BILL ANALYSIS Ó
AB 792
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ASSEMBLY THIRD READING
AB
792 (Chiu)
As Introduced February 25, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
|----------------+------+----------------------+---------------------|
|Banking |12-0 |Dababneh, Travis | |
| | |Allen, Achadjian, | |
| | |Brown, Chau, Gatto, | |
| | |Hadley, Kim, Low, | |
| | |Perea, Ridley-Thomas, | |
| | |Mark Stone | |
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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 Section 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
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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
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
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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% 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
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:
i) the fund subject to the restriction has a total value of
less than $100,000; ii) 20 or more years have elapsed since
the fund was established; and iii) the institution uses the
property in a manner consistent with the charitable purposes
expressed in the gift instrument;
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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
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
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investment shall meet the following standards set forth in
Corporations Code 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 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
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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
[Corporations Code] Sections 5240 and 9250 to allow compliance
with UPMIFA to satisfy the requirements of the Corporations
Code.
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 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, which was approved by
National Conference of Commissioners on Uniform State Laws 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
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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 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 for modifying charitable
trusts. Like the Uniform Trust Code provisions, UPMIFA's
modification rules preserve the historic position of the attorneys
general in most states as the overseers of charities.
Analysis Prepared by:
Mark Farouk / B. & F. / (916) 319-3081 FN:
0000273
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