(1)New legislation should retain, largely unchanged, the prudent person principle in Part 2 of the Trustee Act 1956. The replacement provision should provide that:
(a)a trustee may invest any trust funds in any property;
(b)when investing, a trustee should be required to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others; and
(c)where a trustee has any special knowledge or experience or holds himself or herself out as having special knowledge or experience, he or she must exercise the level of care, diligence, and skill that it is reasonable to expect of a person with that special knowledge or experience.
(2) The obligations in P17(1) should apply in every trust to the extent they are not overridden or excluded by the trust deed.
(3) The new legislation should make the following changes to the provisions in Part 2 of the Trustee Act 1956:
(a)clarify that the power to invest does not preclude a trustee from taking account of other relevant matters when deciding how to manage a trust fund. A trustee may, where it is appropriate to give effect to the objectives or purpose of the trust, purchase or retain property for purposes other than investment;
(b)clarify that the higher standard of prudence imposed on a professional trustee applies to any trustee who has any special knowledge or experience or holds himself or herself out as having special knowledge or experience;
(c)repeal section 13G and include the requirement that a trustee comply with the provisions of the trust in section 13D (which already provides for the terms of the trust to modify or exclude the default duties in respect of investment);
(d)retain the power of the court (in section 13Q) to set off gains and losses in an action for breach of trust and also clarify that the rule of general trust law that requires the assessment of the decisions of a trustee on an investment by investment basis if the decisions are called into question (the anti-netting rule) has been abolished;
(e)add the additional factors that the court may take account of in section 13M to the list of matters trustees may have regard to when exercising their powers of investment in section 13E. Trustees would then have regard to their overall investment strategy and whether trust investments have been diversified (as is currently the case under section 13M); and
(f)repeal sections 13I, 13J, 13K, 13L, 13N, 13O and 13P on the basis that these provisions are now either outdated or unnecessary.
Please give us your views on this proposal.
5.2Investment is regulated by Part 2 of the Trustee Act. A trustee may invest in any property but must exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others when investing. If the trustee’s profession, employment, or business involves acting as a trustee or investing money for others, the trustee must exercise the level of care, diligence, and skill of a person engaged in that profession, employment, or business. Professional trustees thus have to meet a higher standard. The prudent person principle and the duty of a professional to exercise the level of care and skill of a person engaged in their profession apply subject to any contrary intention in the trust instrument.
5.3Section 13E sets out a non-exhaustive list of factors a trustee may have regard to, including diversification, maintenance of the real value of capital and income, capital appreciation, and inflation. Section 13F preserves the general legal duties of trustees including the duty to act in the best interests of present and future beneficiaries, the duty of even-handedness, and the duty to take advice.
5.4Section 13M allows the court, in considering a trustee’s liability as regards investment powers, to have regard to diversification of the trust fund and any investment strategy. Section 13Q provides that in an action for breach of trust, the court may set off a loss arising from an investment against a gain from any other investment. This section does not specifically revoke the anti-netting rule which operated before 1988 to prevent a loss on one investment by a trustee to be offset by a gain on another. Allowing the court to take into account profits from one investment and adjust losses from another was arguably an implicit repeal.
5.5The remaining provisions in Part 2:
- impose a duty on trustees to comply with any requirement imposed on investment by the trust deed (section 13G);
- give trustees a power to retain any non-compliant investment (section 13H);
- impose a requirement that redeemable securities must be held in a bank for safekeeping (section 13I);
- regulate the purchase and redemption of redeemable securities (section 13J);
- give trustees powers in relation to company securities (section 13K);
- give trustees the power to apply the trust’s capital to pay any calls on shares (section 13L) and the power to make certain loans and investments on the strength of a valuation without breaching the trust (section 13N); and
- provide that trustees will not be liable for losses caused by reason of improperly secured investment and release of part of security (sections 13P and 13O).
5.6The Fourth Issues Paper raised relatively few substantive issues over the current investment powers. The Commission has proceeded on the basis that the prudent person principle, enacted in Part 2 of the Trustee Act, ought to be retained. It is generally considered to be working well, and we have not been made aware of any significant problems with it.
