HomeMy WebLinkAboutMinutes - July 5, 1993- CCFinance Department • 213 E. Foothill Blvd. • P.O. Box 1395 • Azusa, CA 91702.1395
(818)334-5125
AGENDA ITEM
TO: CHAIRMAN AND DIRECTORS OF THE REDEVELOPMENT
AGENCY OF THE CITY OF AZUSA q
FROM: ROBERT E. TALLEY, AGENCY TREA-S�
VIA: HENRY GARCIA, EXECUTIVE DIRECTORb/
DATE: JULY 5, 1993
SUBJECT: REDEVELOPMENT AGENCY OF THE CITY OF AZUSA
INVESTMENT POLICY
Back rg ound
State law requires that the investment policy for each Agency be re -adopted every year, with
changes that may be necessary or desirable. The Redevelopment Agency Board of Directors last
re -adopted its Investment Policy on July 7, 1992. No changes are recommended in the Agency's
Investment Policy this year, except that Exhibit B to the Policy has been updated to reflect
current law and practices.
Recommendation
Staff recommends that the Board of Directors adopt the attached draft Resolution re -adopting the
Investment Policy of the Redevelopment Agency of the City of Azusa.
Attachment:
GJC:pap f
•
RESOLUTION NO
RESOLUTION OF THE BOARD OF DIRECTORS OF THE REDEVELOPMENT
AGENCY OF THE CITY OF AZUSA RE -ADOPTING ITS INVESTMENT POLICY
WHEREAS the Redevelopment Agency of the City of Azusa receives taxes and
other revenues from a variety of sources and uses the funds to pay its bills on a regular
basis; and
WHEREAS the Agency Treasurer is charged with the duties of handling and
maintaining the cash that is taken in or otherwise received by the Agency; and
WHEREAS the balance of these funds fluctuates between $3,000,000 and
$20,000,000 or more; and
WHEREAS the Agency Treasurer is charged with the responsibility of investing
idle public funds, doing so on the basis of protecting' the safety of the funds, ensuring the
liquidity of the investments, and maximizing earnings in that order of importance and based
on the "Prudent Man Rule"; and
WHEREAS the State of California requires each City Redevelopment Agency to
adopt an investment policy for its jurisdiction.
NOW THEREFORE BE IT RESOLVED that the Board of Directors of the
Redevelopment Agency of the City of Azusa does hereby re -adopt its Investment Policy
attached hereto as Exhibit A and instsructs the Agency Treasurer to be guided by it in
carrying out the duties of his office for the benefit of the Redevelopment Agency.
ADOPTED AND APPROVED this day of , 1993.
CHAIRMAN
I HEREBY CERTIFY that the foregoing resolution was duly adopted by the
Board of Directors of the Redevelopment Agency of the City of Azusa at a regular meeting
thereof on the day of 1993 by the following vote of Directors:
AYES: BOARD DIRECTORS:
NOES: BOARD DIRECTORS:
ABSENT: BOARD DIRECTORS:
SECRETARY
THE REDEVELOPMENT AGENCY OF THE CITY OF AZUSA
INVESTMENT POLICY
I. STATEMENT OF OBJECTIVES
Temporarily idle or surplus funds of The Redevelopment Agency of the City of Azusa
shall be invested in accordance with principles of sound treasury management and in
accordance with the provisions of California Government Code Sections 53600, et seq.,
the Municipal Code, guidelines established by the California Municipal Treasurer's
Association and the California Society of Municipal Finance Officers, and this Investment
Policy ("Policy").
A. Overall Risk Profile
The basic objectives of the Agency's Investment Program are, in order of
priority:
1. Safety of invested funds;
.2. Maintenance of sufficient liquidity to meet cash flow needs; and
3. Attainment of the maximum yield possible consistent with the first two
objectives.
The achievement of these objectives shall be accomplished in the manner
described below:
1. Safety of Invested Funds
The Agency shall ensure the safety of its invested idle fund by limiting
credit and interest rate risks. Credit risk is the risk of loss due to the
failure of the security issuer or backer.
Interest rate risk is the risk that the market value portfolio securities will
fall due to an increase in general interest rates.
a) Credit risk will be mitigated by:
(i) limiting investments to the safest types of securities;
(ii) by prequalifying the financial institutions with which it will
do business; and
(iii) by diversifying the investment portfolio so that the failure
of any one issue or backer will not place an undue financial
burden on the Agency.
b) Interest rate risk will be mitigated by:
(i) structuring the Agency's portfolio so that securities mature
to meet the Agency's cash requirements for ongoing
operations, thereby avoiding the need to sell securities on
the open market prior to their maturation to meet those
specific needs; and
(ii) investing primarily in shorter term securities.
C) The physical security or safekeeping of the Agency's investments
is also an important element of safety. Detailed safekeeping
requirements are defined in Section III of this policy.
2. Liquidity
The Agency's investment portfolio shall be structured in a manner which
strives to achieve that securities mature at the same time as cash is needed
to meet anticipated demands (Static Liquidity). Additionally, since all
possible cash demands cannot be anticipated, the portfolio should consist
largely of securities with active secondary or resale markets (Dynamic
Liquidity). The specific percentage mix of different investment
instruments and maturities is described in Section II of this Policy.
3. Yield
Yield on the Agency's investment portfolio is of secondary importance
compared to the safety and liquidity objectives described above.
Investments are limited to relatively low risk securities in anticipation of
earning a fair return relative to the risk being assumed. While it may
occasionally be necessary or strategically prudent of the Agency to sell a
security prior to maturity to either meet unanticipated cash needs or to
restructure the portfolio, this policy specifically prohibits trading securities
for the sole purpose of speculating on the future direction of interest rates.
Specifically, "when" and "if issued" trading and open-ended portfolio
restructuring transactions are prohibited.`
B. Time Frame for Investment Decisions
The Agency's investment portfolio shall be structured to provide that sufficient
funds from investments are available every month to meet the Agency's
anticipated cash needs. Subject to the safety provisions outlined above, the choice
in investment instruments and maturities shall be based upon an analysis of
anticipated cash needs, existing and anticipated revenues, interest rate trends and
specific market opportunities. No investment should have a maturity of more
than five (5) years from its date of purchase without receiving prior Executive
Board approval.
C. Definition of Idle or Surplus Funds
Idle or surplus funds for the purpose of this policy are all Agency funds which
are available for investment at any one time, including the estimated checking
account float, excepting those minimum balances required by the Agency's banks
to compensate them for the cost of banking services. This policy also applies to
the idle or surplus funds of other entities for which the Redevelopment Agency
personnel provided financial management services.
II INVESTMENTS
This section of the Investment Policy identifies the types of instruments in which the
Agency will invest its idle funds.
A. Eligible Securities
The Agency operates its temporary pooled idle cash investments under the
Prudent Man Rule - I/ (Civil Code Section 2261, et seq). See Exhibit A. This
affords the Agency a broad spectrum of investment opportunities as long as the
investment is deemed prudent and is allowable under current legislation of the
State of California (Government Code Section 53600, et seq). (See Exhibit B for
definition of investments.)
* Insured Certificates of Deposit (CD's) of California banks and/or savings
and loan associations, and/or savings banks which mature in five years or
less, provided that the Agency's investments shall not exceed One
Hundred Thousand Dollars ($100,000) per institution. If the investment
exceeds the insured $100,000, the funds are to be collateralized at 110%
of the deposit in government securities or 150% in mortgages.
'/ The Prudent Man Rule states, in essence, that "in investing exercise the judgment and
care, under the circumstances then prevailing, which men of prudence, discretion and
intelligence exercise in the management of their own affairs ....
* Local Agency Investment Fund (State Pool) Demand Deposits
* Securities of the U.S. Government, or its agencies
* Negotiable Certificates of Deposit placed with Federal and State savings
and loan associations and Federal and State chartered banks with an office
in the State of California (limited to 30% of portfolio)
* Bankers Acceptance (limited to 40% of portfolio) (not collateralized;
emergency use only)
* Commercial Paper (limited to 30% of portfolio) (not collateralized;
emergency use only)
* Passbook Savings or Money Market Demand Deposits
* Repurchase Agreements (limited to 30% of portfolio)
* Los Angeles County Treasurer's Investment Pool
* Money Market Mutual Fund (with $1 net asset value)
B. Qualification of 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 Q.
C. Collateralization Requirements
Uninsured Time Deposits with banks and savings and loans shall be collateralized
in the manner prescribed by law for depositories accepting municipal investment
funds.
D. Pre -formatted Wire Transfers
Wherever possible, the Agency will use pre -formatted wire transfers to restrict
the transfer of funds to pre -authorized accounts only. When transferring funds
to an account not previously approved, the bank is required to call back a second
employee for confirmation that the transfer is authorized.
E. Notice of Dealers
The Agency shall annually send a copy of the current edition of the Policy and
its enabling Resolution to all institutions which are approved to handle the
Redevelopment Agency investments. Receipt of the Policy and Resolution,
including confirmation that it has been received by persons handling the Agency's
account, shall be acknowledged in writing within thirty (30) days.
F. Diversification
The portfolio should consist of a mix of various types of securities, issues and
maturities.
G. Confirmation
Receipts for confirmation of purchase of authorized securities should include the
following information: trade date, par value, rate, price, yield, settlement date,
description of securities purchase, agency's name, net amount due, third party
custodial information. These are minimum information requirements.
H. GASB 3
The Governmental Accounting Standards Board issued GASB 3 in April 1986,
and the local entity's investments must be categorized into three levels of credit
risk as follows:
a) securities that are insured or registered, or for which the securities are
held by public units or its agent in the units;
b) securities that are uninsured and unregistered and are held by the broker's
or dealer's trust department or agent in the unit's name;
C) securities that are uninsured and unregistered and are held by the broker
or dealer, or by its trust department or agent, but not in the unit's name.
The carrying amount and market value of all types of investments must be
disclosed in total and for each type of investment.
Governmental Accounting Standards Board 3 exempts mutual funds and LAIF
investments from the mandatory risk categorization.
