BILL ANALYSIS Ó
AB 792
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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
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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
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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
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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
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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.
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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
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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
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