HomeMy WebLinkAboutResolution No. 92-R43RESOLUTION NO 92-R43
RESOLUTION OF THE BOARD OF DIRECTORS OF THE REDEVELOPMENT
AGENCY OF THE CITY OF AZUSA RE -ADOPTING ITS INVESTMENT POLICY
WHEREAS the Redevelopment Agency of the City of Azusa receives taxes and
other revenues from a variety of sources and uses the funds to pay its bills on a regular
basis; and
WHEREAS the Agency Treasurer is charged with the duties of handling and
maintaining the cash that is taken in or otherwise received by the Agency; and
WHEREAS the balance of these funds fluctuates between $3,000,000 and
$20,000,000 or more; and
WHEREAS the Agency Treasurer is charged with the responsibility of investing
idle public funds, doing so on the basis of protecting the safety of the funds, ensuring the
liquidity of the investments, and maximizing earnings in that order of importance and based
on the "Prudent Man Rule"; and
WHEREAS the State of California requires each City Redevelopment Agency to
adopt an investment policy for its jurisdiction.
NOW THEREFORE BE IT RESOLVED that the Board of Directors of the
Redevelopment Agency of the City of Azusa does hereby re -adopt its Investment Policy
attached hereto as Exhibit A and instsructs the Agency Treasurer to be guided by it in
carrying out the duties of his office for the benefit of the Redevelopment Agency.
ADOPTED AND APPROVED this 7th day of July , 1992.
I HEREBY CERTIFY that the foregoing resolution was duly adopted by the
Board of Directors of the Redevelopment Agency of the City of Azusa at a regular meeting
thereof on the 7th day of July 1992 by the following vote of Directors:
AYES: BOARD DIRECTORS: DANGLEIS, MADRID, NARANJO, ALEXANDER, MOSES
NOES: BOARD DIRECTORS: NONE
ABSENT: BOARD DIRECTORS: NONE
THE REDEVELOPMENT AGENCY OF THE CITY OF AZUSA
INVESTMENT POLICY
Temporarily idle or surplus funds of The Redevelopment Agency of the City of Azusa
shall be invested in accordance with principles of sound treasury management and in
accordance with the provisions of California Government Code Sections 53600, et seq.,
the Municipal Code, guidelines established by the California Municipal Treasurer's
Association and the California Society of Municipal Finance Officers, and this Investment
Policy ("Policy").
A. Overall Risk Profile
The basic objectives of the Agency's Investment Program are, in order of
priority:
1. Safety of invested funds;
2. Maintenance of sufficient liquidity to meet cash flow needs; and
3. Attainment of the maximum yield possible consistent with the fust two
objectives.
The achievement of these objectives shall be accomplished in the manner
described below:
The Agency shall ensure the safety of its invested idle fund by limiting
credit and interest rate risks. Credit risk is the risk of loss due to the
failure of the security issuer or backer.
Interest rate risk is the risk that the market value portfolio securities will
fall due to an increase in general interest rates.
a) Credit risk will be mitigated by:
(i) limiting investments to the safest types of securities;
(ii) by prequalifying the financial institutions with which it will
do business; and
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(iii) by diversifying the investment portfolio so that the failure
of any one issue or backer will not place an undue financial
burden on the Agency.
b) Interest rate risk will be mitigated by:
(i) structuring the Agency's portfolio so that securities mature
to meet the Agency's cash requirements for ongoing
operations, thereby avoiding the need to sell securities on
the open market prior to their maturation to meet those
specific needs; and
(ii) investing primarily in shorter term securities.
C) The physical security or safekeeping of the Agency's investments
is also an important element of safety. Detailed safekeeping
requirements are defined in Section III of this policy.
2. Liquidijy
The Agency's investment portfolio shall be structured in a manner which
strives to achieve that securities mature at the same time as cash is needed
to meet anticipated demands (Static Liquidity). Additionally, since all
possible cash demands cannot be anticipated, the portfolio should consist
largely of securities with active secondary or resale markets (Dynamic
Liquidity). The specific percentage mix of different investment
instruments and maturities is described in Section II of this Policy.
3. Yield
Yield on the Agency's investment portfolio is of secondary importance
compared to the safety and liquidity objectives described above.
Investments are limited to relatively low risk securities in anticipation of
earning a fair return relative to the risk being assumed. While it may
occasionally be necessary or strategically prudent of the Agency to sell a
security prior to maturity to either meet unanticipated cash needs or to
restructure the portfolio, this policy specifically prohibits trading securities
for the sole purpose of speculating on the future direction of interest rates.
Specifically, "when" and "if issued" trading and open-ended portfolio
restructuring transactions are prohibited.'
B. Time Frame for Investment Decisions
The Agency's investment portfolio shall be structured to provide that sufficient
funds from investments are available every month to meet the Agency's
anticipated cash needs. Subject to the safety provisions outlined above, the choice
in investment instruments and maturities shall be based upon an analysis of
anticipated cash needs, existing and anticipated revenues, interest rate trends and
specific market opportunities. No investment should have a maturity of more
than five (5) years from its date of purchase without receiving prior Executive
Board approval.
C. Definition of Idle or Surplus Funds
Idle or surplus funds for the purpose of this policy are all Agency funds which
are available for investment at any one time, including the estimated checking
account float, excepting those minimum balances required by the Agency's banks
to compensate them for the cost of banking services. This policy also applies to
the idle or surplus funds of other entities for which the Redevelopment Agency
personnel provided financial management services.
L-i.u_ VU .ry
This section of the Investment Policy identifies the types of instruments in which the
Agency will invest its idle funds.
A. Eligible Securities
The Agency operates its temporary pooled idle cash investments under the
Prudent Man Rule - V (Civil Code Section 2261, et seq). See Exhibit A. This
affords the Agency a broad spectrum of investment opportunities as long as the
investment is deemed prudent and is allowable under current legislation of the
State of California (Government Code Section 53600, et seq). (See Exhibit B for
definition of investments.)
* Insured Certificates of Deposit (CD's) of California banks and/or savings
and loan associations, and/or savings banks which mature in five years or
less, provided that the Agency's investments shall not exceed One
Hundred Thousand Dollars ($100,000) per institution. If the investment
exceeds the insured $100,000, the funds are to be collateralized at 110%
of the deposit in government securities or 150% in mortgages.
V The Prudent Man Rule states, in essence, that "in investing exercise the judgment and
care, under the circumstances then prevailing, which men of prudence, discretion and
intelligence exercise in the management of their own affairs ...."
•
* Local Agency Investment Fund (State Pool) Demand Deposits
* Securities of the U.S. Government, or its agencies
* Negotiable Certificates of Deposit placed with Federal and State savings
and loan associations and Federal and State chartered banks with an office
in the State of California (limited to 30% of portfolio)
* Bankers Acceptance (limited to 40% of portfolio) (not collateralized;
emergency use only)
* Commercial Paper (limited to 30% of portfolio) (not collateralized;
emergency use only)
* Passbook Savings or Money Market Demand Deposits
* Repurchase Agreements (limited to 30% of portfolio)
* Los Angeles County Treasurer's Investment Pool
* Money Market Mutual Fund (with $1 net asset value)
B. Qualification of Bmkgrs. Dealers and
Einancial Institutions
United States Treasury issue transactions will be conducted only with primary
dealers from the list of Government Security dealers reporting to the Markets
Reports Division of the Federal Reserve Bank of New York (Exhibit Q.
Uninsured Time Deposits with banks and savings and loans shall be collateralized
in the manner prescribed by law for depositories accepting municipal investment
funds.
i•s::
Wherever possible, the Agency will use pre -formatted wire transfers to restrict
the transfer of funds to pre -authorized accounts only. When transferring funds
to an account not previously approved, the bank is required to call back a second
employee for confirmation that the transfer is authorized.
►I9 1 lig_ .e
The Agency shall annually send a copy of the current edition of the Policy and
its enabling Resolution to all institutions which are approved to handle the
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Redevelopment Agency investments. Receipt of the Policy and Resolution,
including confirmation that it has been received by persons handling the Agency's
account, shall be acknowledged in writing within thirty (30) days.
F. Diversification
The portfolio should consist of a mix of various types of securities, issues and
maturities.
G. Confirmation
Receipts for confirmation of purchase of authorized securities should include the
following information: trade date, par value, rate, price, yield, settlement date,
description of securities purchase, agency's name, net amount due, third party
custodial information. These are minimum information requirements.
H. GASB 3
The Governmental Accounting Standards Board issued GASB 3 in April 1986,
and the local entity's investments must be categorized into three levels of credit
risk as follows:
a) securities that are insured or registered, or for which the securities are
held by public units or its agent in the units;
b) securities that are uninsured and unregistered and are held by the broker's
or dealer's trust department or agent in the unit's name;
c) securities that are uninsured and unregistered and are held by the broker
or dealer, or by its trust department or agent, but not in the unit's name.
The carrying amount and market value of all types of investments must be
disclosed in total and for each type of investment.
Governmental Accounting Standards Board 3 exempts mutual funds and LAIF
investments from the mandatory risk categorization.
O ' t t lUlM.L
A. Safekeeping A reement
The Agency shall contract with a bank or banks for the safekeeping of securities
which are owned by the Agency as a part of its investment portfolio or
transferred to the Agency under the terms of any repurchase agreements.
W. Handling
D=sit Collateral
All securities owned by the Agency shall be held by its safekeeping agent, except
the collateral for time deposits in banks, savings banks, and savings and loans is
held by the Federal Home Loan Bank. The collateral for time deposits in banks
is held in the Agency's name in the bank's trust department, (if a safekeeping
agreement has been executed) or, alternatively, in the San Francisco Federal
Reserve Bank.
The authorization to release Agency's securities will be telephoned to the
appropriate bank by a finance department member other than the person who
initiated the transaction. A written confirmation outlining details for the
transaction and confirming the telephoned instructions will be sent to the bank
within five (5) working days.
W10 L , , ..
Securities transferred to the Agency as collateral securing time deposits which are
being held in safekeeping for the Agency will be verified in writing and examined
on a surprise basis during the year by the Agency's independent auditors as part
of the Agency's annual independent audit.
