In December 25, 1999, Pennsylvania’s “Prudent Investor Rule” became effective. It makes several important changes from the prior investment standard commonly referred to as the “prudent man” standard. Under the rule fiduciaries must invest and manage a trust as a prudent investor would considering the terms of the trust and its purpose.
The rule expands the discretion of fiduciaries to make investments and manage property under their control. This increased discretion permits fiduciaries to invest in any type of investment vehicle as long as it is appropriate under the particular circumstances; in the past fiduciaries could only consider traditional investments. Non-traditional investments include temporary short-term, non-interest-bearing accounts.
Investments are now viewed collectively as part of the overall portfolio; no single investment can be inherently proper or improper. Furthermore, fiduciaries may delegate day-to-day control of the portfolio to an investment agent or to a co-fiduciary. This provides an opportunity for the fiduciary to limit its liability since he or she is not responsible for the performance of an agent if the delegation is made with reasonable care.
The prudent investor rule, which is followed by a majority of states, applies to trustees and guardians; executors, custodians and agents under a power of attorney are not subject to the rule. The governing instrument may be drafted to limit application of the rule, however.
In short, the new prudent investor rule gives fiduciaries broader latitude in selecting investments and delegating certain investment duties while reducing somewhat their exposure to claims of mismanagement.
– Leslie Heffernen