Special Program: The ALI's Prudent Investor Rule 20 Years On (and after the Financial Crisis)
Sunday, May 20, 1:00 to 3:00 p.m.
This program is open to all Annual Meeting attendees. CLE credit is available.
In the last twenty-five years, every state has adopted a version of the modern Prudent Investor Rule, dramatically transforming the law of trust and other fiduciary investment. Rooted in the teachings of Modern Portfolio Theory (MPT), the Rule abolishes all categorical restrictions on investments and imposes a portfolio-as-a-whole standard of care that includes an augmented duty to diversify. The scholarly literature that argued for this change, as well as the official commentary to the underlying Restatement and Uniform Act provisions that effected it, also made reference to the Efficient Capital Market Hypothesis (ECMH), which is relevant to trust investment in certain circumstances.
In the wake of the 2008 financial crisis, scholars, policymakers, and investors have reappraised the leading economic and financial theories of market behavior, including the ECMH and MPT. Some practitioners and academics have come to question the wisdom of the Rule, arguing that the financial crisis disproved the economic theories on which the Rule was based.
Such criticisms misapprehend the substantive law and the economics that underpin the Rule. The paper on which this talk is based has three purposes. First, it restates the law and economics of trust investment, brining both up to current, among other things to account for the learning of the behavioral finance movement that has arisen since the development of the Rule. The literature concerning the Prudent Investor Rule, both pro and con, is replete with misunderstandings about the relevant law and economics. Foremost among these errors is the idea that the Rule depends on or otherwise codifies the ECMH. To the contrary, the Rule codifies the basic teachings of MPT, which can be applied in efficient or inefficient markets and to traded or non-traded assets. ECMH is relevant to prudent trust investment only to the extent that the the trust holds or could hold assets that trade in an efficient market. Moreover, the teachings of behavioral finance tend to support the Prudent Investor Rule as currently constructed. Certainly noting in behavioral finance undermines the Rule.
Robert H. Sitkoff, Harvard Law School
Susan Gary, University of Oregon School of Law
Bevis Longstreth, Debevoise & Plimpton
Randall W. Roth, University of Hawaii, William S. Richardson School of Law
There is no registration fee, but advance registration is required. Registrations will be accepted at the door if space permits, beginning at 12:30 p.m.
Those who pay the $100 CLE fee for the Annual Meeting may claim CLE credit for this program as well (total 60-minute CLE hours of substantive instruction: 2; total 50-minute CLE hours: 2.4).