� r �t a ►11 ' � ► 1• 1 YY
This section of the Policy defines the overall structure of the investment management
program.
A. Responsibilities of the Agency Treasurer
The Agency Treasurer is charged with responsibility for maintaining custody of
all public funds and securities belonging to or under the control of the Agency,
and for the deposit and investment of those funds in accordance with principles
of sound treasury management and in accordance with applicable laws and
ordinances.
The Executive Director is responsible for keeping the Executive Board fully
advised as to the financial condition of the Agency.
The Executive Board shall consider and adopt a written investment policy. As
provided in that policy, the Board shall receive, review and accept monthly
investment reports.
D. RRrWnsibilities of the Investment Committee
There shall be an Investment Committee consisting of the Executive Director, the
Director of Finance and Agency Treasurer. The Committee shall meet quarterly
to discuss cash flow requirements, the monthly investment reports, investment
strategy, investment and banking procedures and significant investment related
work projects being undertaken in each department which will affect the cash
flow management of the Agency. Treasurer. This will require timely reports from
the department heads to the Agency Treasurer concerning significant future cash
flow requirements. The Committee's meetings will be summarized in minutes
that are distributed to the Executive Board.
V REPORTING
The AgencyTreasurer shall prepare a monthly investment report, including a succinct
management summary that provides a clear picture of the status of the current investment
portfolio and transactions made over the past month. This management summary shall
be prepared in a manner which will allow the Executive Director and the Executive
Board to ascertain whether investment activities during the reporting period have deviated
from the Agency's Investment Policy.
The monthly report shall include the following:
A. A list of individual securities held at the end of the reporting month.
B. Unrealized gain or loss resulting from appreciation or depreciation by listing the
cost and market value of securities over one year in duration.
C. A description of the current investment strategy and the assumptions upon which
it is based.
D. Average rate of return on the Agency's investments.
E. Maturity aging by type of investments.
1 t►0 Yu l ►1 a :.: „t . r
Policy Review
This investment policy shall be reviewed annually by the Executive Board in accordance
with State law to ensure its consistency with respect to the overall objectives of safety,
liquidity and yield. Proposed amendments to the policy shall be prepared by the
Treasurer and after review by the Investment Committee and City Attorney be forwarded
to the Executive Board for consideration.
9 _1! � ' 11
This policy was duly adopted by authority of the Executive Board of the Redevelopment
Agency of the City of Azusa on the 19th day of February, 1991.
February 4, 1992
E"HIBIT A
PRUDENT MAN RULE
§ 2261 TRUSTS FOR THIRD PERSONS
Div. 3
§ 2261. Investments
(a) Degree of care, skill, prudence and diligence. (1) Subject to
paragraph (2), when investing, reinvesting, purchasing, acquiring, ex-
changing, selling and managing property for the benefit of another, a
trustee shall act with the care, skill, prudence, and diligence under the
circumstances then prevailing, specifically including, but not by way of
limitation, the general economic conditions and the anticipated needs of
the trust and its beneficiaries, that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, to attain the goals of
the trustor as determined from the trust instrument. Within the limita-
tions of the foregoing and considering individual investments as part of
an overall investment strategy, a trustee is authorized to acquire every
kind of property, real, personal or mixed, and every kind of investment.
(2) The trustor may expand or restrict the standards set forth in
paragraph (1) by express provisions in a trust instrument. Any trustee
acting for the benefit of another under that instrument shall not be liable
to anyone whose interests arise from that trust for the trustee's good
faith reliance on those express provisions.
(b) Retention of property. In the absence of express provisions to
the contrary in any trust instrument, a trustee may without liability
continue to hold property received into a trust at its inception or
subsequently added to it or acquired pursuant to proper authority if and
as long as the trustee, in the exercise of good faith and of reasonable
prudence, discretion and intelligence, may consider that retention is in
the best interests of the trust or in furtherance of the goals of the
trustor as determined from any trust instrument. Such property may
include stock in the trustee, if a corporation, and stock in any corporation
controlling, controlled by, or under common control with such trustee.
(c) Deposit of funds. In the absence of express provisions to the
contrary in any trust instrument, a deposit of trust funds at interest in
any bank (including the trustee, if a bank) shall be a qualified investment
to the extent that such deposit is insured under any present or future
law of the United States, is collateralized pursuant to any present or
future law of this state or the United States, or to such greater extent as
a court of competent jurisdiction may authorize. Nothing in this section
shall be construed as limiting the right of trustees in proper cases to
make deposits of trust moneys in banks, subject, in the case of interest-
bearing deposits, to such notice or other conditions respecting withdraw-
al as may be prescribed by law or governmental regulation affecting
such deposits.
(d) Deviations from terms of trust: court order. Nothing in this
section shall abrogate or restrict the power of the appropriate court in
320
OBLIGATIONS OF TRUSTEES
Pt. 4
§ 2261
proper cases to direct or permit the trustee to deviate from the terms of
the trust regarding the making or retention of investments.
(e) Application of section; construction of investment authoriza-
tions. The provisions of this section shall apply to all trusts now
existing or hereafter created. The terms "investments permissible by
law for investment of trust funds," "authorized by law for investment of
trust funds," 'legal investments," "authorized investments," "invest-
ments acquired using the judgment and care which men of prudence,
discretion and intelligence exercise in the management of their own
affairs, not in regard to speculation, but in regard to the permanent
disposition of their funds, considering the probable income, as well as the
probable safety of their capital," and other words of similar import used
in defining the powers of the trustee relative to investments, in the
absence of other controlling or modifying provisions of the trust instru-
ment, shall be construed as authorizing any investment permitted, and
imposing the standard of prudence required, by the terms of subdivision
(a) of this section.
(f) Property defined. The term "property" as used in this section
includes life insurance, endowment, and annuity contracts issued by legal
reserve companies authorized to do business in this state.
(Enacted 1872. Amended by Stats.1943, c. 811, p. 2602, § 1; Stats.1967, c. 688, p.
2054, § l; Stats.1967, c. 1706, p. 4265, § 1; Stats.1968, c. 161, p. 385, § 1;
Stats.1969, c. 259, p. fill, § 1; Stats.1984, c. 1372, § 1.)
Ilistorical Note
The section, as originally enucted in 1872,
provided:
",1 trustee must invest money received
by him under the trust, u fast as he col-
lects a sufficient amount, in such manner as
to afford reasonable security and interest
for the sume."
The 1943 amendment rewrote the section
to read:
"(1) In investing, reinvesting, purchasing,
acquiring, exchanging, selling and manag-
ing property for the benefit of mother, a
trustee shall exercise the judgment and
care, under the circumstances then prevail-
ing, which men of prudence, discretion and
intelligence exercise in the management of
their own affairs. not in regard to specula-
tion, but in regard to the permanent disposi-
tion of their funds, considering the probable
income, as well an the probable safely of
their capital. Within tine limitations of llw
foregoing suindanl, and subject to tiny ex-
press provisions or limitations contained in
any particular Lnlal instrument, a trustee is
authorized to acquire every kind of prolmr-
ty, real, personal or mixed, and every kind
of investment, specifically including, but
not by way of limitation, corporate obliga-
tions of every kind, and stocks, preferred or
common, which men of prudence, discretion
and intelligence acquire for their own ac-
count -
"12) In the absence of express provisions
to the contrary in the trust instrumen4 a
trustee may continue to hold property re-
ceived into a trust at its inception or subse-
quently added to it or acquired pursuant to
proper authority if and as long as the trus-
tee, in the exercise of good faith and of
reasonable prudence, discretion and intelli-
gence, may consider that retention is in the
best interests of the trust.
"(3) In the absence of express provisions
to the contrary in the trust insurumen4 a
deposit of trust funds at interest in any
savings bank or the savings department of
any bank lincluding the savings department
of the trustee, if a bank) shall be a qualified
investment ht the exlcut that such deposit
321
0
§ 2261
is insured under any present or future law
of the United States, or to such greater
extent as a court of competent jurisdiction
may authorize. Nothing in this section
shall be construed as limiting the right of
trustees in proper cases to mike deposits of
trust moneys in banks, subject, in file me
of interest-bearing deposiLs, to such notice
or other conditions respecting withdrawal
as may be prescribed by law or governmen.
tal regulation affecting such deposits.
"(4) Nothing in this section shall abro-
gnte or restrict the power of the appix l-
ate court in proper cases to direct or permit
the trustee to deviate from the terms of the
trust regarding the making or retention of
investments.
"(5) The provisions of this section shall
apply to all trusts now existing or hereafter
created. Where, in trusts now existing or
hereafter created, the term 'investments
permissible by law for investment of trust
funds; or 'nuthorized by law for investment
of trust funds,' 'legal investments,' or 'au-
thorised investments,' or other words of
similar import are used in defining the pow.
ers of the trustee relative to investments,
such language, in the absence of other win.
trolling or modifying provisimmi of tie trust
instrument, shill be construed as authoriz.
ing any investment permitted by the terms
of subdivision (1) of this section."
The 1967 amendment by c. 1706 added the
concluding sentence to subd. (2), (later
amended. see 1969 amendment); and delet.
ed references to savings banks and to the
savings department of banks from suhti. (S}.
Effect of amendment of section by two or
more acts at the same session of the legisla.
tore, see Government Code 4 9605.
The 1968 Amendment added subd. (6).
The 1969 Amendment added the words
"and stock in any corporation controlling,
controlled by, or under common control
with such trustee" to the end of solid. (2).
The 1984 amendment rewrote the section
which as amended in 1969 had read;
"M In investing, reinvesting, purchasing,
acquiring, exchanging, selling and manag-
ing property for the benefit of another, a
trustee shall exercise the judgment and
care, under tike circumstances then prevail.
ing, which men of prudence, discretion and
intelligence exercise in the management of
their own affairs, not in regard to specula.
tion, but in regard to the permanent disponi.
tion of their funds, considering the probable
0
TRUSTS FOR THIRD PERSONS
Div, 3
income, as well as the probable safety of
their capital. Within the limitations of the
foregoing standard, and subject to any ex.
press provisions or limitations contained in
any particular trust instrument, a trustee is
authorized to acquire every kind of proper-
ty, real, personal or mixeti, nod every kind
of investment, specifically including, but
not by way of limitation, corporate obliga.
tions of every kind. and stocks, preferred or
common, which men of prudence, discretion
and intelligence acquire for their own ac.
count.
