Eligibility of Trusts to Make Alternative Investments

Stacy K. Mullaney (Trust Counsel, Boston, MA) recently published her article entitled Complex Securities Laws and the Eligibility of Trusts to Make Alternative Investments, 24 Prob. & Prop. 38 (Nov./Dec. 2010). The introduction is below:

With the adoption of the Uniform Prudent Investor Act (UPIA), promulgated by the National Conference of Commissioners on Uniform State Laws in 1994, a broadened and diversified world of investing was opened up to trust fiduciaries. Replacing the former “prudent man rule,” the UPIA reflects a “modern portfolio theory” and “total return” approach to the exercise of fiduciary investing and removes many of the common law restrictions on the investment authority of fiduciaries. With the shift to modern portfolio theory investment strategies under the UPIA, no category or type of investment is deemed imprudent per se. In fact, an appropriate asset allocation and diversification strategy (one that maximizes return while minimizing risk and volatility) can include investments in derivatives, futures, commodities, and other investments that may hedge investment risk. Most commonly, access to these types of investments is through unregistered limited partnerships and other private investment vehicles. For the trustee and the legal professional advising the trustee, this requires an understanding of federal and state securities laws and regulations governing such investments to assess and advise whether a trust is legally permitted to make an investment in such an investment vehicle.