HomeMy WebLinkAboutResolution No. 92-C094RESOLUTION NO 92—C94
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF AZUSA
RE -ADOPTING ITS INVESTMENT POLICY
WHEREAS 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 City Treasurer is charged with the duties of handling and
maintaining the cash that is taken in or otherwise received by the City; and
WHEREAS the balance of these funds fluctuates between $3,000,000 and
$20,000,000 or more; and
WHEREAS the City 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 to adopt an investment
policy for its jurisdiction.
NOW THEREFORE BE IT RESOLVED that the City Council of the City of
Azusa does hereby re -adopt its Investment Policy attached hereto as Exhibit A and instsructs
the City Treasurer to be guided by it in carrying out the duties of his office for the benefit of
the City of Azusa.
ADOPTED AND APPROVED this 7th day of July , 1992.
I HEREBY CERTIFY that the foregoing resolution was duly adopted by the
City Council of the City of Azusa at a regular meeting thereof on the 7th day of July
1992 by the following vote of Coouncil:
AYES: COUNCILMEMBERS: DANGLEIS, MADIRD, NARANJO, ALEXANDER, MOSES
NOES: COUNCILMEMBERS: NONE
ABSENT: COUNCILMEMBERS: NONE
-CrrY OF AZUSA.._,,- ,,. -_
- DRTSTMIINT --POLICY
-
Temporarily idle or surplus funds 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 Ofircers, and this Investment Policy ("Policy").
A.— == - - = - — - ----- --
Overail Risk
The basic objectives of Azusa's Investment Program are, in order of priority: -
1. Safety of invested funds;
Z. Maintenance of sufficient liquidity to meet cash flow needs; and
3. -- Attainment of the maximum yield possible consistent with the first two
objectives.
The achievement of these objectives shall be accomplished in the manner
described below:
The City 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;
(u) by prequalifying the financial institutions with which it will
do business; and
(iii)- - -. -by diversifying the investment portfolio so that the failure ._ _
of any one issue or backer will not place an undue financial -
on the City:—
b) - - = Interest rate risk -will -be -mitigated by:
(1) structuring the City's portfolio so that securities -mature to
meet the City'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 cerin -securities.
-_ - c) - The physical security or -safekeeping of the_City's investments is
also -an- -important element 'of safety,.---:
- . - portan Detailed =safekeeping = "
requirements are defined in Section III of -thispolicy
- - - - - . req . ------
2.
- 2. liquidity
-The City'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 City'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 City 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 City's investment portfolio shall be structured to provide that sufficient funds
from investments are available every_month to meet the City's anticipated -=
,,,.,.,,needs; __. Subject to the safety, provisions _outlined above,. theghq�g-ice inYestment
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 City Council approval.
1 lJ i I , , M - , „ M,
Idle or surplus funds for the purpose of this policy are all City funds which are
available for investment at any -one-time, including the estimated checking account
float, excepting _those- minimum balances required by the City'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 City of Azusa personnel
provided financial management services.
This =section of the Investment Policy identifies the types of instruments in which the City
will invest its idle funds.
- A. Eligible Securities -
The City of Azusa operates its temporary pooled idle cash investments under the
Prudent Man Rule - r/ (Civil Code Section 2261, et seq). See Exhibit A. This
affords the City 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 sec). (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 City'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.
1/ 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 ....'
0
Local -Agency Investment Fund (State Pool) -Demand Deposits.--.
- - -I IT,
Securities of the U.S. Government; or its agencies
Negotiable Certificates of Deposit placed -with- Federal- State sa s4
vingand 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 Brokers_ Dealers and
Financial 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 C).
. -e :±ti ':� -rite -
Uninsured Time Deposits with banks and savings and loans shall be collateralized
in the manner prescribed by law for depositories accepting municipal investment
funds.
Wherever possible, the City 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.
The City shall annually send a copy of the current edition of the Policy and its
enabling Resolution to all institutions which are approved to handle City of Azusa
vestments. _ Receipt of _the_ Policy and Resolution, including confirmation that -
it 7has - been ` received by persons handling -the
-City's " account; -shall =be ; `T: -
-
-'acknowledged in writing within thirty (30) days.-- =rte. `
F. =s 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 ofsecurities=purchase, agency's -name, net amount due = dlW
_ 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 LAW
investments from the mandatory risk categorization.
The City shall contract with a bank or banks for the safekeeping of securities
which are owned by the City as a part of its investment portfolio or transferred
to the City under the terms of any repurchase agreements.
:B. _:Handling of Ciiy-0wned Securities and Time
17
- -_ - D=sit Collateral _
All securities owned by the City shall be held by its safekeppm agent, except the , . Y
g.
�»= = collateral for time deposits in banks, savings banks, and savings and loans is held:: - -- _- a
by the Federal Home Loan Bank. The collateral for time deposits in banks is _
- -held in the City's name in the bank's trust department, (if a safekeeping
agreement has been executed) or, alternatively, in the San Francisco Federal
Reserve Bank. - -
C. Security Transfers -
The authorization to release City'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 - foi the- transaction -_ and
jwnfinniag the.telephoned instructions willbe. sent to the bank within -five (S)- -
- working days. _--- -
D. Verification of Securkty
Securities transferred to the City as collateral securing time deposits which are
being held in safekeeping for the City will be verified in writing and examined -
on a surprise basis during the year by the City's independent auditors as part of
the City's annual independent audit.
This section of the Policy defines the overall structure of the investment management
program.
The City Treasurer is charged with responsibility for maintaining custody of all
public funds and securities belonging to or under the control of the City, 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 City Administrator is responsible for keeping the City Council fully advised
as to the financial condition of the City.
�C,_.__AaMsibilities of the City Council ,
The City Council shall consider and adopt a written investment policy. As - --
provided.
-_-
= provided. in that policy, the Council shall receive review and accept Monthly
investment reports.._
-D. lcnsibilities of the Investment Committee
There shall be an Investment Committee consisting of the City Manager, the
Director of Finance and City 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 City Treasurer.:This_will require timely reports from
-- - the department heads to the City Treasurer concerning significant fuiure cash flow
requirements. The Committee's meetings will be summarized in minutes that are
distributed to the City Council. _
V REPORTING
Y _
The City Treasurer 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 City Administrator and City Council to
ascertain whether investment activities during the reporting period have deviated from
the City'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 insulting 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 City's investments.
E. Maturity aging by type of investments.
r ' •
_ __ VI _. -REMW OF INVESTMENT MANAGEAIENT - - -
= w _ ' = -This im+estineat policy shall be ieviewed annually by the City Counal-in"'accordance with ~ '
- State law to ensure its consistency -with iespect=to-the overall objeitives-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 beforwarded
to the City Council for consideration.
c_ y_y;_ I ;_y y_
=---:This policy was duly adopted -by authority_of the -City Council of -the City -of --Azusa on
- -- ----- -- - - - -= - -
= the 24th day of October, 1988
January 27, 1992
EYIiIAIT A ---_: -
ti PRUDENT MAN RULE
TRUSTS FOR THIRD-PEIISONS
- 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 alike character and with like aims, to attain=the goals of
= the trustor as determined from the trust instrument. Within the limits -
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.---
M
rovisions.--(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 _ " _:? $ 2261
_ 4t; 4
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 She 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.
M Property defined. The term "property" as used in this section
---_-- -_-___ inEiides life'insurance, endown"t,'8ed'anliuify contracts issued by legal -
reserve companies authorized to do business in this state.
(Enacted 1872 Amended by Stats.1943, c. 811, p. 2602, $ 1; State.1967, c. 688, p.
2054, § 1; Stats.1967, c. 1706, p. 4265, 11 1; Stats.1968, m 161, p. 885, 4 1;
_,,.Stats.1969, c.-259, p. 611,1 1; Stats.1�84, c_1372,
111sloricol Note
The section, as originally enacted in 1672,
authorized to acquire every kind of proper
provided:
ty, real, personal or mixed, and every kind
"A trustee must invest money received
of investment, specifically including, but
by him under the trust, as fast as he col-
not by way of limitation• corporate obliga-
lecu a sufficient amount. in such manner as
tions of every kind, and stocks, preferred or
to afford reasonable security and interest
common, which men of prudence, discretion
for the same."
ami intelligence acquire for their awn at,
The 1943 amendment rewrote the section
count
"('L) In the absence of express provisions
to read:
to the contrary in the trust instrument, a
"(A In investing, reinvesting, purchasing,
trustee may continue to hold property re-
acquiring, exchanbhng, selling and manag-
ceived into a trust at its inception or subse.
ing property for the benefit of another, a
quently added to it or acquired pursuant to
trustee shall exercise the judgment and
proper authority if and as long as the true.
care. under the circumstances then prevail.
tee, in the exercise of goal faith and of
Ing, which men of prudence, discretion and
reasonable prudence, discretion and intelli.
