prudent man rule

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Prudent Man Rule

A legal rule requiring investment advisers to only make investments for their clients' discretionary accounts that a "prudent person" would make. This means that investment advisers operating discretionary accounts are not allowed to make investments they believe will lose money for the client. It does not require that the investment adviser always make correct decisions; it merely requires him/her to make decisions that will be generally accepted as sound for someone of average intelligence. The rule has its origins in an 1830 court decision in Massachusetts, stating that trustees must manage the affairs of others as if they were managing "their own affairs." See also: Suitability rules, Twisting.

prudent man rule

A federal and state regulation requiring trustees and portfolio managers to make financial decisions in the manner of a prudent man, that is, with intelligence and discretion. The prudent man rule requires care in the selection of investments but does not limit investment alternatives. See also investment-grade, legal list.

Prudent man rule.

The prudent man rule is the basic standard a fiduciary, who is responsible for other people's money, must meet.

It mandates acting as a thoughtful and careful person would, given a particular set of circumstances. A trustee, for example, observes the prudent man rule by preserving a trust's assets for its beneficiaries.

The prudent man rule has sometimes been described as a defensive approach to money management, putting greater emphasis on preservation than on growth. The newer prudent investor rule differs by putting greater emphasis on achieving a reasonable rate of return and by delegating decision-making to investment professionals.

References in periodicals archive ?
The prudent man rule, however, focuses primarily on prudence in the selection of individual investments.
ERISA was aimed at protecting pension fund holders from the outrageous acts of money managers who flouted the Prudent Man Rule. ERISA came under the Department of Labor's control (in my experience a bureaucratic snakepit).
Some of the important aspects of ERISA included a revision of the Prudent Man Rule, rules affecting funding, a rule allowing fiduciaries to delegate fiduciary responsibilities, and the requirement that all pension funds develop and maintain an investment policy statement.
Generalizations were articulated and efforts were made to provide guidance to trustees, with the result that over time the prudent man rule lost mulch of its generality and adaptability as applied in most states.
(89.) See generally BEVIS LONGSTRETH, MODERN INVESTMENT MANAGEMENT AND THE PRUDENT MAN RULE (1986); Harvey E.
Known as the prudent man rule, it requires a trustee to "observe how men of prudence...manage their own affairs...considering the probable income as well as the probable safety of the capital to be invested."
Vesting requirements take up two pages, minimum funding standards, two pages, and the prudent man rule, three pages.
The Prudent Man Rule requires that fiduciaries act "with care, skill, prudence, and diligence under the circumstances then prevailing." While the circumstances of a few years ago may have limited a fiduciary's ability to evaluate TDFs, those circumstances have changed.