Withdrawn Uniform Acts

Trustee Investment Act 1997

WITHDRAWN IN 2012 ON ADOPTION OF THE UNIFORM TRUSTEE ACT

General Comments: These uniform amendments to provincial and territorial Trustee Acts:

  • enhance the statutory powers of investment and delegation of trustees in order to enable trustees who are not acting under a sophisticated trust instrument to invest efficiently under modern market conditions, and
  • allow the standard of performance required of trustees and other principles governing the administration of trusts to better reflect accepted elements of modern portfolio theory, including diversification, covariance, and risk and return analysis.
In particular, the statutory list of authorized investments still retained in seven provinces is replaced with a power to invest in any kind of property or security. This power would be subject to a general duty to exercise the degree of care, skill, and judgment that a prudent investor would employ. A statutory power of similar scope already exists in the jurisdictions that have enacted the uniform provisions on trustee investment recommended by the Conference in 1970. These provisions go somewhat further than the 1970 uniform legislation in incorporating features of portfolio theory, and address the additional issue of delegation of investment authority by trustees.

The Trustee Act is amended by repealing section(s)... and substituting the following:

Investment of trust property

01.    (1)    A trustee may invest trust property in any form of property or security in which a prudent investor might invest including a security issued by a mutual fund as defined in the [name of statute in jurisdiction regulating securities].

Comment: S. 01(1) replaces the "legal list" of authorized trustee investments (where it is still retained) with an investment power comparable in scope to the power usually conferred by well-drafted trust instruments. Such an investment power enables trustees to properly diversify the trust portfolio, achieve adequate income and capital growth, and protect the trust capital against inflation.

The reference to mutual funds clarifies that the removal of restrictions on categories of investments reverses Haslam v. HaslamSee footnote 1 and authorizes the acquisition of mutual fund securities. See the comment to s. 07(7), infra.

(2) Subsection (1) does not authorize a trustee to invest in a manner that is inconsistent with the trust.

Comment: Statutory powers may supplement, but do not supplant, the trust terms. Subs. (1) does not authorize deviation from the terms of the trust.

(3)  A trustee may have regard to the following criteria in planning the investment of trust property, in addition to any others that are relevant to the circumstances:
  • (a) general economic conditions;
  • (b) the possible effect of inflation or deflation;
  • (c) the expected tax consequences of investment decisions or strategies;
  • (d) the role that each investment or course of action plays within the overall trust portfolio;
  • (e) the expected total return from income and the appreciation of capital;
  • (f) other resources of the beneficiaries;
  • (g) needs for liquidity, regularity of income and preservation or appreciation of capital;
  • (h) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
Comment: The guidelines set out in subs. (3) are the same as the ones that appear in s. 2(c) of the NCCUSL Uniform Prudent Investor Act. They direct the trustee's attention to considerations relevant to the development of a successful investment strategy for a particular trust: e.g., risk/return analysis, diversification, projected income and capital requirements, and avoidance of unfavourable tax consequences.

Standard of care

02. In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

Comment: S. 02 embodies the "prudent investor" standard of care. The context provided by s. 01 and ss. 03-05 allows the test of prudence to be applied in terms of the overall soundness of the trustee's investment strategy.

The NCCUSL Uniform Prudent Investor Act sets out a similar standard, but also requires trustees with special expertise or skill to exercise the capabilities they profess to have. In Canada, the same result is possible because of the provisions in the Trustee Acts allowing discretionary relief from liability for technical breaches of trust where the trustee has acted honestly and reasonably. It is harder for professional trustees to obtain discretionary relief. (See Fales v. Canada Permanent Trust Company.See footnote 2 )

Diversification

03. A trustee must diversify the investment of trust property to an extent that is appropriate having regard to
  • (a)  the requirements of the trust, and
  • (b)  general economic and investment market conditions.
Comment: Diversification is a central tenet of modern portfolio theory. Through acquisition of securities that are not subject to the same influences on value, the overall degree of risk to the trust property is reduced. This feature of good investment strategy is important enough to warrant the imposition of an express duty to diversify.

Trustee not liable if overall investment strategy prudent

04.  A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances.

Comment: Trust law traditionally measures the trustee's adherence to the prudential standard of care on an investment-by-investment basis. This principle developed in a period when trustees were limited to categories of "authorized investments."

Section 04 draws on s. 79 of Manitoba's Trustee Act and s. 2(b) of the NCCUSL Uniform Prudent Investor Act, both of which require that trustees' investment decisions be evaluated not in isolation, but in a portfolio context. It is intended to prevent trustees whose overall investment activity and strategy are sound from being held in breach of trust merely because individual investment decisions may appear to have been imprudent when viewed in isolation with the benefit of hindsight.

Quantification of trustee's liability when investment strategy imprudent

05.  A court assessing the damages payable by a trustee for a loss to the trust arising from the investment of trust property may take into account the overall performance of the investments.

Comment: The present rule for assessing a trustee's liability for an investment-related breach of trust does not allow the netting of gains against losses. All gains may be enjoyed by the beneficiary, but the losses fall solely on the trustee. This much-criticized "anti-netting" rule compels an investment-by-investment analysis that is inconsistent with the portfolio-based assessment of the trustee's conduct introduced by s. 04. S. 05 abrogates the "anti-netting rule" by making a trustee who breaches the standard of care of the prudent investor liable only for the net loss to the trust.

