OPERATIONAL GUIDANCE

TRUSTEE ACT 2000

POWER TO EMPLOY NOMINEES AND CUSTODIANS

OG 86 B4 - 23 November 2001

Purpose: This guidance looks at the powers and terms by which nominees and custodians may be appointed and who is allowed to act.
Please note: throughout this OG series, "the Act" refers to the Trustee Act 2000, not the Charities Act 1993.

Divisional responsibility

For action:

Charity Support Division
Investigation Division

For information:

All operational divisions

Contents

1. What are nominees and custodians?
2. Why are they needed?
3. Powers to appoint nominees and custodians
4. Persons who may be appointed as nominees or custodians
5. Terms of appointment of nominees and custodians

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. What are nominees and custodians?

1.1 Nominees
1.2 Property to be held on trust
1.3 Custodians

1.1 Nominees

"Nominee" is an expression which is normally used to describe someone who holds title to investments as a "bare trustee", on a valid trust for one or more other persons. Thus, a person may be registered as the owner of certain shares in a company, but may in fact hold them as nominee for a charitable trust. Here, the trust has a proprietary interest in the property held by the nominee on its behalf. But the expression "nominee" is also sometimes used to describe someone who has no more than a contractual liability to account for the value of the investments which they hold on behalf of the client trust.

A "bare trustee" means someone who is the legal owner of the trust property, but has no personal power to manage that property otherwise than in accordance with the lawful directions of the third party on whose behalf it holds the property, eg, the trustees of the charity. The charity trustees remain responsible for the management of the property.

1.2 Property to be held on effective trust by nominee

The Commission's statutory guidance under section 19(4) of the Trustee Act 2000 contemplates that, save in exceptional circumstances, charity trustees should only appoint a nominee in circumstances where the nominee will hold the title to investments on a bare trust for the charity. The charity does not have to be the exclusive beneficiary of the trust; it can be a joint beneficiary of the trust with other clients of the nominee. But there should normally be an effective trust. Charities should not normally appoint a nominee on the basis that they have no proprietary interest in the investments which the nominee holds on their behalf. They would then be left with purely contractual rights against the nominee, which would put them at a disadvantage in the event of the nominee's insolvency.

If the nominee does hold investments on a valid trust for the charity, those investments are not available to the creditors of the nominee if the nominee becomes insolvent - the charity's interests are therefore more secure. Our normal policy is that a nominee should hold property on a valid trust for the charity.

There are some doubts about the validity of a trust declared over a specified number of shares which are part of a larger holding of shares held by the nominee (the remaining part only being intended to be in the beneficial ownership of the nominee). Trustees should consider the need to take legal advice before authorising a nominee to hold investments in which they are interested as part of a larger holding in which the nominee has a beneficial interest. Further information can be found in CC42.

1.3 Custodians

A custodian is defined as a person who undertakes the safe custody of some or all of the assets of the trust or of any documents or records concerning the assets. Appointment of custodians in this context should not be confused with appointment of custodian trustees under the terms of the Public Trustee Act 1906, which is dealt with separately in OG 39 even though "custodian trustee" has the same meaning in both the Public Trustee Act 1906 and in the Trustee Act 2000.

2. Why are they needed?

2.1 Benefits of using nominees and custodians
2.2 Disadvantages of using a nominee

2.1 Benefits of using nominees and custodians

Nominees and custodians can be used in the administration of a charitable trust for the following purposes:

• to eliminate the need to transfer the title of trust property when changes to the trustee body occur, or the subsequent problems that arise where such changes occur but the transfer of title to property does not take place. (This problem will not arise where the trustees are already incorporated, or choose to be incorporated, under the Charitable Trustee Incorporation Act (now repealed) or under section 50 of the Charities Act 1993);

• to facilitate the transfer of trust property into, and out of, the trust. For example, the processes of buying and selling shares may be facilitated if the investments are held in the name of a nominee; and

• to reduce the risk of trust documents showing title to property from being lost.

The Trustee Act facilitates the use of nominees and custodians but with safeguards on their selection and use.

2.2 Disadvantages of using a nominee

Safeguards are built into the Act and are also contained in our own guidance - CC42, provided under section 19(4) of the Act, to ensure that the appointment of a nominee will not create any material lessening of the charity's security in relation to its investments.

However, charities should bear in mind that if they use a nominee they may, in practice, lose some of the benefits which they would have enjoyed had the charity or its trustees been registered as members of the company in which shares are held. Examples of this might be:

• the right to receive reports and accounts from the company;

• the ability to vote at company AGMs or other general meetings; and

• the loss of membership benefits because the nominee is the actual member of the company and, on grounds of cost, may not be willing to take the steps necessary to enable the charity trustees to enjoy them. (This may well be an important factor where charities need to consider their ethical stance on issues of public controversy.)

In some instances nominees are willing to pass on company reports and accounts and vote shares as the charity trustees, as beneficial owners of the shares, wish. However, it is likely that the administrative costs of doing this will be passed on to the charity. Charity trustees will therefore need to judge whether or not there is likely to be a problem for their organisation.

