In the 1900s, state governments adopted "legal lists
" - lists of investments considered safe enough for fiduciary investing.
Legal lists originated in England in the eighteenth century as a list of assets for which, if they earned poor or negative returns, a trustee could not be held liable.
State legal lists could be used to resolve the principal-agent dilemma, but it is also plausible that they could be a means by which states coerce the plans they sponsor to invest only in state approved assets.
Gone are the days of "legal lists
," based on state statutes, which spelled out what securities nonprofits invested in.
This survey shows that about one quarter of public-sector pension systems are still subject to "legal lists
" that prohibit specific investment, whereas the modern prudent-investor standard tries to replace that approach with a focus on the overall portfolio's risk/return profile.
More extensive compilations of legal lists
can be found on the Internet, provided by Lyonette Louis-Jacques of the University of Chicago at www.lib.uchicago.edu/cgi-bin/law-lists, Margaret L.
Yet, in far too many states, school employee pension fund investments are made by state officials who care more about short-term budget balancing than long-term fund growth--or who are bound by "legal lists
" of conservative, low-yield investment categories.
In some cases, the prudent person standard is supplemented with legal lists
specifying the allowed types of investments and the maximum percentage of assets that can be invested in certain securities.
Socalled legal lists
of permissible institutional investments were compiled; stocks were not included.
Thankfully, the days of legal lists
of prohibited investments are gone, but the expectations for trustees have markedly increased.
A Book of Legal Lists is thoroughly enjoyable and tailor-made for those of us whose free time comes in small packages.
Obviously, A Book of Legal Lists is light reading, although Schwartz cannot hide his scholarship.