A Trustee's Duties In Volatile Markets

• Published date: 29 July 2020
• Law Firm: Miller Thomson LLP
• Author: Mr Dwight D. Dee, Pia Hundal, Thomas Ghag and Darren Lund

Introduction

Market volatility arising from the COVID-19 pandemic is unlike anything experienced in recent history. Two of the largest single day drops in the history of the Dow Jones Industrial Average occurred in March 2020. Later that same month, the S&P 500 Index experienced an 18% surge over a period of three days; and since March, stock indexes in both Canada and the U.S. have recovered significantly from the lows brought on by the pandemic. With this level of volatility in the markets, investors are forced to base their decisions on uncertain and rapidly evolving market conditions.

Trustees that have trust property invested in the markets have additional considerations that can make their roles particularly challenging in these times. In addition to following the terms of the trust deed or indenture, a trustee must continue to act in the best interests of beneficiaries and to comply with the trust legislation in their province. The purpose of this article is to consider the general duties imposed on trustees with an emphasis on duties relating to investing trust property and the possible consequences of failing to comply with such duties. To illustrate, we will refer to trustee legislation and case law from both B.C. and Ontario.

A Reminder of A Trustee's General Duties

The law imposes a number of general duties upon trustees, including the following:

1. To act in the best interests of the beneficiaries;
2. To act honestly and with the level of skill and prudence which would be expected of a reasonable person administering their own affairs;
3. Not to delegate their office to others (with some exceptions); and
4. Not to profit personally from their dealings with trust property.

In addition to the duties that the law imposes on trustees, the terms of the trust instrument must be followed by the trustees.

With respect to investments, trustees are generally expected to exercise the care, skill, diligence and judgment that a prudent investor would exercise when making investments. This does not mean, however, that a trustee is authorized to invest in a manner inconsistent with the trust instrument. To illustrate how this standard is applied, it is helpful to examine specific legislation and case law.

Prudent Investor Standard - British Columbia

Trustee Act, RSBC 1996, c. 464 (the "B.C. Act")

The following is a brief overview of some of the most important provisions in the B.C. Act relating to investments made by trustees.

Pursuant to section 15.1 of the B.C. Act, a trustee may invest property in any form or security that a prudent investor might invest, so long as this is not done in a manner inconsistent with the trust.

Section 15.2 of the B.C. Act sets out the standard of care for trustees when investing trust property:

Standard of care

15.2 In investing trust property, a trustee must exercise the care, skill, diligence and judgment...