Investment advice

06. (1) A trustee may obtain advice in relation to the investment of trust property.

(2) It is not a breach of trust for a trustee to rely upon advice obtained under subsection (1) if a prudent investor would rely upon the advice under comparable circumstances.

Comment: Like other investors, individual trustees often require advice in order to maximize the return from trust property while holding risk to a tolerable level. General trust law assumes, however, that trustees will exercise their own judgment and discretion. Their ability to seek and rely upon investment advice without an express power to do so is in some doubt. Subs. (1) eliminates the doubt by conferring a statutory power to obtain investment advice. Subs. (2) prevents a trustee from being held liable for breach of trust merely for relying on advice that in hindsight proves wrong, as long as it was advice that other prudent investors might have relied upon.

Delegation of authority with respect to investment

07. (1) In this section, "agent" includes a stockbroker, investment dealer, investment counsel and any other person to whom investment responsibility is delegated by a trustee.

Comment: Under present-day circumstances, individual trustees can no longer be expected to personally carry out every transaction involving the investment of trust property. In most cases, they must make use of the services of financial intermediaries like stockbrokers and investment dealers. The categories of actors in the investment market are somewhat fluid, however. The definition of "agent" is therefore open-ended.

(2) A trustee may delegate to an agent the degree of authority with respect to the investment of trust property that a prudent investor might delegate in accordance with ordinary business practice.

Comment: Under general trust law as it now is, trustees need to be wary of delegating authority that may be characterized as discretionary unless they have an express power wide enough to fit the circumstances. Delegation of carefully delineated discretionary authority to an investment manager will frequently be a normal and prudent act on the part of present-day investors, however. This is particularly true in relation to large portfolios, the day-to-day management of which requires considerable sophistication. For this reason, trust instruments frequently confer the power to employ an investment manager, together with wide powers of delegation.

The power conferred by subs. (2) is aimed at allowing trustees to invest as efficiently as other prudent investors may do, regardless of their own level of financial sophistication.

(3) A trustee who delegates authority under subsection (2) must exercise prudence in
  • (a) selecting the agent,
  • (b) establishing the terms of the authority delegated, and
  • (c) monitoring the performance of the agent to ensure compliance with the terms of the delegation.
Comment: Subs. (3) closely resembles s. 9(a) of the Uniform Prudent Investor Act, but substantially restates the supervisory obligations under existing Canadian law of a trustee who delegates authority to an agent. Implementing jurisdictions may choose to adapt subs. (3) to refer also to other provisions in their Trustee Acts dealing with delegation of authority by trustees.

(4) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.

Comment: Subs. (4) is identical to s. 9(b) of the NCCUSL Uniform Prudent Investor Act.

(5) A trustee who complies with the requirements of subsection (3) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.

Comment: Subs. (5) is based on the NCCUSL Uniform Prudent Investor Act (s. 9(c)), but is also consistent with the present law in common law provinces. See Re WeallSee footnote 3 and Brown v. BrownSee footnote 4 .

(6)  This section does not authorize a trustee to delegate authority under circumstances in which the trust requires the trustee to act personally.

Comment: The terms of the trust may convey an intent that the trustee is to carry out a function or exercise a discretion personally. This is more likely to be the case in relation to major decisions like those involving retention or sale of larger assets, or distributions of income and capital among the beneficiaries, than in relation to day-to-day matters of administration. Subs. (6) nevertheless clarifies that the statutory powers of delegation do not override the intent expressed by the terms of the trust.

(7) Investment in a security issued by a mutual fund as defined in [name of statute in jurisdiction regulating securities] or in a similar investment is not a delegation of authority with respect to the investment of trust property.

Comment: Some recent decisions, notably Haslam v. HaslamSee footnote 5 and Re Central Guaranty Trust Company and Sin-SaraSee footnote 6 hold that investment in mutual funds or other types of pooled funds managed by third parties are impermissible delegations of authority in the absence of an express power to invest in this manner. Subs. (7) reverses the effect of the Haslam line of cases expressly.

Note on consequential amendments to other legislation: Some enactments other than the Trustee Act may confer investment powers that are expressed to be congruent with the ones trustees have. Enactments of this kind are frequently predicated on the presence in the Trustee Act of a list of authorized investments. Implementing jurisdictions may need to examine the policy behind the investment powers given by other legislation, and determine if the rationale for limiting their scope remains once the statutory investment power of a trustee is no longer restricted to authorized categories of securities.

Note on transition: The uniform amendments are intended to apply to existing trusts, subject to any express or implied restrictions imposed by the instrument on the trustee's ability to invest trust property or delegate authority.

Footnote: 1 1. (1994) 114 D.L.R. (4th) 562 (Ont. Gen. Div.).
Footnote: 2 2. [1977] 2 S.C.R. 302, 324-325, 70 D.L.R. (3d) 257, 274-275.
Footnote: 3 3. (1889), 42 Ch.D. 674.
Footnote: 4 4. [1932] 2 D.L.R. 819 (Ont C.A.).
Footnote: 5 5. Supra, note 1.Footnote: 6 6. (1995) 24 O.R. (3d) 820 (Gen. Div.).

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