"(2) In the absence of express provisions
to the contrary in the trust instrument a
trustee may continue to hold property re-
ceived into a trust at its inception or subse-
quently added to it or acquired pursuant to
proper authority if and as long as the trus-
tee, in the exercise of good faith and of
reasonable prudence, discretion and intelli-
gence, may consider that retention is in the
best interests of the trust Such property
may include stock in the trustee, if a corpo-
ration, and stock in any corporation control.
ling, controlled by. or under common con.
trill with such trustee.
"(3) In the absence of express provisions
In the contrary in the trust instrument, a
deposit of trust funds at interest in any
bank (including the trustee, if a bank) shall
be a qualified investment to the extent that
such deposit is insured under any present or
future law of the United Stales, or to such
greater extent as a court of competent jury
indiction may authorize. Nothing in this
section shall be construed as limiting the
right of trumeen in proper cases to make
deposi Ls of trust moneys in banks, subject,
in the case of interest-bearing deposits, to
such notice or other conditions respecting
withdrawal as may be prescribed by law or
governmental regulation affecting such cl -
pc its.
"(41 Nothing in this section shall abro.
gate or restrict the power of the appropri.
ate court in proper cases to direct or permit
the trustee to deviate from the terms of the
trust regarding the making or retention of
investments.
"(5) The provisions of this section shall
apply to all trusts now existing or hereafter
created. Where, in trusts now existing or
hereafter creatnl, the term 'investments
permissible by law for investment of trust
funds,' or 'authorized by law for investment
of trust funds,' 'legal investments,' or 'nu.
thorized investments,' or other words of
similar import are used in defining the pow-
ers of the trustee relative to investments,
322
0
OBLIGATIONS OF TRUSTEES
PL 4
such language, in the absence of other con-
trolling or modifying provisions of the trust
instrument, shall be construed as authoriz-
ing any investment permitted by the terms
of subdivision (1) of this section.
See West's California Code Forms, Civil.
10
§ 2261
"(6) The term 'property' as used in this
section includes life insurance, endowment,
and annuity contracts issued by legal re-
serve companies authorized to do Illusions
in this stale."
Forms
Cross References
Common trust funds of trust companies, see Financial Cade § 1564.
Common trusts, establishment for investment of funds of Department of Mental Health
held as trustee, see Welfare and Institutions Code § 7286.
Corporate shares, liability of fiduciary for subscription price, see Corporations Code § 413.
Deposit of trust company funds awaiting investment, see Financial Cale § 1562.
Investments authorized, provisions not altering degree of etre required, see 4 2269.1.
Investments of trust company trust funds, see Financial Code § 1561.
Mortgage participation certificates and securities guaranteed by mortgage policies as legal
investments, see Insurance Code § 12528.
Registration of stock held in trust in name of nominee of trust company, see Financial Code
§ 1563.
Savings accounts of savings associations as legal investments for funds of trustees, see
Financial Cale § 7000.
Trustee to manage proceeds of sale of property subject to life estate upon partition, see
Code of Civil Procedure § 873.840.
law Review Commentaries
Application of SEC Rule X -10B-5 to pre-
vent nondisclosure in sale of corporate secu-
rities. (1151) 39 C.L.R. 429.
Beneficiary's other resources as affecting
necessity of invasion of trust corpus.
(1953) 1 U.C.LA.Law Rev. 119.
Common stock as a prudent trust invest-
ment (1951) :19 C.L.R. :180.
Construction and application of the Uni.
form Principal and Income Act. (1939) 28
C.L.R. 34.
Delay causing estoppel to object to pur.
chase in breach of fiduciary duty. (1941) 14
So.CaI.I.R. 355.
History of supervision of charitable
trusts and corloratiuns in California. Wal.
lace Huwl;uad (1966) 1:1 U.C.LA. Law Rev.
I0'^J.
Liability of trustee for improper invest-
ments. (1951) :19 C.L.R. :180.
Prudence, information and trust invest-
ment law. .John A. Humbach and Stephen
P. ])resell (197(1) fit A.B.AJ. 11109.
Prudent man investment of trust funds
during inflation. (1951) 39 C.L.R. 380.
Prudent mull investment rule in the law
relating to trusts. (1943) 18 S.Bar J. 283.
Representation of adverse parties in trust
administration. (19117) 55 C.L.R. 948.
Revolution in trust investment law.
(1976) 62 A.B.A.J. 887.
Trust participation in partnership ven-
tures. (1951) 3 Stan.f.R. 467.
Trustee's power. lower to sell as includ-
ing lower to option. Michael H. Dessent
(1970) 7 San Diego I.Rev. 22.
Toasts—Corlorate executor/trustee.
(1975) 2 West SLII.I.Rev. 295.
Liability of the trustee for appreciation
of properly (1957) 4 U_C.L.A. law
Rev. 314.
Violation of duty by corporate trustee by
Planning for incompetency. Louis M. investing in its own stock. (1949) 37 C.LR.
Brown (1104). _ 3'J S. Bar J. 268. 539, &il
Planning for incmniktency and practices War conditions as presenting new prob-
under the conservatorship buy. George E. lems for investment of funds by trustees.
Zillgitt 11964) 37 Su.Cal.I.R. 181. (11142) 17 S.Bar J. 36.
323
§2261 TRUSTS FOR THIRD PERSONS
Div. 3
Library References
Trusts 1-216 to 217.5. Probate Court Practice, Goddard,
C.J.S. Trusts §§ 320, 322. 324 to 329, 331. §§ 1823, 1825, 2207, 2208.
Notes of Decisions
Borrowing funds 7
Charges agninst trust for beneficiary 8
Cnilccting judgments, not". rents, etc.
10
Construction and application 1
Corpornle trustees 6
Court orders for devintlon from trust 23
Declaration of trust 9
Deposit of funds 11
Discretion of trustee I
Interest charges ngninel trustee 25
Investing property 12. 13
In general 12
Prudent investor standard 13
Liability of trustee 21
Lnening property 14
Mortgages 25
Possession of prnpertv 15
Preserving properly 15
Prudent investor standard. investing prop-
erty 13
Record of trust funds 22
Retention of property 17
Selling property 18
Speculating with properly 19
Strndnrd of care 5
Surrendering property 20
Trust funds 2
Use of funds in general 3
Value of use and occupation by trustee
21
1. Construction and application
This section does not supersede trustee's
were given inadequate directions for con-
trolling tmst property. Estate of Berges
(1977) 142 Cal,Rptr. 685, 76 C.A.3d 100.
In determining date of breach of trust by
trustee who negligently failed to invest in-
come within reasonable time, factors to be
considered include purpose of trust, amount
of munev on hnnd and amount deemed nec.
essary to meet possible contingencies or
emergencies in light of role that trustee, in
investing and managing property for bene-
fit of another, should exercise such core
under circumstances as prudent man would
exercise in management of his own affairs.
Lynch v. John M. Redfield Foundation
(1970) 88 Cal.Rptr. 86, 9 C.A.3d 293, 51
A.LR.3d 1284.
Provision of former subd. 09) of this sec-
tion, that where term "investments permis-
sible by law for investment of Gust funds,"
or other words of similar import are used in
defining (rowers of trustee relative to in-
vestments, such language, in absence of
other controlling or modifying provisions of
trust instrument, shall he construed as au.
thorizing any investment permitted by for-
mer subd. f of this section, establishing the
Prudent Man Rude of investment, is only
applicable where testator limits investments
to statutory approved investments. and has
no npplication where .settlor himself speci-
fies particular investments that are prr tr
ited. Stanton v. Wells Fnrgo Bank k Union
Trust Co. (1057) 310 P.2d 1010. 150 C.A.2d
70.
general duty to maximize trust assets can.
sistent with safety and other relevant con-
2. Troll funds
siderations: a slalulodip authorized invest-
Land acquired by irrigntion district Be-
ment may or may not be the prudent course
cause of delinquencies in assessments in
of conduct for the trustee to pursue. Mut-
trust property, held for the uses and pur-
ter of Pelton 11982) 183 Cai.Rptr. 188, 132
lmses of Gen.Laws 1931, Act 3854, govern-
C.A.3d 4%.
ing irrigation districts, and proceeds of
Where testator's will after making a spe-
Tense thereof have Lhe same character.
cific hequest of tush and any automobile to
Provident Land Corp. v- Zumwalt (1939) 85
designated individual. bequentbed to his
P.2d 116, 12 C.2d 365.
brother and sister as trustees the sum of
$600 for each of their respective children
3. Use of funds In general
with pmvision that each trust terminates
Probate court's factual findings were in -
when the child attains 19 years of age.
ade.luate hh permit court or appeal to deter -
trusts were valid over cnnlentinn of benefi.
mine whether bank/conservator breached
ciary that the purlwses or terms of trust
its fiducinry duty by keeping approximately
could not be ascertnined and that trustees
$2M.W1 in eslnte's assets in bank's WW.
324
•
OBLIGATIONS OF TRUSTEES
PL d
passbook account for 17 months, during
which substitution of conservators wits be-
ing arranged, at a time when amounts in
excess of $100,000 were earning V.'A inter-
est in 30 -day accounts at various banks; a
remand for further proceedings was re-
quired. Matter of Pelton (1982) 183 Cal.
Rptr. 188. 102 C.A.3d 496.
Trustee, who is directed by terms of trust
to pay income to beneficiary during desig-
nated period and on expiration of that peri-
od to pay principal to another beneficiary,
owes duty to former beaefciury to take
care not merely to preserve trust property
but to make it productive so that reasonable
income will be avuilable for him. and trus-
tee is under duty to latter beneficiary to
take rare to preserve trust pruporty for
him. In re Bissinger's Estate (190.9) 28
Cal.Rptr. 217, 212 C.A.2d 831.
Manner in which charter city effectuates
purposes of tidelands trust, including man-
ner in which it conducts negotiations fur
leasing of lands, is municipal affair. Silver
Y. City of I.os Angeles 11!1621 17 CaLl it
379, 366 P.2d 651, 57 C.2d 39, certiorari
denied 82 S.CL 11,13, 369 U.S. 873, 8
L.Ed.2d 2n0.
