The Nonprofit Public Benefit Corporation Law and the Nonprofit Religious Corporation Law each require a board of directors for a corporation formed under its provisions to manage corporate investments in compliance with prescribed investment standards. The laws specify that compliance with its prescribed standards do not preclude the application of a separate investment standard under the Uniform Prudent Management of Institutional Funds Act.

This bill would modify the prescribed investment standard in each law to include the Uniform Prudent Management of Institutional Funds Act, if that act would be applicable.

The Nonprofit Public Benefit Corporation Law and the Nonprofit Religious Corporation Law each require a board of directors for a corporation formed under its provisions to manage corporate investments in compliance with prescribed investment standards. The laws specify that compliance with its prescribed standards do not preclude the application of a separate investment standard under the Uniform Prudent Management of Institutional Funds Act.

This bill would modify the prescribed investment standard in each law to include the Uniform Prudent Management of Institutional Funds Act, if that act would be applicable.

The Nonprofit Public Benefit Corporation Law and the Nonprofit Religious Corporation Law each require a board of directors for a corporation formed under its provisions to manage corporate investments in compliance with proscribed investment standards. The laws specify that compliance with its proscribed standards do not preclude the application of a separate investment standard under the Uniform Prudent Management of Institutional Funds Act.

This bill would modify the proscribed investment standard in each law to include the Uniform Prudent Management of Institutional Funds Act, if that act would be applicable.

 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 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):
   
   

   1. 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.
      
      

   2. 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.
      
      

   3. 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:

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 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: (Verified 6/18/15)

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: (Verified 6/18/15)

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 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 ****

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Marty Block, Chair

2015 - 2016 Regular

Bill No: AB 792 Hearing Date: June 17, 2015

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

1. 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:
   
   

1. 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.
   
   

2. 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.
   
   

1. 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).
   
   

2. 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).
   
   

3. 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 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):
   
   

   1. 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.
      
      

   2. 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.
      
      

   3. 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

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 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:
   
   

   1. 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

Opposition

None received

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 792

Author:(Chiu)

As Introduced Ver:February 25, 2015

Majority vote

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:

   1. 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 assets designated by the institution as an endowment fund for its own use;

   2. 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;

   3. 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;

   4. 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;

   5. Specifies the factors for the institution to consider when making a determination to appropriate or accumulate so much of an endowment fund;

   6. 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;

   7. 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 trustee would be liable for those actions or decisions under Probate Code Sections 16052 and 16401;

   8. 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;

   9. 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;

   10. 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;

   11. 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;

   12. 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,

   13. 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:

   1. 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.

   2. 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,

   3. 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 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 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 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

Date of Hearing: May 4, 2015

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Matthew Dababneh, Chair

ABPCA Bill Id:AB 792

Author:(Chiu) – As Introduced Ver:February 25, 2015

SUBJECT: Board of directors: investment standards

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 18500 et seq., the following:
   
   

   1. 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 assets designated by the institution as an endowment fund for its own use;

2. 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;
   
   

3. 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;

4. 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;
   
   

5. Specifies the factors for the institution to consider when making a determination to appropriate or accumulate so much of an endowment fund;
   
   

6. 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;
   
   

7. 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 trustee would be liable for those actions or decisions under Probate Code sections 16052 and 16401;
   
   

8. Provides that the appropriation for expenditure in any year of an amount greater than 7 percent of the fair market value of an endowment fund creates a rebuttable presumption of imprudence;
   
   

9. 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;
   
   

10. 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;
    
    

11. 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: 1) the fund subject to the restriction has a total value of less than $100,000; 2) 20 or more years have elapsed since the fund was established; and 3) the institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument;
    
    

12. 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,
    
    

13. 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.
    
    

1. 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:
   
   

   1. 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.
      
      

   2. 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,
      
      

   3. Provides that nothing in this section shall be construed to preclude the application of the UPMIFA.
      
      

2. Requires, under Corporations Code Section 9250 that a nonprofit religious corporation when investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing the corporation's investment shall meet the following standards set forth in 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 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 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 (NCCUSL) 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 (UMIFA), which was approved by NCCUSL 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 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 (UTC) for modifying charitable trusts. Like the UTC provisions, UPMIFA’s modification rules preserve the historic position of the attorneys general in most states as the overseers of charities.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Bar (Sponsor)

Opposition

None on file.

Analysis Prepared by: Mark Farouk / B. & F. / (916) 319-3081