You asked us to research the laws of the six states in Region VIII as those laws concern
a representative payee's responsibilities for the conservation and investment of benefit
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
You have asked that we examine the laws of the states in our region to determine:
(1) What are the rules followed by trustees regarding the investment of funds with
which they are entrusted;
(2) What investments are considered appropriate under the "prudent man" rule; and
(3) Under State law, are parent payees permitted to invest the funds belonging to
their minor children differently than other types of payees? 1_/
Our answers for each state in Region VIII are set out below.
1. What are the rules followed by trustees regarding the investment of funds with
which they are entrusted?
South Dakota applies the prudent investor rule, which provides that
“[t]he trustee shall invest and manage trust assets as a prudent investor would, by
considering the purposes, terms, distribution requirements, and other circumstances
of the trust. This standard requires the exercise of reasonable care, skill, and
caution and shall 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.”
S.D. Codified Laws § 55-5-6. The prudent investor rule is a test of conduct and not
of resulting performance. Id. § 55-5-7. Trustees should diversify unless it is in the best interest of the beneficiary
not to diversify. They should review the funds reasonably soon after taking over.
They should have a strategy and consider the fund as a whole. They must be impartial
with no conflict of interest. They may delegate their investment decisions, as long
as they do it with care. Id. §§ 55-5-8-16.
2. Which types of investments are considered appropriate under the “prudent man” rule?
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. Id. §§ 55-5-8-7. The “prudent man” rule generally does not authorize trust investments in commodities since commodity
trading is speculative in nature. See In re Hadleigh D. Hyde Trust, 458 NW.2d 802, 805 (S.D. 1990).
3. Under State law, are parent payees permitted to invest the funds belonging to
their minor children differently than other types of payees?
South Dakota law is silent on this issue. However, there is an assumption that the
prudent investor be impartial and have no conflict of interest. To the extent that
a family relationship may be a barrier to such impartiality and may create a conflict
of interest, one may need to scrutinize these funds more carefully. The standard,
however, appears to be identical.
Two of our six states, Colorado and Wyoming, have incorporated the Uniform Prudent
Investor Act within their laws. The other four states have incorporated most of the
theory behind the Uniform Prudent Investor Act. We believe that a fair reading of
the laws in each of these states would require that a representative payee use reasonable
care, skill and caution with the interest of the beneficiary as the key element. We
believe that the facts and circumstances of each case determine whether the representative
payee has acted with the required care, skill and caution and that the test is a test
of conduct and not of results.
1_/ We have reordered the questions presented in your May 24, 2001, memorandum.