Prohibition to create trusts by unilateral act

By means of General Resolution No 447/03, published in the Official Gazette on September 3, 2003 (the “Resolution”), the ‘Comisión Nacional de Valores’ (“CNV”) has amended section 3 of chapter XV of its Rules (text as reinstated), establishing the prohibition to create new financial trusts where a single person acts both as trustee and beneficiary.

Thus, the new wording of the relevant paragraph of such section 3 is as follows: “It shall not be permitted to create a trust by means of an unilateral act, i.e. in those cases in which a single person acts both as settlor and trustee, nor a single person shall be entitled to act both as trustee and beneficiary”.

With respect to trusts currently existing, section 3 sets out that: “Trusts currently existing and with certificates of participation and/or debt securities already issued, shall be allowed to continue until maturity of the respective terms for which they have been authorized in each case”.

As indicated in the Resolution recitals, the same has been issued by the CNV by exercising the powers granted to it by section 19 of Law No 24,441 and sections 6 and 7 of Law No 17,811.

Sections 6 and 7 of Law No 17,811 grant the CNV, among other things, the power to authorize the public offer of securities and to issue rules in that connection, while section 19 of Law No 24,441 grants the CNV the power to issue regulations regarding financial trusts.

That is why the Resolution refers exclusively to financial trusts, although the grounds developed in the recitals could be applicable to other type of trusts as well.

As per the grounds of the Resolution it is established that the contractual nature of the trust requires the participation of different persons, and that the appointment of the beneficiary as trustee could generate a conflict of interest which could, in turn, jeopardize the impartial and objective performance of the trustee’s fiduciary duties.

It is also established that no person should be entitled to act both as trustee and beneficiary as a consequence of the trustee’s duty of loyalty, which prohibits the interest of the trustee to prevail over that of the beneficiary.

Additionally, it is pointed out that the above-mentioned conclusion is also based on the fact that the trust is a contract mainly based on confidence.

As indicated above, the Resolution is exclusively applicable to financial trusts. Notwithstanding, the discussion regarding whether a single person is entitled to act both as trustee and beneficiary has also arisen in connection with other type of trusts (different from the financial trust) and several opinions have been expressed in that respect.

In principle regarding the particular case of guaranty trusts, the prevailing opinion has been to allow a single person to act both as trustee and beneficiary under certain circumstances.