PENNSYLVANIA PRUDENT INVESTOR RULE
2019 Pennsylvania Consolidated Statutes
Title 20 – DECEDENTS, ESTATES AND FIDUCIARIES
Chapter 72 – Prudent Investor Rule
Chapter Notes
Enactment. Chapter 72 was added June 25, 1999, P.L.212, No.28, effective in six months unless otherwise noted. Cross References. Chapter 72 is referred to in sections 5145, 7780.6 of this title; sections 5548, 5586 of Title 15 (Corporations and Unincorporated Associations).
§ 7201. Definitions.
The following words and phrases when used in this chapter shall have the meanings given to them in this section unless the context clearly indicates otherwise:
“Fiduciary.” Includes guardians and trustees, whether domiciliary or ancillary, individual or corporate, subject to the jurisdiction of the orphans’ court. The term shall not include a custodian under Chapter 53 (relating to Pennsylvania Uniform Transfers to Minors Act), an agent acting under a power of attorney, a personal representative, an administrator of a municipal pension or retirement plan or a person whose fiduciary duties are, by statute, governed by the principles of Chapter 73 (relating to municipalities investments).
“Mutual fund.” The securities of an investment company registered under the Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. § 80a-1 et seq.).
“Trust.” Includes guardianships and trusts subject to the jurisdiction of the orphans’ court and having property owned or managed by a fiduciary. The term shall not include custodianships, agencies created by a power of attorney, decedents’ estates or municipal pension or retirement plans.
(July 7, 2006, P.L.625, No.98, eff. imd.)
2006 Amendment. Act 98 amended the def. of “mutual fund.”
§ 7202. Default rule.
(a) General rule.–Except as otherwise provided by the governing instrument, a fiduciary shall invest and manage property held in a trust in accordance with the provisions of this chapter.
(b) Exception.–Where the instrument establishing a trust contains a restriction on the fiduciary’s power of investment and the court having jurisdiction over the trust finds that adherence to the restriction is impractical or that the existing or reasonably foreseeable economic conditions are so far different from those prevailing at the creation of the trust that adherence to the restriction might deprive the respective beneficiaries of income and principal of the full benefits the testator or settlor intended them to enjoy, the court may release the fiduciary from the restriction to the extent and on conditions, if any, as the court may deem appropriate.
(c) Court direction.–A fiduciary appointed by the court and not acting under a trust instrument, in addition to or in place of the investments authorized by this chapter, may make, and retain without liability for resulting loss, investments as the court, upon petition of the fiduciary or of any party in interest, after notice as it shall direct, aided by the report of a master if necessary, shall authorize or direct, subject only to the conditions and limitations as shall be fixed by the court in the decree authorizing or directing the investment.
§ 7203. Prudent investor rule.
(a) General rule.–A fiduciary shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust.
(b) Permissible investments.–A fiduciary may invest in every kind of property and type of investment, including, but not limited to, mutual funds and similar investments, consistent with this chapter.
(c) Considerations in making investment and management decisions.–In making investment and management decisions, a fiduciary shall consider, among other things, to the extent relevant to the decision or action:
(1) the size of the trust;
(2) the nature and estimated duration of the fiduciary relationship;
(3) the liquidity and distribution requirements of the trust;
(4) the expected tax consequences of investment decisions or strategies and of distributions of income and principal;
(5) the role that each investment or course of action plays in the overall investment strategy;
(6) an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries, including, in the case of a charitable trust, the special relationship of the asset and its economic impact as a principal business enterprise on the community in which the beneficiary of the trust is located and the special value of the integration of the beneficiary’s activities with the community where that asset is located;
(7) to the extent reasonably known to the fiduciary, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument; and
(8) to the extent reasonably known to the fiduciary, the income and resources of the beneficiaries and related trusts.
