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Investment and delegation (Duty to invest (Positive duty - found in...…
Investment and delegation
Duty to invest
Positive duty - found in...
Statute - Trustee Act 2000
Trust instrument - can vary depending on settlor's wishes
Successive interest trusts - have a duty to be even-handed - balance income generation with capital growth
Express powers
Kessler, Drafting Trusts and Will Trusts - "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."
Moffat, Trusts Law - "Such clauses will remain common" - even with the introduction of the new Trustee Act, the general principle remains that you should invest as if it were your money, while always keeping in mind that it isn't - opportunity vs. risk
Land
Re Power (1947) - held that buying land for beneficiaries to occupy was not an investment because it didn't generate income
Section 8 of the Trustee Act 2000 allows trustees to acquire freehold or leasehold land in the UK, for the purposes of...
Occupation by beneficiaries
Any other reason
Investment
Investment - traditional approach
Produce an income, maintain the capital - difficult due to narrow investment range
Complaints that trust income could not keep up with inflation
Trustee Investment Act 1961 - extended authorised range of investments - somewhat helpful but problems remained
Investment - modern approach
Trustee Act 2000
Expanded investment powers
Introduced "modern portfolio theory" - Nestle v Natwest Bank (1992)
Review investments as a whole - it used to be that trustees were liable for losses made on each individual investment, even if they had made profit elsewhere - risk led to them taking a cautionary approach
Law Com. No 315, Capital and Income in Trusts, para. 3.7 - "The TA 2000 enables but does not require trustees to follow modern portfolio theory"
Specific sections
Section 3
Applies to trusts whenever created (s7 TA 2000) - aka retrospective effect
In addition to other powers
But may be restricted or excluded (s6 TA 2000) - e.g. explicitly excluding unethical investments through trust instrument
Applies to mortgages - ss3(3) and (4) - general power of investment only excludes land over seas and equitable interests in land
General power of investment
Section 4
Standard Investment Criteria (SIC)
Trustees must have regard to SIC when exercising any powers of investments, both statutory and express - s4(1)
Suitability and diversification
Linked to modern portfolio theory - not defined in legislation
a) The suitability to the trust of investments of the same kinds as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind
So just have to look at investments of a similar kind and decide which one is the most suitable
b) The need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust
Subjective according to circumstances - e.g. with smaller trusts, diversification might not be appropriate as it would limit returns
Review investment from time to time - s4(2)
Section 5
Trustees must obtain and consider proper advice
'Proper advice'
Advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment - s5(4)
Subjective reasonable belief - up to the trustee to demonstrate - changes according to the nature of the investment
Trustees need not obtain advice if he reasonably concludes it is unnecessary or inappropriate to do so - s5(3)
Circumstances not defined
E.g. existing knowledge and experience of trustee means shouldn't spend trust money getting advice - though still may want to obtain it to cover themselves - very high threshold
E.g. if the fund is so small it would be prohibitively expensive
Must consider the advice, but also make their own decision - Shaw v Cates (1909)
Section 1 - duty of care
Standard is the "prudent person of business" - Speight v Gaunt (1883) - objective test
Trustees must exercise such care and skill as is reasonable in all the circumstances
Professional vs. Lay trustees
s1(a) - looks at any special knowledge or experience that they hold themselves out as having - held to higher standard
s1(b) - professional trustees treated more stringently - lower standard for lay trustees, while taking into account their level of education, job etc.
Application - Schedule 1
Exercise of statutory/express power of investment
SIC
Obtain and consider proper advice
Power to acquire land
Delegations
Section 11 - delegations
Not possible prior to TA 200 (unless express)
Lists what may not be delegated - included ability to distribute trust property, advance capital or income to beneficiaries, and appoint trustees - though trust instrument can authorise
Agents are subject to same restrictions as trustee
SIC and review - s13(1)
Advice - s13(2) - however it may be that the agent is the kind of person who would have given advice to the trustee - depends on knowledge required e.g. agents often still get advice on land as it is a complex area
Trustee still has duty to review, and duty of care applies when choosing the agent
Ethical investment
Settlors are able to restrict investment - usually quite explicit in trust instrument but if not, can look to common law
Cowan v Scargill (1985) - question of whether miners' pensions should be invested in oil - court held that the primary goal is the benefit of beneficiaries, to make them money - any personal moral considerations have to be set aside
Harries v Church Commissioners (1992) - question of whether Church of England fund should invest outside what some viewed to be the 'purpose of Christian faith' - court said there was duty to be completely neutral - if trust instrument doesn't restrict, then should only look at returns - put personal beliefs behind