III SAFEKEEPING OF SECURITIES
A. Safekeeping Agreement
The Agency shall contract with a bank or banks for the safekeeping of securities
which are owned by the Agency as a part of its investment portfolio or
transferred to the Agency under the terms of any repurchase agreements.
B. Handling of Agency -Owned Securities and Time
Deposit Collateral
All securities owned by the Agency shall be held by its safekeeping agent, except
the collateral for time deposits in banks, savings banks, and savings and loans is
held by the Federal Home Loan Bank. The collateral for time deposits in banks
is held in the Agency's name in the bank's trust department, (if a safekeeping
agreement has been executed) or, alternatively, in the San Francisco Federal
Reserve Bank.
C. Securijy Transfers
The authorization to release Agency's securities will be telephoned to the
appropriate bank by a finance department member other than the person who
initiated the transaction. A written confirmation outlining details for the
transaction and confirming the telephoned instructions will be sent to the bank
within five (5) working days.
D. Verification of Security
Securities transferred to the Agency as collateral securing time deposits which are
being held in safekeeping for the Agency will be verified in writing and examined
on a surprise basis during the year by the Agency's independent auditors as part
of the Agency's annual independent audit.
IV STRUCTURE AND RESPONSIBILITY
This section of the Policy defines the overall structure of the investment management
program.
A. Responsibilities of the Agency Treasurer
The Agency Treasurer is charged with responsibility for maintaining custody of
all public funds and securities belonging to or under the control of the Agency,
and for the deposit and investment of those funds in accordance with principles
of sound treasury management and in accordance with applicable laws and
ordinances.
B. Responsibilities of the Executive Director
The Executive Director is responsible for keeping the Executive Board fully
advised as to the financial condition of the Agency.
C. Responsibilities of the Executive Board
The Executive Board shall consider and adopt a written investment policy. As
provided ,in that policy, the Board shall receive, review and accept monthly
investment reports.
D. Responsibilities of the Investment Committee
There shall be an Investment Committee consisting of the Executive Director, the
Director of Finance and Agency Treasurer. The Committee shall meet quarterly
to discuss cash flow requirements, the monthly investment reports, investment
strategy, investment and banking procedures and significant investment related
work projects being undertaken in each department which will affect the cash
flow management of the Agency Treasurer. This will require timely reports from
the department heads to the Agency Treasurer concerning significant future cash
flow requirements. The Committee's meetings will be summarized in minutes
that are distributed to the Executive Board.
V REPORTING
The AgencyTreasurer shall prepare a monthly investment report, including a succinct
management summary that provides a clear picture of the status of the current investment
portfolio and transactions made over the past month. This management summary shall
be prepared in a manner which will allow the Executive Director and the Executive
Board to ascertain whether investment activities during the reporting period have deviated
from the Agency's Investment Policy.
The monthly report shall include the following:
A. A list of individual securities held at the end of the reporting month.
B. Unrealized gain or loss resulting from appreciation or depreciation by listing the
cost and market value of securities over one year in duration.
C. A description of the current investment strategy and the assumptions upon which
it is based.
D. Average rate of return on the Agency's investments.
E. Maturity aging by type of investments.
VI REVIEW OF INVESTMENT MANAGEMENT
Policy. Review
This investment policy shall be reviewed annually by the Executive Board in accordance
with State law to ensure its consistency with respect to the overall objectives of safety,
liquidity and yield. Proposed amendments to the policy shall be prepared by the
Treasurer and after review by the Investment Committee and City Attorney be forwarded
to the Executive Board for consideration.
VII AUTHORITY
This policy was duly adopted by authority of the Executive Board of the Redevelopment
Agency of the City of Azusa on the,19th day of February, 1991.
February 4, 1992
January 27, 1992
EvHIBIT A
PRUDENT YAN RULE
§ 2261 TRUSTS FOR THIRD PERSONS
Div. 3
§ 2261. Investments
(a) Degree of care, skill, prudence and diligence. (1) Subject to
paragraph (2), when investing, reinvesting, purchasing, acquiring, ex-
changing, selling and managing property for the benefit of another, a
trustee shall act with the care, skill, prudence, and diligence under the
circumstances then prevailing, specifically including, but not by way of
limitation, the general economic conditions and the anticipated needs of
the trust and its beneficiaries, that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, to attain the goals of
the trustor as determined from the trust instrument. Within the limita-
tions of the foregoing and considering individual investments as part of
an overall investment strategy, a trusteeis authorized to acquire every
kind of property, real, personal or mixed, and every kind of investment.
(2) The trustor may expand or restrict the standards set forth in
paragraph (1) by express provisions in a trust instrument. Any trustee
acting for the benefit of another under that instrument shall not be liable
to anyone whose interests arise from that trust for the trustee's good
faith reliance on those express provisions.
(b) Retention of property. In the absence of express provisions to
the contrary in any trust instrument, a trustee may without liability
continue to hold property received into a trust at its inception or
subsequently added to it or acquired pursuant to proper authority if and
as long as the trustee, in the exercise of good faith and of reasonable
prudence, discretion and intelligence, may consider that retention is in
the best interests of the trust or in furtherance of the goals of the
trustor as determined from any trust instrument. Such property may
include stock in the trustee, if a corporation, and stock in any corporation
controlling, controlled by, or under common control with such trustee.
(c) Deposit of funds. In the absence of express provisions to the
contrary in any trust instrument, a deposit of trust funds at interest in
any bank (including the trustee, if a bank) shall be a qualified investment
to the extent that such deposit is insured under any present or future
law of the United States, is collateralized pursuant to any present or
future law of this state or the United States, or to such greater extent as
a court of competent jurisdiction may authorize. Nothing in this section
shall be construed as limiting the right of trustees in proper cases to
make deposits of trust moneys in banks, subject, in the case of interest-
bearing deposits, to such notice or other conditions respecting withdraw-
al as may be prescribed by law or governmental regulation affecting
such deposits.
(d) Deviations from terms of trust; court order. Nothing in this
section shall abrogate or restrict the power of the appropriate court in
320
OBLIGATIONS OF TRUSTEES § 2261
Pt. 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 the trustee relative to investments, in the
absence of other controlling or modifying provisions of the trust instru-
ment, shall be construed as authorizing any investment permitted, and
imposing the standard of prudence required, by the terms of subdivision
(a) of this section.
(f) Property defined. The term "property" as used in this section
includes life insurance, endowment, and annuity contracts issued by legal
reserve companies authorized to do business in this state.
(Enacted 1872. Amended by Stats.1943, c. 811, p. 2602, § 1; Stats.1967, c. 688, p.
2054, § 1; Stats.1967, c. 1706, p. 4265, § 1; Stats.1968, c. 161, p. 385, § 1;
Stats.1969, c. 259, p. 611, § 1; Stats.1984, c,. 1372, § 1.)
Ilisloricul Note
The section, as originally enacted in 1872,
authorized to acquire every kind of proper -
or mixed, and every kind
provided:
Ly, real, personal
of investment, specifically including, but
"A trustee must invest money received
not by way of limitation, corporate obliga-
by him under the trust, as fast as he col-
tions of every kind, mid stocks, preferred or
leets a sufficient amount, in such manner as
common. which men of prudence, discretion
to afford reasonable security and interest
and intelligence acquire for their own ac -
for the same."
count.
The 1948 amendment rewrote the section
x.(2) In the absence of express provisions
to read:
to the contrary in the trust instrument, a
"(1) In investing, reinvesting, purchasing,
trustee may continue to hold property re-
into a trust at its inception or subse-
acquiring, exchanging, selling and manag-
for the benefit of another, a
ceived
quently added to it or acquired pursuant to
ing property
trustee shall exercise the judgment and
proper authority if and as long as the trus-
in the exercise of good faith and of
care, under the circumstances then prevail-
discretion
lee,
reasonable prudence, discretion and intelli-
ing, which men of prudence, and
may consider that retention is in the
intelligence exercise in the management of
genre,
best interests of the trust.
their own affairs, not in regard to specula-
but in regard to the permanent dispmsi-
"(:n In the absence of express provisions
tion.
tion of their funds, considering the probable
to the contrary in the trust instrument, a
income, as well as the probable safety of
deposit of trust funds ut interest in any
bunk the savings department of
their capital. Within the limitations of lire
s;rvings or
bank (including the savings department
foregoing standard, and subject to any ex-
ur limitations contained in
anv
of the trustee, if a bank) shall he a qualified
press provisions
trust instrument, a Lru%Lce is
investment to the e'xte'nt that such deposit
any particular
321
92261
is insured under any present or future law
of the United States, or to such greater
extent as a court of competent jurisdiction
may authorize. Nothing in this section
shall be construed as limiting the right of
trustees in proper cases to make deposits of
trust moneys in banks, subject. in the case
of interest -hearing deposits, to such notice
or other conditions respecting withdrawal
as may be prescribed by law or governmen-
tal regulation affecting such deposits.
"(4) Nothing in this section shall abro-
gate or restrict the power of the appropri-
ate court in proper cases to direct or permit
the trustee to deviate from the terms of the
trust regarding the making or retention of
investments.
"(5) The provisions of this section stmt)
apply to all trusts now existing or hereafter
created. Where, in trusts now existing or
hereafter created, the term 'investments
permissible by law for investment of trust
funds,' or 'authorized by law for investment
of trust finds; 'legal investments,' or 'au-
thorized investments,' or other words of
similar import are used in defining the pow-
ers of the trustee relative to investments,
such language, in the absence of other con-
trolling or modifying provisions of the trust
instrument, shall be construed as authoriz-
ing any investment permitted by the terms
of subdivision (1) of this section."
The 196.7 amendment by c. 1706 added the
concluding sentence to suhd. (2). (later
amended. see 1969 amendment): and delet-
ed references to savings banks and to the
savings department of banks from suhd. (3).
Effect of amendment of section by two or
more acts at the same session of the legisla-
ture, see Government Code 4 9005.
The 1968 Amendment added subil. (8).
