New Development
Assembly Bill 792 (AB 792) addressing investment standards for nonprofit public benefit and religious corporations was recently signed by Governor Brown in California and becomes effective January 1, 2016.

What AB 792 Means for You
AB 792 will resolve an inconsistency in California law between two sets of standards that apply to investment funds held by nonprofit public benefit and religious corporations (hereinafter, a charity). The governing board of a charity is responsible for establishing and adhering to guidelines for the management of the charity’s investment assets, including any endowments. The governing board, and in particular, finance and investment committees of charities, should be made aware of any changes to their fiduciary responsibilities.

Charities’ investment funds are currently governed by investment standards provided under California Corporations Code Sections 5240 and 9250, and those provided under the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Due to the confusing and uncoordinated interplay between these two investment standards, governing boards are typically advised to attempt to comply with both- resulting in an overly conservative investment approach.

AB 792 will coordinate the two sets of investment standards by allowing compliance with the UPMIFA to satisfy California Corporations Code Sections 5240 and 9250.

Summary

A. The Current Investment Standards under California Corporations Code Sections 5240 and 9250

California Corporations Code Sections 5240 and 9250 provide the standards for the investment and management of charities’ funds in California. Such charities include nonprofit hospitals, colleges, museums, and some social service agencies.

The current standard provided under California Corporations Code Section 5240 directs investors to “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.”

Notwithstanding a body of case law, there appears to be no precise legal definition of “speculation.” There have been attempts by courts to categorize investments as speculative but there is no clear or uniform guidance to assist fiduciaries with respect to prospective investment decisions. Instead, courts have emphasized that fiduciaries should avoid all risk and have reviewed investment decisions individually rather than looking at the decisions for an investment portfolio as a whole. This standard has often discouraged charities from diversifying their portfolios and  lead to what many would characterize as overly conservative investment decisions.

Today, the term “speculation” still cannot be clearly defined. This puts current investment standards under California Corporations Code Section 5240 at odds with modern investment approaches that no longer banish risk completely, but rather call for measured, appropriate risk depending on the asset, the fund, and portfolio diversity.

The current standard provided under California Corporations Code Section 9250 directs charities’ board of directors to perform their duties “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 is appropriate under the circumstances.” This standard is very general and similarly lacks clear guidance for investors.

B. UPMIFA

Effective January 1, 2009, California adopted Probate Code Section 18500 et seq., also known as the Uniform Prudent Management of Institutional Funds Act (UPMIFA). California’s charities must comply with the standards of the UPMIFA, in addition to the investment standards provided under California Corporations Code Sections 5240 and 9250. The UPMIFA departs from the standards in California Corporations Code Sections 5240 and 9250 above 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 a broad requirement to “avoid speculation,” UPMIFA directs investors to consider a variety of factors when investing or otherwise managing a corporation’s investments, including a consideration of the investment’s risk and the appropriateness of it with respect to the institution.

More details on the UPMIFA, can be found in our previous Alert, entitled “Investment of Funds by California Charities: Law Changes in ’09, available here.

C. What AB 792 Does

AB 792 clarifies California law with respect to the state’s investment standards for charitable organizations by providing a single, detailed set of guidelines for the investment and management of a charity’s investment assets.

AB 792 achieves this by coordinating the UPMIFA with California Corporations Code Sections 5240 and 9250. AB 792 ensures that compliance with the applicable guidelines provided under the UPMIFA will satisfy the investment standard under both California Corporations Code Section 5240, for nonprofit public benefit corporations, and Corporations Code Section 9250, for religious corporations. This will allow charities to adopt more modern investment strategies.

A link to AB 792 is available here.

Next Steps
When AB 792 goes into effect January 1, 2016, charities will be able to more confidently invest and manage their investment assets under the standards  articulated in UPMIFA. Although many organizations have already adopted  UPMIFA standards, charities should nevertheless review their investment and spending policies to make sure they are consistent with UPMIFA, particularly in the following areas:

1. Confirm that the investment considerations specified in UPMIFA are referenced in the charity’s investment policy.
2. Require investment advisors to be selected through an RFP or other appropriate competitive evaluation process and ensure that the relationships with existing advisors are reviewed and rebid on  a periodic basis.
3. Hold regular meetings with the charity’s investment advisors to review and verify underlying facts regarding the activities and results achieved by the investment advisors and the performance of such advisors as measured against UPMIFA standards, competitive market performance criteria, the commitments made by the advisors, and any specific policies and procedures adopted by the charity. These meeting should also be used to  monitor the actual performance of the investment portfolios, including a review of any performance evaluations provided by the advisors, to determine whether the investment goals and objectives are being met, and to assure that appropriate action is taken if such goals and objectives are not being met consistently, with due regard for overall market conditions.