Intelligence exercise in the management of
gence, may consider that retention is in the
their own affairs, not in regard to specula-
best interests of the trust.
tion, but in regard to the permanent disposi-
"(9) In the absence of express provisions
tion of their funds, considering the probable
to the cuntrary in the trust instrument, a
income, as well as the probable safety of
deposit of trust funds at interest in any
their capital. Within the limitations of Use
savings lank or the savings department of
foregoing standard, and subject to any ex.
any bank (including the savings department
press provisions or limitations contained in
of the traetce, it a bank) shall be a qualified
any particular inial instrument, a Wale: is
investment to tine extent that such deposit
321
' �_9 2261 `-
TRUSTS FUR-THIRII "' RSUNS
4
- _
Div. 8
' - - 'k insured under any present or future law
income,•ns well as the Probablesafetyof
of the United States, or to such greeter_
their capital. Within the limitations of the
" extent an a court of competent jurisdiction
foregoing standard, and subject to any ex.
MAY authorize. Nothing in this section
press provisions or limitations contained in -
shall be construed as limiting the right of
_
any Particular trust instrument, a trustee is
- -- trustees in proper cases to make deposits of
authorized to acquire every kind of proper.
trust moneys in banks, subject, in the sue
ty, real, personal or mixed, and every kind
- of interest-bearing deposits, to such notice
of investment specifically including, but
or other conditions respecting withdrawal
not by way of limitation, corporate obliga.
as may be prescribed by law or governmen-
tions of every kind, and stocks, preferred or
tall regulation affecting such deposits
common, which men of prudence. discretion
"(41 Nothing in this section shall abro.
and intelligence acquire for their own ac.
gate or restrict the power of the appiopri-
- count-
- - - - -- - _ -ate court in proper cases to director permit
--- - (2) In the absence of express pr-
the trustee to deviate from the terms of the
_ to the contrary' in the trust insttumenk a - - -
_ --
trust -regarding the me g_or retention of
- _ investments
trustee may continue to hold -property te-_-
ceived into a trust at its inception or subs& - --
-"- -- - _• - - -
_ - "(5) The provisions of this section shall
- quently added to it or acquired pursuant to
--proper authority if and as longasthe tris. - - -- -- - -
" - - - apply to all Crusta now existing or hereafter
-
- _ tee, in the exercise of good faith and of
- =--created. Where, in trusts now existing or
-`reasonable prudence, discretion and intelli- -
hereafter created, the term 'investments
gence, may consider that retention Is in the
permissible by law for investment of trust
beat interests of the trust Such property
funds; or 'authorized by law for investment
may include stock in the trustee, if a corpo.
of trust funds; 'legal investments; or 'au-
ration, and stock in any corporation control-
-- :-- •thorized investments; or other words -of _-
ling, controlled by, or under common con-
- -- similar import are used in defining the pow-
trol with such trustee.
ers of the trustee relative to investments,
such language, in the absence of
"(8) In the absence of express provisions
other can.
trolling or modifying provisions of Use trust
Instrument, shall be
to the contrary in the trust instrument, a -
deposit of trust funds at interest in any
construed as authoriz-
bank (including the trustee, if a bank) shall
- Ing any investment permitted by the terms
be a qualified investment to the extent thatof
subdivision (1) of this section."
such deposit is insured under any present or
The 1967 amendment by c. 1706 added the
future law of the United States, or to such
concluding sentence to auMl. (2), (later
greater extent as a court of competent jure
amended, see 1969 amendment); and delet-
isrk:tion may authorize. Nothing in this
ed references to savings banks and to the
section shall be construed as limiting the
savings department of banks frnm subd. (3).
right of trustees in proper cases W make
Effect o[ amendment of section h two
• Y or
delanits of trust moneys in banks, subject,
In the case of interest-bearing deposits, to
more acts at the same session of the legisla.
•- ture, see Government Code 4 9605.
such notice or other conditions respecting
withdrownl as may be prescribed by law or
The 1968 Amendment added aubd. (6).
governmental regulation affecting such de -
The 1969 Amendment added the wnrds
kik'
.,and stock in any corporation controlling,
"(4) Nothing in this section shall abro-
controlled by, or under common control
gate or restrict the power of the appropri.
with such trustee" to the end of solid. (2).
ate court in proper cases to direct or permit
The 1984 amendment rewrote the section
the trustee to deviate from the terms of the
which as amended in 1969 had read:
trust regniding the making or retention of
investments.
"(ll In investing, reinvesting, purchasing,
15) ')lie provisions of this section shall
acquiring, exchanging, selling and manag-
Ing property for the benefit of another,
apply to all trusts now existing or hereafter
a
trustee shall exercise the judgment and
created Where, in trusts now existing or
hereafter create'], the term 'investments
core, under the circumstances then prevail.
Ing. which men of prudence, discretion and
permissible by law for investment of trust
fumts; or 'authorized by law for investment
Intelligence exercise in the management of
their own affairs, not in regard to specula-
of treat funis; 'legal investments; or 'au.
thorized investments; or other words of
this, but in regard to the permanent disponi-
similar import are used in defining the pow.
tion of their funk, considering the probable
ers of the trustee relative to investments,
322
- OBLIGATIONS OF TRUSTEES - - $ 2261
such language, in the absence of other coo- "(6) The term 'property' as used in this
trolling or modifying provisions of the trust section includes life insurance, endowment, '
-- - - Instrument, shall be construed as authoriz- and annuity contracts issued by legal re- _ -
ing any investment permitted by the terms serve companies authorized to do business
- of subdivision (1) of this section. - in this state." - -
Forms
See West's California Code Forms, Civil.
Cross References
- _ Common trust funds of trust companies, ase Financial Code 4 1564.
-- - - -- - - - - ---Common trusts, establishment for investment at funds. of Department of Mental Health -
held as trustee, see Welfare and Institutions Code 9 7286.-
-------
286.-= -'"-- _Corporate shares, liability of fiduciary for subscription price, see Corporations Cade 1 413..-
- - • -`-'Deposit of trust company funds awaiting investment, see Financial Code 4 1562 - --
-. Investments authorized, provisions not altering degree of -care sequined; see -9 2269.1.
_ Investments of trust company trust funds, see Financial Code 4 1561.
--- = Mortgage participation certificates and securities'guaranteed by mortgage policies as legal - - - -
investments, see Insurance Code 1 12528.
Registration of stock held in trust in name of nominee of trust company, see Financial Code
9 1563. - - - - -
Savings accounts of savings associations as legal investments for funds of trustees, see
_ --- .F-umacial Code 4 7000. _ --•. _„ _
Trustee to manage proceeds of sale of property suiiject to life estate upon portitkm, ase
Code of Civil Procedure 4 873.840.
Law Review Commentaries
'Application of SEC Rule X-100-5 to pre. --- -Prudence, information and trust invesP
vent nondisclosure in sale of corporate secu. ment law. John A. Humbach and Stephen
rities. (1961) 39 C.L.R. 429. P. Dresch 0WO 62 A.B.AJ. 13119.
Beneficiarya other resources as affecting Prudent man investment of trust funds
necessity of invasion of trust corpus, during inflation. (1951) 39 C.LR. 380.
(1953) 1 U.C.L.A.Law Rev. 119. Prudent man investment rule in the law
Common stock as u prudent trust invest- relating to trusts. (1043) 18 S.Bar J. 283.
ment. (1951) 39 C.LR. 380. Representation of adversepp¢arties in trust
01
administration. (19 55 C LR. 948.
Construction and application of the Uni
form Principal and Income Act. p939) 28 Revolution to trust investment Inw-
C.LR. 34. (1970) 62 A.B.AJ. 887.
Delo mucin • estoppel el to oli cct to par, Trust participation in partnership van.
Y 6 I I 1 p Wren. (1951) 3 Stau.LR. 467.
chase in breach of fiduciary duty. (194 1) 14 Trustee's power. power to sell as includ.
So.CaiLR. SSS, ing power to option. Michael H. Descent
History of supervision of charitable (1970) 7 Sun Diego I.Rev. V_
trusts and corporations in California. Wal- Trusts --Corporate executor/trustee.
lose Howland 1196G) 13 U.C.LA. Law Rev. (197 5) 2 West SLI1.LRev. 2.5.
IPJ9. Liability of the trustee forapppprecmdoq
Liability of trustee for improper invest- of property (19571 4 U.GL.A. Law
meats. (19511 :i9 C.LR. 380. Rev. 314.
Violation of duty by corporate trustee by
Planning for incompetency. Louis M. investing in its own stock. 11949) 37 C.LR.
Brown (10114). 39 S. Bar J. 268. 639, 552
Planning for incompetency and practices War conditions as presenting new prob.
umler the conservatorship law. George E. lens for investment of funds by trustees.
