World Burning Down? Remember the Prudent Investor Rule
The past two years saw Wall Street virtually melt down. The global economy coughed and sputtered, trade was disrupted, general panic ensued. Now it appears that a group of significant countries may default on their respective debts, starting with Greece, then Spain, Italy, Ireland, Portugal. The risk appears to be that the financial structures of these countries will collapse like dominos: first their creditworthiness ratings get downgraded, one country after the other, raising the cost of borrowing to finance debt payments to the point where they default, and one country’s collapse will trigger a similar process in the next.
This could be spreading though the global financial system like "ebola", causing a deeper crisis. Britain may be hit. Asia is already seeing market fluctuations. Not to be overly dramatic, but the National Post headline "Greek debt crisis sweeps all before it" pretty much describes the news chatter. Canada has already been affected.
This may have professional relevance for the estates and trusts bar. Events like this often seem to involve rapid exchange rate fluctuations. It may be a good time to ensure that trustee clients, particularly those holding assets denominated in foreign currency, have been advised or reminded of their obligations to invest trust property in accordance with section 27 of the Trustee Act (the Prudent Investor Rule), and that exchange rate fluctuations could be seen by a court as being relevant to their management decisions. A court might require a trustee to indemnify the beneficiaries to the extent of a loss due to exchange rate fluctuations, if the court finds the standard of care defined in section 27 has not been met.
Of course, mere lawyers can neither advise (or even calculate) the prudent level of exposure, nor can we predict fluctuations. Anyone who can predict the exchange rate fluctuations would not need to practice law. But we can point out the Prudent Investor Rule and draw attention to the potential risks that exchange rate fluctuations pose, so clients can decide for themselves.
Christopher M.B Graham – Click here to learn more about Chris Graham.