Study On The Prudent Investor Rule In American Trust Law

The prudent investor rule is one of the achievements of codifying and unifying the American trust law at the end of the 20th century,and it was quickly adopted by most states through legislation and became a part of their trust law after it was created by a private institution,so that it promoted,in fact,codification and unification of American trust investment law.The prudent investor rule,a default rule,functionally can reduce transaction costs and redress information asymmetries between settlers and trustees.The prudent investor rule is a good example of the combination of legal theory and economics theory in the trust investment law.And the theoretical foundations of prudent investor rule consist of the fiduciary duty of the equity and the modern portfolio theory in economics.Fiduciary duty can be categorized into duty of loyalty and duty of care,while the duty of care becomes the duty of prudent investment in trust investment law.The Prudent investor rule is based on the classification of duty of loyalty and duty of care,and the rule designed under the dualistic framework consisting of duty of loyalty and duty of prudent investment deriving from the duty of care.At the same time,the prudent investor draws on the general consensus of modern portfolio theory that was widely accepted investor in its system design,including portfolio investment,diversification,tradeoff in all investing between risk and return,and the efficient market hypothesis.The creation of prudent investor rule is the result that American trust investment law had developed for a long time.In 1830,the Massachusetts Supreme Court refused to apply the legal list rules and created the prudent man rule,but this rule at that time had not been recognized widely.In 1869,New York Court of Appeals established its own legal list rule,and from that time,the legal list had been the mainstream governing trustee's conducts to invest in most of states,but rather regions of application of prudent man rule are greatly narrowed.In the 1940s,scholars and practitioners being familiar with modern portfolio theory had reinterpreted and attempted to promote the revival of the prudent man rule,from then on,the prudent man rule had been the dominant rule of the trust investment law in the United States for several decades.However,a lot of scholars came to rethink and attack the disadvantages of prudent man rule that had been reinterpreted since the 1970s,and recommended that the trust investment law should reflect the general consensus of modern portfolio theory when reform it.In the end,the American law institute response to these criticism and suggestions and formally promulgated the prudent investor rule in 1992.The evolution of prudent investor rule shows that whether the conservativeness or openness of the trust investment law is to make it reflect and adapt to the practical needs of the society.In other words,the trust investment law had self-adapted to the needs for maximizing the interests of beneficiary under any circumstances.The Prudent investor rule contains duty of prudent investment and duty of loyalty in its content.First,the prudent investor rule requires that trustees invest and manage funds of trust as a prudent investor would,in light of the purpose,terms,distribution requirements and other circumstances of the trust.In satisfying this,the trustees shall exercise reasonable care,skill and caution.Second,the prudent investor rule specifies a series of factors that trustees should consider when they invest trust funds.In addition,the rule design several sub-rules according to the investment,tradeoff in all investing between risk and return,diversification,delegate,cost control and ex ante standard and so on.Third,the prudent investor rule reiterated the duty of loyalty of trust law,and it also according to the modern portfolio theory,reinterprets the duty of impartiality deriving from the duty of loyalty.Finally,American trust law revised its contents in relation to the liability of trustee for breach of trust,so that it can be applied to the circumstances that a trustee violates the prudent investor rule.The liability of trustee for violating the prudent investor rule belongs to liability of fault in nature,and its extent of compensation includes direct loss and consequential loss.The Trust Law of the People's Republic of China does not prescribe the prudent investor rule.The rules governing the investment conduct of trustees are included in the rules about the duty of care of trustees,however,they too abstract and simple to apply.Consider the requirement for monitoring the conduct of trustees investing and managing trust funds prudently,and maximize the interests of beneficiary,it is necessary to draw lessons from the prudent investor rule of American trust law to reform the trust investment law of our country.To be specific,we may add a new chapter on trustee's duty of prudent investment in the Trust Law of the People's Republic of China,and adopt some of prrequirement of the modern portfolio theory to guide the trustee's investment,including portfolio udent investor rule in American trust law to establish the prudent investor rule of Chinese trust law when revise the Trust Law of the People's Republic of China.