Zilpgitt (1964) 37 So.Cal.I.R. 181. 11942) 17 S.Rar J. 36.
323
0
02261 _ TRUSTS FOR THIRD PERSONS
Div. 3
Library References
Trusts q-216 to 217.5. - � 1 Probate Court Practice, Goddard,
U.S. Trusts §§ 320, 322, 324 to 329, 331. $§ 1823, 1825, 2207, 2208. -
Notes of Decisions
-., - Sorrowing funds 7 "-
were given inadequate directions for con -
Charges against trust for beneficiary 8
- trolling trust property. Estate of Berges
__ -- Collecting judgments, notes, rents, e_le.
" (1077) 142 Cal.Rptr. 635, -76 CrA.3d 106.
_
--_
IO ----'-trustee
- _ Construction Bud altPllcatlon A - _- _
-In determining date of breach of trust by
-` trustee who negligently failed to- Invest in. -
- Corporate trustees 6 - --- -
" Court orders for deviation from trust 23 "
_ come within rensonnble time, factors to be _
considered include purpose of trust, amount
. - _Declaration of trust 9 " - - ' :
- of monev on hand and amount deemed nec-
_ Deposit of funds - 11- _ . - _
- - - Discretion of trustee 4 " " -
- essary io meet possible contingencies or
-
Interest charges against trustee 25
emergencies in light of rule that trustee, in
Investing and managing property for bene.
Investing property IL 13 . _
fit of another, should exercise such can
- - - In general 12
Prudent investor standard 13
under circumstances as prudent man would
_-,1�exercise in managementof his own affairs.
_ - -- - Liability of trustee -2�t' -. Lynch v. John M. -Redfield -Foundation -
Laening properly W
Mortgages 26
(1970) 88 Cal.Rptr. 86, 9 C.A.3d 293, 51
- - __= Possession of properly 15
A.LR.3d 1284.
Preserving IB
Provision of former subd. (5) of this set -
In eroPe*ty
investor etandard_imesling prop•
tion, that where term "investments permis-
-ertyPrudent
-eery 13
sible by law for investment oftrust fundx,"
Record of trust fonds Y2
or other words of similar import are used in
of property l7
defining powers of trustee relative to in.
Selling
Sal property 18
vestments, such language, in absence of
Standard g with property t9
other controlling or modifying provisions of
care 6
Surrende
trust instrument, shnil he construed as au-
in
Surrendering property YO
thorizing any investment permitted by for
Trust funds Y
mer subd. I of this section, establishing the
Use funds In general 3
Prudent Man Rule of investment in only
Value of use and occupation by trustee
applicable where testator limits investments
(statutory
_
2l
to approved investments. and has
no application where settlor himself speci-
Rex particular investments that are proh'b-
l. Construction and application
ice• Stanton v. Wells Fnrgo Bank k Union
This section does not supersede trustee's
Trust Co. (1957) 310 P.2d 1610, 150 C.A.2d
7GJ.
general duty to maximize trust assets con-
sixtent with safely and other relevant con-
L Trust funds
sideration; a statutorily authorized invest -
Land aeluirel by irrigation district Be-
ment may or may not be the prudent course
of conduct for the trustee to pursue. Mat-
cause of delinquencies in assessments in
ter of Pelton 11982) 183 Cal.Rptr. 188, 132
trust property, held for the uses and par,
poses of Gen.iswx 1931, Act 3854, govern-
C.A.3d 496.
ing irrigation districts, and proceeds of
Where testator's will after making a spe-
lease thereof have the same character.
cifir bequest of cash and any automobile to
Provident lend Corp. v. Zumwalt 119391 85
designated individual, bequeathed to his
P.2d 116, 12 C.2d 306.
brother and sister as trustees the sum of
3600 for each of their respective children
3. Use of funds In general
with provision that each trust terminates
Probate court's factual findings were in -
when the child attains 18 years of age,
adtslunte ta permit court of appeal to deter.
trusts were valld over contention of bene(!-
mine whether bank/ennservatar breached
ciary that the purposes or terms of trust
its fxluciary duty by keeping approximately
could not be ascertained amt that trustees
=204,000 in estate's assets in bank's 51/476
324
0 0
on such interment pints, or to invest such 6. Corporate trustees
funds in the stock of such cemetery, its Different types of investments for "cor-
subsidiary, or affiliate. 28 Ops.Atty.Cen• porate trustee" and for "amateur trus-
321• tees" are not authorized under prudent in -
4. Discretion of trustee vestor stonebadt difference, rather, is that
corporate trustee is held to a greater stan-
A trustee occupies a fiduciary position dust of cure bused on his presumed exper-
with duty to exercise its independent juhg- list Matter of CullinY Estate (1977) 139
ment and may not automatically accede to CuLRptr. (344, 72 C.A.:kl 6193.
demands of test beneficiary. Morse v.
Cracker Nut. Bunk HMO 190 (%LI.Rplr. 8.W. 7• Borrowing funds
142 C.A.:hl 228. Under this section, though trustees are
An almolule discretion dues not permit a not ordinarily liable for interest an moneys
trustee to neglect his trust or abdicate his coming into their Iamb unless they have
judgment. Matter of Collins' Estate (1977) improperly failed to invest them, they are
13'J Cul.ltptr. 644. 72 C.A.3d 6693. not justified in borrowing more money than
Absolute discretinn given defendant trus- they need, and charging trust with interest
tees of teslanenary lresl of which plain. on sums borrowed, and, where they have
tiffs weft beneficiaries was specifically line pile money on hand, it it their duly to apply
itel by requirement in trust instrument dint it so as to stop unnecessary interest
trustees he subject always to discharge of clmrkes. Purdy v. Johnson (1917) 163 P.
their fiduciary obligation. Id. 89:1. 174 C. 621.
S25
OF TRUSTEES -`
-'= - § 2261---
Pt 4
- Note 7..:::: =
passbook account for 17 months, during.-;
P._revision of testamentary teas[ that "all:--
--- - "_• _ -:which substitution of conservators was bo- - -
eiseretiuna conferred upon th't'l'nielee shall
Ing arranged, at a time when amounts in
be ubsulute," viewed as an exculpatory
excess of $100,000 were earning 9'&M inter -clause.
was subject to rule of strict con -
est in 30•duy accounts at various banks, a
struction. Id. -
remand for further proceedings was re-
Absolute discretion conferred by provi-
quired. Matter of Pelton (1982) 183 Cal.
sion of testamentary trust that "all discre-
Rptr. 188, 1:52 C.A.3d 496. -
tions conferred upon the Trustee shall be
Trustee, who is directed by terms of trust
absolute" was specifically limited by ve-
to pay income to beneficiary during desig-
quirement that trustee by "subject always
nated period and on expiration of that peri-
to the discharge of its fiduciary oblign-
od to pay principal to another beneficiary,
tions." Id.
-- owes duty to former beneficiary to take
-_ care not merely to preserve trust property
6. Standard of care
but to make it productive 90 that removable
__-'Standnni-imposed upon is that
_income will be available for him, and true --_-they
-trustees
exercise that judgment and care which
tee is under duty to latter beneficiary to -.-men
_
of prudence, discretion and intelligence
_ - - - - take -care to -preserve trust property for
- -- --- - _---`him.
would exercise in management of their own --- - -' - -_ --
- In re Rissingers Estate (190) 28
-affairs. Matter of Collies' -Estate 11977) - -: ---- -
_ -Cud.Rptr. 217,-212 C.A.2d 831.
1:10 Cul.Rptr. 044, 72 C.4.3d 663.
- - - - ---Manner in which charter city efhetuates -
-- Trustee -Cs aider b duty to beneficiary to = -
- purposes of tidelands trust, including man--
distribute risk of lose by removable divereo-
nee in which it conducts aff ir'uns for
frcation of investments unless under circum-
- = Leming of lands, ha affair. Silver -
stances it is prudent not to do so. [d.
Angelesmunicipal
v. City o[ l.os Angeles (191i2) 17 CaLRpte
(1
-.--- 479. 366 P.2d 661,-57--Q2d ,3%_certiomri_,.
_ A trustee with absolute discretion may
- - denied 82 S.Ct. 1143, 369 U.S. 873, 8 --not
neglect its trust or -abdicate its judg
LEd.2d 270.
ment. Id.
