A wise man once said, “To be trusted is a greater compliment than to be loved.” It is true in life and probably most true in commercial law.
“To put our hard-earned money in established institutions’ trust departments is all worth our faith in the financial system.
Engaging in the trust business fundamentally means holding property for the use, benefit or on behalf of others. In this fiduciary relationship, there are three parties, namely, the trustor who establishes the trust, the trustee with whom the confidence is reposed and the beneficiary with whom the benefit is ultimately conferred.
It is never too late to consider entering into trust agreements as our law has placed enough safeguards for the protection of the public. In fact, from the requirements of trust operations alone, hole-in-the-wall trust entities are essentially not feasible.
For instance, before a stock corporation may become a trust entity, it must be sanctioned by the Monetary Board (MB) to engage in the trust business. Pursuant to this, the Securities and Exchange Commission cannot register the articles of incorporation or by-laws or any amendment thereto of any trust entity unless accompanied by a certificate of authority from the Bangko Sentral ng Pilipinas (BSP). In addition, the minimum capitalization requirement for a trust corporation should not be less than P100 million in paid-in capital upon incorporation, which must reach P300 million after five years in operations. This proves to be a barrier against entry of mom-and-pop trust entities. Further, in the case of domestic and foreign banks, higher capitalization is required, in accordance with the schedule prescribed by the MB.
Moreover, the BSP requires a trust entity to make a deposit of the faithful performance of trust duties in an amount prescribed by the MB.
Under Section X403 of the Manual of Regulations for Banks (MoRB), the specific powers of a trust entity may be classified into two. The first is called “Trust Business,” which refers to any activity resulting from a trustor-trustee relationship (trusteeship) involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of others called beneficiaries and the rest may be lumped into other fiduciary business. The second may be lumped into “other fiduciary activities,” which refer to any activity of a trust-licensed bank resulting from a contract or agreement whereby the bank binds itself to render services or to act in a representative capacity, such as in an agency, guardianship, administratorship of wills, properties and estates, executorship, receivership and other similar services which do not create or result in a trusteeship. Under the former, a property relationship is created between the parties while in the latter, the trust entity renders services to the counterparty merely in a representative capacity.
The prudent man rule
Due to the utmost confidence and size of funds involved in trust operations, our banking law only allows trust managers to handle their accounts as a prudent man would. Essentially, the rule of the prudent person states that in case the governing trust instrument is not explicit on the types of investment allowed, the fiduciary is limited to investing trust assets like a prudent man investing his own property to a venture. Rationality and caution therefore are implied. This is the way to restrict the fiduciary’s discretion in order to preserve one’s capital.
The BSP is keen in ensuring that our financial system remains resilient. Hence, under the MoRB, it is expected of every trust department of banks to uphold the cardinal principles of prudent administration, undivided loyalty and utmost care, non-delegation of responsibilities, preservation and protection of property and keeping and rendering accounts.
The rule on self-dealing
Self-dealing implies conflict of interest that could result in either poor governance of the trust or creating an undue competitive advantage to officers and directors. Self-dealing transactions may include transactions, such as an investment in related interests of the trust entity or purchase of securities from or through an affiliate. To guard against these evils, the only instance a trustee may engage in a self-dealing transaction is only upon full disclosure of the relationship of the trustee and its counterparty to the trustor or beneficiary of the trust and the trustor must give his specific authority in writing. Both of these must be done prior to the transaction. To operationalize this safeguard, a trust entity is mandated to install policies to identify looming conflicts of interest and create procedures to deal with such as soon as it comes into play.
With these measures in place, it is safe to say that to put our hard-earned money in established institutions’ trust departments is all worth our faith in the financial system. For as we all know, it is too big to fail.