3. Powers to appoint nominees and custodians

3.1 Use of existing powers
3.2 The new powers

3.1 Use of existing powers

The law requires all trust property to be held collectively by the trustees, in the absence of explicit authority to do otherwise. The new statutory default powers to appoint nominees and custodians are in addition to any constitutional powers, to any existing statutory powers, and to any powers provided by the Court or the Commission, which enable trustees to allow trust property to be held otherwise than by themselves collectively. We are likely to find constitutional powers being used by unincorporated associations, such as village halls, where the governing document might stipulate that property is to be held in the names of two or more individuals or by a corporate body as nominees. It is unlikely that they would wish to use the Trustee Act powers, which, so far as it is relevant to the present discussion, only enable the appointment of professional nominees who would expect to be paid for their services.

3.2 The new powers

The new powers can be found at sections 16 and 17 of the Act, and apply to all charitable trusts except as indicated below. In appointing nominees and custodians trustees are subject to the statutory duty of care, see OG 86 B6 subject to any contrary indication in a trust instrument.

These powers will not apply to:

• trusts established by schemes made under sections 24 and 25 of the Charities Act 1993 (and their statutory predecessors), which are common investment funds and common deposit funds, with the exception of pooling scheme CIFs established under section 24 of the 1993 Act (and its statutory predecessor). (See OG 86 B1 section 3 for a further explanation of a pooling scheme.);

• trusts which have a custodian trustee - the statutory duties of a custodian trustee are not compatible with the appointment of a separate person as nominee or custodian;

• trusts where the specific assets are vested in the Official Custodian for Charities - for the same reason as applies to trusts with a custodian trustee. (However, trustees can appoint nominees and custodians for other assets not vested in the OCC);

• trusts where the governing document provides to the contrary.

As indicated above, the new statutory default powers are in addition to any existing powers. Constitutional powers allowing the use of nominees are very common, particularly in the case of charities whose charity trustees are expected to change frequently, like local community groups. These powers will continue to be used; they are usually less restrictive as regards the identity of who may be appointed than are the new statutory powers - see section 4. But the statutory duty of care will still apply when these constitutional powers are exercised unless there is a contrary indication in the governing instrument.

4. Persons who may be appointed as nominees or custodians

4.1 Conditions governing who may act
4.2 Charity Commission guidance
4.3 Persons who may act

4.1 Conditions governing who may act

• carry on a business which consists of or includes acting as a nominee or custodian; or

• are a body corporate recognised under s. 9 of the Administration of Justice Act 1985 (a provision which covers solicitors' nominee companies); or

• are a body corporate which is controlled by the trustees.

• by means of holding of shares or the possession of voting powers in or in relation to that or any other body corporate; or

• by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate;

4.2 Charity Commission guidance

The Act recognises that charities have particular concerns about the security of their property which may not apply to non-charitable trusts. Charities operate in the public interest, and without identifiable beneficiaries to look after their own interests in the trust.

Section 19 (4) envisages that the Commission will give its own guidance on the appointment of nominees and custodians, and requires trustees (other than trustees of exempt charities) to follow any guidance the Commission does give. The guidance we have produced under section 19(4) is contained in leaflet CC42 available to trustees on our web site.

In addition to the requirements of the Act, our own guidance;

• emphasises the importance of ensuring that trust assets held by a nominee/custodian do, in fact, still belong to the charity and that the charity can prove this legally, if necessary;

• draws attention to the particular risks of appointing nominees/custodians who are unregulated or whose business has no connection with the UK;

• emphasises the need for charity trustees to balance the advantages and disadvantages of appointing as nominees and custodians, persons who are independent of each other and of any discretionary investment manager; and

• draws attention to the desirability of ensuring periodic reports from the nominee/custodian to the trustees on the controls put in place to safeguard the charity's property.

4.3 Persons who may act

• one of their own number, if that one is a trust corporation - but a sole trustee cannot in any case appoint themselves; or

• two (or more) of their own number, if they are to act as joint nominees or custodians.

Of course any person appointed must satisfy the conditions in section 4.1 above. The trustees may also appoint as a nominee a person who is appointed as their custodian or is authorised to carry out functions as their agent. Likewise, they may appoint as a custodian a person who is appointed as their nominee or is authorised to carry out functions as their agent.

There is no objection to the power to appoint a nominee/custodian being delegated by the charity trustees to their discretionary investment manager, but the trustees will still be subject to the statutory supervisory responsibilities in relation to the nominee/custodian selected by the discretionary investment manager on their behalf.

5. Terms of appointment of nominees and custodians

Section 20 allows trustees to decide the terms, including any remuneration, on which their nominees and custodians are appointed. However, it is important to remember that where a trustee is appointed as nominee or custodian they cannot be paid for the work that they do unless there is an explicit authority, in the governing document or from the Commission or the Court, to receive such remuneration.

• permit the nominee or custodian to appoint a substitute;

• restrict the liability of the nominee or custodian or their substitute to the trustees or any beneficiary;

• permit the nominee or custodian to act in circumstances capable of giving rise to a conflict of interests.

In practice, trustees will probably find that most nominees or custodians will decline to work for the charity unless the trustees agree to some or all of these terms. If the trustees have to agree to these terms in order to secure the services of their preferred nominee/custodian, we will accept that this test of reasonable necessity in relation to the appointment will have been met. This is provided that the trustees have a good reason for selecting that particular nominee/custodian, rather than some other nominee/custodian, who would not have insisted on the inclusion of any of these terms in their agreement with the trustees.

The following words and phrases are defined in the Glossary of Terms:

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trustees
custodian
custodian trustee

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