Under trust principles and applicable pro-
- Record contained no evidence that de.
visions of the Health and Safety Code, it is
fendant trustees satisfied even the lesser
not legally proper to use endowment care
standard of care for which they contended
funds of private cemeteries to purchuse in--in-claiming
that trust instrumentconferred
terment plots looted in the cemetery, for
on them an "absolute discretion" so as to
which the fund was established, or to loan
reiluire them to refrain to act arbitrarily
such funds to the cemetery, its sulmidiury,
and to use their best judgment Id.
or affiliate, on the security of a trust deed
on such interment pints, or to invest such 6. Corporate trustees
funds in the stock of such cemetery, its Different types of investments for "cor-
subsidiary, or affiliate. 28 Ops.Atty.Cen• porate trustee" and for "amateur trus-
321• tees" are not authorized under prudent in -
4. Discretion of trustee vestor stonebadt difference, rather, is that
corporate trustee is held to a greater stan-
A trustee occupies a fiduciary position dust of cure bused on his presumed exper-
with duty to exercise its independent juhg- list Matter of CullinY Estate (1977) 139
ment and may not automatically accede to CuLRptr. (344, 72 C.A.:kl 6193.
demands of test beneficiary. Morse v.
Cracker Nut. Bunk HMO 190 (%LI.Rplr. 8.W. 7• Borrowing funds
142 C.A.:hl 228. Under this section, though trustees are
An almolule discretion dues not permit a not ordinarily liable for interest an moneys
trustee to neglect his trust or abdicate his coming into their Iamb unless they have
judgment. Matter of Collins' Estate (1977) improperly failed to invest them, they are
13'J Cul.ltptr. 644. 72 C.A.3d 6693. not justified in borrowing more money than
Absolute discretinn given defendant trus- they need, and charging trust with interest
tees of teslanenary lresl of which plain. on sums borrowed, and, where they have
tiffs weft beneficiaries was specifically line pile money on hand, it it their duly to apply
itel by requirement in trust instrument dint it so as to stop unnecessary interest
trustees he subject always to discharge of clmrkes. Purdy v. Johnson (1917) 163 P.
their fiduciary obligation. Id. 89:1. 174 C. 621.
S25
0 0
§ 2261
TRUSTS FOR THIRD PERSONS
Note 6
Div. 3
-- - 8. Chargee against trust for beneficiary
fault Purdy v. Johnson (1917) 163 P. 893, - -
Fact that testamentary trustee had violat-
174 C. 521.
ed her duties is such by commingling trust
Where testamentary trustees rented land --
funds with her own, omitting to Invest
- of trust but their accounts in beneficinry's
them, and negligently failing to keep any
action against them showed that only part
- records which would enable her to render a
of rent was collected, trustees were bound
true account had a bearing, in absence of
to account for balance, unless they could
vouchers or receipts, on question of wheth-
show some good reason for failure to col-
er charges ngainst trust estate for board,
lett Id.__-
--' "---clothes, laundry, eta. for beneficiary for 15
years were established by satisfactory eve
- It. Deposit of funds _ _ -
- ----
'- -deme. In re. McCabe's Estate (1048) 220_
-
_ Generali fiduciary is
1 sry personally Mable
P.2d 614, 98 C.A.2d 503. - - - -
for money deposited -by him in bank which--
- -
-9.
--becomes insolvent,- unless evidence shows
' -- - - "Declaration of trust -
that he was not negligent in so doing, and,
- Even if trust instrument permitted a type
in absence of order of- court, deposit of - - : --
of investment generally frowned on under
trust funds In bank is not warranted as an --- --- --
---- -,prudent-investor rule, it did not authorize
Investment Allen v. Rainey (1935) 41 Ptd
- ---_ --defendant trustees to make that investment
$74, 4 C.A.2d 658.
_
blindly. Matter of Collins' Estate (1977)
_
139 Col.Rptr. 144, 72 CA.3d 663.
12. Investing property—in general
While the declaration of trust may have
Rule that trustee has duty to Invest a4
enlarged the prudent -investor
generally, -pertaining -to investment
__possibly
dard us far as the type of instrument wns
of principal, applies likewise to Investment- - - -
concerned, it could not be ennstrued as per-
of accumulated income. Lynch v. John M.
mitting deviations from -that standard in
-Redfield Foundation (1970) 88 Cal.Rptr. 86,
investigating the soundness of a specific
9 C.A-3d 293, 51 A.LR.3d 1284.
investment Id.
Objections of trust beneficiary that
trus-tee,
which had been given -absolute discre-
10. Collecting Judgments, notes, rents.
tion in managing trust property, had negli-
etc.
gently and carelessly failed to properly ad -
One holding judgment as trustee for cor-
minister or manage trust and that oa a
partition and another was required as such
proximate result beneficiary had been de.
trustee and as secretary of the corporation
prived of reasonable return and had sus -
to use his hest efforts to collect the judg-
tained loss of some S50.000 from sale of
ment in full by execution sale of stock
assets were sufficient to mise issues of
owned by judgment debtor. Darden v.
abuse of discretion and failure to exercise
Reeve (1949) 200 P.2d 81, 88 C.A.2d 904.
judgment which trustee should be required
Where trust instrument provided that
to meet Coberly v. Superior Court for Los
trustor and son should occupy a dwelling on
Angeles County (1966) 42 Cal.Rptr. 64, 231
land constituting the corms of the trust
C.A.2d 685.
during lrustor's lifetime and that the land
Rule that it is fluty of a trustee to invest
should be sold on trustors death and pro.
trust fumb so that they will be productive
ceeds of the sale distributed in a specified
of income ix designed for trusts intended to
manner, and on trustors death trustee rc-
be productive of income or other gain, but
covered. but dkl net collect judgment in
the rule is not applicable in the case of a
ejectment against the ren. trustee was
trust not designed for income purposes but
properly charged with the stipulated value
for other purposes, such as holding and
of the property an hale trust was to be
preservation of property for use by others.
terminated, the rental of the house ronner-
Higgins v. City of Santa Monica (1964) 41
ly occupied by the son, anti the judgment
Cal.Rptr. 9, 396 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 903, 52 C.A.2d 720.
instructions as to interpretation of trust
It was duty of teslamentnry trustees to
instrument, and to obtain permission to de-
collect promissory notes distributed to
vi'ate from terms thereof regarding making
them. mul they were liable In beneficiary
or retention of investments, did not cnusti-
for amount of near, with interest. unless
lute exercise of a "(ower" within conlem-
their failure to collect was not due to their
plation of 4 860 requiring that all unite in
326
--OBLIGATIONS OF TRUSTEES -
__ .§2261
-'-PL 4'
-Note 13 .. _
execution of a power vested in several per.
in order to avoid charge of negligently man-
- •- tons, and 4 2268 requiring all co -trustees to
aging such funds. Id.
_ unite in any act to bind treat property, and
In determining whether golf club mort.
hence one trustee could appeal from deci-
guges were proper investments for trust -
tion allowing deviation from trust require-
funds, appraised value of realty and chatac-
menls as to investments, though other trus-
ter, financini standing, and past perform.
tee did not wish to appeal. Stanton v. Preis
ance of officers and members of clubs could
11956) 291 P.2d 118, 138 C.A.2d 63.
be considered. id.
Under will and decree of distnbution giv-
The fact that mortgage participation cet-
., .. _ ing testamentary trustees right to invest in
tificates purchased by trustee depreciates in
stocks of corporations of which testatrix
value standing alone does not warrant equi-
_ was a stockholder on her death if trustees
, ty court in opening, surcharging, or falsify -
obtained written consent of beneficiaries,
_ice. trustees accounts. approved by court.
- . truaten were not required to obtain such
Ormerod v. Se:urily.-Flist Net. Dank of baa -
- -eonsent-m purchase stocks of corporations
Angeles (1937) 69 P.2d 489; 21-C.A.2d 862-
. -of which testatrix was not a -stockholder.
-_ In as action against trustees, to have de-
In re Fowler's Estate (19431. 13'2 P.2d 535,
clared void a purchase -made by them, evi-_
__ C.A.2d 451. - _-_-_-dence
that one of them understood the pro.. -_ -
-56
- - .. That trustees held an investment in stock
priety of the purchase wast first to be sub- - - - - --
of bank which thereafter failed did not
milted to the beneficiary is admissible. Red
- -- -- show mismanagement of trust In re
Jucket Tribe No. 28 v. Gibson (18861 12 P.
Knox' Estate (1942) 126 P.2d 108, 52 C.A.2d
_
127, 70 C. 128.
