The Effect of the Prudent Person Rule on State-Run Local Government Investment Pools

Abstract

The purpose of this dissertation is to be an introductory examination of whether the use of the Prudent Person Rule in place of legal list investment restrictions could have a significant difference upon the return on investment that a state or local government may receive through its cash management practices. The dissertation will examine this issue by studying the effect of the Prudent Person Rule and legal list limitations on state-run local government investment pools in the United States. The specific question to be asked in this study will be: "Is there a difference in the return on investment yield performance of state-run local government investment pools among those operating under the Prudent Person Rule fiduciary standard, those operating under a legal list fiduciary standard, and those operating under a combination legal list/Prudent Person Rule fiduciary standard, for the five-year period beginning with Fiscal Year 1992 and ending with Fiscal Year 1996?

It appears from this brief examination that there may be a difference in return among state-run pools operating under different fiduciary standards. However, because of various factors that might affect the results, the author believes that this is just a preliminary study, and that further research must be done on this important topic in public cash management.