The 1969 Amendment added the words
,.and stock in any corporation controlling,
controlled by, or under common control
with such trustee" to the end of subd. (2).
The 1984 amendment rewrote the section
which as amended in 1909 had read:
"(1) In investing, reinvesting, purchasing,
acquiring, exchanging, selling and manag-
ing property for the benefit of another, a
trustee shall exercise the judgment and
care, under the circumstances then prevail-
ing, which men of prudence, discretion and
intelligence exercise in the management of
their own affairs, not in regard to speculn-
tion, but in regard to the permanent disposi-
tion of their funds, considering the probable
TRUSTS FOR THIRD PERSONS
Div. 3
income, as well as the probable safety of
their capital. Within the limitations of the
foregoing standard, and subject to any ex-
press provisions or limitations contained in
any particular trust instrument, a trustee is
authorized to acquire every kind of proper-
ty, real, personal or mixed, and every kind
of investment, specifically including, but
not by way of limitation, corporate obliga-
tions of every kind, and stocks, preferred or
common, which men of prudence, discretion
and intelligence acquire for their own ac-
count.
"(2) In the absence of express provisions
to the contrary in the trust instrument, a
trustee may continue to hold property re-
ceived into a trust at its inception or sulil
quently added to it or acquired pursuant to
proper authority if and as long as the trus-
tee. in the exercise of good faith and of
reasonable prudence, discretion and intelli-
gence, may consider that retention is in the
best interests of the trust. Such property
may include stock in the trustee, if a corpo-
ration, and stock in any corporation control-
ling, controlled by, or under common con-
trol with such trustee.
"(3) In the absence of express provisions
to the contrary in the trust instrument, a
deposit of trust funds at interest in any
bank (including the trustee, if a bank) shall
be a qualified investment to the extent that
such deposit is insured under any present or
future law of the United States, or to such
greater extent as a court of competent jur-
isdiction may authorize. Nothing in this
section shnli 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
withdrawal as may be prescribed by law or
governmental regulation affecting such de-
posits.
"(4) Nothing in this section shall abro-
gate or restrict the power of the appropri-
ate court in proper cases to direct or permit
the trustee to deviate from the terms of the
trust regarding the making or retention of
investments.
"(5) The provisions of this section shall
apply to all trusts now existing or hereafter
created. Where, in trusts now existing or
hereafter created, the term 'investments
permissible by law for investment of trust
funds,' or'authorized by law fur investment
of trust funds,' 'legal investments; or 'nu-
thorized investments; or other words of
similar import are used in defining the pow-
ers of the trustee relative to investments,
322
OBLIGATIONS OF TRUSTEES
Pt. 4
such language, in the absence of other con-
trolling or modifying provisions of the trust
instrument, shall be construed as authoriz-
ing any investment permitted by the terms
of subdivision (1) of this section.
See West's California Code Forms, Civil.
§ 2261
"(6) The term 'property' as used in this
section includes life insurance, endowment,
and annuity contracts issued by legal re-
serve companies authorized to do business
in this stale."
Forms
Cross References
Common trust funds of trust companies, see Financial Code § 1564.
Common trusts, establishment for investment of funds of Department of Mental Health
held as trustee, see Welfare and Institutions Code § 7286.
Corporate shares, liability of fiduciary for subscription price, see Corporations Code § 413.
Deposit of trust company funds awaiting investment, see Financial Code § 1562.
Investments authorized, provisions not altering degree of care required, see § 2269.1.
Investments of trust company trust funds, see Financial Code § 15fil.
Mortgage participation certificates and securities guaranteed by mortgage policies as legal
investments, see Insurance Code § 12528.
Registration of stock held in trust in name of nominee of trust company, see Financial Code
§ 1563.
Savings accounts of savings associations as legal investments for funds of trustees, see
Financial Code § 7000.
Trustee to manage proceeds of sale of property subject to life estate upon partition, see
Code of Civil Procedure § 873.840.
Law Review Commentaries
Application of SEC Rule X-106-5 to pre-
vent nondisclosure in sale of corporate secu-
rities. (19511 39 C.L.R. 429.
Beneficiary's other resources as affecting
necessity of invasion of trust corpus.
(1953) 1 U.C.L.A.Law Rev. 119.
Common stack as it prudent trust invest-
ment. (1951) :39 C.L.R, :180.
Construction and application of the Uni-
form Principal and Income Act. (1939) 28
C.L.R. 3.1.
Delay causing estoppel to object to pur-
chase in brunch of fiduciary duty. (104 1) 14
So.Cal.L.R.:355.
History of supervision of charitable
trusts and curporaliuns in Califurniu. Will -
lace Howland (1966) 13 U.C.L.A. Law Rev.
10'29.
Liability of trustee for improper invest-
ments. (1951):3!) C.L.R.:180.
Planning for incompetency. Louis M.
Brown (1904). 3!) S. Bar J. 268.
Planning for incompetency and practices
under the conservatorship law. George E.
Zillgitt (19614) 37 Sa.Cal.l..R. 181.
Prudence, information and trust invest-
ment low. .John A. Humbach and Stephen
P. Dresch (1976) 62 A.B.A.J. 1:1119.
Prudent mall investment of trust funds
during inflation. (1951) 39 C.L.R. 38U.
Prudent mail investment rule in the law
relating to trusts. (1!)431 18 S.Bar J. 283.
Representation of udverse parties in trust
administration. (19117) 55 C.L.R. 948.
Revolution in trust investment law.
(1976) tit A.B.A.J. 887.
Trust participation in partnership ven-
tures, (1951) 3 Slan.L.R. 4617.
Trustee's power: power to sell as includ-
ing power to option. Michael H. Dessert
(1!)70) 7 San Diego L.Rev. 22.
Trusts—Corporate executor/ trustee.
(1!176) 2 West S1.11.L.Rev. 295.
Liability of the trustee for appreciation
of property (1957) 4 U_C.L.A. Law
Rev. 314.
Violation of duly by corporate trustee by
investing in its own stuck. (1949) 37 C.L.R.
53!), 5:32.
War conditions as presenting new prob-
lems for investment of funds by trustees.
(1942) 17 S.Rar J. 30.
323
§ 2261 TRUSTS FOR THIRD PERSONS
Div. 3
Library References
Trusts c>21f, to 217..1. Probate Court Practice, Goddard,
C.J.S. Trusts §§ 320, 322. 324 to 329, 331. §§ 1823, 1825, 2207, 2208.
Notes of Decisions
Burrowing funds 7
Charges against trust for beneficiary 8
Collecting Judgments, notes. rents, etc.
t0
Cnnslructinn and application 1
Corporate trustees 6
Court orders for deviation from trust 23
Declnrutlon of trust 9
Deposit of funds 11
Dlscrellon of trustee 4
Interest charge, ngninst trustee 25
In"sting properly 12, 13
In general 12
Prudent investor standard 13
Liability of trustee 24
Loaning properly 1.1
Mortgages 26
Possession of properly 15
Preserving properly 16
Prudent investor standard. investing prop-
erty I3
Record of trust funds 22
Retention of property 17
Selling property 18
Speculating with property 19
Standard of care 5
Surrendering properly 20
Trust funds 2
Use of funds in general 3
Value of use and occupation by trustee
21
1. Construction and npplicatiun
This section does not supersede trustee's
were given inndequate directions for con-
trolling trust property. Estate of Berges
(1977) 142 CaLRptr. 685, 76 C.A.3d 100.
In determining date of breach of trust by
trustee who negligently failed to invest in-
come within reasonable time, factors to be
considered include purpose of trust, amount
of mnuev on hand and amount deemed nec-
essary to meet possible contingencies or
emergencies in light of rule that trustee, in
investing and managing property for bene-
fit of another, should exercise such care
under circumstances ns prudent man would
exercise in management of his own affairs.
I,ynch V. John M. Redfield Foundation
(1970) 88 Cnl.Rptr. 88, 9 C.A.3d 293, 51
A.L.R.3d 1281.
Provision of former subd. (5) of this sec-
tion, that where term "investments permis-
sible by law for investment of trust funds,"
or other words of similar import are used in
defining powers of trustee relative to in-
vestments, such language, in absence of
other controlling or modifying provisions of
trust instrument. shall he construed as au-
thorising any investment permitted by for-
mer subd. l of this section, establishing the
Prudent Man Rode of investment, is only
applicable where testator limits investments
to statutory approved investments, and has
no application where settlor himself speck
fies particular investments that are prnhib-
ited. Stanton v. Wells Fargo Bank & Union
Trust Co. (1!)57) 310 P.2d IoIU, 150 C.A.2d
763.
general duty to maximize trust nssets con-
sistent with safely and other relevant con-
authorized invest.
2. Trust runds
Land acquired by irrigation district Be-
sideratimis: n statutorily
ment may or may not be the prudent course
cause of dehinqumucies in assessments is
of conduct for the trustee to pursue. Mal-
trust property, held for the uses and pur-
ter of Pelton 11982) 183 Cal.Rptr. 188. 132
imses of Cen.Laws 1931. Act 3854, govern-
C.A.3d 496-
ing irrigation districts. and proceeds of
Where teslnlor's will after making a spe-
lease thereof have the same character.
Zumwalt (1939) 85
cific bequest of cash and any automobile to
Provident land Corp. v.
designated individual. bequeathed to his
P.2d 116. 12 C.2d M5.
brother and sister as trustees the sum of
7 Use of funds In general
$600 for each of their respective children
with provision that each trust terminates
Probate court's factual findings were in -
W court of appeal to deter -
when the child altaius 19 yenrs of age.
trusts were valid over cnnlcutinn of bell'fi-
adequate permit
mine whether hank/ennservator breached
ciary that the purposes or terns of trust
its fiduciary duty lly keeping approximately
$2114.000 in estnte's assets in bank's 5447^
could not be ascertained and that trustees
324
OBLIGATIONS OF TRUSTEES
Pt. 1
passbook account for 17 months, during
which substitution of Consenmtors was be-
ing arranged, ut a time when amounts in
excess of $100,000 were earning 911 inter-
est in 3U-1lay accounts at various banks; a
remand for further proceedings was re-
quired. Alatter of Pelton (1989) 183 Cal.
