Prudent Investors 1996

Footnotes


Footnote: 1Uniform Law Conference of Canada, Proceedings of the Seventy-seventh Annual Meeting (1995) 220.


Footnote: 2Conference of Commissioners on Uniformity of Legislation in Canada, Proceedings of the Fifty-second Annual Meeting (1970) 35, 117.


Footnote: 3National Conference of Commissioners on Uniform State Laws, 1994.


Footnote: 4Supra, n. 1 at 46-47.


Footnote: 5While the resolution noted in the 1995 Proceedings refers to the trustee investment provisions recommended for enactment by the ULCC in 1970 as the Uniform Prudent Investor Act, Appendix E to the 1970 Proceedings refers to them simply as "An Act to Amend the Trustee Act:" supra, n. 2 at 117. The Consolidation of Uniform Acts published by the Uniform Law Conference of Canada refers to them as "An Act to Amend the Uniform Trustee Act (re Trustee Investments)."


Footnote: 6Ontario (Trustee Act, R.S.O. 1990, c. T.23, ss. 26, 27), Québec (Civil Code, art. 1339); Newfoundland (Trustee Act, R.S.N. 1990, c. T-10, s. 3, as amended); Prince Edward Island (Trustee Act, R.S.P.E.I. 1988, c. T-8, s. 2, as amended); Saskatchewan (Trustee Act, R.S.S. 1978, c. T-23, s. 3, as amended); Alberta (Trustee Act, R.S.A. 1980, c. T-10, s. 5, as amended); British Columbia (Trustee Act, R.S.B.C. 1979, c. 414, s. 15).


Footnote: 7At the beginning of the nineteenth century, the only securities trustees were allowed to acquire were the 3% consolidated annuities ("consols") issued by the Bank of England: see Gibson v. Bott (1802) 7 Ves. Jun. 89, 32 E.R. 37; Dimes v. Scott (1828) 4 Russ. 194, 38 E.R. 778. An Act to further amend the Law of Property, and to relieve Trustees (Lord St. Leonard's Act), 22 & 23 Vict., c. 35, s. 32 empowered trustees to invest in ordinary stock of the Banks of England and Ireland, the East India Company, and land mortgages. As the nineteenth century progressed, however, further statutes repeatedly added new categories of authorized investments to the legal list.


Footnote: 8Conference of the Commissioners on Uniformity of Legislation in Canada, Proceedings of the Thirty-ninth Annual Meeting (1957) 24, 82, 84 (s. 2(h)).


Footnote: 9British Columbia, Manitoba, Nova Scotia, Saskatchewan, Yukon and Northwest Territories.


Footnote: 10All but two provinces now permit trusts to acquire preferred and common shares without an express power to do so in the instrument. Saskatchewan still restricts trustees to acquiring preferred shares, while Newfoundland's legal list allows neither preferred nor common shares: The Trustee Act, R.S.S. 1978, c. T-23, s. 3(i); Trustee Act, R.S.N. 1990, c. T-10, s. 3.


Footnote: 1156 & 57 Eliz. 2, c. 62.


Footnote: 12Law Reform Commission of Saskatchewan, Consultation Paper on the Law of Trust, No. 2: The Investment Powers of Trustees (1995) 23-24.


Footnote: 13Law Reform Committee, Twenty-third Report: The Powers and Duties of Trustees (1982) 16-17.


Footnote: 14Law Reform Commission of Western Australia, Report on Trustees Powers of Investment (1984) 18.


Footnote: 15Harvard College v. Amory, (1830) 26 Mass. (9 Pick.) 446, 461.


Footnote: 16See American Law Institute, Restatement 2d: Trusts (1959), s. 227; Restatement 3d: Trusts (Prudent Investor Rule) (1992), s. 227.


Footnote: 1729 U.S.C. 1001, 1104(a)(1). See Appendix B.


Footnote: 18Conference of Commissioners on Uniformity of Legislation in Canada, Proceedings of the Fifty-second Annual Meeting (1970) 35, 117.


Footnote: 19Trustee Act, R.S.N.B. 1973, c. T-15, s. 2.


Footnote: 20Trustee Act, R.S.Y.T. 1986, c. 173, s. 2.


Footnote: 21Trustee Act, R.S.N.W.T. 1988, c. T-8, s. 2.


Footnote: 22Trustee Act, C.C.S.M. 1987, c. T160, s. 68(2). See Appendix B. See also Manitoba Law Reform Commission, Report on Investment Provisions Under the "Trustee Act" (MLRC Report No. 50, 1982).


Footnote: 23Trustee Act, R.S.N.S. 1989, c. 479, ss. 3-5, as am. by S.N.S. 1994-95, c. 19. See Appendix B. The Nova Scotia provision is similar to the wording of s. 450 of the Trust and Loan Companies Act, S.C. 1991, c. 45 and s. 46 of the Bank Act, S.C. 1991, c. 46.


