BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 792 Hearing Date: June 17,
2015
-----------------------------------------------------------------
|Author: |Chiu |
|-----------+-----------------------------------------------------|
|Version: |February 25, 2015 Introduced |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Urgency: |No |Fiscal: |No |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Consultant:|Eileen Newhall |
| | |
-----------------------------------------------------------------
Subject: Board of directors: investment standards.
SUMMARY Provides that compliance by a nonprofit public benefit or
nonprofit religious corporation with the Uniform Prudent
Management of Institutional Funds Act (UPMIFA), as specified,
constitutes compliance with the investment standards applicable
to these corporations.
DESCRIPTION
1. Provides, under the Nonprofit Public Benefit Corporation
Law, that compliance with the UPMIFA (Probate Code Section
18501 et seq.), if that act would be applicable, is deemed
to represent compliance with the rules for investing,
reinvesting, purchasing, acquiring, exchanging, selling, and
managing a nonprofit public benefit corporation's
investments.
2. Provides, under the Nonprofit Religious Corporation Law,
that compliance with the UPMIFA, if that act would be
applicable, is deemed to represent compliance with the rules
for investing, reinvesting, purchasing, acquiring,
exchanging, selling, and managing a nonprofit religious
corporation's investments.
EXISTING LAW
AB 792 (Chiu) Page 2
of ?
3. Establishes the Nonprofit Public Benefit Corporation Law
(Corporations Code Sections 5110 et seq.), and prescribes
rules that must be followed by nonprofit public benefit
corporations seeking to invest assets that are unrelated to
the corporation's public or charitable programs
(Corporations Code Section 5240). In investing,
reinvesting, purchasing, acquiring, exchanging, selling, and
managing the corporation's investments, the board of a
nonprofit public benefit corporation must 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.
4. Provides, under the Nonprofit Public Benefit Corporation
Law, that nothing shall be construed to preclude the
application of UPMIFA, if that act would otherwise be
applicable, but states that nothing in the UPMIFA alters the
status of governing boards, or the duties and liabilities of
directors under the Nonprofit Public Benefit Corporation Law
(Corporations Code Section 5240).
5. Establishes the Nonprofit Religious Corporation Law
(Corporations Code Sections 9110 et seq.); provides that the
board of a nonprofit religious corporation must meet
specified standards in investing, reinvesting, purchasing,
acquiring, exchanging, selling, and managing that
corporation's investments; and provides that nothing shall
be construed to preclude the application of UPMIFA, if that
act would otherwise be applicable, but states that nothing
in the UPMIFA alters the status of governing boards, or the
duties and liabilities of directors under the Nonprofit
Religious Corporation Law (Corporations Code Section 9250).
6. Provides for the UPMIFA (Probate Code Section 15000 et
seq.). That act defines a charitable purpose as the relief
of poverty, advancement of education or religion, promotion
AB 792 (Chiu) Page 3
of ?
of health, promotion or a governmental purpose, or any other
purpose, the achievement of which is beneficial to the
community. The act defines an institution as a person,
other than an individual, organized and operated exclusively
for charitable purposes; a government or governmental
subdivision, agency, or instrumentality, to the extent that
it holds funds exclusively for a charitable purpose; and a
trust that had both charitable and noncharitable interests,
after all noncharitable interests have terminated. The act
applies the following standards to investments by persons
responsible for managing and investing institutional funds
(Probate Code Section 18503; similar standards apply to
investments by persons responsible for managing endowment
funds, pursuant to Probate Code Section 18504):
a. In addition to complying with the duty of loyalty,
each person responsible for managing and investing an
institutional fund shall manage and invest the fund in
good faith and with the care an ordinarily prudent person
would exercise under similar circumstances.
b. In managing and investing an institutional fund, an
institution may incur only costs that are appropriate and
reasonable in relation to the assets, the purposes of the
institution, and the skills available to the institution,
and shall make a reasonable effort to verify facts
relevant to the management and investment of the fund.
c. Except as otherwise provided by a gift instrument,
those responsible for managing and investing an
institutional fund must consider general economic
conditions; the possible effect of inflation or
deflation; the expected tax consequences, if any, of
investment decisions or strategies; the role that each
investment or course of action plays within the overall
investment portfolio of the fund; the expected total
return from income and the appreciation of investments;
other resources of the institution; the needs of the
institution and the fund to make distributions and to
preserve capital; and an asset's special relationship or
special value, if any, to the charitable purposes of the
institution.
