BILL NUMBER: SB 222 AMENDED
BILL TEXT
AMENDED IN SENATE APRIL 3, 1995
INTRODUCED BY Senator Beverly
FEBRUARY 6, 1995
An act to add Section 1561.1 to the Financial Code, to
amend Sections 16003, 16008, 16012, 16040 ,
16200 , and 16401 of, to add Article 2.5 (commencing with
Section 16045) to Chapter 1 of Part 4 of Division 9 of, and to repeal
Section 16042 Sections 16008, 16042, and
16223 of, the Probate Code, relating to trusts.
LEGISLATIVE COUNSEL'S DIGEST
SB 222, as amended, Beverly. Trusts: prudent investor.
Existing law regulates the creation and administration of trusts,
as specified. Among other things, existing law provides for the duty
of the trustee to administer the trust solely in the interest of the
beneficiaries. Existing law prescribes the duty of the trustee to
administer the trust and to manage, control, and preserve the trust
property as a prudent person would under the circumstances, as
specified. Existing law specifies the criteria for prudent
investment. Existing law provides, that although the trustee has a
general duty not to delegate the administration of the trust or the
performance of acts in furtherance of the trust, as specified, the
trustee may make limited delegations where appropriate and may hire
experts to assist in the administration of the trust. Existing law
also provides that the trustee has the power to make any type of
investment in conformance with applicable duties.
This bill would enact the Uniform Prudent Investor Act. Among
other things, it would declare that it, combined with existing
provisions of law, constitute the prudent investor rule, as
specified, and would provide that a trustee owes a duty to the
beneficiaries of the trust to comply with the rule. The bill would
provide that the prudent investor rule is an objective
standard and would provide a number of factors that the
trustee shall consider in investing and managing the trust assets, as
specified. The bill would require the trustee to diversify the
investment of the trust unless the trustee reasonably
determines that, because of special circumstances, the purposes of
the trust are better served without diversifying ,
under the circumstances, it is prudent not to do so . The bill
would specify the duties of the trustee at the inception of the
trusteeship and the duty to incur reasonable costs only. The bill
would provide that compliance with the prudent investor rule is to be
determined in light of the facts and circumstances existing at the
time of the trustee's decision or action and not by hindsight. The
bill would provide that the trustee may delegate investment and
management functions, as specified, and provide that the trustee is
not liable to the beneficiaries or to the trust for the decisions or
actions of the agent to whom the function was properly delegated.
The bill would specify the language in a trust authorizing any
investment or strategy permitted by the bill. The bill would provide
that it shall apply only to trusts existing on or created after its
effective date. As applied to trusts existing on its effective date,
it would govern only decisions or actions occurring after that date.
Existing provisions of the Financial Code regulate the investment
of trust funds by banks and trust companies.
This bill would provide that a trust company acting under a court
trust or private trust may invest or reinvest in the securities of,
or other interests in, any fund to which the trust company is
providing services, as specified. The bill would define "fund" for
these purposes. The bill would require the trust company to render
specified statements of account. The bill would also make
legislative findings and declarations.
The bill would also make conforming changes.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 1561.1 is added to the Financial Code, to
read:
1561.1. (a) As used in this section, "fund" means any investment
company registered under the Investment Company Act of 1940 (15
U.S.C. Sec. 801-1 et seq.), as amended from time to time.
(b) In addition to all other investments authorized by statute or
by the governing instrument, a trust company acting in any capacity
under a court trust or private trust may, in the exercise of its
investment discretion or at the direction of another person
authorized to direct the investment of the trust, invest and reinvest
in the securities of, or other interests in, any fund to which the
trust company or its affiliate is providing services as an investment
advisor, sponsor, distributor, custodian, agent, registrar,
administrator, servicer, or manager, and for which the trust company
or its affiliate receives compensation from the fund.
(c) With respect to any court or private trust invested as
provided in subdivision (b), the trust company shall disclose to all
persons to whom it is required to render statements of account, at
least annually by prospectus, statement of account, or other written
notice, the rate, formula, or other method by which the compensation
paid on the fund to the trust company or its affiliate is calculated.
SEC. 2. Section 16003 of the Probate Code is amended to
read:
16003. If a trust has two or more beneficiaries, the trustee has
a duty to deal impartially with them and shall act impartially in
investing and managing the trust property, taking into account any
differing interests of the beneficiaries.
