Trustees' duties when investing: standard investment criteria and proper advice (TA 2000)
Femi Adeyemi and Gwen Price are unpaid lay trustees of a £600,000 family trust in England. The trust deed contains no investment clause and does not exclude any statutory duty. They plan to invest the whole fund in the shares of a single technology company that was recommended in a friend's investment newsletter. They do not intend to take any advice, because they consider the opportunity too good to miss.
Which of the following best describes the trustees' duties?
Choose one answer to see the reasoning.
Worked answer
Correct answer B: They must have regard to suitability and diversification, and obtain and consider proper advice unless they reasonably conclude it is unnecessary or inappropriate.
THE RULE TO REMEMBER
Trustees investing must consider suitability and diversification and must obtain and consider proper advice, unless they reasonably conclude it is unnecessary or inappropriate (TA 2000 ss.4 and 5).
Trustees' duties when investing: standard investment criteria and proper advice (TA 2000)
Under section 3 of the Trustee Act 2000 a trustee may make any kind of investment he could make if absolutely entitled to the trust assets, but this is subject to the rest of Part II. Section 4 requires a trustee exercising any power of investment to have regard to the standard investment criteria. These are the suitability to the trust of investments of that kind and of the particular investment, and the need for diversification so far as appropriate to the trust's circumstances. Section 5 requires a trustee, before exercising any power of investment, to obtain and consider proper advice about how the power should be exercised in the light of those criteria. The only exception is where the trustee reasonably concludes that in all the circumstances advice is unnecessary or inappropriate. Putting a £600,000 fund into one company's shares on the strength of a newsletter ignores diversification. Their reason for skipping advice is not a reasonable conclusion that it is unnecessary. The statutory duty of care under section 1 also applies to these investment functions.
Why A is wrong: The general power under s.3 is expressly subject to the duties in ss.4 and 5 and to the statutory duty of care.
Why C is wrong: Restriction to narrow-range investments reflects the repealed regime; the 2000 Act gives a general power of investment.
Why D is wrong: The Act requires regard to the criteria and to advice, not beneficiary consent.
Why E is wrong: Section 5 applies to every trustee; expertise may at most support a reasonable conclusion that advice is unnecessary.
A little more practice done.
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