Amendments to the Trustee Act (Ontario)

Overview of the Changes and Some Practical Considerations for directors of charities^[1] BY:  BRIAN ILER AND TED HYLAND, LAWYERS ILER, CAMPBELL, KLIPPENSTEIN

On July 1, 1999, the Ontario Government substantially revised the powers and duties of some individuals and organizations holding and investing money, or other assets, for others, or for a charitable purpose.

Who is affected?

Not everyone who holds assets for others is affected. The revisions are to a statute called the Trustee Act (the “Act”), and affects only those who hold assets in trust for others called trustees.

Because the law imposes on charities the obligations of trustees for assets held by the charity, these changes apply to all organizations which are charities and do not contain in their incorporating ‑ or other documents setting up the charity ‑ specific rules for investment of the charity’s assets. If specific rules exist, they will govern where they conflict with the Act’s new rules.

As a general rule, directors of charities are considered to be trustees of the assets of a charity, even though the charity itself is clearly trustee of those assets. Accordingly, directors of charities are bound by the obligations set out in the Act ‑ subject, again, to any contrary rule binding on them in the charity’s own incorporating documents.

The Reasons behind the Change

Prior to the amendments, the Act contained a very precise list of investment instruments in which trustees were authorized to invest trust property.  These included government bonds, some publicly‑traded shares, some mortgages, and deposits with financial institutions.

Underlying the former rules was the principle that a trustee’s principal task was to get the best return on investment, but not by placing the money invested at risk.  This conservative approach conflicts with current mainstream investment wisdom, which encourages a broader and riskier approach, to maximize return on investment.

What Type of Investments are Now Allowed?

The old list of permitted investments has been abolished.  Now, a charity may invest trust property in any form of investment in which a prudent investor would invest.  What does that mean?

The Act provides some help, but not a lot: it says that, “in investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.”

This is the conventional legal statement of the duty or responsibility of a trustee.  In fact, by deleting the “legal list”, the law is placing back on to directors of charities, in relation to investments, the duty to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.  They can no longer rely on the “legal list” to avoid the responsibility to act prudently in making investment decisions.

But what does a prudent investor do?

First, except for investments placed in mutual funds (what constitutes an acceptable mutual fund is not defined in the Act), directors may not delegate their duty to make decisions on investments to others

Second, directors must consider, at a minimum, these seven factors set out in the Act:

•           general economic conditions;

•           the possible effect of inflation or deflation on the investment;

•           the expected tax consequences of investment decisions or strategies;

•           the role that each investment or course of action plays within the overall trust portfolio;

•           the expected total return from income and the appreciation of capital;

•           the needs for liquidity, regularity of income and preservation or appreciation of capital; and

•           an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Third, if there are other factors that are relevant in the circumstances or that are required by the incorporating documents of the charity, they must be considered.

Fourth, there are factors which the law prohibits directors from considering - social or political issues generally, although where two proposed investments are equally financially beneficial to a charity, and one is politically unpalatable, the directors may choose the other.

Fifth, although directors cannot delegate their investment powers to professional investment advisors, the Act does specifically permit them to consult such advisors in relation to the investment of trust property.  Moreover, there is a provision in the amendments that saves them from liability for breach of trust as a result of relying on the advice, if a prudent investor would do so under similar circumstances.

Directors’ Liability: What if the Investments Lose Money?

According to the Act, the standard that directors must adhere to is mandatory and “objective”.  This means that members of boards of directors of charities, irrespective of their background and experience in investing, will be held to the same standard.  Someone with little or no background will not be held to a lower standard than someone with more experience.

However, the Act states that a director will not be liable for losses from investments if the investments were made according to a plan consisting of reasonable assessments of risk and return that a prudent investor would make under similar circumstances.

In the event that a court does find a director in breach of trust as a result of loss to the charity arising from the investment of trust property, the court may take into account the overall performance of the investments in assessing the damages payable by the director.  It is important to note that this provision applies only to the assessment of damages and does not shield the director from scrutiny by a court of every investment decision, and from being held personally liable for bad decisions.

What Does it All Mean?

There are a number of immediately practical implications for boards of directors of charities that flow from the changes.

First, the board of directors of a charity will be responsible for the investment decisions, and each director will be personally liable for any losses suffered by the charity as a result of investment decisions that did not demonstrate the required standard of care, diligence and judgment of prudent investor.

The focus is now on each director to show that he or she acted as a prudent investor in the circumstances.

Second, because of the requirement to diversify (as the Act states, “to the extent appropriate to the requirements of the trust and general economic conditions”), the board of directors should consider whether it is appropriate to invest in only one type of asset.

Finally, the amendments make it perfectly clear that acting as a director of a charity holding substantial assets is a serious responsibility, with consequences for failure to meet the minimum duties placed on directors.  Prior to assuming such obligations, an individual should consider whether the risk is one which she/he wishes to assume, and whether directors’ liability insurance is available to address that risk.

However, to make this decision even more difficult, the Ontario Public Guardian and Trustee, an official of the Ontario government, takes the position that even spending money on premiums for directors’ liability insurance may be a breach of the duties of directors of charities in certain circumstances!

A charity that does not have a policy for investing its accumulated funds would do well to establish one.  Doing so will assist the board in fulfilling its duties.  The policy should contain the criteria contained in the Act, as well as any other investment criteria contained in the charity’s incorporating or other constitutional documents.  Having a policy will not, alone, be sufficient, however.  In order to discharge its duties, the board must assess each investment decision in light of the criteria set out in the Act and must ensure that it develops a plan or strategy for investing the charity’s property.