Investor Fraud - Prudent Man Rule

This is a continuation of last week's topic, investor fraud. The first paragraph will be the Vanguard weekly recap. Secondly will be the section on investor fraud that discusses the foundation for determining fraud which is the Prudent Man Rule. Lastly are some quotes for your enjoyment.

Vanguard

A variety of reports, from retail sales to industrial production, pointed to strengthening economic growth this week as consumer and producer prices continued an upward move. For the week ended January 14, the S&P 500 Index rose 1.7% to 1,293.24. The yield of the 10-year U.S. Treasury note increased 1 basis point to 3.35%.

Investor Fraud Foundation - Prudent Man Rule

The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court decision, Harvard College v. Armory 9 Pick (26 Mass) 446, 461 (1830). The prudent man rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."

Reasonable or Prudent man is a hypothetical person used as a legal standard especially to determine whether someone acted with negligence. This hypothetical person exercises average care, skill, and judgment in conduct that society requires of its members for the protection of their own and of others' interests. The conduct of the reasonable man serves as a comparative standard for determining liability.

The Prudent Man Rule requires that each investment be judged on its own merits. Isolated investments in a portfolio may have been imprudent at the time of acquisition. However, as a part of a portfolio designed under a strategy the investment could be prudent. Thus, a fiduciary may not be held liable for a loss in one investment.

This is the foundation for determining investor fraud. An investment advisor must act prudently and in the best interest of the respective client. All of the questions that are asked when opening an account, which are kind of a pain, and exist to protect the interest of the investor. As an investor you should be glad that these questions are asked as they help protect you.

The reason that questions like income level, income tax rate, net worth, and risk level exist are to determine what is prudent for the investor. Income level and net worth are use specifically to determine what kind of investor you are. If your income level or net worth is above a certain level you are viewed as smart enough to know about investing such that you can not sue your investment advisor.

When determining if fraud has been committed in an investigation, this information is used. The law aggressively protects people who are below a certain income level and net worth. An investment advisor must invest prudently based upon this information to meet the principles of the Prudent Man Rule.

The next newsletter will illustrate how this information is used to protect an investor and give examples of fraud.

Anonymous Quotes

• The voices in my head may not be real, but they have some good ideas!
• Always borrow money from a pessimist. They won't expect it back.
• Hospitality - making your guests feel like they're at home, even when you wish they were.
• Money can't buy happiness, but it sure makes misery easier to live with.
• I used to be indecisive. Now I'm not sure.