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 ?
1998) (indicating that the assumption behind the Prudent Man Rule is that "trust beneficiaries are highly risk averse and therefore prefer to receive a lower expected return in exchange for taking fewer risks").
Moreover, the recent cases were litigated under situations governed by the "prudent man rule," whereas most states' trust laws have by now adopted the Prudent Investor Act.
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).
* Investment skills: Most states require that trustees operate under the "Prudent Man Rule" of investing and have certain investment mixes that trustees must adhere to.
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.
In earlier periods of the twentieth century, the so-called "prudent man rule" gradually became the dominant rule of trust investment law in the various states, generally displacing less flexible approaches, such as "legal lists" of permissible investments.
Prudent Man and Prudent Investor Rules--The Prudent Man Rule was developed through years of analysis dating back to 1830.
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."
Randall Miller, in the November 1989 issue of Contingency Journal, explains that we must exercise our "duty of trust" and "duty of care" and apply the common-law standard of the "prudent man rule" to our management of information assets.
Vesting requirements take up two pages, minimum funding standards, two pages, and the prudent man rule, three pages.
The "best interest" standard is a combination of ERISA's prudent man rule and duty of loyalty.
On the other hand, traditional and rollover IRAs-and SEPs and SIMPLE IRAs that cover only business owners and their spouses-are not ERISA plans, in which case ERISA's prudent man rule does not apply.