(d) Requirements for charitable trusts having voting control of certain publicly traded business corporations.–
(1) Notwithstanding any other legal requirement or process which may include court review of the activities of a charitable trust, a fiduciary for a charitable trust with a majority of its beneficiaries at a principal location within this Commonwealth having voting control of a publicly traded business corporation received as an asset from the settlor shall not consummate any transaction, or vote to permit consummation of or otherwise act to consummate any transaction, which would result in the trust no longer having voting control of that corporation, by sale, merger, consolidation or otherwise, without:
(i) serving notice upon the Attorney General at least 60 days prior to the consummation of the transaction; and
(ii) directing that at least 30 days’ prior notice of the consummation of the transaction be provided by the publicly traded business corporation controlled by the trust to employees of that corporation who are located in this Commonwealth.
(2) In addition to any other power or duty provided by law, the Attorney General also has the power to seek judicial review pursuant to this subsection from the court having jurisdiction over the trust if the Attorney General concludes that the consummation of a transaction described in paragraph (1) is unnecessary for the future economic viability of the corporation and would constitute a failure to comply with the provisions of subsection (c) or an impairment of the charitable purpose of the trust.
(3) In a judicial proceeding commenced by the Attorney General under this subsection, the Attorney General must prove by a preponderance of the evidence that consummation of a transaction which would result in the charitable trust no longer having voting control of the corporation is unnecessary for the future economic viability of the corporation and must be prevented in order to avoid noncompliance with the provisions of subsection (c) or an impairment of the charitable purpose of the trust.
(3.1) If a fiduciary provides the notice under paragraph (1)(i), the following apply:
(i) Except as set forth in subparagraph (ii), upon expiration of the notice period under paragraph (1)(i), the fiduciary may:
(A) vote to permit consummation of a transaction described in paragraph (1); or
(B) otherwise act to consummate the transaction described in paragraph (1).
(ii) The fiduciary has no authority under subparagraph (i) if the Attorney General has, within 30 days of receiving the notice under paragraph (1)(i), commenced a judicial proceeding under paragraph (2).
(iii) If the fiduciary is enjoined in a judicial proceeding under subparagraph (ii), the fiduciary shall not have authority under subparagraph (i)(A) or (B) unless the injunction is dissolved by:
(A) stipulation of the fiduciary and the Attorney General; or
(B) an order of a court of competent jurisdiction which is not subject to further judicial review as of right.
(4) In the event court approval to consummate a transaction described in paragraph (1) is obtained pursuant to this subsection, the court shall ensure that the provisions of 15 Pa.C.S. Ch. 25 Subchs. I (relating to severance compensation for employees terminated following certain control-share acquisitions) and J (relating to business combination transactions – labor contracts) apply to the business corporation described in paragraph (1) upon the consummation of the transaction.
(5) A fiduciary of a charitable trust with a majority of its beneficiaries at a principal location within this Commonwealth having voting control of a publicly traded business corporation received as an asset from the settlor shall not be subject to liability for the commercially reasonable sale of certain shares of the corporation not necessary to maintain voting control and for which no control premium is realized if the fiduciary reasonably determined that such sale was authorized in a manner consistent with the requirements of this section and other applicable provisions of this title.
(6) The requirements of this subsection shall not apply to a noncharitable trust, including a noncharitable trust with a charitable remainder and a charitable trust which reverts to noncharitable purposes.
(7) As used in this subsection, the term “voting control” means a majority of the voting power of the outstanding shares of stock entitled to vote on the election of directors.
(Nov. 6, 2002, P.L.1101, No.133, eff. imd.; Nov. 30, 2004, P.L.1525, No.194, eff. imd.)
2004 Amendment. Act 194 amended subsec. (d).
2002 Amendment. Act 133 amended subsec. (c)(6) and added subsec. (d).
Cross References. Section 7203 is referred to in section 7207 of this title; sections 3303, 4303, 5303 of Title 68 (Real and Personal Property).
§ 7204. Diversification.
(a) Requirement.–Except as provided in section 7205 (relating to retention of inception assets), a fiduciary shall reasonably diversify investments, unless the fiduciary reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes, terms and other circumstances of the trust and the requirements of this chapter.
