B. Permissive Delegation

This covers the situation where the trustee or the manager is given the discretion to delegate all or some of the duties and powers to a third party if it so wishes. In this sense, delegation permitted in equity or under the Trustee Act 1925 is permissive in nature.

For an authorized unit trust, the position is governed by regulation 7.15 of the Financial Services (Regulated Schemes) Regulations 1991. In general, subject to two broader categories of restrictions, and also subject to any restriction in the trust deed, both the trustee and the manager are permitted to delegate any of their functions to any person, including the trustee and the manager themselves. The delegation permitted by this regulation is not confined to ministerial acts but extends to any discretion.

The first category of restriction is on delegation of core functions. Under the Regulations, the trustee has two core functions, oversight of the manager and custody of trust assets. The trustee is prohibited from delegating the oversight function to the manager or its associates. It is also prohibited from delegating the custody function to the manager. In respect of delegation to any other person, regulation 7.15.3 provides that:

FundsThe trustee may not delegate to anyone the function of being a custodian of documents of title or documents evidencing title to property of the scheme unless the arrangements with the custodian prevent the custodian from releasing the documents into the possession of a third party without the consent of the trustee.

The trustee can appoint a custodian under the general power of delegation conferred by regulation 7.15 but this paragraph requires the trustee to do so on terms that the custodian cannot release title documents into the possession of a third party without the consent of the trustee. It aims at preventing any third party lien from arising. One particular concern is whether this restricts the trustee’s ability to appoint a nominee for the purpose of a dematerialized clearing system such as CREST. The answer seems to be not. This is because this paragraph only applies to an appointment of ‘a custodian of documents of title or documents evidencing title to property of the scheme‘. While a nominee appointed for the purpose of settlement under a clearing system may have legal title to the securities or properties involved, that nominee is not given any custody of title documents. The very fact of its appointment is to avoid the need for any title document. Thus, regulation 7.15.3 does not affect any appointment of nominees for the purpose of dematerialized clearing or settlementsystems.

The management function of an authorized unit trust is vested in the manager. Contrasting with the trustee’s delegation, there is no prohibition on the persons to whom the manager may delegate its management function. But if the manager delegates any function concerning the management of the property of the scheme, the manager remains responsible for all acts and omissions of such delegate. This is so even though the delegate may not in any way be associated with the manager. In practice, relying on regulation 7.15, a manager frequently appoints investment advisers and investment managers which are its associates and these appointments are disclosed in the scheme particulars.

The second category of restriction is on delegation to associates. The regulation provides that if the manager or the trustee delegates any function to the manager, the trustee or their associates, it will remain responsible for the acts or omissions of the delegate ‘as if they were acts or omissions of the manager, or as the case may be of the trustee‘.328 This in effect provides for automatic vicarious liability of the manager or the trustee. It is an absolute liability even though the manager (or the trustee) acts in good faith and it appoints and supervises the delegate with due care and diligence.

Subject to these two restrictions, the trustee and the manager may delegate to any person, including the other party. It will not be vicariously liable for acts or omissions of its agent if the conditions of regulation 7.15.6 are satisfied. These conditions are:

Thus, the manager and trustee can avoid liability if it exercises reasonable care and skill in the initial appointment of as well as in its supervision of the agent.

For non-authorized unit trusts, clauses enabling the manager and the trustee to delegate are widely drafted. In particular, without express provisions, it would seem difficult to delegate to a custodian the power of holding title to properties, and also to appoint a nominee for the purpose of dematerialized clearing or settlement systems. Widely drawn powers are inserted to avoid any difficulty of having to make amendments to the trust deed if such power is found subsequently to be wanting. To protect the unitholders, it is often provided that the consent of the other party (i.e. the trustee or the manager, as the case may be) is required for some delegations. In making such delegations, the trustee of a non- authorized unit trust, like a private trustee, is under the duty to act as a prudent person would do in the selection of agents and also to continue to exercise the necessary supervision.

The manager in making a delegation will have a duty of care, either under equitable principles or by virtue of an implied term. If trustee cases are a guide, it is likely that a court will conclude that there is a duty of care in both the selection and the continuing supervision of the agent.

Possibly related posts: (automatically generated)
Unit Trust Delegation Must Know part B