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

See all articles by Paul Ali

Paul Ali

University of Melbourne - Law School

Martin Gold

Sydney Business School, University of Wollongong Australia

Abstract

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 This principle has arguably been superseded by the broad statutory powers conferred by the Australian Corporations Law on fiduciaries that are responsible for managed funds.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

Ali, Paul and Gold, Martin, The Next Generation of Index-Trackers: Exchange-Traded Funds and the Investment Duties of Fiduciaries. Company and Securities Law Journal, Vol. 18, November 2000. Available at SSRN: https://ssrn.com/abstract=267312

Paul Ali (Contact Author)

University of Melbourne - Law School ( email )

University Square
185 Pelham Street, Carlton
Victoria, Victoria 3010
Australia
+61 3 8344 1088 (Phone)
+61 3 8344 5285 (Fax)

HOME PAGE: http://www.law.unimelb.edu.au

Martin Gold

Sydney Business School, University of Wollongong Australia ( email )

Level 8, Gateway Building
I Macquarie Place
Sydney, New South Wales 2000
Australia
+61 2 9266 1300 (Phone)

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