R20 : Prudent Man / Expert / Investor Rule

R20 : Prudent Man / Expert / Investor Rule Which is strictest ? What are the differences betweem them ? What are the reasons for their different applications as follows ? Prudent Man Rule : Foundation Prudent Expert : DB/DC plan Prudent Investor : Endowment Anyone can explain / clarify tangibly ?

Prudent Man RUle: the requirement that a trustee, investment manager of pension funds, treasurer of a city or county, or any fiduciary (a trusted agent) must only invest funds entrusted to him/her as would a person of prudence, i.e. with discretion, care and intelligence. Prudent Man Rule requires that each investment be judged on its own merits. Under the Prudent Man Rule, speculative or risky investments must be avoided. investments aren’t viewed in a portfolio context. Prudent Expert Rule: Revised version of the prudent man rule required by ERISA to guide managers of pension and profit sharing portfolios. The main addition is that the manager must act as someone with familiarity with matters relating to the management of money, not just prudence. Prudent Investor rule: This is a modified version of Prudent Man Rule in that it views asset allocation from a portfolio context. An asset (like derivatives) may be too risky to invest if considered on a stand-alone basis but can provide diversification benefits if viewed in a portfolio context.

level3aspirant, TKVM for your advice ! Then, which is strictest ? What are the reasons for their different applications as follows ? Prudent Man Rule : Foundation Prudent Expert Rule : DB/DC plan Prudent Investor Rule : Endowment

in my opinion, prudent expert rule imposes most strict standards on pension fund managers since they are liable for the pension obligations due to its participants. foundations and endowments do not have a specified liability stream (besides the mandatory spending payout requirements for private / co sponsored and operating foundations) still this is not as strict as pension fund’s obligations. foundations and endowments focus on asset only aproach to asset management which is less restrictive in terms of alloawable investments compared to ALM approach followed by pensions. hope this makes it clear.

level3aspirant, TKVM for your explanation / clarification ! Anyone else has complementary explanation / clarification ?

You guys seem to be reading too much into it. First of all: It is Prudent Person rule, not Prudent Man. The first is a concept/general definition of what it means to be ‘prudent’. As you recall from level II, it was interpreted to be the specific “Prudent Man” standard. In modern time, it is interpreted to be “Prudent Investor”. Check your level II book if you are unsure about the difference or definition for each of them. ‘Prudent Man’ is not in use any more (not as I am aware of). This Prudent Investor standard applies for all persons acting as fiduciary (trust, endowment, pension fund,…) In the pension fund context in the US, the standard is further codified (thus more exact) in a law known as ERISA which regulates pension funds. The principles are the same, but ERISA is more specific to pension funds. What the differences are well beyond the scope of CFAI reading. Suffice to know is all acting as fiduciary need (is expected) to act as Prudent Investor.

elcfa, TKVM for your further explanation / clarification. Indeed, my brain is overflowing due to the big volume of the exam material and the memory capacity is too small. I will review the L2 book as suggested by you. Thanks again !