(b) Applicability.–Subsection (a) does not apply to any of the following:
(1) A trust which became irrevocable prior to December 25, 1999. This paragraph applies even if the action of the trustee occurs after December 25, 1999.
(2) A trust created by a revocable instrument executed prior to December 25, 1999, if such instrument is not amended after December 24, 1999. This paragraph applies even if the action of the trustee occurs after December 25, 1999.
(Nov. 6, 2002, P.L.1101, No.133, eff. imd.)
2002 Amendment. Act 133 reenacted and amended the entire section. Section 5 of Act 133 provided that the General Assembly finds and declares that the amendment of section 7204 is intended to clarify existing law and shall not be construed to change existing law.
Special Provisions in Appendix. See section 6(b) of Act 28 of 1999 in the appendix to this title for special provisions relating to applicability.
§ 7205. Retention of inception assets.
A fiduciary, in the exercise of reasonable care, skill and caution, may retain any asset received in kind, even though the asset constitutes a disproportionally large share of the portfolio.
Cross References. Section 7205 is referred to in section 7204 of this title.
§ 7206. Delegation.
(a) Permissible delegation.–A fiduciary may delegate investment and management functions that a prudent investor of comparable skills might delegate under the circumstances.
(b) Duties of fiduciary.–A fiduciary shall not be responsible for the investment decisions or actions of the investment agent to which the investment functions are delegated if the fiduciary exercises reasonable care, skill and caution in selecting the investment agent, in establishing the scope and specific terms of the delegation and in reviewing periodically the investment agent’s actions in order to monitor the investment agent’s performance and compliance with the scope and specific terms of the delegation.
(c) Duties of investment agent.–The investment agent shall comply with the scope and terms of the delegation and shall exercise the delegated function with reasonable care, skill and caution and shall be liable to the trust for failure to do so. An investment agent who represents that he has special investment skills shall exercise those skills.
(d) Jurisdiction.–An investment agent who accepts the delegation of a fiduciary’s function from a fiduciary who is subject to the jurisdiction of a court of this Commonwealth shall be deemed to have submitted to the jurisdiction of that court even if the delegation agreement provides for a different jurisdiction or venue.
(e) When cofiduciary may delegate to another cofiduciary.–A cofiduciary may delegate investment and management functions to another cofiduciary if the delegating cofiduciary reasonably believes that the other cofiduciary has greater investment skills than the delegating cofiduciary with respect to those functions. The delegating cofiduciary shall not be responsible for the investment decisions or actions of the other cofiduciary to which the investment functions are delegated if the delegating cofiduciary exercises reasonable care, skill and caution in establishing the scope and specific terms of the delegation and in reviewing periodically the other cofiduciary’s actions in order to monitor the cofiduciary’s performance and compliance with the scope and specific terms of the delegation.
(f) Mutual funds.–Investment in a mutual fund is not a delegation of investment function, and neither the mutual fund nor its advisor is an investment agent.
Special Provisions in Appendix. See section 6(b) of Act 28 of 1999 in the appendix to this title for special provisions relating to applicability.
§ 7207. Retention of cash; temporary investments.
(a) Uninvested cash.–A fiduciary may hold cash uninvested:
(1) which the fiduciary reasonably expects to:
(i) distribute to beneficiaries as income on a quarterly or more frequent basis;
(ii) use for payment of debts, taxes, expenses of administration or reinvestment within the next 90 days; or
(2) when the amount available for investment does not justify the administrative burden of making the investment determined in the light of the facilities available to the fiduciary.
A corporate fiduciary may deposit uninvested funds in its own or an affiliate’s commercial department.
(b) Temporary investments.–A fiduciary may make temporary investment of funds which the fiduciary is entitled to hold uninvested or which the fiduciary wishes to hold in liquid form in short-term interest-bearing obligations or deposits, or other short-term liquid investments, selected in each case in compliance with the standards of section 7203 (relating to prudent investor rule) but without regard to any investment restrictions imposed by the governing instrument and may make a reasonable charge, in addition to all other compensation to which the fiduciary is entitled, for services rendered in making the temporary investment.