Under trust principles and applicable pro-
visions of the Health and Safety- Code, it is
not legally proper to use endowment care
funds of private cemeteries to purchase in-
terment plots located in the cemetery, for
which the fund was established. or to loan
such funds to the cemetery, its subsidiary,
or affiliate, on the security of a trust deed
on such interment plots, or to invest such
funds in the stock of such cemetery, its
subsidiary, or affiliate. 28 Ops.Alty.Gen.
321.
4. Discretion of trustee
A trustee occupies a fiduciary position
with duly to exercise its independent judg-
ment ;and may not ahtnnatically accede to
demands of trust beneficiary. 6forsu v.
Crocker Not. Bunk 11!18:1) 1911 CaLlItAr. 8:19,
142 C.A.3d 228.
An absolute discretion does not permit a
trustee to neglnst his trust or abdicate his
judgment. Matter of Collins' Estate (1977)
I39 Cal.ltptr. 644, 72 C.A.3d 66:1.
Absolute discretion given defeod:nt trus-
W�,s of tcsutowutvy trust of wlnicln plain-
tiffs were boneficiuries was specifically Ba-
ited by requirement in trust instrument that
trustees be subject always to discharge of
their fiduciary obligations. Ill.
§ 2261
Note 7
Provision of testamentary trust that "all
discretions conferred upon the Trustee shall
be ubsolule," viewed as an exculpatory
clause, nvus subject to rule of strict con-
struction. Id.
:Absolute discretion conferred by provi-
sion of testamentary trust that "all discre-
tions conferred upon the Trustee shall be
absolute" was specifically limited by re-
quirement that trustee by "subject always
to the discharge of its fiduciary obliga-
tions." Id.
5. Standard of cure
Standard imposed upon trustees is that
they exercise that judgment and care which
men of prudence, discretion and intelligence
would exercise in management of their own
afLhirs. Matter of Collins' Estate (1977)
139 CulAtplr. 1144, 72 C.A.3d 663.
Trustee is alder a duty to beneficiary to
distribute risk of loss by reasonable diversi-
fication of investments unless under circum-
stances it is prudent not to do so. Id.
A trustee with absolute discretion may
not neglect its trust or abdicate its judg-
ment. til.
Record contained no evidence that de-
fendant trustees satisfied even the lesser
standard of care for which they contended
in claiming that trust instrument conferred
on chem an "absolute discretion" so as to
require them to refrain to act arbitrarily
and to use their best judgment- Id.
6. Corporate trustees
Different types of im'estments for "cor-
porate lnusteew" and for "amateur Irus-
tces" are not authorized under prudent in-
eestnr standard; difference, ratter, is that
corporate trustee is held to a greater stan-
dard of care based on his presumed exper-
tise. Mutter of Collins' Fstate (1977) 131)
CaLltplr. 64.1, T2 GA.ad 663.
7. Borrowing funds
Under this section, though trustees are
nut orcioarily liable fur interest on moneys
coming into their hoods unless they have
improperly failed to incest them, they are
out justified ill borrowing inure money than
they need, and charging trust with interest
un sums borrowed, and. where thuy have
idle namcy nn hand, it is their iluly Un apply
it sn as to slop nmcreessary intemlit
charges. Purdy v. Johnson (1917) Ilia P.
8!):I, 174 C. 521.
325
11
§ 2261
Nole 8
8. Charges against trust for beneficiary
Fact that testamentary trustee had violat-
ed her duties as such by commingling trust
funds with her own, omitting to invest
them, anti negligently failing to keep any
records which would enable her to render a
true account had a bearing, in absence of
vouchers or receipts, on question of wheth-
er charges against trust estate for board,
clothes, laundry, etc., for beneficiary for 15
years were established by satisfactory evi-
dence. In re McCabe's Estate (1948) 220
P.2d 614, 98 C.A.2d 593.
9. Declaration of trust
Even if trust instrument permitted a type
of investment generally frowned on under
prudent -investor rule, it did not authorize
defendant trustees to make that investment
blindly. Matter of Cullins' Estate (1977)
139 Cnl.Rptr. 644, 72 C.A.3d 663.
While the declaration of trust may have
possibly enlarged the prudent -investor stan-
dard as far as the type of instrument was
concerned, it could nut be construed as per-
mitting deviations from that standard in
investigating the soundness of a specific
investment. Id.
10. Collecting Judgment.%, notes, rents,
etc.
One holding judgment a% trustee for cor-
poration and another was required as such
trustee and as secre Lary of the corporation
to use his hest efforts to collect the judg-
ment in full by execution sale of stock
owned by judgment debtor. Darden v.
Reese (1949) 200 P.2d 81. 88 C.A.2d 9U4.
Where trust instrument provided that
trustor and son should occupy a dwelling on
land constituting the corpus of the trust
during trustor'% lifetime and that the land
should be sold on trustor's death and pro-
ceeds of the sale distributed in a specified
mnnner, and on trustor's death trustee re-
covered. but dirt not collect judgment in
ejectment against the son, trustee was
pmper(y charged with the stipulated value
of the property an dale trust was to be
terminated, the rental of the house former-
ly occupied by the son, and the judgment
E
TRUSTS FOR THIRD PERSONS
Div. 3
fault Purdy v. Johnson 11917) 163 P. 893,
174 C. 521.
Where testamentary trustees rented land
of trust. but their accounts in beneficiary's
action against them showed that only part
of rent was collected. trustees were bound
to account for balance, unless they could
show some good reason for failure to col-
lect. Id.
I1. Deposit of funds
Generally fiduciary is personally liable
for money deposited by him in bank which
becomes insolvent, unless evidence shows
that he was not negligent in so doing, and,
In absence of order of court. deposit of
trust funds in bank is not warranted as an
Investment. Allen v. Rainey (1935) 41 P.2d
374, 4 C.A.2d 558.
12. Investing property—In general
Rule that trustee has duty to invest al-
though generally pertaining to investment
of principal, applies likewise to investment
of accumulated income. Lynch r. John M.
Redfield Foundation (1970) 88 Cal.Rptr. 86,
9 C.A.3d 293, 51 A.L.R.3d 1284.
Objections of trust beneficiary that trus-
tee, which had been given absolute discre-
tion in managing trust property, had negli-
gently and carelessly failed to properly ad-
minister or manage trust and that as a
proximate result beneficiary had been de-
prived of reasonable return and had sus-
tained loss of some E50.W0 from sale of
assets were sufficient to raise issues of
abuse of discretion and failure to exercise
judgment which trustee should be required
to meet Coberly v. Superior Court for Los
Angeles County (1966) 42 Cal.Rptr. 64, 231
C.A.2d 685.
Rule that it is duly of a tnistee to invest
trust funds so that they will he productive
of income is designed for trusts intended to
be productive of income or other gain, but
the Wile is not applicable in the rnae of a
trust not designed for income purlroses but
for other purposes. such as holding and
preservation of property for use by others.
Higgins Y. City of Santa Monica (1964) 41
Cal.Rptr. 9. 390 Ptd 41, 62 C.2d 24 -
rendered in the ejectment action. Johns v. The capacity of co -trustees to seek court's
Peterson (1942) 126 P 2d 90:4, 52 C.A2d 720. instruction as to interp relation of trust
It was duty of testamentary tnntees t
collect prornissory notes distributed t
them, and they were liable Gr beneficiary
for amount of notes, with interest, unless
their failure to collect was not due to thei
o instrument and to obtain permission to de -
o viate from terms thereof regarding making
or retention of investments, did not cnn%li-
s Lute exercise of a "Imwer' within cnntem-
r elation of 4 860 requiring that all unite in
326
OBLIGATIONS OF TRUSTEES
PL 4
execution of a power vested in several per
sans, and 4 '_2?68 requiring all co -trustees to
unite in any act to bind trust property, and
hence one trustee could appeal from daci-
sion allowing deviation from trust require -
mems us to investments, though other trus-
tee did not wish to appeal. Stanton v. Preis
(19561 291 P.2d 118, 138 C.A.2d 63.
Under will and decree of distribution giv-
ing testamentary trustees right to invest in
stocks of corporations of which testatrix
was a stockholder on her death if trustees
obtained written consent of beneficiaries,
trustees were nut required to obtain such
consent to purchase stocks of corporations
of which testatrix was not a stockholder.
In re Fowler's Estate (1943) 182 P.2d 535,
56 C.A.2d 751.
That trustees held an investment in stock
of bank which thereafter failed did not
show mismanagement of trust. In re
Knox' Estate (1942) 126 P.2d 108, 52 C.A.2d
338.
Under will directing testamentary trus-
tees to accumulate in cosh or negotiable
securities the sum of $15,000 and to pay
income therefrom to beneficiary, a note se-
cured by mortgage on Illinois realty was
not improper investment, as against conten-
tion that. under Illinois law, murtguge was
not negotiable security, where negotiability
of note was not affected under Illinois how
by the mortgage, and word "negotiable" in
will was employeil to keep trust funds in
comparatively liquid state. Id.
In investiug trust funds, trustee 311011111
consider aggregate value of trust estate,
nature of other investments of funds of
trust, and udvisability of diveroifying in-
vestments in order to insure against all.
verse enmlitions in any particular field.
Day v. First Trust k Savings Rank of Pasa-
dena WAD 118 P.2tl 51, 47 C.A.2d 476.
Whether trustee los acted prolwrly in
making investment depends on circumstanc-
es at time investment is made and not oil
subsequent events. W.
A financial institution with broad general
knowledge of nummunity oasls and trends,
of character and worth of citizens with
whom institution hus dealt and specific
knowledge of property values in cumuumi-
ty, can consider such positive generul
knowledge in investing trust funds, and is
not restricted to letter upon letter and line
upon line conformity with pme. criled ritual
in estimating value of pminised invuzooent
C�
§ 2261
Note 17
in order to avoid charge of negligently man-
aging such funds. Id.
In determining whether gulf club mort-
gages were proper investments for trust
funds, appraised value of realty and charac-
ter, financial standing, and past perform-
ance of officers and members of clubs could
be considered. Id.
