Investment and Delegation Flashcards
Common type of investment clause
Investment
Trustee Duties
- ‘The trustees may make any kind of investment that they could make if they were absolutely entitled to the Trust Fund. In particular the Trustees may invest in land in any part of the world and unsecured loans.’ (Kessler, Drafting Trusts and Will Trusts)
- Clauses remain common (less so since Trustee Act 2000)
Trustees meant to treat the investment as though investing own property whilst being aware that investing someone else’s property so should be even more careful
Speight v Gaunt (1883)
Duty of Care
Trustee Duties
Property should be invested as a ‘prudent [person] of business’ would have done
Section 1 Trustee Act 2000
Duty of Care
Trustee Duties
-
S1(1) T(s) must exercise such care and skill as is reasonable in all the circumstances, having regard in particular
- S1(1)(a) to any special knowledge or experience that he has or holds himself out as having, and
- S1(1)(b) if he acts a trustee in the course of a business or profession, to any special knowledge or experience that is reasonable to expect of a person acting in the course of that kind of business or profession.
Different stratas of Trustees
Duty of Care
Trustee Duties
-
Professional vs. Lay
- Distinguish between different strata of trustees
- Lower Level - lay trustees - treated more leniently than others – don’t have experience, higher education, work in middle class professions
- Middle Level – professionals like doctors, lawyers – taken to be treated more stringently because better educated
- Highest Level – professional trustees - treated very strictly as it’s their job
- Distinguish between different strata of trustees
- Treat people because they hold themselves to be experienced, e.g. someone says they’re a financial genius and experienced trustee, will be held to that higher standard, even if it’s not true
When does duty of care apply?
Trustee Duties
- Duty of Care applies:
- When trustee is exercising statutory/express power of investment
- When SICs are being examined
- When Obtaining and considering proper advice
- When acquiring land
- Delegations – e.g. turning over control of investment to an agent
- Duty of care can be partially or completely excluded by the trust instrument.
Re Whiteley [1886]
Traditional Investment Approach
Trustee Duties
- A trustee must ‘take such care as an ordinary prudent man would take if he were minded to make an investment for other people for whom he felt morally obliged to provide’.
- High objective standard, emphasizing need for a cautious and somewhat risk-free investment strategy
- Narrow investment range (19th century approach) – only a couple of things you could invest in so became very different to balance between life tenant and remainderman
- Income generated by trust property didn’t keep up with Inflation
Bartlett v Barclays Bank Trust Co [1980]
Different stratas of Trustees
Trustee Duties
A paid trustee is historically expected to exercise a higher standard of diligence and knowledge than an unpaid trustee, while a corporate trustee was expected to use the special care and skill which they held themselves out as having in their dealings with the settlor and their advertising materials.
Nestle v Nat West Bank [1992]
Modern Investment Approach
Portfolio Theory
Trustee Duties
- Looking at portfolio of investments as a whole. Traditionally, looked at each individual investment – e.g. invest in 10 houses, 5 make money and 5 lose money – trustee liable for the 5 losses even if had made money overall. Modern portfolio theory looks at the whole.
Trustee Act 2000
Portfolio Theory
Modern Approach to Investment
Trustee Duties
- Modern Portfolio theory looks at the portfolio as a whole
- The Trustee Act 2000 enables but does not require trustees to follow modern portfolio theory.” (Law Com. No. 315, Capital and Income in Trusts…., para. 3.7)
- However, much better way of dealing with investment strategy
- Trustees have much more freedom and not scared of consequences of a loss
AG v Alford [1855]
Failure to Invest
Trustee Duties
A trustee must not leave trust money uninvested for an unreasonable period; if they breach this rule will be charged with interest on the uninvested sum.
Nestle v Nat West Bank [1992]
Failure to Invest
Trustee Duties
- Plaintiff must prove trustees have made decisions they should not have made or failed to make decisions which they should have made
- Where no investments are specified and trustee fails to invest, suggested that trustee will be liable for the difference between actual value of trust fund and what could prudently have achieved by reference to average performance for ordinary shares in the relevant period.
- Even if trustees fail to perform their investment duties, they will escape liability if the beneficiaries fail to prove the trustees’ lapse resulted in loss to the trust fund.
Re Mulligan [1998]
Failure to Invest
Trustee Duties
Losses were proved by claimant in circumstances where trustee had much favoured the life tenant at the expense of the claimant remaindermen.