^— --- --'•`-- �- -- _ - -
-" _A ,California domiciled state or national
- - -' Under will directing testamentary trus-
bank having a treat department which is --- _--
- - tees to accumulate in cash or negotiable
the trustee under an instrument which di-
- -- - securities the sum of $15,000 and to pay
- rects the investment of the corpus in United
income therefrom to beneficiary•, a note ae-
States government obligations, may not in -
cured by mortgage on Illinois realty was
vest such corpus in a mutual fund, the
. - ---• - - - - '---'-'-"-not improper investment, as against conten-
portfolio or which is limited to short-term
don tient, under Illinois law, mortgage was
United States treasury uhdigutions. 67 Ops.
not negotiable security, where negotiability
ALty.Gen. 212, fila -84.
of note was not affected under Illinois law
Where only the intertest on the corpus of
by the mortgage, and word "negotiable" in
funds given in trust to the director of elu-
will was employed to keep trust runds in
cation is to be used for educational put -
comparatively liquid state. Id.
paces the director of education on behalf of
In investing trust funds, trustee should
estate and in his official capacity should
consider aggregate value of trust estate,
invest the trust fouls, collect the interest
nature of other investments of funds of
and apply the interest as specified by the
trust, and advisability of diversifying in-
truster. 1 Ops.Alty.Gen.9o.
vestments in order to insure against a4
verse conditions in any particular field.
13. — Prudent investor standard, In.
Day v. First Trust & Savings Bank of Pusa-
vesting property
duna (1941) 118 Ptd 61, 47 C.A.2d 470.
Prudent investor standard dues not apply
Whether trustee, has acted properly in
where settlor himself specifies trustee is
making investment depends on circunstancr
mol limited! ley what law provides are proper
so at time investment is made and not oninvestments•
Matter of Collins' Estate
subsequent events. Id.
(19771 1313 Cul.Rplr. 644. 72 C.A.&I 663.
A financial institution with [,rated general
Although California does not dimiC trus-
knowledge of community nerals anti trends,
teas authority to a list of authorized invest-
or character and worth of citizens with
menta, relying instead on prudent inventor
whom buttaulion has dealt. anti specific
role, that role neverthe4ena encompasses
knowledge of property vuhex in comm
certain guideliuees that must be followed by
ly, con consider such pxsilive general
trnslee. Id.
knowledge in investing trust runds, ami is
Provision in trust instrument to purchase
not restricted to better upon letter anti line
every kind of pmegerty amt make every kind
upon pine conformity with prescribed ritual
of investment "irrCagRecteve or whether said
in estimating value of propose) investment
invicertments ore in accordance wide We laws
327
71
_ $ 2261
TRUSTS FOR THIRD PERSONS -
Note 13
Div. 3 -
then enforced in the Slate of Udifornin
the some time make the estate productive.
pertaining to the investment of trust funds
Day v. First Trust & Savings Bank of Pasa-
by corporate trustees" did not authorize
dena (1941) 118 P.2d Sl, 47 C.A.2d 470.- - -
trastees to make improper investments in
A trustee must use due care and skill and
violation of prudent investor standard. Id.
the caution of a prudent man in making
Different types of investments are not
investment., and, in absence of provision in
authorized for "corporate trustees" as dis.
trust or statute, he can make those invest-
tinguished from amateurs•, difference, rath-
ments which a prudent man would make in
- -, er. is that corporate trustees are held to a
investing in property outside of ordinary
greater standard of can based on their
business risks and with a view to safety of -- -
_
'- -- - - -- _presumed expertise. Id. ---
- - -
principal and to securing of an income res-
- - - Defendant trustees failed to follow "pro,_
sonable in amount and payable with eegu- -_---- - --- - ---
_
-,dent investor" standard with respect to ad- _
Iarity. Id.-
-'ministration of testamentary trust of which -
Evidence warranted denial of liability of - - —_
- - - - -- plaintiffs were beneficiaries where they bit-
---trustee for depreciation of trust assets dur- _ -
- vested two thirds of trust principal do a
Ing economic depression, on ground that - - -
-,- single investment, invested in real property
trustee was not negligent in investment of
- -- secured only by asecond deed of trust, and
funds, but exercised care of ordinarily pru-
made that investment without adequate in-
dent person. Id.
vestigation of either borrowers or collater
_
al. Id.
The liability of a director of education
Investment by nonprofit cemetery corpo-
acting as official trustee for bequests of
'_ •''-=--'^••-_ = ••-- --- -
-_-�— -ration of nearly &MF of Its endowment funul--
funds to be used for educational purposes is - -
-
in note and first deed of trust on one parcel
to make such investments as a prudent man -
of real property could be found to be a
would make of his own property, having
- -- violation of prudent investors rule with re-
Primarily in view the preservation of the
spect to investment of trust funds anti cem.
estate ami the regularity and amount of
etery board, department of professional and
income. 1 Ops.Atty.Geu 90.
' -- --'vocational standanis, was authorized to or ----
- - - - -
der that sum lent be reinvested. Mandel v.
14. Loaning
g property
Cemetery Bd., Dept of Professional and
Evidence that the land mortgaged to so-
Vocational Standards (1900) 8 Cal.Rptr. 342
cure a Inan made by it trustee was aril
186 C.A.2d 583.
land. which it was practically impossible to
This section broadens list of legal invest-
irrigate, and that the trustee made the loan
menta for trustees of endowment care
upon the statements of one mm, whom she
funds. but also places trustees under man.
knew, and a written report by three strong -
date of prudent investors rule in regard to
era, two of whom were the former owners
all of their financial transactions. Id.
of the land who had conveyed it to a dummy
An essential part of prudent investors
for the purpose of securing the loan them
rule with respect to investment of trust
on, sustained the trial court's finding that
funds is the requirement that investments
the trustee was negligent in making the
be diversified. Isl.
loan, and was therefore bound to make
Under provisions of this section embody-
P the loss. Inrmons Estate (1923)
Ing "prudent man rule' in setting rarth
2goo
99. H
duty of trustee in connection with invest.
Where an agent or trustee is instructed
ment of trust funds, and under general law
to "lonn out" funds held by him, it means
applicable to trusters, trustee, even where
that he is to invest them for his principal's
given broad discretionary Ismer of invest.
account and to make an accounting to the
ment. must exercise its independent discre.
principal of such investment and he is not
tion and judgment in reference to invest.
authorized to borrow the funds for his own
ment of trust funds. In re Talbot's Estate
purposes. In re Armstrong's Estate (1883)
119.5(1) 270 P.2d 848, 141 C.A.2d 300, 58
1 Cof. ISi. affirmed 10 P. 335, 99 C. 239.
A.f.12d Still.
Where trustee loaned out the funds of
A trustee is neither equrted to bury his
beneficiary without advising her of the risk
talents nor to exercise infallible judgment in
to which lie was subjecting her fumis nor of
investment of funds, but he must exercise
his mingling the funds with his awn imlis-
skill and judgment of reasonably prudent
eriminately he was Roble for the Ion result -
business man in preserving estate and at
ing therefrom and his account as special
328
0
0
OBLIGATIONS OF TRUSTEES 12261
"Pt; 4 Note 16--
„-c,c�r` adminiatrotor fw the beneficiary should be Talbot's Estate (1956) 2951 P.2d 848, 141
` charued with the lune sustained. Id. — `-C.A.2d M, 68 A.LR.2d 6..98. _
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 v. Leiter (19501 215 P.2d
755, 99 C.A.2d 439. -
r 16. -'Preserving property = - -
Executor serves in fiduciary capacity and
Where trustee has a broad power of sale,
right of income beneficiary 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 hurtbyreason of
the trustee's failure to keep certain stocks.
[d.
Where trustee who owned as trustee all
the stock of corporation, which by the sale
of its teal estate supplied assets for distri-
bution to trustee in trust, dissolved the tilt,
')oration, trustee hud-title to real estate and
had power and duty to carry out purpose of
trustor by selling lands -and receiving pro -
seeds from sales into the WsC Stubbs Y. "- -
has powers and nbligauans sins r W Wa-
- - tee, except dint primary duty is to preserve -
-7anea (t953) 283 P.2d 100, l21 C.A.2d 218. -
-_
- - - estate until distribution, rather than invest
A testamentary trustee, using diligence
funds. In re Slingsby's Estate (1931) 297 P. _--and
discretion in selling foreign government
931, 112 C.A. 76T: In re Brenhart's Estate
bonds includud in trust assets and receiving
(1931) 297 P. 931. 112 C.A. 71;0; In re
highest prices obtainable therefor, was
Smith's Estate (1931)-297 P. 927, 112 C.A.
properly allowed train on accounting for
680.
loss sustained in sale thereof for less than
----..._-.-_
their value,as fixed by court in settlement
-- -- 17. Retention of property - - - -- - ---of
previous accounts, in absence of evidence
- Usually trust is created to preserve prop-
of negligence in making sale or showing
- -arty intact and to earn income for benefi-
-that life beneficiaries of income, in contest -
nary, and ordinarily trustee is directed to
ing previous account, sought to charge Ws-
tee with value of bonds as cash on bund
_ administer funds in order to substitute sup-
- -- ^- -- -• ^_•=--- •_- `posedly superior judgment of trustee- for'-
owing tui -carafe because of his neglect to
that of beneficiary. Day v, Fant Trust &
11.2d
mall bonds. [n to Bothwell's Estate (19441'
151 P.2d V8, 9.i C.A.2d 598. rehearing de -
Savings Bank of Patadenn (1941) 118
51, 47 C.A.2d 470.
nied 151 P.'al 868. 65 C.A.2d 598.