The fact that mortgage participation cer
tificates purchased by trustee depreciates in
value standing alone does not warrant equi-
ty court in opening, surcharging, or falsify-
ing trustee's accounts, approved by court.
Ormeral v. Security -First Nat. hank of Los
Angeles (1937) 69 P.2d 469, 21 C.A.2d 882.
In an action against trustees to have de-
clared void a purchase made by diem, evi-
dence that one of them understood the pro-
priety of the purchase was first to be sub-
mitted to the beneficiary is admissible. Rett
Jacket Tribe No. 28 Y. Gibson (1886) 12 P.
t27, 70 C. 128.
A California domiciled state or national
baulk having a trust department which is
the trustee under an instrument which di-
rects the investment of the corpus in United
States government obligations, may not in-
vest such corpus in a mutual fund, the
portfolio of which is limited to short -Lunn
United States treasury obligaduus. bi Ops.
Atty.Gen. 212, fr29-84.
Where unly the interest on the corpus of
funds given in trust to the director of elu-
culiun is to be used for educatimud pur-
poses the director of education on hehalf of
estate and in his official capacity should
invest the trust funds, collect the interest
and apply the iutcrest as specified by the
trustor. I Ops.A Lty.Gen. 90.
17. — Prudent investor standard, in.
vesting property
Ilmdeul investor standard does not apply
where settlor himself specifies trustee is
not limited by what law provides are proper
iuvesunenls. Matter of Collins' Estate
(1977) 139 Cal.Rplr. 644. 72 C.A.3d 663.
Although Californias does not limit trus-
tee's authority to a list of authorized invest.
mmnts, relying instead un prudent invevutor
rule• that rule nevertheless encompasses
curtain guidelines that must le followed by
trustee. Id.
Provision in trust Instnunenl to purchase
every kill([ of pmperly and stake every kind
of invustment "irruapective of whether said
invealmcuci are in accorda ce widt We luws
327
§ 2261
Note 13
then enforccl in the Stale of California
pertaining to the investment of trust funds
by corporate trustees" did not authorize
trustees to make improper investments in
vialnlion of prudent investor standard. Id,
Different types of inveslme-nl-a are not
authorized for "corporate trustees" as dis-
tinguished from amateurs; difference, rath-
er. is that corporate trustees are held to a
greater standard of care based on their
presumed expertise. Id.
Defendant trustees failed to follow 'pr t -
dent investor" standard with respect to ad-
ministration of testamentary trust of which
plaintiffs were beneficiaries where they In-
vested two thirds of trust principal in a
single investment, invested in real property
secured only by a second deed of trust, and
made that investment without adequate in-
vestigntion of either borrowers or collater-
al. Id.
Investment by nonprofit cemetery corpo-
ration of nearly BIM of its endowment fund
in note and first deed of trust on one parcel
of real property could be found to be a
violation of prudent investors role with re-
spect to investment of trust funds and cem.
etery boort], department of professional and
vocational standards, was authorized to or-
der Hot sum lent be reinvested. Mandel v,
Cemetery Bd., Dept_ of Prnfcssiona] and
Vocational Standards (1960) 8 Cal.Rptr. 342,
185 C.A.2d 583.
This section broadens list of legal invest-
ments for trustees of endowment care
funds. but also places trustees under man-
date of prudent investors role in regard to
all of their financial transactions. Id.
An essential part of prudent investors
rule with respect to investment of trust
funds is the miquirement that investments
be diversified. Id.
Under provisions of this section eml)n dv-
iug "prudent man role" in setting forth
duty of trustee in cnnucetiun with invest- Where an agent or trustee is instructed
me.nL of trust funds, aml under general law to "loan out" frauds held by him. it means
applicable to Lrustmw. trustee, even where that he is to invest them far his principal's
given broad discretionary luoacer of invest. ncent nt. and to make an accounting to the
ment, must exercise its independent discre- principal of such investment and he is nut
tion and judgment io reference to iuvmt. authorized to borrow Lite funds for his own
ment of trust funds. In re Talbot's ESlate purposes, In re Armstrong's Estate (1883)
11956) 296 P.2I 848, 141 C.A.2d 30:), 58 1 Cot 157, affirmed 10 P. 335, 69 C. 239.
A.LR.2d MR- Where trustee loaned out the funds of
A trustee is neither expected in bury his beneficiary without advising her of the risk
talents nor to exercise infallible judgment in to which he was subjecting her funds nor of
investment of Grads, hitt he mast exercise his mingling the funds with Itis own in lis -
skill rand judgment of reasonably prudent crinrinalely he was liable for the loss result.
business man its preserving estate and at ing therefrom and his account a; special
328
0
TRUSTS FOR THIRD PERSONS
Div. 3
Lite same time make the estate productive.
Day v. First Trust & Savings Bank of Pma-
dena (1941) 118 P.2d 51, 47 C.A.2d 470.
A trustee must use due care and skill and
the caution of a prudent man in making
investments, and, in absence of provision in
trust or statute, he can make those invest-
ments which a prudent man would make in
investing in property outside of ordinary
business risks and with a view to safety of
principal and to securing of an income ren-
sonable in amount and payable with regu-
larity. Id.
Evidence warranted denial of liability of
trustee for depreciation of trust assets dur-
ing economic depression, on ground that
trustee was not negligent in investment of
funds, but exercised care of ordinarily pru-
dent person. Id.
The liability of a director of education
acting as official trustee for bequests of
funds to be used for educational purposes is
to make such investments its a prudent man
would make of his own property, having
primarily in view the preservation of the
estate and the regularity and amount of
Income. 1 Ops.A Lty.Gen. 90.
H. Loaning property
Evidence that the land mortgaged to se.
cure a Iran made by a trustee was and
land, which it -at; practically imlossible to
irrigate, and that the trustee made the loan
upon the statements of one man, whom she
knew, and a written report by three strang-
ers, two of whom were the former owners
of the land who had conveyed it to a dummy
for Lite purpose of securing the loan there-
on, sustained the trial court's finding that
the trustee was negligent in making the
loan, and was therefore bound to mnke
good Lite loss. In re Hamon's Estate (1923)
212 P. 399, 60 C.A. 154.
r�
u
OBLIGATIONS OF TRUSTEES
Pt. 4
administrator for the beneficiary should be
charged with the loss sustained. Id.
15. Possession of property
In action for declaratory relief with re-
spect to the scope of joint will by which
husband and wife converted property into
community property, court had broad pow-
ers and could, prior to distribution, interpret
will on question of whether widow upon
distribution, would be entitled as against
trustees to possession of any of property
involved. Chase Y. Leiter (1950) 215 P.2d
756, 96 C.A.2d 439.
16. Preserving property
Executor serves in fiduciary capacity and
has powers and obligations similar to trus-
tee, except that primary duty is to preserve
estate until distribution, rather than invest
funds. In re Slingsby's Estate (1931) 297 P.
931, 112 C.A. 767; In re Brenhart's Estate
(1931) 297 P. 9:11. 112 C.A. 766; In re
Smidn's Estate (1931)'297 P. 927, 112 C.A.
680.
17. Retention of property
Usually trust is created to preserve prop-
erly intact and to earn income for benefi-
ciary, and ordinarily trustee is directed to
administer funds in order to substitute sup-
posedly superior judgment of trustee for
that of beneficiary. Day v, t•Irst Trust &
Savings Bunk of Pasadena (1941) Hil 11.24
51, 47 C.A.2tl 470.
An honest trustee is not liable to make
good the loss susunined by retaining an
authorized security it, a falling market, if he
did so honestly and truthfully, in the belief
that it was best course to take in inwresl of
all parties. Id.
18. Selling property
Where trustee bud broud power of stile
but, iusteud of exercising independent judg-
ment as to sale of common stocks, relied on
one beneficiary's unfulfilled ;wsurance that
latter would secure from other beneficiaries
written consents to the sale. and tnnstee
sold stocks which thereafter doubled in val-
ue, trustee was liable for mluctimn in value
of objecting beneficiary's share of corpus,
i.e., reduction consisting of capital gains
taxes and expense of stock sales and bond
purchases. and for interest oil amount of
such reluction, but trustee was not liable
for appreciation in value of stocks after sale
or for loss of income on stocks. In re
0
§ 2261
Note 18
Talbot's Estate (19561 '296 P.2d 848, 141
C.A.2d 309, 58 A.L.R.2d 658.
Where trustee has a broad power of sale,
right of income beneficiury is simply to
insist that trustee shall exercise its indepen-
dent judgment. and income beneficiary has
no legal right to compel retention of any
stocks and is not legally hurt by reason of
the trustee's failure to keep certain stocks.
Id.
When trustee who owned as trustee all
the stock of corporation, which by the sale
of its real estate supplied assets for distri-
bution to trustee is trust, dissolved the cor-
poration, trustee had title to real estate and
had power and duty to carry out purpose of
trustor by selling lands and receiving pro-
ceeds from sales into the trust Stubbs v.
Jones (19531 263 P.2d 100. 121 C.A.2d 218.
A testamentary trustee, using diligence
and discretion in selling foreign government
bunds includeil in trust assets and receiving
highest prices obuninable therefor, was
properly allowed credit on accounting for
loss sustained in sale thereof for less than
their value as fixed by court in settlement
of previous accuunts, in absence of evidence
of negligence in making sale or showing
that life beneficiaries of income, in contest.
ing previous account, sought to charge Lrua-
tee with value of bonds as cash on hand
owing to estate because of his neglect to
sell bonds. In re Bothwell's Estate (1944)
151 P.2d LN8, tis C.A.2d 5,98, rebeuring de-
nied 151 1'.2d 868, 65 C.A."_d 598.
Assessment of damages against trustee
for negligence in falling to Sell trust really
as directed by trust instrnnent, thereby
depriving life beneficiaries of income,
should not be resorted to by them when
another appropriate remedy, such as appur-
lionnnenl of proceeds of subsequetlL stile
thereof between principal and income, is
available. Id.
