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
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          |Author:    |Chiu                                                 |
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          |Version:   |February 25, 2015    Introduced                      |
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          |Urgency:   |No                     |Fiscal:    |No               |
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          |Consultant:|Eileen Newhall                                       |
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                 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
           







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           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  








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              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








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          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  








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              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








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          Opposition
               
          None received


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