PR 07240.016 Illinois

A. PR 04-069 RSI-Illinois - Determination of Appropriate Investment of Conserved Funds Kirk B~ for children, ~ Susan L. G~ for Matthew E. P~, ~ ~

DATE: January 20, 2004

1. SYLLABUS

Under Illinois State law, the investments appear to meet the standards of the Prudent Investor Act. However, the RCC is unable to determine whether the subject life insurance also meets these standards without additional information.

2. OPINION

You asked whether the investment of benefits by the representative payees in certain mutual funds and life insurance is appropriate under Illinois law. Illinois state law, which follows the "prudent investor" rule, indicates that a representative payee must use reasonable care, skill and caution with the interest of the beneficiary as the key element. We conclude that the mutual funds appear to meet that standard. However, we cannot determine whether the life insurance policy meets that standard without additional information.

FACTS

It appears Kirk B~ is the representative payee for the conserved funds of Elizabeth and Benjamin B~. Sometime prior to June 2002, the payee invested an amount of money_11 in two separate Fidelity Blue Chip Growth funds.

It appears Susan G~ is the representative payee for the conserved funds of Matthew P~. Sometime prior to September 2002, the payee invested $1,200 in American Funds: The Income Fund of America.

It appears Kay M~ is the representative payee for the conserved funds of Blake P~. Sometime prior to January 2003, the payee invested an amount of money_22 in Gerber Life Insurance.

DISCUSSION

Federal regulations provide that, after a representative payee has used Social Security 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, 416.645. 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 00603.040(A). Generally, states tend to follow a "prudent investor" rule, and that rule is applied in Illinois. See 760 ILCS 5/5; Memorandum from Reg. Chief Counsel, Chicago, to Deputy General Counsel, Office of the General Counsel, Six State Survey, Investment of Conserved Funds, at 1 (August 2, 2001).

The regulations sate that the preferred investments for excess funds are United States savings bonds and deposits in an interest or dividend paying account in a bank, trust company, credit union, or savings and loan association which is insured under either Federal or State law. 20 C.F.R. §§ 404.2045(b), 416.645(b). Similarly, operating procedures require that excess benefits be conserved or invested with minimum risk, with preferred investments being United States savings bonds. Benefits may also be invested in accordance with state law governing the investment of trust estates by trustees. POMS GN 00603.001

The prudent investor rule is found at 760 Illinois Complied Statutes (ILCS) 5/5. No specific types of investments are required or restricted. No specific investment or course of action is, taken alone, prudent or imprudent. The trustee may invest in every kind of property and type of investment, subject to the prudent investor rule. 760 ILCS 5/5(2). Illinois case law does not provide much guidance in this area. Rubin v. Laser, 703 N.E.2d 453 (Ill. App. 1998), discusses the purchase of bank stock in the trustee's capacity as trustee and as an individual. Giagnorio v. Torkelson Trust, 686 N.E.2d 42 (Ill. App.2d 1997), discusses the sale price of a particular limited interest stock held by the trust, but did not object to the trust buying and selling stock.

In addition, a trustee in Illinois is required to consider the purposes, terms, distribution requirements, and other circumstances of the trust. A trustee has the duty to use reasonable care, skill and caution in the investment of funds. 760 ILCS 5/5(a)(1). A trustee should diversify investments, unless it is in the best interests of the beneficiary not to diversify. 760 ILCS 5/5(a)(3). Generally, a trustee in Illinois has a duty not to delegate to others the performance of any acts involving the exercise of judgment and discretion. 760 ILCS 5/5.1(a). However, a trustee may properly delegate investment functions by exercising reasonable care, skill and caution in selecting the investment agent, in establishing the scope and specific terms of any delegation, and in periodically reviewing the agent's actions in order to monitor overall performance and compliance. 760 ILCS 5/5.1(b)(1). This, presumably, would allow a trustee to invest in managed funds, such as mutual funds. See also 760 ILCS 5/5.2.

Mr. B~'s investment in the Fidelity Blue Chip Growth Fund appears appropriate, so long as the investment was selected with "reasonable care, skill and caution" and the assets are reasonably diversified. See 760 ILCS 5/5(a)(1). The objective of the Fidelity Blue Chip Growth Fund is to seek growth of capital over the long term and normally invests primarily in common stocks of well-known and established companies. See http://fidelity.com (last visited Jan. 15, 2004). It normally invests at least eighty percent of assets in blue chip companies whose stock is included in the Standard & Poor's 500 Index or the Dow Jones Industrial Average, and companies with market capitalizations of at least one billion dollars if not included in either index. See id. The fund has a Morningstar rating of four stars. See id. Regarding volatility, as of December 31, 2003, the fund had a beta of 1.04 and R2 of 0.97._33 See id. Finally, the fund has 190 total holdings. See id. In light of the foregoing, Mr. B~'s investment in the Fidelity Blue Chip Growth Fund appears appropriate as long as he has exercised reasonable care, skill and caution in selecting this fund and there is no conflict of interest on his part in selecting it.

