Modern Investment Management and the Prudent Man Rule PDF
Preview Modern Investment Management and the Prudent Man Rule
Modern Investment Management and the Prudent Man Rule This page intentionally left blank Modern Investment Management and the Prudent Man Rule BEVIS LONGSTRETH New York Oxford OXFORD UNIVERSITY PRESS 1986 Oxford University Press Oxford New York Toronto Delhi Bombay Calcutta Madras Karachi Petaling Jaya Singapore Hong Kong Tokyo Nairobi Dar es Salaam Cape Town Melbourne Auckland and associated companies in Beirut Berlin Ibadan Nicosia Copyright © 1986 by Bevis Longstreth Published by Oxford University Press, Inc., 200 Madison Avenue, New York, New York 10016 Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Longstreth, Bevis. Modern investment management and the prudent man rule. Includes index. 1. Legal investments—United States. 2. Portfolio management—United States. I. Title. KF1083.L66 1986 346.73'07 86-16294 ISBN 0-19-504196-8 347.3067 2 4 68 10 9 7 5 31 Printed in the United States of America on acid-free paper Statement of Advisers We have examined the study entitled Modern Investment Management and the Prudent Man Rule directed by Bevis Longstreth in collaboration with the Salo- mon Brothers Center for the Study of Financial Institutions at New York Uni- versity's Graduate School of Business Administration. In our opinion this study identifies and thoroughly explores the gap that exists between legal notions of pru- dence in investment management by fiduciaries, on one hand, and the teachings of financial economics and sound practices of investment professionals, on the other. The development of a modern legal standard of prudence contained in Chapter 4 is generally sound. It deserves serious consideration by fiduciaries sub- ject to some form of prudent man rule and by others, including judges, lawyers, and investment managers, who are called upon to interpret and apply that legal standard. Francis H. Burr, Esq. Hilda Ochoa-Brillembourg, C.F.A. Ropes & Gray Chief, Pension Investment Division World Bank Professor Robert Charles Clark Harvard Law School Professor Myron S. Scholes Graduate School of Business Judge Frank H. Easterbrook School of Law United States Court of Appeals Stanford University 7th Circuit Dean Richard R. West Nicholas deB. Katzenbach, Esq. Graduate School of Business Riker, Danzig, Scherer, Administration Hyland & Perretti New York University Dean LeBaron James D. Wolfensohn Trustee President Batterymarch Financial Management James D. Wolfensohn Incorporated This page intentionally left blank Foreword It is axiomatic that fiduciaries must be prudent in the investment of funds for which they are responsible. Defining prudence may always have been a challeng- ing matter, but in a time of rapidly changing investment markets, with new investment opportunities, new financial products, and proliferating investment methods and strategies, the task is even more difficult. Finding an appropriate legal framework in which to manage funds has become particularly important to today's manager of endowment funds, especially those devoted to charitable, educational, and other eleemosynary purposes. Faced by increasing financial pressures, institutions have looked to their endowment man- agers to use energy and imagination to increase total return. Excessive caution and failure to take advantage of new financial products and new investment opportunities, methods, and strategies can adversely affect the charitable or edu- cational enterprise's ability to accomplish its purposes as surely as can excessive risk taking. Responsive legal guidance that permits active management and timely decision-making is a necessity for many institutions. However, legal counsel for many charitable institutions have too often found themselves unable to respond adequately to questions posed by their officers and trustees in this new and evolving investment environment. The innovative approaches to endowment management are sophisticated and complex, and exist- ing statutes and case law do not provide clear guidance. In the course of discussing this matter, the four of us, in our capacities as legal counsel respectively for Columbia, Harvard, Princeton, and Stanford Universi- ties, with encouragement from colleagues at other institutions, came to the view that a study of this subject had the possibility of providing clarification and better understanding of the issues. We believed that a thorough legal analysis of the law of prudence and a review of current economic theory on the subject of risk man- agement, supplemented by a "real world" survey of investment activities by insti- tutional investors, could point the way to more solid ground. Bevis Longstreth's familiarity with the relevant legal principles and his experience as a legal adviser to several kinds of charitable institutions, together with his recent service as a Commissioner of the Securities and Exchange Commission, fitted him well for viii FOREWORD the role of directing such a study. We were pleased to find that the foundations to which we took our proposal agreed about the importance and promise of such a study. We have been influenced from the beginning, in our vision of this study, by the contribution of William Cary and Craig Bright in their creative work, The Law and Lore of Endowment Funds (and The Law and Lore Revisited). These studies changed in important ways the manner in which certain legal principles applica- ble to the management of institutional endowments are viewed. Those changes have, of course, now been largely codified and adopted in many states, in the Uniform Management of Institutional Funds Act. But it was changes in percep- tions of lawyers, judges, legislators, and fiduciaries that made possible the recod- ifications that occurred. We do not, of course, know exactly what effects this study will have. We believe that the study squarely addresses the central issues and consequently considerably advances the reader's understanding of the law of prudence and provides a useful analytic framework for considering and answering the legal questions posed by the fiduciary in today's world. We are optimistic that this thoughtful work will lead to a substantial clarification in what seems to us now to be an unnecessarily vague and outdated understanding of the meaning of "prudence" with regard to the responsibilities of fiduciaries and in particular their management of educa- tional and charitable endowments. May 1986 John Mason Harding Columbia University Daniel Steiner Harvard University Thomas H. Wright Princeton University John J. Schwartz Stanford University Acknowledgments There are many deserving of thanks for helping to bring this book into being. Thomas H. Wright, General Counsel of Princeton University, and Daniel Steiner, General Counsel of Harvard University, share parentage of the idea that the pru- dence standard be addressed. They, together with their counterparts at Columbia and Stanford Universities, John Mason Harding and John J. Schwartz, initiated early planning for the study, selected the author as study director, and advanced funds to support the preparation of a "prospectus" to test the idea's utility against the opinions of possible users and funding sources. The five foundations supporting the study, and those at the foundations whose special interest led to support, include the Alfred P. Sloan Foundation and its President, Albert Rees, the Carnegie Corporation of New York and its Vice Pres- ident, David Z. Robinson, The Ford Foundation and its Vice President, Louis Winnick, The William and Flora Hewlett Foundation and its President, Roger W. Heyns, and The Rockefeller Foundation and its Treasurer and Chief Invest- ment Officer, Jack R. Meyer, and its Vice President, Alberta B. Arthurs. Sloan provided 50 percent of the budget and the others 121/2A percent each. While acknowledging the generous support of these universities and founda- tions, I should emphasize that they bear no responsibility for the book's analysis and conclusions. New York University's Graduate School of Business Administration and, in particular, its Salomon Brothers Center for the Study of Financial Institutions, administered the study. The Center's Director, Dr. Arnold W. Sametz, became the study's associate director, lending his important support and that of the Cen- ter to the effort. In addition to assuring the interest in the project of several econ- omists at the Center, including Professors Edwin J. Elton and Martin J. Gruber, the authors of Appendix A, and Professor Kose John, who wrote a research paper, Dr. Sametz provided able advice and reassuring support throughout the study. In Professor Jeffrey N. Gordon, I enjoyed not only a contributor, whose essay appears in Appendix B, but an adviser as well, who interested himself in all aspects of the study and provided important guidance along the way. Over the course of writing this book, I was fortunate to have the advice of a
Description:The list of books you might like