Footnote: 24Waters, Law of Trusts in Canada (2nd ed.) 783; Goodman, "Commentary on the Ontario Law Reform Commission Report on the Law of Trusts," (1986) 8 E.T.Q. 6-8.


Footnote: 25Waters, ibid., 783.


Footnote: 26Speight v. Gaunt (1883) 9 App. Cas. 1, 19 (H.L.); Learoyd v. Whiteley (1887) 12 App. Cas. 727, 733 (H.L.); Re Gamble (1925) 57 O.L.R. 504; Re Meakes [1968] 2 O.R. 637 (Surr. Ct.).


Footnote: 27In re Whiteley (1886) 33 Ch.D. 347, 350 (C.A.); Davies v. Nelson (1927) 61 O.L.R. 457 (C.A.).


Footnote: 28[1977] 2 S.C.R. 302, 315, (sub nom. Wohlleben v. Canada Permanent Trust Company)(1977) 70 D.L.R. (3d) 257, 267.


Footnote: 29Supra, n. 22.


Footnote: 30S. 2(a). See Appendix B.


Footnote: 31Return consists of the income and capital gain from an investment.


Footnote: 32Kingren, "The Diversification of Trust Investments," (1986/87) 38 Ala. L.R. 123, 137; Johnston, "Prudence in Trust Investment" (1975), 8 U. Mich. J. L. Ref. 491, 497.


Footnote: 33Finn & Ziegler, "Prudence and Fiduciary Obligations in the Investment of Trust Funds," (1987) 61 Austl. L.J. 329, 335. More technically expressed, it is the dispersion of probability distributions of future prices about an expected price: Johnston, ibid., 497.


Footnote: 34Ibid. This can also be expressed conversely: a rational investor will select the investment that brings the greatest expected return for an acceptable level of risk.


Footnote: 35Kingren, supra, n. 32 at 136. Direct covariance, in which the values of two investments increase and decrease in response to the same influences, is sometimes described as "positive." If one value declines when the other increases, the situation is sometimes described as "negative covariance," although there is, in one sense, no covariance at all. The use of the adjectives "positive" and "negative" assists in mathematical analysis of portfolio risk. Perfect positive covariance might be described as +1, since there would be a one-to-one correspondence between the increase in the market value of each investment. Perfect negative covariance would be described as -1. Degrees of covariance between the two extremes would have fractional values, with an appropriate sign.


Footnote: 36Re Barker, (1898) 77 L.T. 712; Dimes v. Scott, (1827) 4 Russ. 195; Snell's Equity, 27th ed., 276. An offset may be allowed if the gains and losses arise from a single transaction: Fletcher v. Green, (1864) 33 Beav. 426. In Bartlett v. Barclays Bank Trust Co. Limited, [1980] Ch. 515 at 538 the rule was stretched to allow a set-off of gains against losses in a series of closely related transactions, and the judgment contains dicta criticizing the rule. S. 213 of the Restatement 3d: Trusts permits netting of gains and losses stemming from related transactions. See Halbach, "Trust Investment Law in the Third Restatement," (1992), 77 Iowa L.R. 1151, 1180-81.


Footnote: 37Kingren, "The Diversification of Trust Investments," (1986/87) 38 Ala. L.R. 123, 134; Langbein & Posner, "Market Funds & Trust Investment Law," [1976] Am. B. Found. Res. J. 1, 6 . Nestlé v. Westminster Bank plc, [1993] 1 W.L.R. 1260 (C.A.) makes it clear that a trustee's failure to obtain the greatest return possible will not in itself amount to a breach of trust.


Footnote: 38For an example of effective hedging by means of a convertible debenture purchased on margin, see Johnston, supra, n. 32 at 520.


Footnote: 39A recent, spectacular example was the failure of the Baring Bros. banking house due to improvident speculation in "derivatives," reportedly by a single employee. Heavy investment in derivatives also brought about the insolvency of Orange County, California: Buckly, "The Downsides of Derivatives," (1995) 69 Aus. L.J. 93.


Footnote: 40C.C.S.M. 1987, c. T160, s. 79.


Footnote: 41 Ontario Law Reform Commission, Report on the Law of Trusts (1984). The draft Trustee Act recommended by the Ontario Law Reform Commission contained this provision:

34.-(1) Subject to section 4, trustees may invest trust money in any kind of property.

(2) In investing trust money under subsection (1), among the matters which it is appropriate for trustees to consider are the following:

1. The marketability of the investment.

2. The length of the term of the investment, including its maturity date, callability and redeemability.

3. The probable duration of the trust.

4. The probable condition of the market with respect to the value of the investment at the termination of the trust, especially if at the termination of the trust the investment must be converted into money for the purpose of distribution.

