BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 792|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
CONSENT
Bill No: AB 792
Author: Chiu (D)
Introduced:2/25/15
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 6/17/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
ASSEMBLY FLOOR: 77-0, 5/18/15 - See last page for vote
SUBJECT: Board of directors: investment standards
SOURCE: Nonprofit Organizations Committee of the Business Law
Section of the California State Bar
DIGEST: This bill 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.
ANALYSIS:
Existing law:
1)Establishes the Nonprofit Public Benefit Corporation Law
(Corporations Code Sections 5110 et seq.) and Nonprofit
Religious Corporation Law (Corporations Code Sections 9110 et
seq.); provides that the boards of both types of corporations
must meet specified standards in investing, reinvesting,
purchasing, acquiring, exchanging, selling, and managing those
corporations' investments; provides that nothing shall be
construed to preclude the application of UPMIFA, if that act
AB 792
Page 2
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 or Nonprofit Religious Corporation Law
(Corporations Code Sections 5240 and 9250).
2)Provides for the UPMIFA (Probate Code Section 15000 et seq.).
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.
This bill:
AB 792
Page 3
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.
Background
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.
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
AB 792
Page 4
institution.
AB 792 allows 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.
Related/Prior Legislation
SB 1329 (Harman, Chapter 715, Statutes of 2008) adopted the
UPMIFA.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: No Local: No
SUPPORT: (Verified6/18/15)
Nonprofit Organizations Committee of the Business Law Section of
the California State Bar (source)
California Society of Association Executives
League of California Community Foundations
OPPOSITION: (Verified6/18/15)
None received
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. Supporters state, "Current state
regulatory requirements as they relate to the investments of
nonprofit public benefit and religious corporations have been
AB 792
Page 5
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."
ASSEMBLY FLOOR: 77-0, 5/18/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Lackey, Levine, Linder, Lopez,
Low, Maienschein, Mayes, McCarty, Medina, Mullin, Nazarian,
Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Atkins
NO VOTE RECORDED: Kim, Mathis, Melendez
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
6/18/15 11:33:14
**** END ****
AB 792
Page 6