Investments in Land
Modern Approach
Since Trustee Act 2000, position has changed. You can now invest in land and can invest it for the reason of the beneficiary to occupy that land. (as long as land located in UK)
S7 Trustee Act 2000
General Powers of Investment
Trustee Duties
Trustee Act 2000 applies to trusts whenever created (s7 TA 2000) so doesn’t just cover new trusts
S6 Trustee Act 2000
General Powers of Investment
Trustee Duties
Trustee Act 2000 may be restricted or excluded – can specifically exclude statute from trust instrument e.g. exclude unethical investments
Ss3(3) & S4 Trustee Act 2000
General Powers of Investment
Trustee Duties
Trustee can invest in Mortgages
Section 4, Trustee Act 2000
Standard Investment Criteria
Trustee Duties
- Standard Investment Criteria (SIC) – need to be applied to all investments
- T(s) Must have regard to SIC when exercising (s4(1)):
- Statutory
- Express
-
Suitability (usually financial suitability) of particular investments and diversification (for maximising gains and spreading risk) – not defined in legislation and what may be suitable for one trust may not be suitable for another
- ‘modern portfolio theory’
Section 4(2) Trustee Act 2000
Duty to Review Investments
Duty to review investment from time to time
Nestle v National Westminster Bank Plc
Duty to Review Investments
Can’t allow investments to stagnate
Section 4(3) Trustee Act 2000
Duty to Make Follow Standard Investment Criteria (SIC)
Trustee Duties
- 2 tests for trustees to consider before exercising any power of investment, whether express of statutory:
1. the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and -
Don’t have to look at all different types of investments, but investments of a similar kind, e.g. if investing in a house, is it suitable compared to a house in another part of the country at a different time; if shares in a company, would it be better to invest in a different company of a similar kind
1. the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust. - Diversification is entirely subjective – if you have a large trust fun, spread the risk and diversify, if a small trust fund, may not make sense to as reduces earnings
Section 5 Trustee Act 2000
Duty to Obtain Advice
Trustee Duties
T(s) must obtain and consider proper advice
- S5(4) - ‘proper advice’ - Advice of a person who is reasonably believed by T(s) to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment - subjective belief
- S5(3) - T(s) need not obtain advice if reasonably conclude it is unnecessary or inappropriate to do so – statute never defines where it is not necessary or would be inappropriate – probably in a position where the trustee is already an expert, e.g. if trustee is a stockbroker, no need to ask another for advice in stocks and shares OR if trust fund is so small that getting the advice would be prohibitively expensive.
Shaw v Cates [1909]
Duty to Obtain Advice
Trustee Duties
T(s) must consider the advice but must make their own decision – can’t blindly go along with advice
Cowan v Scargill [1985]
Ethical Considerations
Investment
Trustee Duties
Primary goal is the benefit of the beneficiaries and to make them money and personal and moral reservations don’t apply.
- Miners pensions – could Miners Pension Fund be invested in oil – argued by board of trustees – some didn’t want it invested because a competitive branch of energy, but other trustees said it was very profitable and would make money for the fund – court agreed with the latter.
Settlors can restrict investment to those they morally approve of. However, if they are not mentioned in trust instrument, need to look at case law
Harries v Church Commissioners [1992]
Ethical Considerations
Investment
Trustee Duties
- Primary goal is the benefit of the beneficiaries and to make them money and personal and moral reservations don’t apply.
- People who didn’t agree with trustees of CoE fund investing in things which were outside the purposes of the CoE. Court disagreed and said duty as a trustee to be completely neutral and to choose investments based on financial suitability even if you don’t agree morally. Can only go with a company you morally agree with if produces and equal or greater return than the other company.
Bartlett v Barclays Bank Trust Co Ltd [1980]
Controlling Shareholding Duties
- Majority shareholder trustees should ensure they receive an adequate flow of information in time to enable trustees to make use of their controlling interest
- ‘Alternatives which spring to mind are the receipt of copies of the agenda and minutes of board meetings if regularly held, the receipt of monthly management accounts in the case of a trading concern, or quarterly reports.’
Re Lucking’s WT [1968]
Controlling Shareholding Duties
Trustee Duties
Shareholder has duty to keep informed, be aware of what is going on, and if trust is losing money, have a positive obligation to step in and stop/mitigate it
- Managing Director is embezzling from company and Trustee Director is aware but keeps signing the cheques. Ts have controlling interest in Company
- Brightman J: (quoting Cross J in Re Lucking’s) - ‘…trustees holding a controlling interest ought to ensure so far as they can that they have such information as to the progress of the company’s affairs as directors would have. If they sit back… they do so at their risk if things go wrong’
Dimes v Scott
Gains and Losses
Trustee Duties
- If a trustee is in breach of trust then they are liable for any loss, but any profit belongs to the trust
- General rule is that losses cannot be set off against gains, unless they arise in one transaction or in carrying out one particular type of venture.
Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980]
Gains and Losses
Trustee Duties
Guildford site gained and Old Bailey site lost – losses in Old Bailey were set off against profits made in Guilford (as they stemmed from exactly the same policy) so significantly reduced the liability of the trustee
Trustee Act 2000
Delegation
Trustee Duties
- General rule is that trustees cannot delegate their powers. TA 2000 allows much more delegation.
- The trustee can delegate delegable functions to an agent. The power applies to all trusts, whenever created.
- Statutory duty of care applies to:
- Selection of Agent
- Setting terms of the agency
- Preparations of a policy statement
What are Delegable Function?
Delegation
Trustee Duties
- S11(1) TA 2000 – trustee can delegate any or all of their delegable functions to an agent
-
S11(2) TA 2000 - Delegable function consist of any function other than:
- In what way assets should be distributed
- Whether any fees or payment due to be made out of trust funds should be made out of capital or income
- Appointing a trustee
- Appointing nominee/custodian
- Trustee cannot delegate decisions about who should benefit under a discretionary trust.
- Investment decisions, however, can be delegated and this is the most important change on delegation.
To whom can a trustee delegate?
Delegation
Trustee Duties
- Trustees can delegate to other trustees or nominee/custodian
- Trustees cannot delegate to beneficiaries
- Trustee is subject to all duties and restrictions of the delegated function – but not the duty to obtain advice
S12 Trustee Act 2000
Delegation
Trustee Duties
Agent may be one or more of the trustees but not a beneficiary, even if they are also a trustee
S22 Trustee Act 2000
Delegation
Trustee Duties
Trustee has a duty to review the arrangement with the agent from time to time
S23 Trustee Act 2000
Trustee Liability for Agent Default
Trustee Duties
-
S23 TA 2000 – a trustee is not liable for any act or default of their agent, nominee or custodian unless they have failed to comply with the statutory duty of care
- a) when carrying into the relevant arrangements; or
- b) when carrying out the reviewing duties under S22