Rptr. 188, 132 C.A.3d 49G.
Trustee, who is directed by terms of trust
to pay income to beneficiary during desig-
nated period and on expiration of that peri-
od to pay principal to -another beneficiary,
owes duty to former beneficiary to take
care not merely to preserve trust property
but to make it -productive so that reasonable
income will be available for him, and trus-
tee is under duty to latter beneficiary to
lake care to preserve trust property for
him. In re Bissinger's Estate (11)63) 28
Cul.Rptr. 217, 212 C.A.2d 831.
Manner in which charter city effectuates
purposes of tidelands trust, including man-
ner in which it conducts negotiations for
leasing of lands, is municipal affair. Silver
V. City of Los Angeles (1962) 17 CaLitptr.
379.:366 P 2 6.51, 57 C.2d 39. certiorari
denied 82 S.Ct. 11.13, S(;9 U.S. 873, 8
L.Ed.2d 2713.
Under trust principles and applicable pro-
visions of the Health and Safety Code, it is
not legally proper to use endowment cave
funds of private cemeteries to purchase in-
terment plots located in the cemetery, for
which the fund was established, or to loan
such funds to the cemetery, its subsidiary,
or affiliate, on the security of a trust deed
Oil such interment plots, or to invest such
funds in the stock of such cemetery, its
subsidiary, or affiliate. 28 Ops.Atty.Gen.
3'21.
4. Discretion of trustee
A trustee occupies a fiduciary posiliun
with duty to exercise its independent judg-
ment mud may not automa(ically accede to
demands of trust beneficiary. Morse v.
Cracker Not. Runk (1983) 11911 Cal.Rplr. 8111),
142 C.A.3,1 2'28.
An absolute discretion dues not permit a
trustee to neglect his trust or abdicate his
judgment. Matter of Collins* Estate 119771
1;31) Cal.liptr. 644, 72 C.A.3d MM.
Absolute discretion given defcuda nt trus-
tees of test nienttry trust of which plain-
tiffs were beneficiaries was specifically lim-
ited toy requirement in trust instrument that
trustees he subject always b, discharge o
their fiduciary obligations. Id.
§ 2261
Note 7
Provision of testamentary trust that "all
discretions conferred upon lbe'rrusLee shall
be absolute," viewed as an exculpatory
clause, was subject to rule of strict con-
struction. Id.
Absolute discretion conferred by provi-
sion of testamentary trust that "all discre-
tions conferred upon the Trustee shall be
absolute" was specifically limited by re-
quirement that trustee by "subject always
to the discharge of its fiduciary obliga-
tions." Id.
S. Standard of cure
SL;mdard imposed upon trustees is that
they exercise that judgment and care which
men of prudence, discretion and intelligence
would exercise in management of their own
uf6n i rs. Matter of Collins' Eslale (1977)
1:;!) Cul.ltptr. 644, 72 C.A.3d 605.
Trustee is under a duty to beneficiary to
distribute risk of loss by reasonable diversi-
fication of investments unless under circum-
stances it is prudent not to do so. Id.
A trustee with absolute discretion may
not neglect its trust or abdicate its judg-
ment. Id.
Record contained no evidence that de-
fendant trustees satisfied even the lesser
slan(avd of cure for which they contended
in claiming that trust instrument conferred
on chem an an "absohde discretion" so as to
require them to refrain to act arbitrarily
and to use their best judgmm�t. Id.
S. Corporate trustees
Different t)'pes of investments for "cor-
porate trustees" and for "amateur trus-
tees" are nut authorized under prudent in-
vestor standard: difference, rather, is that
corporate trustee is held to a greater stun-
dard of cove haled on his presumed exper-
tise. Almter of Collins' Esta Le (1!177) 13!1
C;nLRptr, 641, 72 C.A16 663.
7. Burrowing funds
Uuder (his section, though trustees are
n
not ordinarily liable for interest omoneys
coming into their hands unless they have
iunprnperly failed to iuvesl them, they are
not justified in borrowing nmre money than
they need, and charging trust with interest
on suns borrowed. and. where they have
idle moray on build, it is their duly Lo aPp1Y
it so :ns to stop unnecessary interest
f churges. Purdy v..lohnsuo (11)17) 16:1 P.
Hirt. 174 C. 521.
325
§ 2261
Note 8
8. Charges against trust fur beneficiary
Fact that testamentary trustee had violat-
ed her duties :is such by commingling trust
funds with her own, omitting to invest
them, and negligently failing to keep any
records which would enable her to render a
true account hod a bearing, in absence of
vouchers or receipts, on question of wheth.
er charges against trust estate for board,
clothes, laundry, etc., for beneficiary for 16
years were established by satisfactory evi-
dence. In re McCabe'., Estate (1948) 220
P.2d 614, 98 C.A.2d 503.
Declnralinn of trust
TRUSTS FOR TURD PERSONS
Div. 3
fault purdy v. Johnson (1917) 163 P. 893,
174 C. 521.
where testamentary trustees rented land
of trust. but their accounts in beneficiary's
action against them showed that only part
of rent was collected- trustees were bound
to account for balance, unless they could
show some good reason for failure to col-
lect. Id.
Even if trust instrument permitted n type
of investment generally frowned on under
prudent -investor rule, it did not authorize
defendant trustees to make that investment
blindly. Matter of Collins' Estate (1977)
139 Ca1.Rptr. 044, 72 C.A.3d 083.
While the declaration of trust rimy have
possibly enlarged lite prudenbinvestor stan-
dard as far as the type of instrument was
concerned, it could not be construed as per-
mitting deviations from that standard in
investigating the soundness of a specific
investment. Id.
to. Collecting judgments. notes, rents,
etc.
One holding judgment as trustee for cor-
poration and another was required as such
trustee and as secretary of the corporation
to use his best efforts to collect the judg-
ment in full by execution sale of stock
owned III- judgment debtor. Darden v.
Reese (1949) 200 P.2d 81, 88 G.A.2d 904.
Where trust instrument provided that
trustor and sun should occupy a dwelling on
jand constituting the corpus of the trust
during lrustor's lifetime and that the land
should be sold on trustnr's death and pro-
ceeds of the sale distributed in a specified
manner, and oil truster's death trustee re-
covered, but did not collect. judgment in
ejeclmrnt wmiust the son, trustee was
properly charged with the stipulated value
of the properly on dnte trust was In be
terminnled, the rental of the house for wr.
ly necupied by the son, and the judgment
rendered in the ejectment action. Johns v.
Peterson (1942) 1215; P.2d 90:1, 52 C.A.2d 720.
11. Deposit of hods
Generally fiduciary is personally liable
for money deposited by him in bank which
becomes insolvent, unless evidence shows
that he was not negligent in so doing, and,
in absence of order of court. deposit of
trust funds in bank is not warranted ns an
investment. Allen v. Rainey (1935) 41 P.2d
374, 4 C.A.2d 558.
12, Investing property—In general
Rule that trustee has duty to invest. al-
though generally perhnioing to investment
of principal, applies likewise to investment
of accumulated income. Lynch v. Jahn 51.
Redfield Foundation (1970) 88 Cal.Rptr. 86,
9 C.A.3d 293, 51 A.L.R.3d 1284.
Objections of trust beneficiary that trus-
tee, which had been given absolute discre-
tion in managing trust property, had negli-
gently and carelessly failed to properly ad-
minister or manage trust and that as a
proximate result beneficiary had been de.
prived of reasonable return and had sus-
tained loss of some $50,000 from sale of
assets were sufficient to raise issues of
abuse of discretion and failure to exercise
judgment which trustee should be required
to meet. Coberly v. Superior Court for Los
Angeles County (191;6) 42 CalBptr. 64, 231
C.A.2d 085.
Rule that it is duly of a trustee to invest
trust foods so lint they will be productive
of income is designed for trusts intended to
be productive of income or other gain, but
the rule is not applicable in the case of a
trust not designed for income purposes bill
for other purposes, such as holding and
preservation of property for use by others.
Higgins v. City of Sman Monica (1904) 41
Cal.ltptr. 1), 390 P.21 It, 62 G.2r1 24.
The capacity of co -trustees to seek courCs
instructions as to interpretation of trust
to de -
It was duly of testamentary trustees to instrument and to obtain perm Its on
cnllrcl promissory notes distributed to virile from terms thereof regarding making
thern. :urd they were liable b, beneficiary or retention of investments, did not ennsti-
for amuunt of notes. with interest, unless Lute exercise of a "power" within conlem-
their failure to collect was net due to their pinlion of 4 81;0 requiring that all unite in
326
OBLIGATIONS OF TRUSTEES
Pt. 4
execution of a power vested in several per-
sons, and 4 2268 requiring all co -trustees to
unite in nov act to bind trust property, and
hence one trustee could appeal from deci-
sion allowing deviation from trust require-
ments as to investments, though other trus-
tee did not wish to appeal. Stanton v. Preis
(19561 291 P.2d 118, 1:18 C.A.2d 63.
Under will and decree of distribution giv-
ing testamentary trustees right to invest in
stocks of corporations of which testatrix
was a stockholder on her death if trustees
obtained written consent of beneficiaries,
trustees were not required to obtain such
consent to purchase stocks of corporations
of which testatrix was not a stockholder.
In re Fowler's Estate (1943) 132 P.2d 53.5,
56 C.A.2d 451.
That trustees held an investment in stock
of bank which thereafter failed did not
show mismanagement of trust. In re
Knox' Estate (1942) 126 P.2d 108, 52 C.A.211
338.
Under will directing testamentary trus-
tees to accumulate in cash or negotiable
securities the sum of $15,000 and to pay
income therefrom to beneficiary, a note se-
cured by mortgage on Illinois realty was
not improper investment, as against conten-
tion that. under Illinois low, mortgage was
not negotiable security, where negotiability
of note was not affected under Illinois law
by the mortgage, and word "negotiable" in
will was employed to keep trust funds in
comparatively liquid stale. Id.
