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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Keep Your Eye on the Octopus |
| by
W. Scott Simon
| 09-07-06 |
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Continued from page
1.
The Octopus: Uniform Prudent Investor Act
To help rectify this, the Uniform Prudent Investor Act was published in 1994 by the National Conference of Commissioners on Uniform State Laws. This Chicago-based group, founded in 1892, is a confederation of state commissioners on uniform laws. Commissioners of each of the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have access to more than 300 prominent attorneys, judges, and law professors who are available to draft uniform and model laws and work toward their enactment. (To date, the commissioners have promulgated approximately 250 uniform and model laws, including such hits as the Uniform Commercial Code.)
The Uniform Prudent Investor Act sets forth prudent fiduciary standards governing the investment conduct of trustees of private family trusts. The terms of the act, however, make clear that its standards also have a bearing on the investment conduct of fiduciaries in other fields of investing. These fiduciaries, as will be shown, include those responsible for investing and managing the assets of ERISA retirement plans, public employee retirement plans, and charitable nonprofits, including foundations and endowments.
The 23-page act draws upon and codifies the 300 plus-page Restatement. A commentator explains the close relationship between the Restatement and the Uniform Prudent Investor Act: "[The act's] tie to the Restatement is significant, because it is the Restatement that provides numerous examples of prudent and imprudent investing, as well as providing the underlying rationale of the rules that are now part of the [act]."
As a result, the act and its commentary embody the wording and principles of prudence laid down by the Restatement and its commentary. The Restatement and the act stand together at the very center of modern prudent fiduciary investing; indeed, they define its very standards.
The act has served as a model for states that have adopted their own versions of it. To date, 44 states (get busy Delaware, Florida, Georgia, Kentucky, Louisiana, and New York), the District of Columbia, and (lest we forget) the U.S. Virgin Islands have enacted the act into law. The American Bar Association endorsed the act in 1995, as has the American Bankers Association.
The tentacles of it have spread far and wide into virtually all fields of U.S. trust investment law. These fields are covered by uniform acts published by the National Conference of Commissioners:
- The Uniform Management of Public Employee Retirement Systems Act, published in 1997.
- The Uniform Principal and Income Act, 1997.
- The Uniform Trust Code, 2000.
- The Uniform Prudent Management of Institutional Funds Act, 2006.
It's not a stretch, then, to say that the fiduciary investment standards of the Uniform Prudent Investor Act govern, directly and indirectly, the conduct of a wide variety of trustees in the investment and management of hundreds of billions of dollars.
Uniform Management of Public Employee Retirement Systems Act
Public pension plans are regulated by state laws, which vary considerably, and in many cases have not kept up with modern investment practices. The Uniform Management of Public Employee Retirement Systems Act sets forth uniform standards governing the investment conduct of fiduciaries responsible for investing and managing the assets of public employee pension plans.
These uniform standards are based on trust law. Fiduciaries are required to live up to the trust law standard, which is the highest known in law. The National Conference of Commissioners' summary of the act describes the special responsibilities of fiduciaries when they hold assets in trust: "By declaring that all retirement system assets are held in trust.public employees are guaranteed the highest standard of conduct in the management and investment of assets for retirement that the law can establish. A trustee.carries the greatest burdens of care, loyalty and utmost good faith for the beneficiaries to whom he or she is responsible."
The act incorporates modern investment practices with relevant text and commentary from the Uniform Prudent Investor Act. Chapter 15 of my book is an analysis of how closely the text of the act tracks that of the Uniform Prudent Investor Act.
Wyoming and Maryland enacted the Uniform Management of Public Employee Retirement Systems Act into state law in 2005, and the fiduciary sections of the act became law in South Carolina in 1998.
Uniform Principal and Income Act
The Uniform Principal and Income Act helps to coordinate the implementation of Modern Portfolio Theory and prudent investing with new rules pertaining to principal and income allocation in trusts. The prefatory note to the act states that one of the two purposes in publishing it was "to provide a means for implementing the transition to an investment regime based on principles embodied in the Uniform Prudent Investor Act."
The Uniform Principal and Income Act is meant to accommodate both the duty of impartiality and facilitate fiduciary implementation of principles of Modern Portfolio Theory and prudent investing set forth in the Uniform Prudent Investor Act and the Restatement.
The act is now law in 41 states and the District of Columbia. The American Bar Association endorsed it in 1998.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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