In action apminst lroslee for accounting
under contract authorizing trustee to man-
age and sell pam is of really on such Lerms
and at such tiles as trustee, within his
discretion, should determine, evidence did
not show that trustee, in refusing offer to
purchase prupery at price subsequently
shown to be adequate, did not exercise an
honest judgmunt. :and his estate was, there-
fore, not liable for da o ges for such refus-
ul. Neel v. Barnard 119441 150 Ptd 171, 24
C.2d 406.
In action against trustee by beneficiaries
of trust for accounting and for damages.
329
0
§ 2261
Note 18
finding that trustee had no opportunity to
sell property involved at such prices as
would have liquidated plaintiffs' indebted.
ness as provided by contract crendng trust.
or on such terms as trustee properly fixed,
determined in effect, that a rensnnnble time
for sale of property had not elapsed. Id.
Even if offer was made to trustee for
purchase of realty which trustee held for
sale for benefit of beneficiaries of trust, it
would be presumed that trustee exercised
Isis judgment upon it and deemt"I price of-
fered too low, and court could not say that
he acted fraudulently or in bad faith in
declining to sell. Id.
A trustee can properly sell trust property
if such sale is necessnry or appropriate to
enable trustee to carry out purposes of
trust. unless sale is forbidden in specific
words by terms of trust or it appears from
terms of trust that property was to be
retained in specie in trust Church v.
Church (1940) 105 P.2d 840, 40 C.A.2d 886.
Where father of minor children took out
shares of stock in a family corporation in
his name ns trustee for children, and the
father had never executed any document in
writing or declaration of trust restricting
his power, as trustee, to transfer shares,
and evidence warranted finding that, aside
from trustee's certificates, there was no
such agreement entered into concerning
shares, and it did not appear that any re-
striction on power of sale was contained in
certificates, it could not be said as matter of
law that the faduer did not have the right•
as trustee, to transfer shares whenever, in
exercise of his discretion, it appeared to him
proper or necessary to do so. Id.
Where money is bequeathed to a trustee
to invest in land, with liberty to change the
investment at his discrelimu. the superior
court is without jurisdiction to entertain a
suit by the cestui que trust to order the
tnistee to sell Lite land subject to confirmn-
don by the court nor an application by an
inten•ener in such a suit to confirm an
alleged contract of side to him by the trus-
tee, and to direct Lite execution of convey-
ance. Murphy v. Union Tnixt Co. of San
Francisco (1907) 89 P. 988, .5 C.A. 146.
19. Speculating with property
A beneficia" who learned that trustee
had disoheyed instructions not to speculate
in stocks was required to net within a Mo.
suitable time thereafter and could not wait
and hold trustee for subsequent decreases
0
TRUSTS FOR THIRD PERSONS
Div. 3
in value of stocks in the account Weiner v.
Mullaney (1943) 140 P.2d 704, 59 C.A.2d
620.
Where beneficiary learned from broker in
January, 1938, that instructions to trustee
not to deal in stocks had been violated,
beneficiary was put upon inquiry at that
time and was charged with "notice" of all
that an inquiry would have disclosed. Id.
Where trustee failed to make full disclo-
sure of facts surrounding use of benefr
ciary's shares in stock transactions contrary
to instructions, that it was no longer within
beneficiary's power to rescind tranenction
when she finally learned the true situation
and her only recourse was to salvage what
stocks were left, such action on her part did
not amount to a "ratification" of trustee's
eonducL Id.
Where trustee was expressly instructed
not to sell or deal in stocks for beneficiary,
his action in dealing in stock was a "breach
of trust" for which he was liable. Id.
A trustee is not permitted to buy and sell
bonds on speculation and die fluctuations in
market value after purchase by the trustee
are merely changes in the value of the
assets of the trust "Lite. which are to be
wholly disregarded in any accounting be-
tween life tenant and remaindermen for
fumis from the trust estate invested in in-
come-benring property. In re Gartenlauh's
Estate (1921) 198 P. 209, 185 C. 648, 16
A.LR. 520.
20. Surrendering properly
Evidence was sufficient to support find-
ing as to market value of bonds in action by
beneficiary against trustee for value of
bonds deposited with trustee which trustee
without authority surrendered to bondhold-
ers' pmtective committee. Martin v. Bank
of America Trust k Savings Assn (1935) 41
P.2d 200, 4 C.A.2d 431.
21. Value of use and occupation by trus-
tee
A purchaser of land with notire of the
facts entitling another to the delivery to
him of a deed pmviouM'v made out in his
favor, who obtains possession by force from
We cestui que trust, must account to him
for Use value of the use and occupation. and
the cestui que trust must pay tiro purchase
price into court for the benefit of the trus-
tee. adding interest from the date of the
tender of the price, unless he chooses to
regard the interest as liquidating the value
330
0
OBLIGATIONS OF TRUSTEES
PL 4
of the use. Cannon v. Handley (1887) 13 P
315, 72 C. 133.
22. Record of trust funds
A trustee or attorney handling funds of a
client cannot escape responsibility for trust
fund by failing to keep any record or data
from which an accounting might be made.
Bruns v. State Bar of California (1941) 117
P.2d 327, IS C.2d 667.
23. Court orders for deviation from trust
Equity court order to sell realty, contrary
to terms of expnsa testamentary trust, and
reinvest proceeds, was unauthorized, in ub-
sence of present market value Lhereof and
showing of character or security of proper.
ty in which he proposed to reinvest pro-
ceeds. Security -First Nat. Bank Y. Easter
(1934) 29 P.2d 4=f. 136 C.A. 691.
21. Liability of trustee
If money paid for trust is lost or de
stroved without fault of trustee -payee, trus
tee -payee is not liable therefor and loss c
borne by payer, trustorlteneficiary. Pelh
erbridge v. Prudential Say. & Loan Ass'r
(1978) 145 Cal.Rptr. 87, 79 C.A.3d 509.
Defendant trustees were subject to being
surcharged for imprudent investment of
monies from testamentary trust in which
plaintiffs were beneficiaries, not because
they lacked prescience of what would hap
pen, but because they both lacked and ig
nored information about what wtu happen
ing at time. Matter of Collins' Eatatt
11977) 139 Cal.Rptr. 644, 72 C.A.3d 663.
Trustee who negligently breaches hit
trust by failing to invest income within rein
sortable time is liable pursuant to statutt
for simple interest at rate of 75 per annum.
Lynch v. John M. Redfield Foundatior
(1970) 88 Cul.liptr. 86, 9 C.A.3d 293, 51
A.LR.3d 1284.
One who engages services of trustee, cor
porate or otherwise, contracts for exercise
of trustee's best judgment and for perform
ante of duties outlined in this section; tone
he has no right to receive any more that
that and no right to complain if those ser
vices are rendered in good faith and with
reasonable prudence. discretion anti intelli
genre. In re Rissinger's Estate MGM 2E
Cal.Rptr. 217. 213 C.A.2d 531.
Generally, trustee's violation of equitable
duty, whether fraudulently or through neg
ligence, mere oversight or forgetfulness, it
breach of trust, and trustee may be churget
10AC I.CaEe—t2
0
§ 2261
Note 25
with rents, profits and income which he
never received, but might and should have
received by exercise of due and reasonable
care and diligence. White v. Citizens Nat.
Trust & Savings Bank of Los Angeles
(1941) 116 P.2d 117, 46 C.A.2d 418.
The nominal title holder of realty, incum-
bered by a trust deed, who upon taking title
to realty assumed obligations of trustee for
benefit of obligees whose claims were se-
cured by trust deed, differed from a mort-
gagor in possession and was liable for all
rents and profits received while in posses.
sion of Lite realty even prior to sale thereof
under power of sale contained in trust deed.
Baumann v. Harrison (1941) 115 P.2d 530,
46 C.A.2d 84.
25. Interest charges against trustee
Failure of directors of charitable, non.
profit corporation to invest dividend income
deposited in corlwration's checking account
over five -your period was breach of their
duty to invest funds as would a reasonable
Pian so that funds would be productive of
income and were liable for interest on suns
Inst in consequence of such failure, notwith.
standing facts that bank had refused to
honor drafts drawn on corporation's ac-
count due to dispute among directors, that
directors served without compensation,
that, during period of inaction, corpus
gained approximately 100.1 in value, and
that costly lawsuit would be necessary to
settle directors dispute and remuve "block-
ing" from bank account. Lynch v. John M.
Redfield Foundation (19701 SS Cal.Rptr. 86,
9 C.A.3d 2993, 51 A.LR.3d 1294.
In action by beneficiary under two ex.
press trusts for an accounting by Lite re-
slwctive trustees, where trustees had
waived delinquent interest on notes due Lite
trust, had not collected note from deceased
maker, and had made loans which were
disapproved! by the court, trial court's
charge of Cis- interest on amount thus sur-
charged, except for the unauthorized loan
concerning which current savings bank in-
terest rates compounded semiannually were
charged, did not constitute nn abuse of dis-
crelinn. Douglas V. Westfull (1952) 248
P.2d 68, 113 C.A.2d 107.
Where will created trust of specific lega-
cy, with amount thereof and accumulations
to be paid to beneficiary when she reached
age of 26, when executor who was also
trustee had failedl to transfer corpus to
himself as trustee or to invest same as
raluired by this section, and estate was not
331
r-1
L-A
§ 2261
Note 25
distributed prior to time for distribution to
beneficiary of trust, 7 per cent interest due
upon corpus for failure to invest would be
allotted 4 per cent against estate and the
remaining 3 per cent against trustee as
such. In re Prior's Estate (1952) 244 P.2d
697, Ill C.A.2d 464.
Where will crented trust of specific lega-
cy, with amount thereof with accumulations
to be paid to beneficiary whet, she reached
age of 26. duties of trustee who was also
executor commenced upon deaUt of testa-
tor, and failure of executor to transfer fund
to himself as trustee could not absolve him
of his duties and responsibilities asst trustee
including duty to invest, and could not limit
liability for interest to 4 per cent rate appli-
cable to executors. Id.
26. Mortgnges
Equity will sanction an investment se-
cured by a second mortgage it, a rare case
but only when security is adequate and
unusual circumstances justify trustee in
1J
TRUSTS FOR THIRD PERSONS
Div. 3
making such an investment. Matter of Col.
lins' Estate (1977) 139 Cal.Rptr. 644, 72
C.A.3d 6f.9.