In investing trust funds, trustee should
consider aggregate value of trust estate,
naLure of other investments of funds of
trust, and advisability of diversifying io-
vestnenls in order to insure against ad-
verse conditions in tiny particular field.
Day v. First frust & Savings Uauk of Pasa-
dena (1!141) 118 Ptd .51, 47 C.A.2d 470.
Whether trustee has acted properly in
making investment depends on circanstanc-
es at time investment is made and amt on
subsequent events. Id.
§ 2261
Note 13
in order to avoid charge of negligently man-
aging such funds. Id.
In determining whether gulf club mort-
gages were proper investments for trust
funds, appraised value of realty and charac-
ter, financial standing, and past perform-
ance of officers and members of clubs could
be considered. Id.
The fact that mortgage participation cer-
tificates purchased by trustee depreciates in
value standing alone does not warrant equi-
ty court in opening, surcharging, or falsify-
ing trustees accounts. approved by court.
Ormerod v. Security -First Nat. Bank of los
Angeles (11137) 69 P.2d 469, 21 C.A.2d 36+2.
In an action against trustees to have de-
clared void a purchase made by them, evi-
dence that one of them understood the pro-
priety of the purchase was first to be sub-
mitted to the beneficiary is admissible. Red
Jacket Tribe No. 28 v. Gibson (1886) 12 P.
127, 70 C. 128.
A California domiciled stale or national
bank having a trust department which is
the trustee under an instrument which di-
rects the investment of the corpus in United
Stales government obligations, may not in-
vest such corpus in a mutual fund, the
portfolio of which is limited to short-term
United States treasury ohligatiuns. 67 Ops.
Atty.Gon. 212. 5-2 3-84.
Where Only the interest un the corpus of
foods givaa in trust to the director of edu-
cation is Um be used for educational pur
poses the director of education mn behalf of
estate :and in his official capacity should
invest the trust funds. collect the interest
and apply the interest as specified by the
t'ustor. 101m,A tty.0 a n. 90
13. — Prudent investor standard, In-
vesting properly
Prudent investor standard Ines not apply
where settlor himself specifies trustee is
not limited by what bur provides are proper
iuvestu;en(s. Matter of Collins' Estate
11!)77) 1J1) Cal.Rptr. lido. 72 C.A.3d 663.
A financial institution with broad general Although C;I ornia does iml limit lrns-
knowledge of community needs and trends, let's authority to a list of authorized invest-
of character and worth of citizens with
ments, relying instead un pnulenl investor
whom institution has dealt, and specific rule, that rule nevertheless l encomwssby
ce'Uain guidelines thnl nwst be followed by
knowledge of property post in cugenera trustee. Id.
ly, can cuusidnr such positive general
knowledge in investing trust funds, :and is Prevision in trust instrument to purchase
not restricted to letter upon Idler and line every kind of property and make every kind
upon line cuuformily with prexcribed ritual Of iuvelaneLL "irrespective of whether said
in esdolziting value of propuscd investment iuveatmcu Ls ore in accur, 1:1 lire with the laws
327
§ 2261 TRUSTS FOR THIRD PERSONS
Div. 3
Note 13
then enforced in the Stade of California
the same time make the estate prnrluctive.
pertaining to the investment of trust funds
Day v. First Trust k Savings Bank of Posit -
C.A.2d 470.
by corporate trustees" did not authorize
dena (1941) 118 P 2 51, 47
trustees to make improper investments in
A trustee must use due care and skill and
violntion of prudent investor standard. Id.
the caution of a prudent man in making
Different types of investments are not
investments, and. in absence of provision in
authorized for "corporate trustees" as dis-
difference, r:i
trust or statute• he can make those invest-
which a prudent man would make in
tinguished from amnleurs;
is that corporate trustees are held to a
ments
investing in property outside of ordinary
er.
greater standard of care based on their
business risks and with a view to -safety of
presumed expertise. Id
principal and to securing of an income rea-
Defendant trustees failed to follow "pro-
sonable in amount and payable with regu-
dent investor" standard with respect to ad-
larity. Id.
ministration of testamentary trust of which
Evidence warranted denial of liability of
plaintiffs were beneficiaries where they in-
trustee for depreciation of trust assets dur.
vested two thirds of trust principal in a
ing economic depression, on ground that
single investment, invested in real property
trustee was not negligent in investment of
secured only by a second deed of trust, and
funds, but exercised care of ordinarily pro -
made that investment without adequate in-
dent person. Id.
cestigation of either borrowers or collater-
The liability of a director of education
al. Id.
acting as official trustee for bequests of
Investment by nonprofit cemetery corpo-
funds to be used for educational purposes is
ration of nearly 8117• of its endowment fund
to make such :nvestmen Ls as a penitent man
in note and first deed of trust on one parcel
would make of his own property, having
of real property could be found to be a
primarily in view the preservation of the
violation of prudent investors rule with re-
estate and the regularity and amount of
spect to investment of trust funds and cent-
income. 1 Ops.Atty.Gen. 90.
eters board, department of professional and
vocational standards, was authorized to or-
I { Loaning property
der that sum lent be reinvested. Mandel V.
Bd., Dept. of Professional and
Evidence that the land mortgaged to so
Cemetery
Vocational Standards (19(;0) 8 Cal.Rptr. 342,
cure it loan made by a trustee wits and
it was Lically Impossible to
185 C.A2d 583.land,
which prat
irrigate, and that the trustee made the loan
This section broadens list of legal invest-
T
uponthe statements of one man, whom she
merits for trustees of eudownnent care
funds, but also places trustees under mail-
knew, and a written report by three strnng-
date of prudent investors ode in regard [o
ens two of whom were the former owners
the land who had conveyed it to a dummy
all of their financial transactions. hl.
of
for We purpose of securing Lhe loanthere-
An essential part of prudent im'estors
at
on, sustained tile that e trial court's finding that
ode with respect to investment of trust
the trustee was negligent in making the
funds is the requirement that investments
loan anti was therefore bound to make
be diversified. Id.
good the loss. In re Hamon's Estate (192:3)
Under provisions of this section embody-
212 P 3!19. tl0 G.A. 154.
ing "prudent man rule" in setting forth
Where mil agent or lnnstee is instructed
to
duty of trustee in connection with invest-
to herlooamt" funds held him, it means
ment of trust funds, and under general law
marl he is In invest them for his principals
he
applicalde to Lrustees, trustee, even where
broad discretionary power of invest-
,heat
and to math an accounting [i the
he is
given
ment, must exercise its independei t. discre-
principal of such investment and not
authorized to horrow Lhe funds for his own
tion mull judgment in reference to invest-
trust funds. In re Talbot's Estate
purposes. In re Armstrong's Estate (1883)
ment of
(1!)fi6) 211(5, P.2d 848, HI C.A.2d 301), 58
1 (,(if. 155,7, affirmed 10 P. 335, 59 C. 201).
A.L.R2d 85S.
Where trustee loaned out the funds of
A trustee is neither expected to bury his
beneficinry without advising her of the risk
talents nor to exercise in Gdlible judgment in
to which he was subjecting her funds nor of
the funds with his -own iudis-
investment of funds, but he most exercise
and judgment of reasonably prudent
his mingling
crinninnlely he was linide for the loss result -
skill
business man in preserving estate and at
ing therefrom and his account as special
328
N 2261
OBLIGATIONS OF TRUSTEES
Note 18
oie
Pt. 4
for the beneficiary should be Talbot's Estate (1956) ''296 P.2d 848. 141
administrator
charged with the loss sustained. Id.
C.A.2d 80, 58 A.L.R.20 8.58.
has a broad power of sale,
15. Possession of properly
Where trustee
right of income beneficiary is simply to
exercise its indepen-
In action for declaratory relief with re-
by which
insist that trustee shall
dent judgment. and income beneficiary has
spect to the scope of joint will
husband and wife converted property into
no legal right to compel retention of any
is legally hurt by reason of
community properly, court had broad pow.
stocks and not
the trustee's failure to keep certain stocks.
ens and could, prior to distribution, interpret
IJ.
will on question of whether widow upon
distribution, would be entitled as against
Where trustee who owned as trustee all
trustees to possession of any of property
P.2d
n, whichhe sale
tile stock ratioasels Cos
Chuse v. Leiter (11)50) 215
its real estate
bution to trustee in trust, dissolved the cor-
756, 96 CAN 409.
poration, trustee had title to real estate and
16. Preserving properly
had power and duly to carry out purpose of
in fiduciary capacity and
trusLpro-
by sellingS` bbs~v.
Executor serves
has powers and obligations similar to trus-
from sules into tile trust.
ceedsr
Jones (19581 263 P.2d I(10, 121 C.A.2d 218.
tee, except that primary duty is to preserve
distribution, rather than invest
A testamentary trustee, using diligence
estate until
funds. In re Slingsby's Estate (1931) 297 P.
and discretion in selling foreign government
981, 112 C.A. 707; In re Brenhart's Estate
bonds included in trust assets and receiving
therefor, was
(1031) 297 P. 931, 112 C.A. 766; In re
Smith's Estate (1'931)'297 P. 927, 112 C.A.
highest prices obtainable
properly allowed credit on accounting for
thereof for less Llan
689.
I,55 Sust'aine'd in sale
their value as fixed by court in settlement
17. Retention of property
of previous accounts, in absence of evidence
in sale or showing
Usually trust is created to preserve prop-
of negligence making
that life beneficiaries of income, in cnn[est-
erty intact and to earn income Cur benefi-
ciary, and ordinarily trustee is directed to
mg previous account, sought to charge trus-
,E bonds as cosh ou hand
adminis[cr funds in order to substitute sop-
for
tee with value
owing to estate because of his neglect to
poscdly superior Judgment of trustee
bonds. In re Bothwell's Estate (1944)
that of lmneficiar Day v. First That &
Its I'.2d
sell
I51 P.2d'2!)8, lis C.A.2d :598, rehcuring de-
Savings Bank uE Pasaden;n I1!WU
nied 151 P._d 868. 65 C.A.•ld 5!18.
