In 1990, the American Law Institute adopted Restatement of the Law Third, Trusts: Prudent Investor Rule, which revised portions of the Restatement Second of Trusts. Since its adoption, nearly every state has accepted a version of the modern Prudent Investor Rule, dramatically transforming the law of trusts and other fiduciary investments. 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 Prudent Investor Rule has been quoted or cited in numerous bank trust officer manuals and by government agencies, and has therefore played a significant role in shaping law and policy. In addition to references made in The FDIC Trust Examination Manual and in publications by the IRS, the rule is cited in the Comptroller of the Currency’s Investment Management Services – Comptrollers’ Handbook, which states:
The incorporation of MPT into trust law was significantly advanced by the adoption of the Restatement (Third) of Trusts by the American Law Institute in May 1990. ERISA’s statutory and regulatory standards for prudent investing, diversification, and delegation of pension plan fiduciaries are also reflected in the Restatement (Third). Specifically, section 227 of the Restatement (Third) recognizes an expansion of the fiduciary responsibilities of trustees and provides greater latitude in fulfilling such responsibilities.
The American Law Institute’s restatements of trusts have been influential with lawyers, professional trustees, and the courts over the years as summaries of state laws and judicial decisions governing the conduct of trustees. It has greatly influenced the development of trust law in the United States.
The Prudent Investor Rule has since been incorporated into the official text of The Restatement Third of Trusts and continues to be highly influential in the courts, the federal government, and the banking world.