PR 07240.005 Arkansas

A. PR 01-225 Investment of Conserved Funds

DATE: August 3, 2001

1. SYLLABUS

In the Dallas Region, the States of Arkansas, Louisiana, New Mexico and Oklahoma have each adopted The Uniform Prudent Investor Act (UPIA) within their laws. While the State of Texas has not formally adopted the UPIA, it follows the “prudent investor” rules which are very similar to the UPIA.

The UPIA was approved and recommended for enactment in all States by the National Conference of Commissioners on Uniform State Laws in 1994. The UPIA provides investment rules for trustees and like fiduciaries, including representative payees, that result in greater protection of assets while providing a prospect of better income.

In each State, trustees must use reasonable care, skill, and caution with the interest of the beneficiary as the key element. There is an assumption that the trustee will be impartial with no conflict of interest. Trustees may invest in every kind of property and type of investment subject to the prudent investor rule. No specific types of investments are required or restricted. No specific investment or course of action is, taken alone, prudent or imprudent. Trustees should diversify investments unless it is in the best interest of the beneficiary not to diversify.

On the issue of whether parent payees are permitted to invest the funds belonging to their minor children differently than other types of payees, Oklahoma State law is silent and the States of Arkansas, New Mexico, and Texas make no special provisions. While Louisiana State law generally provides parents with usufruct (i.e., enjoyment of their children's property until the child's majority or emancipation), Social Security regulations require that the child's benefits be used only for the child's current maintenance or conserved or invested on the child's behalf. In each State it appears that parents must follow the same rules that apply to all other types of trustees.

2. OPINION

You asked us, in response to the Agency's request, to research the laws of the States in Region VI as those laws affect a representative payee's responsibilities for the conservation and investment of benefit payments. The regulations provide that, after a representative has used benefit payments for the current maintenance of the beneficiary, any remaining amounts are to be conserved or invested on the beneficiary's behalf. See 20 C.F.R. § 404.2045. Any such "[c]onserved funds should be invested in accordance with the rules followed by trustees." Id. We look to state law to determine how trustees should invest funds. See POMS GN 00603.040A. Generally, states tend to follow a "prudent investor" rule.

You have asked that we examine the laws of the states in our region to determine:

(1) What investments are considered appropriate under the "prudent investor rule?"

(2) Does state law permit parent payees to invest funds belonging to their minor children differently than other types of payees? and

(3) What rules do trustees follow when investing funds?

Our specific responses for each State are set out below.

ARKANSAS

Which types of investments are considered appropriate under the “prudent man” rule?

Arkansas codifies the prudent investor rule at Ark. Code Ann. § 28-71-105 (2001). The trustee must use judgment and care under the circumstances then prevailing which men of prudence, discretion, and intelligence exercise in the management of their own affairs. Id. The investment strategy must consider the probable income, as well as the probable safety of the trust assets. Id. Arkansas law does not indicate preference for any specific investment, but instead permits investment in “every kind of real, personal, or mixed property and every kind of investment. . .” subject to the prudent investor standard. Ark. Code Ann. § 28-71-106 (2001). Examples of these investments include, but are not limited to:

1) bonds, debentures, and other corporate obligations,

2) preferred or common stocks,

3) shares or interests in common trust funds,

4) and securities of any open-end or closed-end management-type investment company or investment trust registered under the Federal Investment Company Act of 1940.

Id. The trustee may also invest in certificates of deposit and savings accounts of any state or national bank whose deposits are insured by FDIC and whose main office is in Arkansas. Id. If the trustee is a bank, it can invest funds in its own accounts. Id. In addition, Arkansas provides one safe harbor. A trustee does not violate the prudent investor standard when he invests no more than 2.5% of the trust funds eligible for investment and no more than 10% of the total trust capital in Arkansas private venture capital project