51, •47 C.A.2d 170.
Assessment of damages against trustee
An hones[ trustee is not liable to make
Cor negligence in failing to sell trust really
good the loss sus t;lille(l by rcu:ining mn
ars directed by trust instrument, thereby
authorized security it,a falling market, if he
did so Ironestl-v nal truthfully, in lire belief
Ie irivin life beneficiaries of income,
slmu Id not be resoled 1, by them wl;en
that it was best course to L•nku in interest of
another er appropriate remedy, such as uppor-
all parties. Id,
tionment OF proceeds of subsequent sale
thereof baweon prtneip;d and incunm, is
18. Selling properly
available. Id.
Where trustee had broad power of sale
In action agninst trustee for accounting
but, instead of exercising independent judg
under contract autlmrizing trustee to mml-
nrent as to sale of common stocks, relied on
age unl sell parcels of realty on such terms
one beneficiary's unfulfilled assururce that
and ut such times its trustee, within his
[titter would secure from other beneficiaries
discretion. should determine, evidence did
written consents to Lite sale. amt trustee
not show that trustee. in refusing offer to
sold stocks which thereafter doolrled in val-
rurcbnse property al price subsequently
no, trustee was liable far reduction in vnh;e
shown U+ be adequate, did not exercise an
of objecting beneficiary's shave of corpus,
honest judgnwnt, nmJ his estate wars, [here-
i.e.. reduction consisting ,f capital gains
pyre. not liable for damages for' such refus-
taxes nod expense of stock soles and bond
Neel Barnard (1944) 150 P.2d 177, 24
purchases, and for interest on amount of
:l. .
C.2d 406.
such reduction, but trustee was not liable
Of stocks after sale In action against trustee by beneficiaries
for appreciation in value
In re
of trust for neem,"till g and for damages,
or for loss of income on stocks.
329
§ 2261 TRUSTS FOR THIRD PERSONS
Div. 3
Note 18
finding that trustee had no opportunity to in value of stoc19431s 140in haP 2d 704 59 Weiner
2d
sell property involved at such prices as
would have liquidated plaintiffs' indebted-
ness as provided by contract creating trust•
or on such terms as trustee properly fixed,
determined in effect, that a reasonable time
for sale of property had not elapsed. Id.
Even if offer was made to trustee for
purchase of realty which trustee held for
sale for benefit of beneficiaries of trust, it
would be presumed that trustee exercised
his judgment upon it mad deemed price of-
fered too low, and court could not say that
he acted fraudulently or in bad faith in
declining to sell. Id.
A trustee can properly sell trust property
if such sale is necessary or appropriate to
enable trustee to carry nut purposes of
trust. unless sale is forbidden in specific
words by terms of trust or it appears from
terms of trust that property was to be
retained in specie in trust. Church v.
Church (1940) 105 P.2d 640, 40 C.A.2d 69G.
Where father of minor children took out
shares of stock in a family corporation in
his name as trustee for children, and the
father had never executed any document in
writing or declaration of trust restricting
his power• is trustee, to transfer shares,
and evidence warranted finding that, aside
from trustee's certificates. there was no
such agreement entered into concerning
shares, and it did not appear that any re-
striction on power of sale was contained in
certifientes. it couhl not he slid as matter of
law that the faLher did not have the right,
as trustee, to transfer shares whenever, in
exercise of his discretion, it appeared to him
proper or necessary to Jo so. Id.
Where money is bequeathed to a trustee
to invest in tai 1, with liberty to change the
investment at his discretion. Lite superior
court is without jurisdiction to entertain a
suit by the cestui qne trust to order the
trustee to sell the land subject to confirma-
tion by the court, tier mit application by an
intervener in such a suit to confirm an
alleged contract of sale to him hY the trus-
tee, and to direct the execution of convey-
ance. Murphy y. Union 'frust Co. of San
Francisco (1907) 811 P. 088, 5 C.A. 146.
Mullaney
620.
Where beneficiary learned from broker in
January, 1998, that instructions to trustee
not to Jeal in stocks had been violated,
beneficiary was put upon inquiry at that
time and was charged with "notice" of all
that an inquiry would have disclosed. Id.
Where trustee failed to mnits full disclo-
sure of facLs surrounding use of benefi-
ciary's shares in stock transactions contrary
to instructions, that it wits no longer within
beneficiary's power to rescind transaction
when she finally learned the true situation
and her mdy recourse oras to salvage what
stocks were left, such action on herpartdid
not amount to a "ratification" of trustee's
conduct. Id.
Where trustee was expressly instructed
not to sell or deal in stocks for beneficiary,
his action in dealing in stock was a "breach
of trust" for which he was liable. Id.
A trustee is not. permitted to buy and sell
bonds on speculation and the fluctuulion t in
market value after purchase by the trustee
are merely changes in the value of the
assets of the trust estate, which are to be
wholly disregnrded in any accounting be-
tween life tennut and remaindermen for
funds (ruin the trust estate invested in in-
come -bearing property. In re Gartenlaub's'
Estate (1921) 198 P. 200, 185 C. 648, 16
A.L.R. 52U.
2U. Surrendering properly
Evidence was sufficient to support find-
ing as to market value of bonds in action by
beneficiary against trustee for value of
bunds deposited with trustee which trustee
without authority surrendered to boulhol -
ers' protective committee. Martin v. Bank
of America Trust & Smvings Ass'n (1935) 41
P.2d 200, 4 CA2ci 431.
21. Value of use and occupnllon by trus-
tee
A purchnser of land with notice of the
facto entitling another to the delivery to
hint of a deet previously made out in his
favor, who obtains possession by force from
the cestui que trust, must section[ to him
19. Speculating with properly for the value of the use and occul mdon. and
A beneficiary who learned that trustee the cestui que trust must pay the, purchase
had disobeyed instructions not to speculate price into court for the benefit of Lite trns-
in stocks was required to act within a rea- Lee. adding interest from the date of the
somblc time [hereafter mod could nut wail tender of the price. m+less he chooses to
and hold trustee for subsequent decreases regard the interest as liquidmting the value
330
OBLIGATIONS OF TRUSTEES
Pl. 4
of the use. Cannon v. Handley (1887) 13 P
315, 72 C. 133.
22. Record of trust funds
A trustee or attorney handling funds of a
client cannot escape responsibility for trust
fund byfailing to keep any record or data
from which an accounting might be made.
Bruns v. State Bar of California (1941) 117
P.2d 327, 18 C.2d 667.
23. Court orders for deviation from trust
Equity court order to sell realty, contrary
to terms of express testamentary trust, and
reinvest proceeds, was unauthorized, in ab-
sence of present market value thereof and
showing of character or security of proper-
ty in which he proposed to reinvest Pro-
ceeds. Security -First Nat. Bunk v. Easter
(1934) 29 P.2d 422, 136 C.A. 691.
21. Linbilily of trustee
If money paid for trust is lost or de-
stmved without fault of trustee -payee, trus-
tee -payee is not liable therefor and loss is
borne by payor, trustor -beneficiary. Peth-
erbridge v. Prudential Say. & Loan Ass'n
(1978) 145 Cal.Rptr. 87, 79 C.A.3d 509.
Defendant trustees were subject to being
surcharged for imprudent investment of
monies from testamentary trust in which
plaintiffs were beneficiaries, not because
they lacked prescience of what would hap-
pen, but because they both lacked and ig-
nored information about what was happen-.
ing at time. Matter of Collins Estate
(1977) 139 Cal.Rplr. 844, 72 C.A.3d 663.
Trustee who negligently breaches his
trust by failing to invest income within rea-
sonable time is liable pursuant to statute
for simple interest at rate of 77 per suntan.
Lynch v. .John M. Redfield Foundation
(1970) 88 Cal.Rptr, 86, 9 C.A:W 293, 51
A.L.R.3d 1284.
One who engages services of trustee, cor-
porate or otherwise, contracts for exercise
of trustee's best judgment and for perform-
ance of duties outlined in this section; and
he has no right to receive any more than
that and no right to complain if those ser-
vices are rendered in good faith and with
reasonable prudence, discretion and intelli-
gence. In re Rissinger's Estate (1963) 28
Cal.Rptr. 217, 213 C.A.21l 831.
Generally, trustee's violation of equitable
duty, whether fraudulently or through neg
ligence, mere oversight or forgetfulness, i;
breach of trust, and trustee may be chargee.
l0A Cm.Coue-12
§ 2261
Note 25
with rents, profits and income which he
never received, but might and should have
received by exercise of due and reasonable
care and diligence. White v. Citizens Nat.
Trust & Savings Bank of Los Angeles
(1941) 116 P.2d 117, 4G C.A.2d 418.
The nominal title holder of really, incum-
bered by a trust deed, who upon taking title
to realty assumed obligations of trustee for
benefit of obligees whose claims were se.
cured by trust deed, differed from a mort-
gagor in possession and was liable for all
rents and profits received while in posses-
sion of the realty even prior to sale thereof
under power of sale contained in trust deed.
Baumann Y. Harrison (1941) 115 P.2d 530,
46 C.A.2d 84.
25. Interest charges against trustee
Failure of directors of charitable, non-
profit corporation to invest dividend income
deposited in corporation's checking account
over five-year period was breach of their
duty to invest funds us would a reasonable
man so that funds would be productive of
income and were liable for interest on suing
Inst in consequence of such failure, notwith-
standing facts that bank had refused to
honor drafts drawn on corporation's ac-
count due to dispute among directors, that
directors served without compensation,
that, during period of inaction, corpus
gained approximately too?; in value, and
that costly lawsuit would he necessary to
settle directors' dispute and remove "bluck-
ing" from bunk account. Lynch v. John M.
