed by the so-called "Prudent Man Rule." In essence, this meant that the manager sought a reasonable return but preserved capital and, most importantly, avoided speculation.