BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 792


                                                                    Page  1





          Date of Hearing:  May 4, 2015


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          AB 792  
          (Chiu) - As Introduced February 25, 2015


          SUBJECT:  Board of directors:  investment standards


          SUMMARY:  Provides that the investment standards under the  
          Nonprofit Public Benefit Corporation Law and the Nonprofit  
          Religious Corporation Law shall include, where applicable, the  
          Uniform Prudent Management of Investment Funds Act (UPMIFA).


          EXISTING LAW:  


          1)Provides under UPMIFA, Probate Code 18500 et seq., the  
            following:

             a)   Defines various terms, including "institutional fund,"  
               "gift instrument," and "endowment fund."  An "endowment  
               fund" means an institutional fund or part thereof that,  
               under the terms of a gift instrument, is not wholly  
               expendable by the institution on a current basis.  The term  
               would not include assets designated by the institution as  
               an endowment fund for its own use;

             b)   Imposes on an institution managing an institutional fund  
               the duty to consider the charitable purposes of the  
               institution and the purposes of the institutional fund when  








                                                                     AB 792


                                                                    Page  2





               managing the fund, subject to the donor's intent, as well  
               as the duty to manage and invest the fund in good faith and  
               in compliance with the prudent investor standard;

             c)   Authorizes an institution, subject to a donor's intent  
               expressed in the gift instrument, to appropriate for  
               expenditure or accumulate so much of an endowment as the  
               institution deems prudent for the uses or purposes and  
               duration of the endowment; 

             d)   Provides that unless stated otherwise in a gift  
               instrument, the assets in an endowment fund are  
               donor-restricted assets until appropriated for expenditure  
               by the institution;  

             e)   Specifies the factors for the institution to consider  
               when making a determination to appropriate or accumulate so  
               much of an endowment fund;

             f)   Allows the institution to delegate to an external agent  
               the management and investment of an institutional fund to  
               the extent the institution could prudently delegate under  
               the circumstances, and would delineate the areas over which  
               the institution must exercise prudence;

             g)   Provides that a charitable institution that complies  
               with this measure is not liable for the decisions or  
               actions of an agent to which the function of management and  
               investment of an institutional fund was delegated except to  
               the extent a trustee would be liable for those actions or  
               decisions under Probate Code sections 16052 and 16401;

             h)   Provides that the appropriation for expenditure in any  
               year of an amount greater than 7 percent of the fair market  
               value of an endowment fund creates a rebuttable presumption  
               of imprudence;

             i)   Authorizes, if the donor consents in writing, the  
               institution to release or modify, in whole or in part, a  








                                                                     AB 792


                                                                    Page  3





               restriction contained in a gift instrument on the  
               management, investment, or purpose of an institutional  
               fund.  Prohibits a release or modification to allow the  
               fund to be used for purposes other than a charitable  
               purpose of the institution;

             j)   Allows, using the doctrine of cy pres, a court, upon  
               application of an institution, to modify a restriction  
               contained in a gift instrument regarding the management or  
               investment of a fund if the restriction has become  
               impracticable or wasteful, if it impairs the management or  
               investment of the fund, or if, because of circumstances not  
               anticipated by the donor, a modification of a restriction  
               will further the purposes of the fund;

             aa)  Authorizes, if an institution determines that a  
               restriction contained in a gift instrument on the  
               management, investment, or purpose of an institutional fund  
               is unlawful, impossible to achieve, or wasteful, the  
               institution, after 60 days' notice to the Attorney General,  
               to release or modify the restriction in whole or in part,  
               if the following apply: 1) the fund subject to the  
               restriction has a total value of less than $100,000; 2) 20  
               or more years have elapsed since the fund was established;  
               and 3) the institution uses the property in a manner  
               consistent with the charitable purposes expressed in the  
               gift instrument;

             bb)  Authorizes a court, upon petition by the Attorney  
               General, to order the winding up and dissolution of a  
               nonprofit public benefit corporation without meeting the  
               requirements of existing law, based on the ground that it  
               is impossible or impracticable to meet some or all of those  
               requirements; and,

             cc)  Provides that nothing in this section alters the duties  
               and liabilities of a director of a nonprofit public benefit  
               corporation as specified in Corporations Code section 5240  
               which, among other things, requires the director to act in  








                                                                     AB 792


                                                                    Page  4





               good faith, in a manner such director believes to be in the  
               best interests of the corporation and with such care,  
               including reasonable inquiry, as an ordinarily prudent  
               person in a like position would use under similar  
               circumstances.

          2)Specifies, under Corporations Code Section 5240 that a  
            nonprofit public benefit corporation when investing,  
            reinvesting, purchasing, acquiring, exchanging, selling and  
            managing the corporation's investments, the board shall do the  
            following:

             a)   Avoid speculation, looking instead to the permanent  
               disposition of the funds, considering the probable income,  
               as well as, the probable safety of the corporation's  
               capital.

             b)   Comply with additional standards, if any, imposed by the  
               articles, bylaws or express terms of an instrument or  
               agreement pursuant to which the assets were contributed to  
               the corporation; and,

             c)   Provides that nothing in this section shall be construed  
               to preclude the application of the UPMIFA. 