Redfield Foundation 09701 88 Ca1.RPlr. 8G,
9 C.A.3d 293, 51 A.L.R.3d 1284.
In action Iny beneficiary under two ex-
press trusts for an accounting by the re-
spective trustees, where trustees had
waived delinquent interest on notes due the
trust, had not collected note from deceased
tanker, and hall made loans which were
disapproved by the court, trial court's
charge of 67. interest on amount thus sur-
charged, except for the unauthorized loan
concerning which current savings bank in-
terest rales compounded semiannually were
clmrged'did not constitute aabuse of dis-
cretion. Douglas v. Westfull (1952) 248
P.2d 68, Ila C.A.2d 107.
Where will created trust of specific lega-
cy, with amount thereof and accumulations
to be paid to beneficiary when she reached
age of 26, when executor who was also
trustee had failed to transfer corpus to
himself as trustee or to invest same as
required by this section, and estate was not
331
§ 2261
Note 25
distributed prior to time for distribution to
beneficiary of trust, 7 per cent interest due
upon corpus for failure to invest would be
allotted 4 per cent ngainst estate and the
remaining 3 per cent against trustee as
such. In re Prior's Estate (1962) 244 P.Zd
697, III C.A2d 464.
Where will crented trust of specific lega-
cy, with amount thereof with accumulations
to bepaid to beneficiary when she reached
age of 2f. duties of trustee who was also
executor commenced upon death of testn-
tor, and failure of executor to transfer fund
to himself as trustee could not absolve him
of his duties anti responsibilities as trustee
including duty to invest, and could not limit
liability for interest to 4 per cent rate appli-
cable io executors. Id.
26. Mortgnees
Equity will sanction in investment se-
cured by a second mortgage iu a rare case
but only when security is adequnte and
unusual circumstances justify trustee in
TRUSTS FOR THIRD PERSONS
Div. 3
making such an investment. Matter of Col-
lins' Estate (1971) 139 Cal.Rptr. 644, 72
C.A.3d 663.
In buying a mortgage for trust invest-
ment. trustee should give careful attention
to valuation of property in order to make
certain that margin of security is adequate;
he must use every reasonable endeavor to
provide protection which will cover risks of
depreciation in property and changes in
price levels nod must investigate status of
property and of mortgage as well as finan-
cial situation of mortgagor. Id.
Provision of testamentary trust that "all
discretions conferred upon the trustee shall
be absolute" did not authorize the trustees
to invest in a junior encumbrance without
ability to protect against the foreclosure of
a senior lien or to refrain from making a
business like investigation of the credit
worth of the borrower or insisting on an
appraisal of the security given by the bor-
rower. Id.
§ 2262. Interest on failure to invest
INTEREST, SIJIPLF. OR COMPOUND, ON OMISSION TO INVEST TRUST MONEYS. If a
trustee omits to invest the trust moneys according to the last section, he
must pay simple interest thereon, if such omission is negligent merely,
and compound interest if it is willful.
(Enacted 1872.)
Forms
See West's California Code Forms, Civil.
Library References
Probate Court Practice. Goddard.
§§ 15911. 182:3.
In general I
Circumstances of the case i
Compound Interest 9
Construction with other lows 2
Duration of investment innetivily
nurntion of liability for interest
Good fnilh 4
Fruitless investments i
Role of interest A
Liability of trustee's estate 111
Notes of Decisions
1. In general
Main characteristics of trust relationship
ire that payor retuhm beneficial interest in
money paid, trustee payee may not use
money for own purposes, in absence of
agreement to contrary, trustee keeps mon-
ey separale from his own funds, trustee has
duty to invest muney and make it produc-
tive null is entitled to reimbursement for all
expenses properly incurred in performance
of trust, anti if motley paid is lost without
3:32
CIVIL CODE
Law Revision Commission Comment
. 1986 Repeal
§§ 2228 to 2290.9
Repealed
Former Section 2273 Is superseded by Probate Code
Former Section 2234, which slated s special application of
Sections 17642(b) (grounds for remove[ of trustee), 16002
the parol evidence rule, Is omitted because this question Is
(duty of loyalty), end 16004 (duty to ovoid cennict of
governed by the general parol evidence rule. See Cade
Interest). [18 Cal.L.Rev.Comm. Reports 301 (1986)].
Civ.Proc. § 1856; see also Prob.Code § 13207 (proof of
Former Section 2234 is superseded by Probate Code
terms of oral trust of personal property). [18 Cal.LRev.
Section 16400 (violation of duty is breach of trust). The
Comm. Reports 501 (1986)].
liability for breach is governed by statute. See Prob.Codc
The part of subdivision (a) of former Section 2258 relating
1§ 16440 (measure of liability for breach of Imst), 16441
to control of the trustee's duties by the tmt instrument i,
(measure of liability for interest). 118 Cal.L.Rev.Comm.
restated in Probate Code Section 16000 (duly to administer
Reports 501, 1790 (1986)].
trust according to trust instrument) without substantive
Former Section 2233 is superseded by Probate Code
change. but the characterization of the duty of the trustee as
Section 16002 (duty of loyalty) and 16004 (duty to avoid
that of an employee is omitted. The part of subdivision (a)
conflict of interest). (18 CaI.L.Ray.Cumm. Reports 501
relating to modification 6 superseded by Probate Code
(1986) J. __
Section 15404 (modification by settlor end all beneneiarics).
Former Section 2276 is superseded by Probate Code
The first sentence of subdivision (b) is continued in
Sections 16009 (duty Io keep trost property separate) and
Probate Code Section 16001 (duty of instes of revocable
16440 (measure of liability for breach of 1m0. See also
tent) without substantive change. The amend sentence Is
-Prob.Code § 16420(a)(3) (redress of breach by payment of
restated in Probate Code Section 16462 (noniiability for
money). 118 Cal.L.Rev.Comm. Reports 301 (1986)].
following Instructions under revocable trust) without sub-
. Pa.., Season 2237 Is superseded by Probate Code
stantive change. The reference to a person having a voted
Sections 16440(a) (measure of liability for breach of trust)
or contingent interest in the trust is replaced by the refer -
and 16441 (measure of liability for Interest). See also
ones in Probate Code Section 16462 to the beneficiary. See
Prob.Code § 16420(a)(3) (redress of breach by payment of
Prob.Cede § 24 ("bcnenclary" defined). The lest part of
money). [I8 Cal.L.Rev.Comm. Reports 501 (1986)1.
the second sentence relating to fiduciary obligations of the
directing party is omitted es unneeesvry. See also Prob.
Subdivision (a) of former Section 2238 is superseded by
Code § 10 (singular includes plural). [18 CeI.LRev.Comm.
Probate Code Section 16440 (measure of liability for breach
Reports 501 (1986)1. -
of lros0. Sutdi,kivn (b) is related in Probate Code
Section 16462(.) (nonliability for following inslraclions un-
The part of former Section 2239 relating to the effect of
der revocable trust) without substantive change. See also
compensation on the standard of care is rotated in Probate
Prob.Code § 16420(a)(3) (redress of breach by payment of
Code Section 16041 without substantive change. The "ordi.
money). (IS Ce1.L.Rev.Comm. Reports 501 (1986) ].
nary care and diligence" standard or former Section 2239 is
Former Section 2239 is restated in Probate Code Section
superseded by Probate Code Section 16040 (trustee's stan-
daed of care in administering trust). (18 Cal.LR.y.Comm.
16402 (trustees liability to beneficiary for act,of cotrustee)
Reports 301 (1986) 1.
with several changes. See the Comment to Prob.Code
1 16402. (I8 CatLRev.Comm. Reports 501 (1986)J.
Former Section 2260 is superseded by Probate Code
Pana of former Section 2240 are superseded by Probate
Sections 15641 (liability of resigning trustee), 15660 (op -
Code Sections 13620 (actions by cotrusten) end 16200
pourumenl of trustee to 011 vacancy). 16000 (duty to admin-
talar lru30, and 17200(b)(10) (petition for appointment of
(Powen subject to limitations in trust). The authority to
trustee). (18 Cal.L.Rev.Comm. Reports 501 (1986)].
make deposits is continued In Probate Code Section 16239
(power to deposit securities in depository) without subuan-
The standard of care governing investments and manage.
live change. (I8 C.I.L.Rev.Comm. Reports 501 (1986)).
ment of trust property provided by subdivision (s)(i) of
Former Section 2243 1, Superseded by Probate Code
farmer Section 2261 it restated to Probate Code Section
Sectlon 18100 (protection of third person dealing with trust.
16040(b) without substantive change. The authority to
ee). See else Prob.Code § 15003 (constructive and resulting
acquire "every kind of properly- Is restated in Probate Code
trusts unaffected). [18 Cal.L.R.v.Comm. Acpons 301
Sections 16223 (power to invest) and 16226 (power to
(1986)1.
acquire property). See also Prob.Code §§ 62 ("property"
defined), 16200 (general powers of Iruslce include powers of
Former Section 2244 is superseded by Probate Code
prudent person). Subdivision (a)(2) of former Section 2161
Section 18101 (application of pmperty delivered to trustee
is restated in Probate Code Section 16040(.) without nub.
by third person). (18 Cal.LRev.Comm. Reports 501
stantive change. Sea also Prob.Code § 16000 (general
(1986)].
duties of trustee subject to control by trust instrument).
Fortner Section 2230 is superseded by Probate Code
The standard of care provided in the len half of the first
Section 82 ("trust" defined). The provision relating to the
sentence of subdivision (b) is superseded by Probate Code
voting of title in the tmtee is not continued. See the
Sections 16070 (Iru,stee's standard of care in administering
Comment to former Section 863. 118 Cal.L.Rev.Comm.
trust) and 16200 (exercise of powers subject to limitations In
Reports 501 (1986) 1.
trust). See also Prob.Code § 16220 (power to collect and
Former Section 2251 is superseded by Probate Code
hold property). The authority to retain property in Rust at
Sections 13200-13207 (creation of trust), 13600 (acceptance
its inception or later acquired pursuant to proper authority
of West by trustee), and 16420(a)(0 (beneficiary may com.
Is restated in Section 16008(6) as an a,,pilon to the general
P-1 least- to perform duties). 118 C !.LRev.Comm. Re-
duty to dispose of improper Investments. The second am.
