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.
What investments are considered appropriate under the “prudent investor” rule?
The prudent investor rule is found at Ohio Revised Code (O.R.C.) 1339.52. Ohio sets
out a number of investments that are considered prudent. See O.R.C. § 2109.37 and O.R.C. § 2109.371. If an investor wants to invest in an “unusual” type of investment, he may do so only with the approval of the court.
Below is a summary of the list of those investments considered prudent. More details
can be found in the Ohio law.
Federal and State bonds
Secured mortgage notes
Life, endowment or annuity contracts of legal reserve life insurance companies
Certificates of deposit
Railroad notes, bonds, and debentures
Securities of an investment company
Short-term commercial paper
Stock, bonds, debentures, notes, or other debt obligations of corporations incorporated
within the United States.
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
Ohio law does not directly address this issue. However, Minnesota requires that a
trustee who has special skills or expertise has a duty to use those special skills
or expertise, suggesting that there may be a heightened duty for certain trustees
such as, for example, investment bankers. O.R.C. § 1339.53(C). A parent who does not
have such skills or expertise would not be held to this higher standard. 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 provide reasonable care, skill and caution. O.R.C. § 1339.53
(A). A trustee should diversify investments, unless it is in the best interest of
the beneficiary not to diversify. O.R.C. § 1339.54(B). A trustee should review the
funds reasonably soon after taking over the funds. O.R.C. § 1339.56. A trustee should
have a strategy and consider the fund as a whole. O.R.C. § 1339.53 (D). A trustee
must be impartial with no conflict of interest. O.R.C. § 1339.55. A trustee may delegate
investment decisions, provided that the trustee uses reasonable care, skill, and caution
in selecting an agent. O.R.C. § 1339.59(A). Compliance with Ohio law is determined
in light of the facts and circumstances existing at the time of a trustee's decision
or action and not by hindsight. O.R.C. § 1339.58.
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.