In buying a mortgage for trust invest-
ment. trustee should give careful attention
to valuation of property in order to make
certain that margin of security is adequate;
he must use every reasonable endeavor to
provide protection which will cover risks of
depreciation in property and changes in
price levels and must investigate status of
property and of mortgage m well us finan-
cial situation of mortgagor. Id.
Provision of testamentary trust that "all
discretions conferred upon the trustee shall
be absolute" did not authorize the trustees
to invest in a junior encumbrance without
ability to protect against the foreclosure of
a senior lien or to refrain from making a
business like investigation of the credit
worth of the borrower or insisting on an
appraisal of the security given by the bor-
rower. Id.
§ 2262. Interest on failure to invest
INTEREST. SIMPI.E OR COMPOUND, ON OMISSION TO INVEST TRUST 610NEYS. If a
trustee omits to invest the trust moneys according to the last section, he
must pay simple interest thereon, if such omission is negligent merely,
and compound interest if it is willful.
(Enacted 1812.)
Forms
See West's California Code Forms, Civil.
Library Rderences
Probate Court Practice. Goddard,
H 1590, 1825.
Not" of De[btluna
In general I
Clrcumelnnces of the case 3
Compound Interest 9
Construction with other law. 2
Dunllon of investment innclivity R
Duration of liability for Interest 5
Gmrd fnilh 4
Fruitless inrestmenls 7
Rate of Interest 9
Liability of lrusleds estate it)
3:32
1. In general
Main chnncteri+tics of trust relationship
are Umt pny-or retains beneficial interest in
money paid, trustee payee muv not use
money for own puritan", in absence of
agreement to contrary, trustee keeps mon.
ev as
separate from his own funds, trustee h
duty to invest money and make it produc.
tive and is entitled to reimbursement for all
expenses Irrolterly incurred in performance
of trust, and if money Imid is lost without
0 0
CIVIL CODE
Law Re'ieion Commission Comment
1966 Repeal
Former Section 2233 Is superseded by Probate Cade
Sections 15642().) (grounds for removal of trustee), 16902
(duty of loysity), and 16004 (duty a avoid connet of
interest). [IS CaLLRev.Comm. Repons 301 (1986)1.
Former Section 2234 is superseded by Probate Code
Section 16400 (violation of duty is breach of Iruat). The
liability for breach Is governed by statute. See Prob.Code
11 16440 (measure of liability for breach of trust), 16441
(measure of liabifity for Interest). [I1 CaLLR".Comm.
Reports 501. 1750 (1986)].
Forme Section 2235 is supmeded by Probate Cade
Section 16002 (duty of loyally) and 16004 (duty to avoid
=film of interest). [18 CAL-Rev.Comm. Reports 501
(1966)1.
Former Section 2.236 is superseded by Probate Code
Seniors 16009 (duty to keep tout property separate) and
16440 (measure of liability for bench of trust). See elm
Prob.Cde § 16420(a)(3) (rdros of breach by payment of
money). 118 CAI.LRev.Casnm. Reports 501 (1996)].
Farmer Section I237 is mpessdd by Probate Code
Salon 16440'x) (meaurc of liability for breach of trout)
and 16441 (meaure of liability fear interet). See elm
Prob.Code § 16420(a)(3) (redress of breach by payment of
master). [IS U.LRev.Comm. Repona 501 (1986)).
Subdivision (1) of farmer Smim 2239 is superseded by
Probate Code Smion 16440 (measure of liability for breach
of cwt). Subdivision (b) ts restated in Probate Code
Section 16462(s) (nonliabiilty for following Instruatiana aro
der revocable trust) without substantive chants. See dm
Prob.Code 1 16420(1)(3) (redress of breach by payment of
money). 118 Cal.LRey.Comm. Reports 501 (1986)1.
Farmer Smion 2239 is restated In Probate Code Section
16402 (lwtee'a liability to beneficiary for acts of cmwlR)
with several changes. See the Comment to Pmb.Code
1 16402 (18 Cs1.LRev.Camrrt Reports 501 (1986)3.
Pana of former Section 2240 are superseded by Probate
Code Sections 15620 (action by totwtm) and 16200
(powers subject to limitations In Irsn). The authority to
make deposits is euvr inud In Probate Code Section 16239
(power to deposit seeuritin in depository) without subsun.
dye change (18 C11.LRev.Comm. Reports 501 (1986)).
Pointer Section 2243 is superseded by Probate Code
Section 18100 (protenion of third perxo t dealing with trust.
R). See aim Pmb.Cde 1 15003 (comtructive and resulting
sail unARend). [Ie Cal.LRey.Cornm. Reports 501
(1986) ).
Former Section 2344 is superseded by probate Code
Salon 18101 (eppllcatlon of propeny delivered to trustee
by thiel person). [I8 CaLL-Rcy.Comm. Report, Sol
(1986)3.
Fortner Section 2250 is mpersdd by Probate Code
Section 32 ("wsl" defined). The provision relating to the
'"ting of title in the trustee is not continued Se, the
Comment m form" Section 863. [19 CO.LRev.Comm.
Reports 501 (1986)}
Former Section 2251 is Npencdd by Probate Code
Section 15200-15207 (creation of Irwt), 15600 (a«eptance
Of trent by IwtR), and 16420(aKI) (beneRnary may wen•
laid tat= m perform clinical. [I$ CaLLRev.Comm. it..
Pons 501 (1986)].
Farmer Section 2252 is omitted a unnecessary. [18
CALLRee.Comm. Reports Sol (1956) 1.
Former Smion 2253 is Npersdod generally by Pmbate
Code Secthsm 15200 (mahode of creating Inst), 17201
(Intension to create Iwt), and 16000 (duty to Administer
trca). 119 GLLRev.Comm. Reports 501 (1986) 1.
14 2228 to 2290.9
Repealed
Former Section 2254, which stated a special application of
the parol evidence Nle, is omitted because this quedon la
governed by the general parol evidence Nle. See Code
Civ.Proe 1 1856; ser also Prob.Code 1 13207 (proof of
terms of oral tnst of personal Property). [18 CAL -Rev.
Comm. Reports 501 (1986) 3.
The pan of .subdivision (a) of runner Section 1258 relating
to control of the trustee I duties by the Inset imwmest is
muted In Probate Code Seellon 16000 (duty to Administer
Irttst according to tat instrument) without substantive
change. but the channerintiun of the duly of the trustee a
that of an employ= is omitted. The pan of subdivision (a)
relating to modification is superseded by Probate Code
Smion 15404 (mdlfintion by settlor and a0 bcmflciarieF
The Mt sentence of suhdMsim (b) is continued in
Probate Code Section 16001 (duty of trustee of revocable
was) without substantive change. The second sentence is
restated in Probate Code Sections 1616I (nemllability for
following instruction under rerooble tout) wlthoat Nb•
suntive change. The reference to a person having a voted
or coningent interest in the trust is replaced by the refer-
tote in Probate Cde Section 16462 to the beneficiary. See
Pmb.Cde § 24 ("beneficiary" defined). The last pan of
the second sentence relating to fiduciary obligations of the
dir=ting party is omitted As unnmeaary. See also Prob.
Code 1 10 (singular includes plural). [I9 CaI.LRm.Comna
Repoms 501 (1986)).
The pan of former Section 2259 relating to the effect of
tumpemation on the standard of care is roused in Probate
Code Smion 16041 without substantive change The "ordl-
nary n= and diligence" standard of former Section 2259 Is
superseded by Probate Code Smion 16640 (tout='a suss.
dard of care in Administering mcst). [I8 Cal.LRev.Camm.
Reports 501 (1996)1.
Fortner Smion 2260 is superseded by Pmhale Code
Sections 15641 (liability of resigning tout"), 15660 (ap.
pointment of utas= Io fill vacancy). 16000 (duty m admin•
lst" bust), and 17200(b)(10) (petition for Appointment of
Wsft). [18 CaLL-Rev.C'ornot. Reports 501 (1986)1.
The standard of care governing Investments and manage•
mast of lint property provided by subdivision (a)(1) of
former Section 2261 is restated in Probate Code Smion
16040(b) without substantive change The authority to
Acquire ""cry kind of property" Is rotated in Probate Code
Sections 16223 (pow" to invest) and 16226 (power to
acquire pmpeny). See also Prob.Cde 11 62 ("propertf
defined). 16200 (general Powers of trust= include powers of
prudent person). Subdivision (a)(2) of former Section 2261
is rotted in Probate Code Salon IW40(c) without sob.
nanlye change. See also Prob.Cde 1 16000 (genenl
duties of trustee subject to control by trust insnamem).
The standard of sue provided in the last IWf of the near
sentence of subdivision (b) Is vupmdd by Probate Code
Sections 16040 (trustee's standard or care in administering
(rust) And 16200 (exercite of powers subject to Iimiudasn In
Ins(). See Also Prob.Cde 1 16220 (power to calla ad
hold propeny). The Authority to retain pmpeny in hurt at
las Inception or later acquired pursuant to proper authority
Is rotated In Smion 16003(b) as an ex.eplim to the Mersa
duty to dlspont of improper invesummm The secod tee.
tense of nbdlyiskm (b) Is superseded by Probate Code
Settlors 16220 (power to hold property in which mss= is
Interested). See also Pmb.Code 1 62 ("property^ delhsed).
Subdivision (c) Is superseded by Probate Cade Sections
16200 (exercise of pow. sabj=t to Ilmitation I. mat) and
16235 (Pow" to make depmiu). See Wo Pn4Cda
1 16201 (power of tours to relieve tat" froom roenetlmu).
Additions or changes Indicated by underline; deletions by seterlsks
7
DESCRIPTION OF INVESTMENTS
The Redevelopment Agency of the City of Azusa's investments are placed in those securities as
outlined below; the balance between the various investment instruments may change in order
to give the Redevelopment Agency the best combination of safety, liquidity and high yield.
Surplus funds of local agencies may only be invested in certain eligible securities. The Agency
invests only in those allowable securities under the State of California statutes (Government
Code Section 53601, et seq).