5. The probable condition of the market with respect to reinvestment at the time when the investment matures.

6. The aggregate value of the trust estate and the nature of the other investments.

7. The effect of the investment in increasing and diminishing liability for taxes.

8. The likelihood of inflation.

(3) Nothing in subsection (2) imposes an obligation upon trustees to consider each of the matters mentioned in that subsection before deciding upon any investment.

The eight guidelines set out in section 34(2) are unquestionably proper considerations in making nearly any investment of trust property. It is not clear how far they achieve their aim of assisting the non-professional trustee, however. For example, how is an unsophisticated trustee to assess "marketability" or "the likelihood of inflation," or make predictions regarding the climate for reinvestment at maturity without receiving expert advice?  Another criticism which may be levelled at the Ontario guidelines is that they emphasize the propriety of decisions about individual investments rather than the need to develop a balanced portfolio.


Footnote: 42Trustee Act 1956, s. 13E, as am. by S.N.Z. 1988, No. 119, s. 3.


Footnote: 43Supra, n. 11.


Footnote: 44Ibid., s. 6(1)(a).


Footnote: 45In re Mueller's Trust, (1965) 135 N.W. 2d 854, 863 (Wis.). The trustee is liable only for the extent of loss attributable to non-diversification: Baker Boyer National Bank v. Garver, (1986) 719 P. 2d 583.


Footnote: 46In re Mendelson's Will, (1965) 261 N.Y.S. 2d 525.


Footnote: 47Baldus v. Bank of California, (1975) 530 P. 2d 1350.


Footnote: 48Kingren, supra, n. 32 at 128. Cf. Restatement 2d: Trusts, comment 228c.


Footnote: 49 S. 227(b). Comment f to s. 227 states that a departure from ordinary diversification may be justified by: special circumstances, the opportunities of a particular trust, peculiar risks facing the beneficiaries, specialized investment abilities of the trustee, special interests or managerial abilities of the beneficiaries, or "special settlor objectives."


Footnote: 50S. 3.


Footnote: 51Supra, n. 28.


Footnote: 52Restatement of Trusts 2d, s. 174; cf. Uniform Prudent Investor Act, s. 2(f).


Footnote: 53Supra, n. 41 at 487. See also Draft Trustee Act, ibid., s. 4(2).


Footnote: 54E.g., Trustee Act, R.S.B.C. 1979, c. 414, s. 98. The Ontario Law Reform Commission's Report, supra, n. 41 at 31-32 acknowledges that the lack of a statutory discretion to grant relief contributed to the more formalized distinction made in the U.S. between ordinary trustees and those with special skills. The draft NCCUSL Trust Act, s. 4-307(b) would confer a discretion to relieve trustees acting reasonably and in good faith of liability that is quite similar to the sections in Canadian Trustee Acts empowering courts to grant relief to trustees whose actions have been reasonable under the circumstances.


Footnote: 55One of the co-trustees of a will trust was a member of the testator's family, and the other a trust company. The family member received inadequate information from her corporate co-trustee about the declining value of the large block of shares in one company that formed the major investment of the estate, but was found to have acted reasonably in relying on the information she received. Substantial losses to the estate resulted from the trust continuing to hold the shares instead of disposing of them in a timely fashion. The individual trustee was relieved of liability for breach of trust under s. 98 of the British Columbia Trustee Act, but the corporate trustee was held liable.


Footnote: 56Re Miller Estate, (1987) 26 E.T.R. 188, 191 (Ont. Surr. Ct.) per Haley, Surr. Ct. J.


Footnote: 57Ibid.


Footnote: 58See McLellan Properties Ltd. v. Roberge, [1947] S.C.R. 561, [1947] 4 D.L.R. 641; Wagner v. Van Cleeff (1991) 5 O.R.(3d) 477 (Gen. Div.);
rev'g (1989) 70 O.R. (2d) 641 (Surr. Ct.) Cf. Waters, Law of Trusts in Canada (2nd ed.) 706-710.


Footnote: 59Re Haslam and Haslam, (1994) 114 D.L.R. 562 (Ont. Ct., Gen. Div.).


Footnote: 60Haslam v. Haslam, ibid., suggests that this is true even if the mutual fund is restricted to securities permitted by the Act or the trust document.


Footnote: 61The comment to s. 9(b) states:

Although subsection (c) of the Act exonerates the trustee from personal responsibility for the agent's conduct when the delegation satisfies the standards of subsection 9(a), subsection 9(b) makes the agent responsible to the trust. The beneficiaries of the trust can, therefore, rely upon the trustee to enforce the terms of the delegation.


Footnote: 62Waters, supra, n. 24 at 46, 399-403.

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