COMMENTS
AB 792 (Chiu) Page 4
of ?
1. Purpose: AB 792 is sponsored by the Nonprofit Organizations
Committee of the Business Law Section of the California
State Bar to clarify the investment standards applicable to
nonprofit public benefit and nonprofit religious
corporations, and provide greater investment flexibility to
these types of organizations.
2. Background: According to this bill's sponsor, the
requirements imposed on California's nonprofit public
benefit and nonprofit religious corporations with respect to
the manner in which they are allowed to invest are confusing
and unclear. For example, Corporations Code Sections 5240
and 9250 allow the application of UPMIFA, but they
specifically subject the application of UPMIFA to
Corporations Code requirements.
This leads to a confusing interplay of rules, which causes most
practitioners to advise clients to attempt to comply with
both sets of rules, resulting in an overly conservative
investment approach. As just one example, the sponsor cites
the provision of Section 5240 that prohibits "speculation"
for each individual investment, but fails to define what is
meant by speculation. The prohibition against speculation
in connection with individual investments is inconsistent
with UPMIFA, which articulates a focus on the overall fund,
rather than on specific investments, and which avoids use of
the term speculation, but instead specifies a variety of
factors that should be used when vetting an investment,
including a consideration of the risk of the investment and
the appropriateness of that risk to the institution.
AB 792 would allow compliance with UPMIFA to satisfy the
requirements of the Corporations Code. The UPMIFA has been
adopted by 49 states and the District of Columbia, and has
been a part of California law since 2009. If AB 792 is
enacted, nonprofits will 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.
3. Discussion: AB 792 provides that compliance with UPMIFA, if
that act would be applicable, constitutes compliance with
AB 792 (Chiu) Page 5
of ?
the investment requirements applicable to nonprofit public
benefit corporations and nonprofit religious corporations.
According to this bill's sponsor, the UPMIFA will not apply
in all circumstances. That act only applies to the
investment of institutional and endowment funds.
4. Summary of Arguments in Support: The Nonprofit
Organizations Committee of the Business Law Section of the
California State Bar is sponsoring AB 792, and the League of
California Community Foundations and California Society of
Association Executives are supporting the bill. "Current
state regulatory requirements as they relate to the
investments of nonprofit public benefit and religious
corporations have been confusing and unclear, causing
nonprofits to adopt an overly conservative investment
approach. AB 792 seeks to clarify those requirements by
amending the Corporations Code to authorize nonprofits to
utilize appropriate investments in accordance with the
nationally recognized standards of UPMIFA. UPMIFA clearly
1) articulates a focus on the overall fund rather than a
particular investment and 2) specifies a variety of factors,
including a consideration of risk and the appropriateness
thereof with respect to the institution. Under the UPMIFA
standards, nonprofits would be in a better position to avoid
an overly conservative investment approach and improve
results."
5. Summary of Arguments in Opposition: None received.
6. Prior and Related Legislation:
a. SB 1329 (Harman), Chapter 715, Statutes of 2008:
Sponsored by the California Commission on Uniform State
Laws. Adopted the Uniform Prudent Management of
Institutional Funds Act.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Nonprofit Organizations Committee of the Business Law Section of
the California State Bar (sponsor)
California Society of Association Executives
League of California Community Foundations
AB 792 (Chiu) Page 6
of ?
Opposition
None received
-- END --