An honest trustee is not liable to make
Assessment of damages against trustee
for negligence in failing to sell treat really
goal the boas sustained by retaining an
authorized security in a falling market, if he
as directcl by Wst instrument, thereby
did so honestly mail truthfully, in the belief
depriving life beneficiaries of income,
not be resorted to by them when
that it was best course to take in interest of
should
another appropriate remedy, such as appor-
all parties. Id.
lionment of proceeds of subsequent sale
18. Selling property
thereof between principal and income, is
available. 111.
Where trustee hall broad lower of sale In scrimp against trustee for accounting
but, instead of exercising independent judg- under ction at in t truite trustee o ming
mend as to sale of common stocks, relied ai and nLrsell taut of sing t on such terns
one beneficiary's mifulfiiled assurance that no ul such noes f Wates, within his
latter would secure from other beneficiaries discretion, should as trine, evidence dial
written consents to the sale, ame trusteeivol- not show that trustee, in refusing offer to
add stocks which liable
et, doubled i v due purchase +rnuertat price subsequently
ue, trustee was liable for redaction in value hown to be aderyate, did not exercise an
of objecting beneficiary's shore it corpus, holiest 'ud gment, and his estate was, them
i.e., and exption consisting of capital lions fore mH liable for (lainiges for such refus-
taxes and expense of stock sales and t of al. Neel v Barnard 119441 150 f! til 171, 24
such redo and for interest on amount le C.2d 4611.
such reduction, but trustee was not Ibihle
for appreciation in value of stocks after sale In action attuiont trustee by beneficiaries
or for kion of income on stocks. In re of trust for accounting and for damages,
329
El
- - - § 2261
TRUSTS FOR T111RD PERSONS_--
„
Note to _
Div. 3-
"- - - finding that trustee had' no opportunity to
in value of stocks in the account Weiner v.-
- ,. sell property involved at such prices as
Mullaney (1943) 140 Ptd 704, 59 C.A.2d
- would have liquidated plaintiffs' indebted-
. 620. - - - - �--
nese as provided by contract creating trust
Where beneficiary learned from broker in
or on such terms as trustee properly fixed,
_
January, 1938, that instructions to trustee - - -
determined in effect, that a reasonable time
not to deal in stocks had been violated, - - - - - -
for sale of property had not elapsed. Id.
beneficiary was put upon inquiry at that
-Even if offer was male to trustee for
- time and was charged -with "notice" of all --
purchase of realty which trustee held for
that an inquiry would have disclosed. Id.
sale for benefit of beneficiaries of trust, it
Where trustee failed to make full disclo.
would be presumed that trustee exercised
sure of facts surrounding use of beneff-
his judgment upon it and deemed price of-
eiary's shares in stock transactions contrary
fered too low, and court could not say that
to instructions, that it was no longer within —_ --- _ -
`he acted fraudulently or, in bad faith In
beneficiary's power- to rescind transaction_-,-
- - - -declining to sell. Id. - • - - -
_when she finally learned the true situation - -- _--- ._ - -
--A trustee can property sell trust property
and her only recourse was to salvage what
- - _ _- - -- -- if such sale is necessary or appropriate
stocks were left, such action on her part did
-to
- - - enable trustee to carry out purposes of
not amount to a "ratification" of trustee's
.trust unless sale is forbidden is specific
conduct Id. - - - - ---
- - words by terms of trust or it appears from
_
Where trustee was expressly instructed -
terms of trust that property was to be
not to sell or deal in stocks for beneficiary, - -
.. retained in specie in trust Church v.
his action in dealing in stock was a "breach -
Church (1940) 106 P.2d 640, 40 C.A.2d 606.
of trust" for which he was liable. Id. - -
-__ _ Where father of minor children took out
A trustee Is not permitted to buy and see
shares of 'Stock io a family carporatlon in
_
bonds on speculation and the fluctuations in
his name as trustee for children, and the -'-market
value -after purchase by the trustee
father had never executed any document in
are merely changes in the value of the _
- _ writing or declaration of trust restricting
assets of the trust estate, which are to be -.
his power, as trustee, to transfer shares,
wholly disregarded In any accounting be-
_ evidence warranted finding that, aside
tween life tenant and remaindermen for
-"from 'trustee's certificates, there was no
- funds from the trust estate invested in in. -
such agreement entered Into concerning
come -bearing property. In re Cartenlaub's
shares, and it did not appear that any re-
Estate (1921) 198 P. 209, 185 a W. 16
striction on power of sale was contained in
A.Lft 520.
certificates. it could not be said as matter of
law that the father did not have the right,
20. Surrendering property
as trustee, to transfer shares whenever, in
Evitlence was sufficient to support find -
exercise of his discretion, it appeared to him
Ing as to market value of bonds in action by
limper or necessary to do so. Id.
beneficiary against trustee for value of
Where money is bequeathed to a trustee
bonds deposited with trustee which trustee
to invest in land, with liberty to change the
without authority surrendered to bomihold-
investment at his discretion, the superior
era' protective committee. Martin Y. Hank
court is without jurisdiction to entertain a
of America Trust R Savings Assn (1935) 41
suit by the cestui que trust to order the
Ptd 200, 4 C.A.2d 431. '
trustee to sell the land subject to confirmn-
tion by the court. nor an application by an
21. Value of use and occupation by true•
Intervener in such a suit to confirm an
lee
alleged contract of sale to him by the true-
A purchaser of land with notice of the
We. and to direct the execution of convey-
fats entitling another to the delivery to
ante. Murphy v. Union Trust Co. of San
him of a deed previously male out in his
Francisco (1907) 99 P. 988, 5 C.A. 146.
favor, who obtains possession by force from
the cestui que trust, must account to him
19. Speculating with property
for the value of the use and occupation. and
A beneficiary who lenrocl that trustee
the cestui que trust must pay the purchase
had disobeyed instructions not to speculate
price into court for We benefit of the trus-
In stocks was nxpuired to act within n rea-
tee, inkling interest from the date of the
sonable time thereafter and could not wait
tender of the price, unless he chouses to
and hold trustee for subsequent decreases
regard the interest as liquidating the value
330
OBLIGATIONS OF TRUSTEES
§ 2261
- -. - _ - -' --_ >�.._ •w';.. PL 1- :_ - - - -
-- - .- -- -"-- -Note 25
of the use. Cartoon v. Handley (1887) 13 P. '
with rents, profits and income which he -
315, 72 C. 133.
never received, but might and should have - -
received by exercise of due and reasonable-
-` - • "'= 22.- Record of trust funds
can and diligence. White v. Citizens NaL -
A trustee or attorney handling funds of a
Trust & Savings Bank of Los Angeles
client cannot escape responsibility for trust
(1941) 116 P.2d 117, 46 C.A.2d 418.
fund by failing to keep any record or data
The nominal title holder of realty, incus-
from which an accounting might be made.
bared by a trust deal, who upon taking title -
Bruns v. State Bar of California (1941) 117
to realty assumed obligations of trustee for
P.2d 327, IS C.2d 667.
benefit of obligees whose claims were se-
cured by trust deal, differed from a mart -
2& Court orders for deviation from trust
Sugar in possession and was liable for all
Equity court order to sell realty, contrary
rents and profits received while in posses-
to terms of express_ testamentary trust, and
, sion. of the. malty even prior to sale thereof
_
reinvest proceeds, was pnaudiorixed, in ab--
-under power of said contained in trust deed.
- " -- -- -sence of present market value thereof and __
Baumann Y. Harrison (1941) 116 P.2d 530, _ _ -
- - - -- - -- —' -- - - =: -showing of character or security of proper -_-46
C.A.2d 84.-
' in which he proposed to reinvest pro
Security -First Not. Bank v. Easter
y,L Interest charge against trustee - - - - -
-
_seeds.
._ - (19341 29 P.2d 4222, 136 C.A. Gilt. ----_
-Failure-of directors of charitable, non-
-
___
i -
-pmfit-corpomWm to invest dividend income
24. Liability of trustee
deposited in corlroralion's checking amount
_ if money paid for trust is lost or de-
over five-year period was breach of their
duty to invest funds as would a reasonable
- stroyed without fault of trustee -payee, true-
tee -payee is not liable therefor and le
so that funds would be productive of
_hiss
-. �y- <M.-. —hortre by payar, trustor-Ixmef%iary. , Pet7t:`.
