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New Guidelines for Investment of Pre-Need Trust Funds

(Article published in the Oct. 31, 2007 issue of Manila Standard Today)     

Tomorrow, a new era dawns for the companies in the pre-need industry and their clients.  SEC Memorandum Circular No. 4, series of 2007, known as the “Guidelines for the Management of the Trust Fund of Pre-Need Corporations” takes effect.

 There is a meaning to the fact that first day of the new guidelines effectivity is November 01. Not that it is the day when the Filipino people go to the cemetery thereby suggesting where the industry is headed.  Rather that it the day when we celebrate the Feast of All the Saints thereby  stressing that the aim of the circular is make sure the service providers act no less than saintly in order to make their clientele happy.

 The guidelines approved by the Securities and Exchange Commission (SEC) on 27 September 2007 cover ten (10) significant matters of concern, but space constraints limit this present discussion to only those that relate to the parameters on the investment of the trust funds.  The balance I will take up in later issues. 

 By far the most significant, in my view, is the set of rules that determine the relationship between the pre-need company and the trustee of the funds required by law to be set up to answer for the future needs of the plan holders.


Section 4 requires a pre-need company to set up one trust fund for each type of plan with a trustee who is authorized to perform trust and other functions by the Bangko Sentral ng Pilipinas (BSP). This ensures that the same business operation will be under the scrutiny of two of the most respected regulators in the country.  The possibility of turf conflicts, which used to be a valid argument against double regulatory oversight, no longer stands as a practical objection.  The seamless cooperation of the BSP, the SEC, and the Insurance Commission at the Anti-Money Laundering Council demonstrates that coordination can be achieved and is being achieved among various regulators.

 The legal obligations pertaining to the parties in the trust are required to be spelled out by Section 5 which removes the once negotiation-driven relation to principles-based requirements.  Thus, the trust agreement, which is required to be approved by the SEC prior to execution, must explicitly state, per Subsection 5(a), that the trust fund is “under the management and control of the Trustee.”

 In one stroke was thus outlawed the trust agreements which, in the past, vested investment discretion on the trustee, but, “subject to specific instructions from the trustor”, i.e. the pre-need company.  That colatilla used to used to be the clause that enabled a trustee to turn a blind eye to some investments which it otherwise would not make on the defense that the trust relation with the pre-need client is “directional,” thus relieving the trustee of liability for investments directed by clients.

 Vesting the control of the trust fund in trustee, however, does not mean giving the trustee untrammeled investment discretion.  Section 6 provides the guiding principle to be followed in investing pre-need trust funds, i.e. that the “Trust Fund, inclusive of earnings, shall be administered and managed by the Trustee for the protection of the Planholders.”  Consequently, “the Trustee shall exercise the skill, care and diligence that a prudent man acting in the same capacity would give under the circumstances, guided by sound investment principles, and taking into consideration, among other things, the following: (a) preservation of capital; (b) risk diversification; and (c) growth of investment portfolio.”

 That standard of care is not the same as the Prudent Man Rule which common law imposes on trustee nor which Section 80 of the General Banking Law imposes on licensed trustees in general.  It is not just the prudence of the man in the street, or even the prudence of a good father of the family in civil law.  It is even more stringent than the standard for an institutional trustee who is expected to “administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of alike character and with similar aims.”

 With its specification of the investment objectives to be achieved, it is more like the Prudent Expert Rule that modern legislation demands of trustees of funds held for the unsophisticated public. 

 An experts’ knowledge of investments is indeed needed since Subsection 5(b) forces the parties to the trust agreement to think deliberately on the investment powers of the trustee.  Time was when, as in personal trusts, pre-need trust investments powers were made as flexible and as wide-ranging as possible, the only constraint being primarily the Prudent Man Rule found in the above quoted portion of Section 80 of the General Banking Law.  Subsection 5(b) of the guidelines makes the parties refer to Section 7 which in subsection 7.1 provides a menu of where the “Trustees are allowed to invest the Trust Fund.”

 The menu is, if I am not mistaken, so far the longest of what is usually called in trust law literature as “legal lists”, or the list of investments a trustee may make.  The purpose of the detailed listing is to operationalize the second purpose of the guidelines which is “to provide an updated and more flexible choice of investments for the Trust Fund subject to rules and regulations that would ensure prudent investment management and protection of the interests of the Planholders.” 

 Included in that list are the traditionals, e.g. government indebtedness (on the legal fiction that the government is the most creditworthy borrower in the country), corporate bonds issued by credit rated “A” domestic corporations, shares of stock of listed companies which are “financially stable, actively traded, possess good track record of growth and have declared dividends for the past three (3) years,”; secured loans, etc. 

 Any doubt that investment expertise is needed by the trustee is swept away by the new comers in the legal list, such as “senior, subordinated or hybrid debt securities issued by banks other than the Trustee’s own bank proper, classified under Tier 1 or Tier 2 in its capital structure…”; collective investment schemes registered with the SEC, such as mutual funds, which must have “a track record of performance at par with or above the median performance of pooled funds in the same category…” and even “ offshore mutual funds with positive fund performance as against their benchmark index for the past three (3) consecutive years.”

 To the chagrin of the trust department of many banks, the Unitized Investment Trust Funds (UITFs), which is the collective investment schemes set up by banks for their fiduciary clients, are not included in the permissible collective schemes.  We will have more to say on that exclusion.  But suffice for now to state that the de facto exclusion of UITFs from the legal list of pre-need trust funds is, in my view, merely temporary.

 I envision the day when the trust managers will, on account of the forced interaction they will have to have with the SEC on account of these guidelines, find themselves comfortably dealing with that regulator and thus work out a modus vivendi with respect to the UITF issue as a whole.  For now, I submit that it is a small cost to pay for the certitude and transparency heralded by the SEC’s promulgation of Memorandum Circular No. 4.