Pons 301 (1986) 1.
tence of subdivision (b) Is superseded by Probate Code
Former Section 2232 is omitted as unnecessary. [18
Section 16220 (power to hold properly in which trustee is
f al.LRe,.CO. m. Reports 301 (1986) 1.
Interested). See also Prob.Cude § 62 ("property" defined).
Former Section 2253 is superseded generally by Probate
Subdivision (e) Is superseded by Probate Code Section,
Code Sections 15200 (methods of creating trust), 13201
16200 (exercise of powers subject to limitations in (rust) and
(Intention to create trust), and 16000 (duty to administer
16223 (power to make deposits). Sec also Prob.Code
trust). (11 C.I.L.Rev.Comm. Reports 501 (1986) 1.
1 16201 (power of court to relieve busies from restrictions).
Addition@ or changes Indicated by underline;
deletions by asterisks e
7
EXHIBIT B
DESCRIPTION OF INVESTMENTS
The Redevelopment Agency of the City of Azusa's investments are placed in those securities as
outlined below; the balance between the various investment instruments may change in order
to give the Redevelopment Agency the best combination of safety, liquidity and high yield.
Surplus funds of local agencies may only be invested in certain eligible securities. The Agency
invests only in those allowable securities under the State of California statutes (Government
Code Section 53601, et seq).
ertificates of DCDoSit
Certificates of deposit allow the Agency to select the exact amount and day of maturity as well
as the exact depository. Certificates of deposit are issued in any amount for periods of time as
short as fourteen days and as long as several years. At any given time, the Agency may have
certificates of deposit in numerous financial institutions in the future.
The Treasurer may at his discretion waive security for that portion of a deposit which is insured
pursuant to federal law. Currently, the first $100,000 of a deposit is federally insured by FSLIC
or FDIC. It may be to the Agency's advantage to waive this collateral requirement for the first
$100,000 because the Agency may receive a higher interest rate. If funds are to be
collateralized, the collateral will be 110% of the deposit in government securities or mortgages
of 150%. At purchase, institutions must not show an operating loss. Banks must have an equity
to asset ratio of at least 6%. Savings and loan associations and savings banks must have an
equity to asset ratio of at least 3 %.
Local Agency Investment Fund
Local Agency Investment Fund of the State of California offers high liquidity because deposits
can be wired to the City/Agency checking account in twenty-four hours. Interest is computed
on a daily basis.
This is a special fund in the State Treasury which local agencies may use to deposit funds for
investment. There is no minimum investment period and the minimum transaction is $5,000,
in multiples of $1,000 above that, with a maximum of $10,000,000 for any agency. It offers
high liquidity because deposits can be converted to cash in twenty-four hours and no interest is
lost. All interest is distributed to those agencies participating on a proportionate share
determined by the amounts deposited and the length of time they are deposited. Interest is paid
quarterly via a check or warrant.
The State keeps an amount for reasonable costs of making the investments, not to exceed one-
quarter of one percent of the earnings.
1
The interest rates are fairly high because of the pooling of the State surplus cash with the surplus
cash deposited by local governments. This creates a multi -billion dollar money pool and allows
diversified investments. In a high interest rate market, we do better than LAIF. But in times
of low interest rates, LAIF yields are higher.
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 Agency will not invest in notes having
maturities longer then five years.
Federal Agency Securities
Federal Agency securities are highly liquid and considered riskless. Federal Agency issues are
guaranteed directly or indirectly by the United States Government. All agency obligations
qualify as legal investments and are acceptable as security for public deposits. They usually
provide higher yields than regular Treasury issues with all of the same advantages. Examples
are:
FNMA's (Federal National Mortgage Association) are used to assist the home
mortgage market by purchasing mortgages insured by the Federal Housing
Administration and the Farmers Home Administration, as well as those guaranteed by
the Veterans Administration.
FHLB's (Federal Home Loan Bank Notes and Bonds) are issued by the Federal Home
Loan Bank System to help finance the housing industry. The notes and bonds provide
liquidity and home mortgage credit to savings and loan associations, mutual savings
banks, cooperative banks, insurance companies and mortgage -lending institutions.
Some other federal agency issues are Federal Intermediate Credit Banks Debentures
(FICB), Federal Farm Credit Bank (FFCB), Federal Land Bank Bonds (FLB), Small
Business Administration Notes (SBA's), Government National Mortgage Association
Notes (GNMA's), Tennessee Valley Authority Notes (TVA's) and Student Loan
Association Notes (SALLIE MAE's). These investments will occasionally be used.
NeEotiable 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 Acceptances
Bankers Acceptances are frequently the highest in yield, are safe investments and are highly
liquid.
Bankers acceptances are a short-term credit arrangement to enable businesses to obtain funds to
finance commercial transactions. They are time drafts drawn on a bank by an exporter or
importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes
primarily liable for the payment of the draft at its maturity. An acceptance is a high grade
negotiable instrument.
Acceptances are purchases in various denominations for 30, 60 or 90 days but no longer than
270 days. The interest is calculated on a 360 day discount basis similar to Treasury Bills.
Local agencies may not invest more than forty -percent of their surplus money in bankers
acceptances.
Commercial Paper
Commercial paper allows the investment of large amounts of money for one to seven days at
rates higher than we can earn from our savings account. Commercial paper is a short-term
unsecured promissory note issued by a corporation to raise working capital. These negotiable
instruments are purchased at a discount to par value. Commercial paper is issued by
corporations such as Shearson -American Express, International Business Machines (IBM) and
Pacific Gas and Electric Company, etc.
Local agencies are permitted by state law to invest in commercial paper of "prime" quality of
the highest ranking or of the highest letter and numerical rating as provided by Moody's
Investor's Service, Inc. or Standard and Poor's Corporation. Purchases of eligible commercial
paper may not exceed 180 days maturity nor exceed thirty percent of the local agency's surplus
funds.
41
Passbook Savines 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 Pond
Los Angeles County Pooled Fund is similar to the State of California Local Agency Investment
Funds. The County fund provides protection, liquidity and higher than market rates for short-
term securities.
The County Pooled Fund is similar to the State of California Local Agency Investment Fund
(LAIF). Los Angeles County has an existing pooled fund with current assets of $3.5 billion
serving school districts and other special districts. This pooled fund is managed by the County
Treasurer and interest is competitive to money market rates. There are no restrictions to number
of transactions or dollar amount of deposits. The funds deposited by a local agency in the
County Pooled Fund cannot be attached by the County.
All interest is distributed to those agencies participating on a proportionate share determined by
the amounts deposited and the length of time they are deposited. Interest is credited to the
account and reinvested. The County keeps an amount for reasonable administrative costs of the
pool. The Los Angeles County Treasurer has started the range of administrative costs is 14 to
18 basis points (approximately 0.14% to 0.18% of the pool fund average daily balance).
Mutual Fund
Mutual fund is another authorized investment allowing the Agency to maintain liquidity and
receive money market rates.
Mutual Funds are referred to in the Government Code, Section 53601.L, as "shares of beneficial
interests issued by diversified management companies". The Mutual Fund must be restricted
by its by-laws to the same investments as the local agency. These investments are Treasury
issues, Agency issues, Bankers Acceptance, Commercial Paper, Certificates of Deposit, and
Negotiable Certificates of Deposit. The quality rating and percentage restrictions in each
investment category applicable to the local agency also applies to the Mutual Fund.
A further restriction is that the purchase price of shares of the mutual funds shall not include any
sales commission. Investments in mutual funds shall not exceed fifteen percent of the local
agency's surplus money.
4
61
Repurchase Agreements
Another authorized investment for cities is repurchase agreements. Repurchase agreements are
purchases of securities by the Agency under an agreement with a term of one (1) year or less
whereby the seller will "repurchase" the same securities on or before a specified date or on
demand of either party and for a specified amount. The underlying securities must be delivered
to the Agency by book entry, physical delivery or a third -party custodial agreement. Transfer
of the underlying securities to the counter -party may be used for book entry delivery.
5
� EXHIBIT C
LIST OF THE PRIMARY GOVERNMENT SECURITIES DEALERS
REPORTING TO THE MARKET REPORTS DIVISION OF THE
FEDERAL RESERVE BANK OF NEW YORK
Bank of America NT & SA
Bankers Truct Company
Bear, Steams & Co., Inc.
Carroll McEntee & McGinley Incorporated
Chase Manhattan Government Securities, Inc.
Chemical Bank
Citibank, N.A.
Continental Illinois National Bank and Trust Company of Chicago
Daiwa Securities America, Inc.
Dean Witter Reynolds, Inc.
Discount Corporation of New York
Donaldson, Lufxin & Jenrette Securities Corporation
Drexel Burnham Lambert Government Securities, Inc.
The First Boston Corporation
First Interstate Capital Markets, Inc.
First National Bank of ChicagoGoldman, Sachs & Co.
Greenwich Capital Markets, Inc.
Harris Trust and Savings Bank
E.F. Hutton & Company, Inc.
Irving Securities, Inc.
Kidder, Peabody & Co., Incorporated
Kleinwort Benson Government Securities, Inc.
Aubrey G. Lanston & Co., Inc.
Manufacturers Hanover Trust Company
Merrill Lynch Government Securities, Inc.
Midland -Montagu Government Securities, Inc.
J.P. Morgan Securities, Inc.
Morgan Stanley & Co., Incorporated
Nomura Securities International, Inc.
Paine Webber Incorporated
Wm. E. Pollock Government Securities, Inc.
Prudential-Bache Securities, Inc.
Refco Partners
L.A. Rothschild, Unterberg, Towbin, Inc.
Salomon Brothers, Inc.
Security Pacific National Bank
NOTE: This list has been compiled and made available for statistical purposes only and has
no significance with respect to other relationships between dealers and the Federal Reserve
Bank of New York. Qualification for the reporting list is based on the achievement and
maintenance of reasonable standards of activity.
Market Reports Division
Federal Reserve Bank of New York
December 11, 1986