The Next Generation of Index-Trackers: Exchange-Traded Funds and the Investment Duties of Fiduciaries
Company and Securities Law Journal, Vol. 18, November 2000
Posted: 7 May 2001
This article explains the structure of Exchange-Traded Funds (ETFs), and describes the proposed Australian ETFs, as well as the ETFs that have been launched in the United States, the UK and Europe, and Asia. The article also considers the key issues under Australian law confronting fund managers, pension trustees and other fiduciaries who are considering investing in ETFs.
Under Australian law, fiduciaries are required to invest the funds entrusted to them in accordance with the "prudent investor rule". However, an allocation of funds to an ETF raises a more fundamental legal issue: has the fiduciary, by investing funds in an ETF, improperly delegated its investment powers and so breached its legal obligation to act personally? This issue arises each time a fiduciary appoints an external manager to invest fund assets, but is particularly acute in the case of ETFs and other managed strategies where the fund assets are committed to a strategy without the ability for the fiduciary to intercede in the strategy.
The law on delegation by fiduciaries in Australia is in an unsatisfactory state. The common law places strict limits on delegation - it is only in cases of "necessity", that a fiduciary can depart from its legal obligation to exercise investment powers personally. This principle has arguably been superseded by the broad statutory powers conferred by the Australian Corporations Law on fiduciaries that are responsible for managed funds. In contrast, despite the introduction of special legislation regulating pension funds, questions remain about the ability of pension trustees to invest pension assets in ETFs and other managed strategies.
Keywords: Exchange-Traded Funds, Managed Funds, Pension Funds, Investment Powers, Fiduciary Duties
JEL Classification: K22, G23
Suggested Citation: Suggested Citation