Certificates of Deposit
Certificates of deposit allow the Agency to select the exact amount and day of maturity as well
as the exact depository. Certificates of deposit are issued in any amount for periods of time as
short as fourteen days and as long as several years. At any given time, the Agency may have
certificates of deposit in numerous financial institutions in the future.
The Treasurer may at his discretion waive security for that portion of a deposit which is insured
pursuant to federal law. Currently, the first $100,000 of a deposit is federally insured by FSLIC
or FDIC. It may be to the Agency's advantage to waive this collateral requirement for the fust
$100,000 because the Agency may receive a higher interest rate. If funds are to be
collateralized, the collateral will be 110% of the deposit in government securities or mortgages
of 150%. At purchase, institutions must not show an operating loss. Banks must have an equity
to asset ratio of at least 6%. Savings and loan associations and savings banks must have an
equity to asset ratio of at least 3%.
Local Agency Investment Fund
Local Agency Investment Fund of the State of California offers high liquidity because deposits
can be wired to the City/Agency checking account in twenty-four hours. Interest is computed
on a daily basis.
This is a special fund in the State Treasury which local agencies may use to deposit funds for
investment. There is no minimum investment period and the minimum transaction is $5,000,
in multiples of $1,000 above that, with a maximum of $10,000,000 for any agency. It offers
high liquidity because deposits can be converted to cash in twenty-four hours and no interest is
lost. All interest is distributed to those agencies participating on a proportionate share
determined by the amounts deposited and the length of time they are deposited. Interest is paid
quarterly via a check or warrant.
The State keeps an amount for reasonable costs of making the investments, not to exceed one-
quarter of one percent of the earnings.
1
0 0
The interest rates are fairly high because of the pooling of the State surplus cash with the surplus
cash deposited by local governments. This creates a multi -billion dollar money pool and allows
diversified investments. In a high interest rate market, we do better than LAIF. But in times
of low interest rates, LAIF yields are higher.
kWO-G-7 l . r
U.S. Treasury securities are highly liquid in addition to being considered the safest of all
investments.
U.S. Treasury Bills are direct obligations of the United States Government. They are
issued weekly with maturity dates up to one year. They are issued and traded on a
discount basis and the interest is figured on a 360 day basis, actual number of days.
They are issued in amounts of $10,000 and up, in multiples of $5,000. They are highly
liquid security.
U.S. Treasury Notes are direct obligations of the United States Government. They are
issued throughout the year with maturities of 2, 3, 4, 5, 6, 10 years. Notes are coupon
securities paying interest every six months. The Agency will not invest in notes having
maturities longer then five years.
Federal Agency Securities
Federal Agency securities are highly liquid and considered riskless. Federal Agency issues are
guaranteed directly or indirectly by the United States Government. All agency obligations
qualify as legal investments and are acceptable as security for public deposits. They usually
provide higher yields than regular Treasury issues with all of the same advantages. Examples
are:
FNMA's (Federal National Mortgage Association) are used to assist the home
mortgage market by purchasing mortgages insured by the Federal Housing
Administration and the Farmers Home Administration, as well as those guaranteed by
the Veterans Administration.
FHLB's (Federal Home Loan Bank Notes and Bonds) are issued by the Federal Home
Loan Bank System to help finance the housing industry. The notes and bonds provide
liquidity and home mortgage credit to savings and loan associations, mutual savings
banks, cooperative banks, insurance companies and mortgage -lending institutions.
Some other federal agency issues are Federal Intermediate Credit Banks Debentures
(FICB), Federal Farm Credit Bank (FFCB), Federal Land Bank Bonds (FLB), Small
Business Administration Notes (SBA's), Government National Mortgage Association
Notes (GNMA's), Tennessee Valley Authority Notes (TVA's) and Student Loan
Association Notes (SALLIE MAE's). These investments will occasionally be used.
2
Negotiable Certificate of Denosit
Negotiable certificates of deposit are high grade instruments, paying a higher interest rate than
regular certificates of deposit. They are liquid because they can be traded in the secondary
market.
Negotiable Certificates of Deposit (NCD's) are unsecured obligations of the financial institution,
bank or savings and loan, bought at par value with promise to pay face value plus accrued
interest at maturity. The primary market issuance is in multiples of $1 million, the secondary
market usually trades in denominations of $500,000 although smaller lots are occasionally
available. Local agencies may not invest more than 30% of their surplus money in negotiable
certificates of deposit. NCD's will only be placed with the largest and most financially sound
institutions.
Bankers Acceptances
Bankers Acceptances are frequently the highest in yield, are safe investments and are highly
liquid.
Bankers acceptances are a short-term credit arrangement to enable businesses to obtain funds to
finance commercial transactions. They are time drafts drawn on a bank by an exporter or
importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes
primarily liable for the payment of the draft at its maturity. An acceptance is a high grade
negotiable instrument.
Acceptances are purchases in various denominations for 30, 60 or 90 days but no longer than
270 days. The interest is calculated on a 360 day discount basis similar to Treasury Bills.
Local agencies may not invest more than forty -percent of their surplus money in bankers
acceptances.
Commercial Paper
Commercial paper allows the investment of large amounts of money for one to seven days at
rates higher than we can earn from our savings account. Commercial paper is a short-term
unsecured promissory note issued by a corporation to raise working capital. These negotiable
instruments are purchased at a discount to par value. Commercial paper is issued by
corporations such as Shearson -American Express, International Business Machines (IBM) and
Pacific Gas and Electric Company, etc.
Local agencies are permitted by state law to invest in commercial paper of "prime" quality of
the highest ranking or of the highest letter and numerical rating as provided by Moody's
Investor's Service, Inc. or Standard and Poor's Corporation. Purchases of eligible commercial
paper may not exceed 180 days maturity nor exceed thirty percent of the local agency's surplus
funds.
C
Passbook Savipas or Money Niarket Account
Passbook savings account allows us to transfer money from checking to savings and earn short-
term on odd amounts of money which are not available for longer investment.
The savings account is similar to an inactive deposit except not for a fixed term. The interest
rate is much lower than CD's, but the savings account allows flexibility. Funds can be deposited
and withdrawn according to daily needs.
Wrlvivm-
Los Angeles County Pooled Fund is similar to the State of California Local Agency Investment
Funds. The County fund provides protection, liquidity and higher than market rates for short-
term securities.
The County Pooled Fund is similar to the State of California Local Agency Investment Fund
(LAIF). Los Angeles County has an existing pooled fund with current assets of $3.5 billion
serving school districts and other special districts. This pooled fund is managed by the County
Treasurer and interest is competitive to money market rates. There are no restrictions to number
of transactions or dollar amount of deposits. The funds deposited by a local agency in the
County Pooled Fund cannot be attached by the County.
All interest is distributed to those agencies participating on a proportionate share determined by
the amounts deposited and the length of time they are deposited. Interest is credited to the
account and reinvested. The County keeps an amount for reasonable administrative costs of the
pool. The Los Angeles County Treasurer has started the range of administrative costs is 14 to
18 basis points (approximately 0.14% to 0.18% of the pool fund average daily balance).
Mutual Fund
Mutual fund is another authorized investment allowing the Agency to maintain liquidity and
receive money market rates.
Mutual Funds are referred to in the Government Code, Section 53601.L, as "shares of beneficial
interests issued by diversified management companies". The Mutual Fund must be restricted
by its by-laws to the same investments as the local agency. These investments are Treasury
issues, Agency issues, Bankers Acceptance, Commercial Paper, Certificates of Deposit, and
Negotiable Certificates of Deposit. The quality rating and percentage restrictions in each
investment category applicable to the local agency also applies to the Mutual Fund.
A further restriction is that the purchase price of shares of the mutual funds shall not include any
sales commission. Investments in mutual funds shall not exceed fifteen percent of the local
agency's surplus money.
4
0 0
Repurchase Agreements
Another authorized investment for cities is repurchase agreements. Repurchase agreements are
purchases of securities by the Agency under an agreement with a term of one (1) year or less
whereby the seller will "repurchase" the same securities on or before a specified date or on
demand of either party and for a specified amount. The underlying securities must be delivered
to the Agency by book entry, physical delivery or a third -party custodial agreement. Transfer
of the underlying securities to the counter -party may be used for book entry delivery.
5
:7 , : EXHIBIT C
LIST OF THE PRIMARY GOVERNMENT SECURITIES DEALERS
REPORTING TO THE MARKET REPORTS DIVISION OF THE
FEDERAL RESERVE BANK OF NEW YORK
Bank of America NT & SA
Bankers Truct Company
Bear, Stearns & Co., Inc.
Carroll McEntee & McGinley Incorporated
Chase Manhattan Government Securities, Inc.
Chemical Bank
Citibank, N.A.
Continental Illinois National Bank and Trust Company of Chicago
Daiwa Securities America, Inc.
Dean Witter Reynolds, Inc.
Discount Corporation of New York
Donaldson, Lufxin & Jenrette Securities Corporation
Drexel Burnham Lambert Government Securities, Inc.
The First Boston Corporation
First Interstate Capital Markets, Inc.
First National Bank of ChicagoGoldman, Sachs & Co.
Greenwich Capital Markets, Inc.
Harris Trust and Savings Bank
E.F. Hutton & Company, Inc.
Irving Securities, Inc.
Kidder, Peabody & Co., Incorporated
Kleinwort Benson Government Securities, Inc.
Aubrey G. Lanston & Co., Inc.
Manufacturers Hanover Trust Company
Merrill Lynch Government Securities, Inc.
Midland -Montagu Government Securities, Inc.
J.P. Morgan Securities, Inc.
Morgan Stanley & Co., Incorporated
Nomura Securities International, Inc.
Paine Webber Incorporated
Wm. E. Pollock Government Securities, Inc.
Prudential-Bache Securities, Inc.
Refco Partners
L.A. Rothschild, Unterberg, Towbin, Inc.
Salomon Brothers, Inc.
Security Pacific National Bank
NOTE: This list has been compiled and made available for statistical purposes only and has
no significance with respect to other relationships between dealers and the Federal Reserve
Bank of New York. Qualification for the reporting list is based on the achievement and
maintenance of reasonable standards of activity.
Market Reports Division
Federal Reserve Bank of New York
December 11, 1986