NUTS & BOLTS: RWA, Trustees & Attestors

Trustee Flavours

I would like to try and clarify what a trustee can do for Maker - and very much what they can’t reasonably do - because I fear there might be some confusion about this in the community.

I think where most get exposed to the term and role of trustee is in respect of universities, schools, charities, museums, pension funds and investment trusts. In these cases there generally is a Board of Trustees (“BOT”) that is somewhat equivalent to a Board of Directors.

These Trustee roles come with serious fiduciary responsibilities and duties - as with a limited company’s Board of Directors. Usually the appointed parties for these roles are, as you can imagine, appropriately experienced and skilled individuals.

There is also another kind of Trustees and that is the kind of Professional Corporate Trustee (“PCT”) services provided by professional service companies and law firms - and sometimes private banks/wealth managers. They provide the service of acting as a trustee for a trust/foundation/whatnot.

There is a very big practical difference between these two kinds of trustee “types” (BOT vs PCT)

The above-mentioned BOT is to use best judgement to provide direction and leadership for the underlying charity/fund/whatnot and accept substantive fiduciary responsibilities - just like you would see on a traditional board of directors.

The PCT instead operates under a very clear, almost mechanical, “letter of instruction” from the beneficiaries of the trust to execute certain tasks on their behalf, such as performing audits, filing accounts, setting up bank accounts and performing transactions under a very clear scheme of go/no-go conditions etc (just for completeness: the corporate trustee would in fact not do these tasks themselves, but would instruct an approved service company to undertake them).

The PCT will NOT want to make any value judgments nor make any decisions on behalf of the trust - it simply cannot accept the accompanying liabilities of doing so. It will just execute according to this clear letter of instructions - and its fiduciary responsibilities will also be accordingly very limited. So, for instance, a PCT would rarely be willing to make any statements or judgement on whether a certain loan was ‘ok’ or within a certain scope - as such a decision requires too much independent judgement - but would happily accept an instruction that said it had to pass a credit application to a certain auditor and await the decision of go/no-go of said auditor before making appropriate payments in respect of the credit application.

Maker Trusts/Foundations and the Trustee role

Now let’s just revisit the general structure we use in RWA to represent the interests of Maker (I am talking very broadly here!) and act on Makers behalf in the RWA world:

  • We setup an orphan Trust/Foundation/Whatnot in some jurisdiction with MakerDAO/MKR holders as beneficiaries (the “Maker Trust”)
  • We use a Trustee to act on behalf of the Beneficiaries for the Trust/Foundation

The important thing to realise is that, in this structure, the type of trustee we are referring to is a PCT - NOT a BOT

The implication of this is that there are very real limits to what this Trustee can actually do for Maker - and they are (again in practice):

  • Execute fairly simple and mechanical tasks as instructed by the beneficiaries - just about enough to ensure a simple day-to-day running of the trust, ensure reporting and accounting/audit filing
  • Ensure that only parties mentioned in the letter of instruction are contacted in cases of doubt or cases that require judgement - and only allow these parties to instruct the Trustee on what to do in these case

So the PCT does ensure some basic operating structure, but primarily ensures decision making and execution within the Maker Trust only transpires as set out in the PCT’s letter of instruction (which obviously is a big deal in itself).

The following clauses from the trust deed Monetalis is putting together in BVI to represent Maker can illustrate the limits of actions and responsibility put to a PCT (this is from the draft - not final agreed deed - still in review):

…Exercise of rights:
1.1 To the extent that the Trustee is entitled to exercise any rights in relation to the Assets (be it in relation to an event of default, waiver, amendment or otherwise), it shall do so in accordance with the instructions of the Deciding Beneficiaries provided pursuant to the Governance Rules.

1.2 The Trustee shall not be required to exercise any rights in relation to the Bonds forming part of the Trust Assets where it has not been expressly and unambiguously instructed to do so pursuant to the Governance Rules…

…ENTITLEMENTS AND DISTRIBUTIONS
It is declared that:

(a) all amounts of interest, coupon or other income (but not, for the avoidance of doubt, principal) with respect to the Assets received by the Trustee in cash less the Permitted Expenses shall be converted to DAI and transferred to MakerDAO in accordance with the instructions of the Deciding Beneficiaries;

(b) all amounts of principal (but not, for the avoidance of doubt, interest, coupon or other income) with respect to the Assets received by the Trustee in cash shall be converted to DAI and transferred to MakerDAO in accordance with the instructions of the Deciding Beneficiaries; and

(c) the Trustee shall have no power, discretion or duty to accumulate amounts representing income of the Trust or otherwise treat such income as an accretion to capital, but shall distribute such amounts in accordance with this Clause 5; pending such distribution, such amounts shall be held on trust for the benefit of the Beneficiaries absolutely…

As a consequence, in the letter of instruction to the PCT, there obviously must be ‘who to ask if in doubt or certain requests are made to the trust’.

For instance - just using Monetalis as an example - we could ask for changing the LTV of our credit box from 80% to 85% for a certain credit class due to market conditions changing - or maybe, because of inflation, we’d change our interest margin target - or would like to change our reporting format to the trust etc… Or for instance the Maker Trust wants to change the Bank or change the Auditor or agree to a new exchange rate card - or understand how to respond to an opinion from an Auditor, make a one-time payment to something etc. There are just a multitude of situations in which the PCT would require instructions - from quite mundane tasks (open a new account in the bank) to very serious decisions (like to close down the Trust).