          3)Requires, under Corporations Code Section 9250 that a  
            nonprofit religious corporation when investing, reinvesting,  
            purchasing, acquiring, exchanging, selling, and managing the  
            corporation's investment shall  meet the following standards  
            set forth in Section 9241.

          FISCAL EFFECT:  None


          COMMENTS:  


          This measure is sponsored by the Business Law Section of the  
          State Bar of California and they provide the following  








                                                                     AB 792


                                                                    Page  5





          background information:


            California regulatory requirements as they relate to the  
            investments of nonprofit public benefit and religious  
            corporations have been confusing and unclear. California  
            Corporations Code Sections 5240 and 9250 subject those  
            corporations to certain investment standards applicable to all  
            assets held by the corporation. Section 5240 includes the  
            requirement to "avoid speculation" for each individual  
            investment.  Notwithstanding a body of case law, there appears  
            to be no precise legal definition of "speculation."  


            Effective January 1, 2009 California adopted Probate Code  
            Section 18500 et seq., the Uniform Prudent Management of  
            Institutional Funds Act ("UPMIFA").  UPMIFA is different from  
            the standard in Section 5240 in at least the following two  
            ways:  (1) UPMIFA clearly articulates a focus on the overall  
            fund rather than a particular investment, and (2) rather than  
            "avoid speculation" UPMIFA specifies a variety of factors  
            including a consideration of the risk and the appropriateness  
            thereof with respect to the institution.   UPMIFA has been  
            adopted by 49 states and the District of Columbia.


            While Corporations Code Sections 5240 and 9250 do not preclude  
            the application of UPMIFA, they specifically subject it to the  
            Corporations Code requirements.  Because of the confusing and  
            uncoordinated interplay between the Corporations Code sections  
            and UPMIFA, in most cases, practitioners advise clients to  
            attempt to comply with both - resulting in an overly  
            conservative investment approach.    


            Assembly Bill 792 would solve the problem by amending Sections  
            5240 and 9250 to allow compliance with UPMIFA to satisfy the  
            requirements of the Corporations Code.









                                                                     AB 792


                                                                    Page  6






            The result would be to authorize these nonprofits to utilize  
            appropriate investments in accordance with the nationally  
            recognized standards of UPMIFA.  Under those standards, the  
            nonprofits would be in a better position to avoid an overly  
            conservative investment approach and improve returns.  For  
            example, reliance on the UPMIFA standards would allow  
            investment in widely used index funds across different asset  
            classes.


           What is UPMIFA?


           At its annual meeting in July 2006, the National Conference of  
          Commissioners on Uniform State Laws (NCCUSL) approved the UPMIFA  
          and recommended it for enactment by the legislatures of the  
          various states.  UPMIFA is designed to replace the existing  
          Uniform Management of Institutional Funds Act (UMIFA), which was  
          approved by NCCUSL in 1972 and has since been enacted in 47  
          states.  UMIFA was a pioneering statute, providing uniform and  
          fundamental rules for the investment of funds held by charitable  
          institutions and the expenditure of funds donated as  
          "endowments" to those institutions.  Those rules supported two  
          general principles: 1) that assets would be invested prudently  
          in diversified investments that sought growth as well as income,  
          and 2) that appreciation of assets could prudently be spent for  
          the purposes of any endowment fund held by a charitable  
          institution.  


          UPMIFA provides guidance and authority to charitable  
          organizations concerning the management, investment and  
          expenditure of funds held by those organizations and imposes  
          additional duties on those who manage and invest charitable  
          funds as well as on the boards of non-profit organizations who  
          authorize spending decisions. These duties provide additional  
          protections for charities and also protect the interests of  
          donors who want to see their contributions used wisely. UPMIFA  








                                                                     AB 792


                                                                    Page  7





          modernizes the rules governing expenditures from endowment  
          funds, both to provide stricter guidelines on spending from  
          endowment funds and to give institutions the ability to cope  
          more easily with fluctuations in the value of the endowment by  
          authorizing the substitution of prudent spending rules for the  
          previously inflexible requirements for maintaining historical  
          dollar value. Finally, UPMIFA updates the provisions governing  
          the release and modification of restrictions on charitable funds  
          to permit more efficient management of these funds. These  
          provisions derive from the approach taken in the Uniform Trust  
          Code (UTC) for modifying charitable trusts. Like the UTC  
          provisions, UPMIFA's modification rules preserve the historic  
          position of the attorneys general in most states as the  
          overseers of charities.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California State Bar (Sponsor)




          Opposition


          None on file.




          Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081









                                                                     AB 792


                                                                    Page  8