-man
income and were liable -for irate. ton soma
lest in consequence of such failure, notwith.
erbridge v. Prudential Sae. & Loan Assn
(1978) 145 Cal.Rptr. 87, 79 C.A.3d 509.
standing facts that bank had refused to
Defendant trustees were subject to being
honor drafts drawn on corporation's air
due to dispute among directors, that
surcharged for imprudent investment of
direccount
served without compensation,
monies from testamentary trust in which
during -parted of inaction, corpus
that. -during
- _...._:___._
were beneficiaries, not because
Utelacked
6�� approximately 100E in value, and
gained
prescience of what would halointiffs
1' p'
that costly lawsuit would be necessary to
pen, but because they both lacked and ig-
settle directors' dispute and remove "block-
nored information about what was happen.
ing' from bank account Lynch v. John M.
ing at time. Matter of Collins' Estate
Redfield Foundation (1970188 Cai.Rptr. 86,
(1 t t) 139 Cal.Rptr. 644, 72 C.A.3d 663.
9 C.A.3d 293, 61 A.LR.3d 1284.
Trustee who negligently breaches his
In action by beneficiary under two ex -
trust by failing to invest income within ma-
press trusts for an accounting by the ee-
sonable time is liable pursuant to statute
spective trustees, where trustees had
for simple interest at rate of 7% per annum.
waived delinquent interest on notes due the
Lynch Y. John M. Redfield Foundation
trust, had not collected note from deceased
(1970) 88 Cal.iiptr. 86, 9 C.A.3d 21YJ, 51
tanker, and had made loans which were
A.LR.3d 1254.
disapproved by the coum trial court's
One who engages services of trustee, cor-
charge of 6% interest on amount thus aur
pointe or otherwise, contracts for exercise
charged, except for the unauthorized loan
of trustee's best judgment and for perform-
concerning which current savings bank In.
ante of duties outlined in this section; and
terest rates compounded semiannually were
he has no right to receive any more than
charged, did not constitute an abuse of dis-
that and no right to complain if those ser.
cretion. Douglas v. Westfall (1952) 248
vices are rendered in good faith and with
P.2d 68, 113 C.A.2d 107.
reasonable prudence, discretion and intelli-
Where will created trust of specific lega-
gence. In re Bissingers Estate (1963) 28
cy, with amount thereof and accumulations
CaLRptr. 217, 213 CLA.2t1831.
to be paid to beneficiary when she reached
Generally, trustee's violation of equitable
age of 26, when executor who was also
duty, whether fraudulently or through neg-
trustee had failed to transfer corpus to
ligence, mea oversight or forgetfulness, is
himself as trustee or to invest same as
breach of trait. aml trustee may be charged
required by this section, and estate was not
rwCALC -19 831
$ 2262. Interest on fallure to Invest
-_,,., „,•,,.,: INTTiRE.St'. 5I41P13t OR _COMP )IINn. ON ONIMON Tn INVEST T7tOSr RONEY9. If a
trustee omits to invest the trustiaolie'ys'ace6eding-to the lit§t section, he
must pay simple interest thereon, if such omission is negligent merely,
and compound interest if it is willful.
(Enacted 1872.)
Forms
See West's California Code Forms, Civil.
Library References
Probate Court Practice. Goddard,
99 lelm, 1873.
Notes of Dechdons
In general I
Clrcumatanrea of the case 3
Compound Inlere-d 9
Construction with other lawn 2
Duration of invetment Inactivity a
Duration of liability for interenl A
Good frith 4
Fruitless investments 7
Rale of interest 9
Liability of trustee: estate to
1. In general
Main characteristics of trust relationship
are thnt payor retains beneficial interest in
money paid, trustee payee may not use
money for own purposes, in absence of
agreement to contrary, trustee keeps mon•
ey separate from his own funds, trustee has
duly to invest money and make it produc.
tive and in entitled to reimbursement for all
expenses properly tneurred in performance
of trust, and if muney paid m lost without
332
§ 2261 _'` ` ` ; ' ' " `
TRUSTS FOR THIRD PERSONS
Note 26 - ----
Div. 3 -
distributed prior to time for distribution to
making such an investment, blatter of Col.
beneficiary of trust. 7 per cent interest due
Ms' Estate (1977) 139 Cttl.Rptr. 644, 72
- apon corpus for failure to invest would be
C.A.3d 663. -
- - - - - allotted 4 per cent against estate and the
3 per cent against trustee as
In buying a mortgage for trust Invest -
- -- such. Imre Estate (1952) 244 P.Zd
ment, trustee should give careful attention
`to
697.
69T, 111 C.\.2d 484.
2d 46s
valuation of property in order to make
Where will created trust of specific lege-
certain that m
margin re smarty is endeavor
he must use every reasonable endeavor to
to,
_ - to with amount thereof with n she reached
' be paid to beneficiary when she reached
provide protection which will cover risks of
a
age of 26, duties trustee who was also
depreciation in property and changes In
a _.Rm
;._executor commenced upon death or tesla
lemb and must investigate statue of _ _ -
tor, and failure of executor to transfer fund -
prop y and of mortgage as well as finan--
to himself as_trostee could not absolve him_
emu siWation of mortgagor, fid"--
_ " -
- of his duties and respmabilitics an trustee
_-,.- _
]hoviaion of textamentdry true( tl-tat-"all-
- --_ -- - -" including duty to invest, and could not limit
discretions conferred upon the trustee shall _
- _ - liability for interest to 4 per cent rate appli-"
-'be absolute" did not authorize the trustee -
- cable to executors. Id -- - - - -- - --to
invest in a -junior encumbrance without _ -
-- -' - -- -`ability
- 28. Mortgages
to protect against the foreclosure of - -
a senior lien or to refrain from making a -
-- - - Equity will sanction an investment se•_ __business
like investigation of the credit
• cured by a second mortgage in a rare case
worth of the borrower or hisinting on an -
.- ..—, but only,,_ when security is adegynte_and
of the security given by the bo y
ual
- -- -unuscircumstances justify trustee -in. --rower.
"appraisal
Id.
$ 2262. Interest on fallure to Invest
-_,,., „,•,,.,: INTTiRE.St'. 5I41P13t OR _COMP )IINn. ON ONIMON Tn INVEST T7tOSr RONEY9. If a
trustee omits to invest the trustiaolie'ys'ace6eding-to the lit§t section, he
must pay simple interest thereon, if such omission is negligent merely,
and compound interest if it is willful.
(Enacted 1872.)
Forms
See West's California Code Forms, Civil.
Library References
Probate Court Practice. Goddard,
99 lelm, 1873.
Notes of Dechdons
In general I
Clrcumatanrea of the case 3
Compound Inlere-d 9
Construction with other lawn 2
Duration of invetment Inactivity a
Duration of liability for interenl A
Good frith 4
Fruitless investments 7
Rale of interest 9
Liability of trustee: estate to
1. In general
Main characteristics of trust relationship
are thnt payor retains beneficial interest in
money paid, trustee payee may not use
money for own purposes, in absence of
agreement to contrary, trustee keeps mon•
ey separate from his own funds, trustee has
duly to invest money and make it produc.
tive and in entitled to reimbursement for all
expenses properly tneurred in performance
of trust, and if muney paid m lost without
332
-CIVIL CODE
2228 to 2290.9
Repeated
' -- - -•--- - •-- "` - - - - - - - taw Revision Commission Comment
-- - 1986
Repeal - - -
Fmmer Section 2233 6 open ed by Probate Code
' Sadden IS642(b) (grounds (ben to mal or trustee), Is=
puma Section 2214, which stated a special application of
the Perot arkha ce rale. I omitted beton this b
(duty of loyaly), and 16001 (duty to amid cordon of
- - httaetA (li Cd.LRn.Coonn, Report 701 (1986)J.
question
gw•enred by the gensrd Pmt evidence rola 9m Coda
ar.Proe 11876; sec dso Prob.Cade 1 15207 (proof of
Former Section 2234 IS superseded by Probate Code
Section 1640 (violation of duty I branch of Int). The
term of urd toot of persona propntyA ill CaLL t".
Comm. Reports 501 (1986)}
_ WAtty for breach b SMI.. by rttele See Pmb.Cade
It 16110 (measure 0f Ilebiity for breach of treat), 16641
the Pon of subdivision (a) of forms section 2271 Minting
(Malcolm of Babiity, rut leterestA Its CaLLRar.Comm.
