Delegation of investment decision-making still an uncertain business

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Most Ontario charities are aware - or should be - that they should address the potential for liability arising when their board of directors continues to delegate investment decision making to a discretionary investment fund manager.

While a court might conceivably be persuaded that there is or should be authority at common law to delegate investment decision making, the Attorney General of Ontario has made a deliberate decision in passing Bill 25 not to provide a statutory right to delegate investment decision making, presumably upon the government's understanding of the common law. This position was evident from the comments contained in a recent letter the Attorney General sent to the Canadian Bankers Association stating:

"As you are aware, the government is committed to- continuing its process of eliminating red tape. However, the recent amendments to the Trustee Act did not include the ability of trustees to delegate investment decisions to others, as it was our view that this step requires extensive policy review. Since the Act is a statute of general application to all trustees, it raises complex issues for accountability of trustees, the regulations of investment professionals and the impact on beneficiaries.

"I have noted your comments and appreciate your concerns. I will take these into account when developing our policy agenda."

Common law prohibition against delegation of investment decision-making?

The Attorney General's position on the delegation issue is also evident from the wording of Bill 25. In providing for the statutory right to invest in mutual funds it states that such statutory authority is given "notwithstanding any rule of law to the contrary". This is arguably a statutory recognition, rightly or wrongly, that there is a common law prohibition against delegation of investment decision making by trustees.

From a practical standpoint, however, since many large charities, as well as some smaller charities regularly retain investment fund managers to operate discretionary investment accounts, the rule against delegation of investment decision making is honoured more in the breach. As a result, charities that have decided to utilize discretionary investment accounts, notwithstanding the lack of statutory power to delegate investment decision making, should adopt a carefully worded investment policy to provide limits on the choice of investments that the investment fund manager can invest in, together with other reasonable terms of reference. This would support the argument that the investment fund manager is more an agent of the charity than an independent investment dealer who had received an unrestricted delegation of investment decision making from the board of directors of the charity.

Public Guardian taking a practical approach, but ...

The practicality of this approach was recognized by the Public Guardian and Trustee of Ontario in a letter sent last fall to the Charity and Not-For-Profit Law Section of the Canadian Bar Association - Ontario:

"...Trustees of charities have an overriding duty to act prudently and reasonably. Each charity should have an investment plan in place... However, the charity must maintain authority, and responsibility, for the overall investment plan and must ensure that the investment plan is followed and revised as necessary...

"The Public Guardian and Trustee agrees that in many cases it is prudent for charities to seek the advice of an investment advisor. The charity may even choose, if appropriate, to have day-to-day investment decisions made by that investment advisor. For example, if the charity has planned to place a certain proportion of its investments in Canadian bank stocks, the investment manager may chose which particular stocks to buy...

"Clearly it will not be enough for a charity only to have a plan in place. The way in which the advisor is chosen and plan created, carried out and monitored will also be important...

"... the legislature in amending the Trustee Act, did not address the power of trustees to delegate with the exception of clarifying that investment in mutual funds in not prohibited. The extent of a trustee's power to delegate investment decisions is a matter for the courts to decide. While I have provided some guidelines on the view of the Public Guardian and Trustee, I cannot state with any certainty how the courts will view this matter. If the case law changes, or new legislation affecting delegation of investment decisions comes into effect, it will be necessary to revisit the issue..."

While this letter does not sanction delegation of investment decision making, it does indicate that if a carefully considered investment policy is developed and implemented, it is unlikely that the Public Guardian and Trustee of Ontario would take issue with a charity retaining an investment fund manager pursuant to the terms of a prudent investment policy.

Notwithstanding the practical approach taken by the Public Guardian and Trustee, given the position taken by the Attorney General of Ontario as described earlier, it would appear that amending legislation will still need to be sought to provide directors and trustees of charitable funds with clear statutory authority to delegate investment decision making in order to overcome the uncertainty that has resulted from Bill 25.

Terry Carter is a partner in Wardlaw, Mullin, Carter, Thwaites & Ward, 235 Broadway, P.O. Box 67, Orangeville, Ontario, L9W 2Z5. Telephone: (519) 941-1760, Fax:(519) 941-3688. E-Mail - tcarter@wardlaw.on.ca, Web: www.wardlaw.on.ca. For more information contact Terry Carter, David G. Thwaites, Patricia L. Sproule Ward or Mervyn White.

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