As you can imagine, it would not be a good idea for all these decisions to require Maker forum polls or MKR token votes. Would make the processes very heavy.

So there is a need for a decision-making entity/role in-between the PCT action-set and the decisions that do indeed require MKR vote to ensure a smooth operation of the Maker Trust.

So, in my mind, this is where the Attestor role comes into play.

Potential Attestor Role in a Maker Trust

Perhaps I can best explain what I am thinking of by showing how I could suggest this Attestor role might work:

Appointment

  • An Attestor is appointed by Maker just like any CU facilitator is voted in.
  • They are to act on behalf of Maker in Maker Trust arrangements
  • They are compensated for the role by Maker (to ensure complete alignment and to make clear this is a serious and real job)
  • Just like CU facilitators, they can be voted off again etc.

Responsibilities

  • Monitor the actions of the PCT (ensuring all is inline) and its reporting etc - and ensure corrective action is made if something is wrong - and ultimately the Attestor would have the responsibility for requesting to the RWF that an PCT is replaced, should it not be performing as required.
  • Triage all Maker Trust decision-making, that are beyond the PCT simple instruction set, into something like the following categories:
    – Attestor can make the decision - and indeed so must make the decision.
    – Decision must be discussed with the RWF team and acceptance gained from RWF
    – Decision must go up for MKR vote
  • Act as the party who instructs the PCT on behalf of the beneficiaries in respect of the decision made from above triage decision making.
  • [For completeness, the Attestor could also have some monitoring/audit role in respect of the ultimate lending business the Maker Trust is serving, but I suspect we don’t want this role to overlap in responsibility and duties with the RWF (the “too many cooks” issue), so the scope could be more “hands-on duties”, for instance, performing quarterly on-site audit of processes - and from time to time conducting random individual loan audits for process, compliance, credib tox etc. Anyhow - that part of the Attestors role is out of scope of this particular Nuts & Bolt discussion]

In terms of legal documentation, when a Maker Trust is set up, a letter of instruction is made for the PCT and a letter of instruction is made for the Attestor (these instructions for the Attestor could be a bit different from situation to situation) - both on behalf of the beneficiaries and filed with the trust deed etc.

I hope that helps clarify the trustee role and provides some idea of how one could consider filling a real-world decision making gap in the Trust/Foundation structure and ensure a smooth operation.

Btw: Why not a BOT? Because, the independence reasonably required by an appropriately skilled BOT governing body, for them to accept any added fiduciary duties and responsibilties on and above the PCT level, would highly likely clash with the desire of the Maker protocol to have 100% direct control of the Trust. PCT is, for now, a better fit - as long as the decision-making gap is filled.

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It is important to have swift decisionmaking when the Trustee is uncertain. But here I’m failing to see limits on what the Attestor can instruct the Trustee to do, and more generally answers to the old question “what if X goes rogue?”.

  1. Could the Trustee be only allowed to ask the Attestor for input when their instructions lack clarity (as opposed to having to do anything the Attestor asks it to do), and/or could the Trustee only be allowed to follow the Attestor’s instruction in certain areas / when at most $X is at risk?
  2. Alternatively or in addition to 1., instead of being a single agent, could the Attestor decision be the result of an offchain committee vote? The committee could be different per-Trustee, and composed of overlapping sets of CU members / delegates / community members. Each committee would have a designated expert/decisionmaker and the voting process would mostly act as a guardrail against a rogue decisionmaker.

If 1. can be legally binding enough, it would provide sufficient protection at the cost of sometimes requiring an onchain vote because the Trustee action does not fall into the Attestor’s perimeter.

As for 2., bad actions would still be possible but require collusion between individuals that are already trusted for crucial decisions by Maker.

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Hi @swakya

Good comments!

On 1) the letter of instruction to both the Trustee and the Attestor must be written with very clear scope - it should state clearly on what subjects the Attestor can decide on and what not - as per the sort of triage - i.e. for certain subjects Attestor can make simple decisions, for others the Attestor needs to show Trustee a confirmation from the RWF - and others again the Attestor needs to show Trustee confirmation from Maker vote etc… I am pretty sure we can get to a point where there is no room for any Attestor to be able to ‘go rogue’ in practice. Please remember also that the Trustee is not entirely without thought - if something doesn’t pass a smell-test, it is highly unlikely the Trustee would act without first getting a confirmation from Maker/the beneficiary - the Trustee will always have that option before acting on any Attestor instructions to request this confirmation.

On 2) That is fine too - I see the point. I worry a little bit about a committee’s speed of decision-making, diffusion of responsiblity, its capacity getting the actual work done. But if these can be overcome, then for sure it brings an extra layer of security.

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Great post, Alan.
Maker needs to develop an ‘reasonable’ governance/oversight process of its investments. As you note the PCT will follow their contractual duties exactly and not make any judgement calls. All governance beyond the narrow PCT scope need to come elsewhere and the Attestor role sounds promising though as you note the Devil is in the details.

I think it is key to understand all the rights/responsibilities/goveranance (RRG) required of a senior secured lender (such as Maker) and then decide how to allocate those RRG a across the PCT, Attestor and MKR Voters. And also build in checks/balances, transparency, competency and efficiency.

I also suggest that an Attestor have some key qualifications:
Signnificant exerience in structured finance and credit investing
Ability to interact well with RWA team
Ability to interact well with MKR holders/delegates
Ability to build and iimplement professional Attestor process (at least for initial Attestors)

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