Similarly, Ms. G~'s investment in American Funds: The Income Fund of America, Class A shares, appears appropriate, so long as the investment was selected with "reasonable care, skill and caution" and the assets are reasonably diversified. See 760 ILCS 5/5(a)(1). The fund objective seeks to provide a current income and, secondarily, growth of capital through a flexible mix of equity and debt instructions. See http://americanfunds.com (last visited Jan. 16, 2004). It seeks investments in both the stock and bond markets that provide an opportunity for above-average current income and long-term capital growth. See id. The fund has typically provided income well in excess of that provided by stocks in general. See id. The Income Fund of America, Class A shares, invests primarily in common or preferred stocks, convertible securities, bonds, U.S. and non-U.S. government securities, cash and equivalents. See id. The fund may invest only twenty percent of its assets in securities rated below investment grade. See id. The fund has a Morningstar rating of five stars. See http://morningstar.com (last visited Jan. 15, 2004). According to Morningstar, this fund has a conservative mix of stock and cash that has not slowed it, but has blunted volatility; overall, it is "a bankable choice that should sit well with conservative investors." See id. In light of the foregoing, Ms. G~'s investment in the American Funds: The Income Fund of America appears appropriate as long as she has exercised reasonable care, skill and caution in selecting this fund and there is no conflict of interest on her part in selecting it.

Ms. M~ indicated she invested a portion of Blake P~'s conserved funds in Gerber life insurance. We are unable to determine if this may have merely been an intent to report payments for premiums on a life insurance policy, or whether this was some other kind of investment involving a life insurance company. If the representative payee was merely paying premiums on a life insurance policy for the SSI beneficiary, it may be more appropriate to evaluate the payments under POMS GN 00602.050. If this involves some other type of investment, we would be unable to determine if this is an appropriate investment without additional information. Ms. M~ has appeared to indicate that she invested conserved funds in a savings/checking account, U.S. savings bonds, and certificates of deposit, as well as the insurance plan. If this is correct, it seems that her investments, considered in their totality, are probably sufficiently diversified. However, we do not have sufficient information to determine whether this particular investment would qualify as an appropriate investment or whether Ms. M~ considered both the reasonable production of income and safety of capital. See 760 ILCS 5/5(a)(5). Without additional information, we are unable to determine if Ms. M~'s investment would be appropriate under Illinois law.

CONCLUSION

Illinois has incorporated the Prudent Investor Act within its laws. Under Illinois law, the investments made by Mr. B~ and Ms. G~ appear to meet this standard. Without additional information, we are unable to determine if the investment made by Ms. M~ is appropriate. If the plan builds cash value and Ms. M~ has invested in other investment vehicles, it appears the Gerber life insurance is an appropriate investment. If the life insurance plan does not build cash value, it seems it is not appropriate.

_11Since Mr. B~ indicated he saved the conserved funds in a saving/checking account and in mutual funds, it is not clear exactly what amount was placed in mutual funds.

_22Since Ms. M~ indicated she saved the conserved funds in a saving/checking account, U.S. savings bonds, certificates of deposit and life insurance, it is not clear exactly what amount was placed in life insurance.

_33Beta is a measure of a portfolio's sensitivity to market movements (as represented by a benchmark index). The benchmark index, such as the S&P 500, has a beta of 1.0. A beta of more (less) than 1.0 indicates that a fund's historical returns have fluctuated more (less) than the benchmark index. Beta is a more reliable measure of volatility when used in combination with a high R2. R2 is a measurement of how closely the portfolio's performance correlates with the performance of a benchmark index, such as the S&P 500. R2 is a proportion which ranges between 0.00 and 1.00. An R2 of 1.00 indicates perfect correlation to the benchmark index, that is, all of the portfolio's fluctuations are explained by the performance fluctuations of the index, while an R2 of 0.00 indicates no correlation. A high R2 indicates a high correlation between the movements in a fund's returns and movements in a benchmark index. The lower the R2, the more the fund's performance is affected by factors other than the market as measured by that benchmark index. See http://fidelity.com (last visited Jan. 15, 2004).