5.7Against that background a number of issues with the current provisions should be addressed in new legislation. The problems, and the options for addressing them, are as follows:
(a)The current provision is not sufficiently clear that the power to invest (section 13A) and the duty to do so prudently (section 13B) do not preclude trustees from taking account of other relevant matters when deciding how to manage a trust fund. As currently drafted, section 13A, which gives a general permission for trustees to invest in any type of property, could be interpreted as limiting the power of trustees to purchase property for purposes other than investment. There are, however, situations where it would be desirable for trustees to retain property for purposes other than investment. For example, there may be circumstances where trustees wish to purchase a property as a residence for the use and enjoyment of beneficiaries and not as an investment. Retaining a family home is not always a good investment, but it may be an appropriate thing to do for other purposes. Or, as may be the case in respect of Māori land under the scheme of Te Ture Whenua Māori Act 1993, the primary role of the trustees may be to retain and protect land assets for future generations. It would therefore be useful to clarify that powers to manage property (including powers to invest) are subordinate to obligations under the trust and that trustees can purchase and retain property for purposes other than investment.
(b)Section 13C currently requires professional trustees to meet a higher standard of prudence. There is a question over whether a professional such as a lawyer or accountant is covered by section 13C. The new Act should clarify that any trustee who has any special knowledge or experience or holds himself or herself out as having special knowledge or experience must comply with the higher standard of prudence imposed by that provision.
There is some uncertainty as to whether the anti-netting rule (which would seem to have been implicitly repealed by section 13Q) was fully abolished. For the avoidance of any doubt the anti-netting rule should now be expressly abolished. (d)
Some of the detailed provisions in Part 2 of the Trustee Act that empower trustees to deal with certain types of investment are no longer necessary. Some were enacted to deal with specific historical points and can now be repealed. Others will be unnecessary because, as discussed in chapter 4, trustees will have broad general powers. In this area our specific proposals are:
- repealing section 13G and including the requirement that trustees comply with the provisions of the trust deed within section 13D (which already provides for the trust deed to modify or exclude the default duties in respect of investment);
- amending section 13E (which lists the matters trustees may have regard to when exercising their powers of investment) to include the additional factors that the court may take account of in section 13M. Trustees would then have regard to their overall investment strategy and whether trust investments have been diversified (section 13M); and
- repealing sections 13I, 13J, 13K, 13L, 13N, 13O and 13P because these provisions are either historic or unnecessary.
5.8Submitters were asked whether the current investment powers required any change. Most submitters said the current prudent person principle should be retained and that the current provisions worked well. The Office of the Māori Trustee submitted that there were particular issues in relation to investment in the context of Māori land, because the scheme of Te Ture Whenua Māori Act 1993 means that the primary role of the trustees is to retain and protect the land assets for future generations. Investment in other assets must give effect to the objectives of the trust. The Māori Trustee (commenting as a part of the Trustee Corporations Association submission) considered however that the current provisions are adequate to address this particular situation.
5.9It would be helpful to clarify in new legislation that trustees may, where it is appropriate to give effect to the objectives of a trust, purchase or retain property for purposes other than investment. In practice this is what happens. Many trust deeds already specifically provide trustees with a power to purchase property for the use and enjoyment of beneficiaries to ensure that trustees are able to do this without considering the test for a prudent investment. Other deeds do not, but trustees often assume they have the power to do this. The Office of the Māori Trustee, for example, interprets the provisions in this way. In addition to providing a home for a beneficiary, there are further circumstances where trustees may need to purchase and retain property other than for investment. The purpose of a trust may be to preserve taonga and land assets for future generations. It would be helpful if the new Act was clear that trustees may do this without meeting the standards that apply to investments.
5.10Greg Kelly Law submitted that it should be clearer whether or not the higher standard of care imposed on professional trustees (by section 13C) applies to lawyers and accountants. There are indications from case law that acting as a trustee is not considered part of the practice of the legal profession, while in the case of accountants trusteeship may come within the ordinary course of their business. The submission recommended that where a lawyer or accountant is appointed because of his or her professional relationship with the settlor or trustee they should meet the higher professional trustee standard.
5.11We agree this matter needs clarification. However, our proposed approach is to be consistent with the general duty of care imposed on all professionals who accept office as trustee. We consider that where a trustee has any special knowledge or experience or holds himself or herself out as having special knowledge or experience, he or she should be required to exercise the level of care, diligence, and skill that it is reasonable to expect of a person with that special knowledge or experience.
5.12New legislation should address the other points listed in paragraph [5.7] above. The anti-netting rule should be expressly abolished for the avoidance of doubt. It would also be appropriate for the trustees and the courts to have regard to the same matters when setting and assessing the overall investment strategy as has been proposed. If new trusts legislation gives trustees the broad natural person powers to administer the trust and deal with trust property, which we have proposed in chapter 4 (P11(1)), then many of the specific powers currently in Part 2 are not needed. The combination of the power to invest and that new provision means that the list of specific powers currently in the Trustee Act is now unnecessary.