SEC. 2. Section 16008 of the Probate Code is amended to read:
16008. (a) Except as provided in subdivision (b), the trustee has
a duty within a reasonable time to dispose of any part of the trust
property included in the trust at the time of its creation, or later
acquired by or added to the trust, that would not be a proper
investment for the trustee to make.
(b) Unless the trust instrument expressly provides otherwise, the
trustee may, without liability, continue to hold property included in
the trust at its creation or later acquired by or added to the
trust, if the purposes of the trust are better served by retention of
the property.
SEC. 3.
SEC. 3. Section 16008 of the Probate Code is repealed.
16008. (a) Except as provided in subdivision (b), the trustee has
a duty within a reasonable time to dispose of any part of the trust
property included in the trust at the time of its creation, or later
acquired by or added to the trust, that would not be a proper
investment for the trustee to make.
(b) Unless the trust instrument expressly provides otherwise, the
trustee may, without liability, continue to hold property included in
the trust at its creation or later added to the trust or acquired
pursuant to proper authority, if retention is in the best interests
of the trust or in furtherance of the purposes of the trust.
SEC. 4. Section 16012 of the Probate Code is amended to
read:
16012. (a) The trustee has a duty not to delegate to others the
performance of acts that the trustee can reasonably be required
personally to perform and may not transfer the office of trustee to
another person nor delegate the entire administration of the trust to
a cotrustee or other person.
(b) In a case where a trustee has properly delegated a matter to
an agent, cotrustee, or other person, the trustee has a duty to
exercise general supervision over the person performing the delegated
matter.
(c) This section does not apply to investment and management
functions under Section 16052.
SEC. 4.
SEC. 5. Section 16040 of the Probate Code is amended to
read:
16040. (a) Subject to the Uniform Prudent Investor Act (Article
2.5 (commencing with Section 16045)), the trustee shall administer
the trust with the
16040. (a) The trustee shall administer the trust with reasonable
care, skill, and caution under the circumstances then
prevailing that a prudent person acting in a like capacity would use
in the conduct of an enterprise of like character and with like aims
to accomplish the purposes of the trust as determined from the trust
instrument.
(b) The settlor may expand or restrict the standards
standard provided in subdivision (a) by express
provisions in the trust instrument. A trustee is not liable to a
beneficiary for the trustee's reasonable good
faith reliance on these express provisions.
SEC. 5.
(c) This section does not apply to investment and management
functions governed by the Uniform Prudent Investor Act, Article 2.5
(commencing with Section 16045).
SEC. 6. Section 16042 of the Probate Code is repealed.
SEC. 6.
SEC. 7. Article 2.5 (commencing with Section 16045) is added
to Chapter 1 of Part 4 of Division 9 of the Probate Code, to read:
Article 2.5. Uniform Prudent Investor Act
16045. This article, together with subdivision (a) of Section
16002 and Section 16003, constitutes the prudent investor rule and
may be cited as the Uniform Prudent Investor Act.
16046. (a) Except as provided in subdivision (b), a trustee who
invests and manages trust assets owes a duty to the beneficiaries of
the trust to comply with the prudent investor rule.
(b) The prudent investor rule, a default rule, may be expanded,
restricted, eliminated, or otherwise altered by the provisions of a
trust. A trustee is not liable to a beneficiary to the extent that
the trustee acted in reasonable reliance on the provisions of the
trust.
(b) The settlor may expand or restrict the prudent investor rule
by express provisions in the trust instrument. A trustee is not
liable to a beneficiary for the trustee's good faith reliance on
these express provisions.
16047. (a) A trustee shall invest and manage trust assets as a
prudent investor would, by considering the purposes, terms,
distribution requirements, and other circumstances of the trust. In
satisfying this standard, the trustee shall exercise reasonable care,
skill, and caution.
(b) A trustee's investment and management decisions respecting
individual assets and courses of action must be evaluated
not in isolation, but in the context of the trust portfolio as a
whole and as a part of an overall investment strategy having risk and
return objectives reasonably suited to the trust.
(c) Among circumstances that a trustee shall
are appropriate to consider in investing and managing
trust assets are such of the following as
are , to the extent relevant to the trust or
its beneficiaries:
(1) General economic conditions.
(2) The possible effect of inflation or deflation.
(3) The expected tax consequences of investment decisions or
strategies.
(4) The role that each investment or course of action plays within
the overall trust portfolio , which may include financial
assets, interests in closely held enterprises, tangible and
intangible personal property, and real property. .