Reports Sol. 1790 (1986)1
m eoonrol of the trtmees duties by the treat Instrument b
Monal in probae Code Section 16000 (duly toland bear
Pointer $all= 2231 b sopmeded by Probes" Code
treat according to coot Instrument) wrthnm moment"
changee but the elteaet
sarintion trs of the duty of the esa
9eetlmh t6W2 (duty of loyalty) and 16001 (duty to avoid
_ -- _ - - _ contort Of interest). 118_G_ LLRer.Comm. Reports Sol
that of an empbya Is -mined. The pmt of s-bdivkhoa (a)
relating m modinotbn b ropers I by Probate Code - -
:
--- - - -(1986)). - _- - - — - -_-
Section 15404 (modiliadon by setter and at bemRdadmA
- Former Section 2236 6 superseded by Probate Code
--- _ - - - --_ _ - Scdmo 16009 (duty to keep toot propeny mpamte) and
the Mt sentence of mbdirbbn (b) Is continued 1,--
Probate Code Section 16001 (duty of treat- of r,,able _
1640 (meamm of liability for to of beat), $ee iso
- Prob.Code 116420(a)(3) (red—s of It by payment of
lost) without substantive chenge. The saved sentence b
Mustd In Probers Code Section 16462 (rmdbW'ity for-
mm ")6 118 CALLRm.Comm. Repose Sol (1986)1.
following hobaetlom under reran sla treat) without not. --
Former Sadon 2237 I mpnudd by Probes Coda
. - - Student 16440(&) (meume of ishiiry for Wash of teem)
Hmtire chenge Tho reference to a person having a a
err contingent interest in the toot I replaced by the rater. -
- and 16441 (mecum of Usbioly for Waste). Sa also
- Pmts.Code 116420(a)(3) (redress of breach by payment of
esea In Praha& Code Salim 16462 to the beneficiary. Sec
Prob.Code 124 ('bendietey" ddined), The Ion part of
mo=yA 118 CaLLRar.Cemm. Report Sol (1986) )•
the saved smtenm ranting to fiduciary obligations of the
Subdivision (a) of former Salm 2231 ismpetaded by
Aa
ctlng party yis
y omitted as unecoma. Sea o Pmts.
- - Problem Code Section 16440 (mecum d Oabolly for breech
Carle I -l0 (sWgaW include plmdA [lir' L-o�••.Camm.
- - of umt Subdlvidon (b) b restated b Probate Code
Report 501 (1916)} - - - - -- ---- - - - - -
Sad= 16442(1) (rmsr0ab06y for fallowing final—ion an
The Pent of termer Section 2239 relating to the effect of
der --able tram) without mbbadve change Sec also
Prob.Codo 116420(a)(3) (redr" of break by Payment of
aompensetbn on the standard of cam is restated in pmbst, -
CO&Section 16041 without sahomm" chmge The -or&
mmy), [I l CALRer.Comen. Repeal 501 (1986)1
any cue and d9lgemd• contend of former Section 2239 is
Paean Swim 2239 is resulted in pmbasa Code Sao"
superseded by Probate Cade Section 16010 (mosm-s ren.
16102 (burse s liability to bendidesy for no of c-tnnrce)
dad of ears to edmidnotng treat), [15 GLLRer.Cmam
with -ani cbnges. Sec the Comment 10 Prob.Code
Report 501 (1986)).
{ 16101 (18 Ca.LRev.Comm. Reports Sol (1986) ).
Pommy Section 2260 6 superseded by probes, Cade
Pub of former Section 220 am slpervedcd by Probate
Seeti-ea 15641 plabinty of resigning testa). 13660 (ap.
Ode Salim 17620 (action by entnnt m) uw 16200
Pobtmmt of trustee to fin vaem C A 16000 (duty to admin•
(powers subject to &Wtatbsn in beat). The authority to
Iter trust), and 17200(b)(10) (petition on appointment of
make deposits b emttimeW in Probst, Code Section 16239
trustee), (18 Cd.LRev.Conon. Report, 501 (1986)1
(wwer to deposit securities in depository) without mbuln.
dm change 118 CaLLRer.Com n. Reports 101 (1986)),
The standard of cone governing investments and
meat of frost property provided by subdivision
Fmoer Section 2243 Is nrpersededoy Probers Coda
(s)(
f-rmer Section 2261 6 ratatd b present Code Section
Section ]$too (protection of third patron dating with trust.
16041D(b) without substantive chenge. The mtihmity to
94 Sec also Prob.Code 1 13003 (oonstruetive and resulting
aegdm "every kind of propertr is rmated in prelude Code
trmb unafecten [18 CaLute..Comm. Reports 301
Sections 16M (power to smear) and 16226 (power to
(1916) ).
acquire Prupemy See do Pub Code 11 62 (-pCPOr
Forcer Senior 2244 I expanded by Probate Code
ddined). 16200 (goners! pow" of man, include powers of
Section 18101 (application of property deoverd m trustee
Isrwdomt Person), Subdividers (a)(2) of Ibsen Section 2261
by third Pet X (I8 CdLRar.Comm. 'Reports Sol
b restated in Peobale Code Section Mettle) with= rob.
(1986) A
unitive chenge $a also Prob.Cde 1 16000 (genod
Pormn Section 2250 Is superseded by Probate Cade
duties or Iwra subject to co ml by true lmtrammiA
Salim a ("trues' ddhm A the prevlhn Mstbg to the
The standard of are provided In the est half of the am
ening of title in the women b qct c adnued. on dm
Comment to fames Smtbn 863. [is CdLRm.Comm
4mtaee of subdivision (b) Is an .'d by Pmbos Code
Sued" ISM (tra tees standard of care in adminbtest g
Repeal Sol (1986) ).
treat) and 162M (exercise of pow" subject to limited" b
Forma Section 2231 Is superseded by Probate Code
Satl-oo 13200-13207 (cratims of from). 11600 Use unce
tnmA see eba Prob.Code 116220 (power to canna and
M ProPetryA the mtbority to remin property in trod st
of tea by trstaA and 164Ma7(I) (leaeRcfny'n&y am.
m r wa
In naepdion a Wer acquhed pummust m props m homy
pel trustee to palbrm duties), [li CLLLRiary
pout Sol (1986) j.
Is reacted in Saturn 1600S(b) u an euepdm to rhe grad
duty to dispute of Improper Investments the mama sen.
onav
PSectionn 2232 b ondltd n
Cod mese omen. Reports 501 "ed ). mn�y. [18
Item of sobdtviaon (b) b superseded by Probate Code
Section 16220 (power to hold property in which mount b
Posner Semon 2233 Is Inteeesded gen"IIy by Probate
Coda Sections 132W (moMds of nesting tnmu 13201doosea
Wtereact* See Mo Prob.Coda 162 ('Popery doled).
Subdivision (c) Is superseded by Probes° Coda Salinas
tmdX 111 m ane trot sad 16000 of ( m )I.
�A Ili CeLLRerCam a Repos 501 (1986)1•
16200 (eeedm d po." subjan to IWimlao b troa) sod
16223 (Power m make depodbA Sm elm PmbCude
116201 (power of cum to rdima emcee once nomek t6m ).
Addltiorn or eltenQee Indktsted by
Imderina:
deletions by asterisks
7
EXHIBIT B
- - DESCRIPTION OF INVESTMEM -
- 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 City of Azusa the
best combination of safety, liquidity and high yield. Surplus funds of local agencies may only
be invested in certain eligible securities. The City of Azusa invests only in those allowable
securities under the State of California statutes -(Government Code Section 53601, et seq).
Certificates of Dem
_ Certificates of deposit allow the Cityto 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 City 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
_= =
777--'7of FDIC_•!ICmay be to the City's advantage to waive this collateral requirement for the fust
$100,000 because the City 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 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
I
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, LAW yields are higher.
- U.S. Treasury Securities
- =- 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 City will not invest in notes having
- maturities longer than five years.--
_ Federal Azalcy Sedirities
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 "CB), 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.
+P]
Nesotiable Certificate of Deposit
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 Acceonces-
- Bankers- Acceptances -are frequently the highest in yield. -are safe investments and are highly .
Bankers acceptances area short-term credit arrangement to enable businesses to -obtain funds to
financecommercial 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 allows the investment of large amounts of money for one to seven days at
rites 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.
3
,,
Passbook Savings or Money Market 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.
Los Angeles County Pooled Fund
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 mmiritica-
The County Pooled Fund is similar to the State of California Local Agency Investment Fund=
(LAIIF). 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 is another authorized investment allowing the City to maintain liquidity and receive
money market rates.
Mutual Funds are referred to in the Government Code, Section 5360LL, 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 m 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
S p •
•
R=rehase Agents
Another authorized investment for cities is repurchase agreements. Repurchase agreements are-
' -Purchases of securities by the City under an agreement with a term of one (1)y ear or less
whereby the seller will "repurchase". -the same securities on or before a specified date of on -
demand -of either party and for a specified amount. The underlying securities must be delivered `
to the City 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
0
LIST OF THE PRIMARY GOVERNMENT SECURITIES DEALERS
REPORTING TO THE MARKET REPORTS DIVISION OF THE
-FEDERAL RESERVE BANKOFNEW 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, Lufkin & 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