B. PR 01-225 Investment of Conserved Funds

DATE: August 2, 2001

1. SYLLABUS

Five of the six States in the Chicago Region, with Wisconsin as the exception, have adopted The Uniform Prudent Investor Act (UPIA) within their laws.

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. Although Wisconsin has not adopted the UPIA, much of its law parallels the Act.

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.

State law in Illinois is silent and the other five States in the region do not directly address the issue of whether parent payees are permitted to invest funds belonging to their minor children differently than other types of payees. However, the standards stated above appear to be the same for parents and for other types of trustees.

2. OPINION

You asked us to research the laws of the six states in Region V as those laws impact 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?

The laws of the states within our region require trustees to use reasonable care, skill and caution with the interest of the beneficiary as the key element. Our specific state answers are set out below.

Illinois

What investments are considered appropriate under the “prudent investor” rule?

The prudent investor rule is found at Illinois Compiled Statutes (ILCS), Chapter 760 § 5/5. Under this law, no specific types of investments are required or restricted. No specific investment or course of action is, in and of itself, prudent or imprudent. The trustee may invest in every kind of property and type of investment, subject to the prudent investor rule. 760 ILCS 5/5(2).

Illinois case law does not provide much guidance in this area. However, there are a few investments mentioned in the context of fiduciary duty that clarify Illinois' attitude toward investments made by trustees. The following is a list suggested by the case law:

Utility bonds: In Lurie v. Fenchel, 1997 WL 56693 (N.D. Ill. Sept. 5, 1997), an unpublished decision, the court noted that fixed-income instruments were conservative investment instruments. The fixed-income investment was a $50,000 interest in a Virginia Electric Power and Light Medium Term note.

Stocks: In Giagnorio v. Torkelson Trust, 686 N.E.2d 42 (Ill. App.2d 1997), the court discussed the sales price of a particular limited interest stock, but did not object to the trust buying and selling stock. In Rubin v. Laser, 703 N.E.2d 453 (Ill. App.1998), the court discussed the purchase of bank stock in the trustee's capacity as trustee and as an individual.

Under State law, are parent payees permitted to invest the funds belonging to their minor children differently than other types of payees?

Illinois law is silent on this issue. The standard appears to be identical, whether the payee is a parent, an impartial third party individual, or a professional investor (such as a bank). However, there is an assumption that the prudent investor be impartial and with no conflict of interest. If the parent's investment suggests a conflict of interest, based on the family relationship, the investment should be investigated.

What are the rules followed by trustees regarding the investment of funds with which they are entrusted?

A trustee has a duty to invest and manage trust assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust. This standard requires the exercise of reasonable care, skill, and caution and is to be applied to investments not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy that should incorporate risk and return objectives reasonably suitable to the trust. 760 ILCS 5/5(a)(1); Jefferson National Bank of Miami Beach v. Central National Bank in Chicago, 700 F.2d 1143 (7th Cir. 1983).

A trustee must be impartial with no conflict of interest. Santarelli v. Katz, 270 F.2d 762 (7th Cir. 1959). A trustee should diversify investments, unless it is in the best interest of the beneficiary not to diversify. 760 ILCS 5/5(a)(3). A trustee should review the funds reasonably soon after taking over the funds. 760 ILCS 5/5(a)(4). A trustee should have a strategy and consider the fund as a whole; the investment is judged by the portfolio as a whole and not as to any particular asset. 760 ILCS 5/5(a)(5).

Generally, a trustee in Illinois has a duty not to delegate to others the performance of any acts involving the exercise of judgment and discretion. However, a trustee may properly delegate investment functions by exercising reasonable care, skill and caution in selecting the investment agent, in establishing the scope and specific terms of any delegation, and in periodically reviewing the agent's actions in order to monitor overall performance and compliance. 760 ILCS 5/5.1(a) and (b)(1). This, presumably, would allow a trustee to invest in managed funds, such a mutual funds.

CONCLUSION

Five of our six states, with Wisconsin as an exception, have incorporated the Prudent Investor Act within their laws. Wisconsin has incorporated most of the theory behind the Prudent Investor Act. Ohio is the only state that sets out guidelines by individual types of investments that are considered prudent as a matter of law. In other states, there is some guidance in the case law, other parts of the state statutes, (in Michigan) in repealed statutes.

In each state, a representative payee must use reasonable care, skill and caution with the interest of the beneficiary as the key element.


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PR 07240.016 - Illinois - 11/18/2008
Batch run: 01/27/2009
Rev:11/18/2008