1. The trustee must not follow a direction of the manager if such direction is in breach of the express provisions of the unit trust. This is so irrespective of whether the power in question is beneficial or fiduciary. If it were otherwise, the duty of supervision would be completely hollow.

In respect of every investment proposed by the manager, this means that the trustee has to check each proposal against the letter of the unit trust deed. It is submitted that this involves a two-stage process. First, the trustee must satisfy itself that the manager’s proposed investment is positively authorized by the unit trust deed or the scheme particulars. The trust deed may have an express clause dealing with what is to be invested or may do the same by way of a definition of ‘authorised investments‘. The authorized investments may be defined by reference to assets, such as bank or money market deposits, bonds, shares, real properties, mortgages, futures, options, and units in other unit trusts. They may also be defined by reference to countries or geographic locations, such as most international and country funds.

FundsEven if a particular investment is an authorized investment, the trustee must satisfy itself that the negative restrictions are complied with. There are four common types of negative restrictions. First, a percentage or concentration restriction may be provided for a single asset, a class of assets, the total assets in a country or a region so that exposure to a particular type of risk is limited. Secondly, a purpose restriction may apply to certain types of investments which are generally perceived to be risky. Thus, a derivative transaction, a forward transaction in currency orstocklending may only be entered into for the purpose of efficient portfolio management. A purpose restriction may be accompanied by a percentage restriction, in which case the trustee must ensure that both are complied with. The third type is a gearing restriction. The trustee has to ensure that the level of borrowing is that permitted by the trust deed. The fourth is a restriction on investments which may place the manager in a position of conflict of interests. This is making express what would otherwise be so regarded by equity.

As the duties of a trustee are continuing ones, it is important that the trustee must monitor the total value of the portfolio as well as the value of individual assets, since most negative restrictions are expressed in terms of the relative values of particular assets to the total portfolio. Changes in market conditions and in the volume of redemption may affect compliance with such restrictions.

From this discussion, it is clear that the nature of the duties of the trustee in relation to investments is administrative in character. In practical terms, this is simply a compliance programme similar to that commonly used in- house by banks, building societies, and securities firms for regulatory compliances. In no sense does this involve the trustee second-guessing the manager’s investment decision as a second-guessing involves a process of assessing the risks of an investment against its return. All trust deeds or regulations, by making the manager responsible for investments, make a clear demarcation that this is the duty of the manager, not of the trustee. (6) Similarly, the trustee should not follow a direction of the manager ifto so do is in violation of any statutory provisions, such as those relating to money laundering or taxation.’

(7) An unanswered issue is whether the trustee is under a duty to solicit directions from the manager. Following the fiduciary and beneficiary distinction, if the manager’s power is a beneficial power, the trustee is not under any obligation to seek a direction. If the power is fiduciary, the position is more complicated. Given the compartmentalization of duties, the centrality of the manager in investment decisions, and the contractual relationship between the manager and each unitholder, there is no duty on the part of the trustee to initiate a decision for investment or disposal of investment in response to market conditions. This does not, however, mean that the trustee can turn a blind eye to the state of affairs of the unittrust.

It is submitted that the trustee’s position in respect of any omission by the manager to give a direction is the same as with any positive direction given by the manager. If the trustee knows or ought to know that any failure to give a direction in a particular situation is a breach of duty on the part of the manager, the trustee should ask the manager to give the direction and, if it fails to direct, should seek the court’s directions. An example would be that, where there is a percentage restriction on certain investments, any change in total value of the portfolio may require the manager to direct a disposal of certain investments in order to comply with the percentage restriction. If the manager does not do so, the trustee should seek its direction. If the manager still does not give the required direction, it does not follow that the trustee can simply act as if the direction had been given and proceed to dispose of the investment itself. The trustee should approach the court for directions. In Re Hart’s Will Trusts Bennet J said:

Before making any change of investment it is the duty of the trustees, in my judgment, upon the construction of this particular power to consult [the son] if they arc reasonably able to consult him and to act in accordance with his directions if he gives them. If he refuses or fails to give them, then they must be free to act.

Clearly, as Bennett J has observed, the question is one of construction. In a unit trust, if the manager does not give a direction, the trustee is not ‘free to act‘ because by the terms of the unit trust deed, investment management power does not vest in it. The trustee should seek directions from the court.

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