Cross References. Section 7207 is referred to in section 3316 of this title.
§ 7208. Life insurance.
A trustee may acquire or retain a contract of life insurance upon the life of the settlor or the settlor’s spouse, or both, without liability for a loss arising from the trustee’s failure to:
(1) determine whether the contract is or remains a proper investment;
(2) investigate the financial strength of the life insurance company;
(3) exercise nonforfeiture provisions available under the contract; or
(4) diversify the contract.
Special Provisions in Appendix. See section 6(b) of Act 28 of 1999 in the appendix to this title for special provisions relating to applicability.
§ 7209. Mutual funds.
Notwithstanding that a bank or trust company or an affiliate provides services to the investment company or investment trust, including that of an investment advisor, custodian, transfer agent, registrar, sponsor, distributor or manager, and receives reasonable compensation for those services and notwithstanding any other provision of law, a bank or trust company acting as a fiduciary, agent or otherwise may invest and reinvest in a mutual fund if the portfolio of the mutual fund consists substantially of investments not prohibited by the governing instrument. With respect to any funds invested, the basis upon which compensation is calculated, expressed as a percentage of asset value or otherwise, shall be disclosed by prospectus, account statement or otherwise to all persons to whom statements of the account are rendered.
Cross References. Section 7209 is referred to in section 7772 of this title.
§ 7210. Common trust fund and mortgage investment fund.
Any corporate fiduciary and its cofiduciary, if any, may invest in:
(1) A common trust fund or collective trust fund containing only investments authorized for fiduciaries, established and maintained by the corporate fiduciary or by any affiliate of the corporate fiduciary within the meaning of section 1504 of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1504) and otherwise in conformity with the laws of this Commonwealth and of the United States.
(2) A mortgage investment fund containing only mortgages and other investments authorized for fiduciaries, established and maintained by the corporate fiduciary in conformity with the laws of this Commonwealth and of the United States.
§ 7211. Further investment authority.
Unless a contrary intent is clearly expressed in the instrument, the authority to invest in specified types of investments includes authorization to invest in a mutual fund, or in any common or collective trust fund established and maintained by a corporate fiduciary, or by any affiliate of a corporate fiduciary within the meaning of section 1504 of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1504) or any successor provision, if the portfolio of the mutual fund or of the common or collective trust fund consists of the specified types of investments and is otherwise in conformity with the laws of this Commonwealth and of the United States.
§ 7212. Degree of care.
A fiduciary shall exercise reasonable care, skill and caution in making and implementing investment and management decisions. A fiduciary who represents that he has special investment skills shall exercise those skills.
§ 7213. Judgment of fiduciary’s decisions.
The rules of this chapter are standards of conduct and not of outcome or performance. Compliance with the rules of this chapter shall be determined in light of the facts and circumstances prevailing at the time of the fiduciary’s decision or action and not by hindsight. A fiduciary is not liable to the extent the fiduciary acted in substantial compliance with the rules of this chapter or in reasonable reliance on the terms and provisions of the governing instrument. A fiduciary’s investment and management decisions respecting individual assets shall be considered in the context of the trust portfolio as a whole and as part of an overall investment strategy, and not in isolation. No specific investment or course of action, taken alone, shall be considered inherently prudent or imprudent.
§ 7214. Language invoking chapter.
The following terms or words or words of similar import in the provisions of a trust, unless otherwise limited or modified, shall authorize any investment or investment strategy permitted under this chapter: “investments permissible by law for investment of trust funds,” “legal investments,” “authorized investments,” “using the judgment and care under the circumstances then prevailing that persons of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their own funds, considering the probable income as well as the probable safety of their capital,” “prudent man rule,” “prudent trustee rule,” “prudent person rule” and “prudent investor rule.”