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 --