Charity Trustees’ Investment Powers
Posted: Tuesday 29 November 2011
The 2005 Act defines a charity trustee as someone who has general control and management of a charity and can therefore include directors, committee members, management board and trustees.
General and Specific Duties
All charity trustees must comply with the general duties set out in the Act regardless of whether the charity is an unincorporated association; company; trust; or Scottish Charitable Incorporated Organisation (“SCIO”). The general duties of all charity trustees are:
- To act in the interests of the charity;
- To seek, in good faith, to ensure that the charity operates in a manner that is consistent with its objects or purposes;
- To act with the care and diligence that is reasonable to expect of a person who is managing the affairs of another person; and
- To ensure that the charity complies with the provisions of the Act, and other relevant legislation.
The 2005 Act also lists some specific duties that charity trustees must ensure are met e.g. in relation to reporting to OSCR, fundraising, financial record keeping and maintaining the correct charity details on the Register.
Charitable and Non-Charitable Trusts
The Trusts Acts of 1921 and 1961 were the longstanding law which governed all trusts, charitable and non-charitable. When the 2005 Act came into force in 2006 it introduced an extension to the general powers of trustees which were found under previously legislation.
As far as charities are concerned, the investment powers introduced by the 2005 Act do not extend to other charitable bodies and are only relevant to charitable trustees and non-charitable trustees of trusts. Therefore, they do not apply to charitable companies and SCIOs.
By virtue of the new provisions in the 2005 Act (sections 93-95), trustees now have wider investment powers and can:
- make any kind of investment of the trust estate including a wider power to acquire stocks and shares; and
- acquire heritable property (i.e. land or buildings)
These wider provisions introduced by the 2005 Act provide a major step forward for many charitable trusts which have been previously restricted by the terms of their trust deeds or provisions under old legislation. The powers provide greater flexibility to trustees to invest more widely, essentially putting them in the same position as if they were beneficial owners of the charity’s investments. However, the powers do not extend to the trustees of a pension fund, a unit trust or a trust regulated by statute.
The 2005 Act stipulates that before a trustee exercises a power of investment, he/she is under a duty to consider the following:
- the suitability to the trust of the proposed investment;
- the need for diversification of the trust’s investments, in so far as is appropriate to its;
- a trustee shall obtain and consider proper advice about the way in which the power should be exercised;
- when reviewing the investments of the trust, a trustee shall obtain and consider proper advice about whether the investments must be varied; and
- If a trustee reasonably concludes that in all the circumstances it is unnecessary or inappropriate to obtain such advice the trustee need not obtain it.
Appointment of Nominees
At section 94 of the 2005 Act, a new statutory default power has been introduced in order that trustees can now appoint nominees (e.g. an investment manager or solicitor) to exercise their investment powers provided that the use of nominees is not forbidden by the trust deed. The result of this power is that it should help to significantly simplify investment administration and reduce transaction costs.
If a nominee is appointed, they must have the necessary knowledge and expertise, and the appointment must be appropriate to the circumstances of the trust. Any appointment must be made in writing and is revocable. The 2005 Act states that, unless it is reasonably necessary for them to do so, the trustees must not allow the appointment of a substitute, the liability of the nominee to be restricted, or for any conflicts of interest to arise.
Power to Delegate Investment Management Function
Section 94 of the 2005 Act also states that trustees have and have always had the power to delegate their investment management function where a trust deed is silent. Such functions relate to both heritable and moveable investments of the trust estate. The investment management functions include looking after a portfolio and maintaining the records rather than actually deciding what the investments are to be and when they are to change.
The 2005 Act indicates that the trustees should satisfy their common law duties of care by:
- selecting agents with care;
- determining the investment policy;
- setting guidelines; and
- communicating with and monitoring agents.
The ability to delegate the investment management function allows decisions to be made promptly on behalf of trustees by a knowledgeable, specialist manager.
Responding to these Duties
Trustees are now required to produce an Investment Policy Statement which outlines the following with regards to the trust:
- financial profile including a timescale;
- investment policy objectives and powers;
- risk assessment;
- investment performance benchmarks and asset allocations;
- reporting requirements; and
- ethical restrictions.
Conclusion
The 2005 Act has made further investment powers available to trustees. Under these powers, trustees now have more freedom to invest, to appoint nominees and to delegate their investment management function. With this increased investment flexibility, trustees should always consider putting an Investment Policy Statement in place in order to reduce any investment risks.
Morton Fraser’s Third Sector and Private Client teams have considerable experience in the formation of, and provision of ongoing advice to, charitable and non charitable trusts in Scotland. For more information please contact Robin Morton or Fiona Byron.