(5) The expected total return from income and the appreciation of
capital.
(6) Other resources of the beneficiaries known to the trustee
as determined from information provided by the beneficiaries .
(7) Needs for liquidity, regularity of income, and preservation or
appreciation of capital.
(8) An asset's special relationship or special value, if any, to
the purposes of the trust or to one or more of the beneficiaries.
(d) A trustee shall make a reasonable effort to verify
ascertain facts relevant to the investment and
management of trust assets.
(e) A trustee may invest in any kind of property or type of
investment or engage in any course of action or investment
strategy consistent with the standards of this chapter.
16048. A trustee shall diversify the investments of the trust
unless the trustee reasonably determines that, because of special
circumstances, the purposes of the trust are better served without
diversifying.
16048. In making and implementing investment decisions, the
trustee has a duty to diversify the investments of the trust unless,
under the circumstances, it is prudent not to do so.
16049. Within a reasonable time after accepting a trusteeship or
receiving trust assets, a trustee shall review the trust assets and
make and implement decisions concerning the retention and disposition
of assets, in order to bring the trust portfolio into compliance
with the purposes, terms, distribution requirements, and other
circumstances of the trust, and with the requirements of this
chapter.
16050. In investing and managing trust assets, a trustee may only
incur costs that are appropriate and reasonable in relation
to the assets, the purposes of the trust, and the skills of the
trustee. reasonable in relation to the assets, overall
investment strategy, purposes, and other circumstances of the trust.
16051. Compliance with the prudent investor rule is determined in
light of the facts and circumstances existing at the time of a
trustee's decision or action and not by hindsight.
16052. (a) A trustee may delegate investment and
management functions that a prudent trustee of comparable skills
could properly delegate under the circumstances. The trustee shall
exercise reasonable care, skill, and caution in the following:
management functions as prudent under the
circumstances. The trustee shall exercise prudence in the following:
(1) Selecting an agent.
(2) Establishing the scope and terms of the delegation, consistent
with the purposes and terms of the trust.
(3) Periodically reviewing the agent's actions in order
to monitor the agent's overall performance and
compliance with the terms of the delegation.
(b) In performing a delegated function, an agent owes
has a duty to the trust to
exercise reasonable care to comply with the terms of the delegation.
(c) A Except as otherwise provided in
Section 16401, a trustee who complies with the requirements of
subdivision (a) is not liable to the beneficiaries or to the trust
for the decisions or actions of the agent to whom the
function was delegated, except where the trustee knows of the agent's
acts or omissions and either conceals the act of the agent or
neglects to take reasonable steps to redress the wrong.
function was delegated.
(d) By accepting the delegation of a trust function from the
trustee of a trust that is subject to the law of this state, an agent
submits to the jurisdiction of the courts of this state.
16053. The following terms or comparable language in the
provisions of a trust, unless otherwise limited or modified,
authorizes any investment or strategy permitted under this chapter:
"investments permissible by law for investment of trust funds,"
"legal investments," "authorized investments," "using the judgment
and care under the circumstances then prevailing that persons 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," "prudent man rule,"
"prudent trustee rule," "prudent person rule," and "prudent investor
rule."
16054. This article applies to trusts existing on and created
after its effective date. As applied to trusts existing on its
effective date, this article governs only decisions or actions
occurring after that date.
SEC. 7.
SEC. 8. Section 16200 of the Probate Code is amended to read:
16200. A trustee has the following powers without the need to
obtain court authorization:
(a) The powers conferred by the trust instrument.
(b) Except as limited in the trust instrument, the powers
conferred by statute.
(c) Except as limited in the trust instrument, the power to
perform any act that a trustee would perform for the purposes of the
trust under the standard of care provided in Section 16040 or
16047 .
SEC. 9. Section 16223 of the Probate Code is repealed.
16223. The trustee has the power to invest in any kind of
property, whether real, personal, or mixed.
SEC. 10. Section 16401 of the Probate Code is amended to
read:
16401. (a) Except as provided in subdivision (b), the trustee is
not liable to the beneficiary for the acts or omissions of an agent.
(b) The Under any of the circumstances
described in this subdivision, the trustee is liable to the
beneficiary for an act or omission of an agent employed by the
trustee in the administration of the trust that would be a breach of
the trust if committed by the trustee under any of the
following circumstances :
(1) Where the trustee directs or permits the
act of the agent.
(2) Where the trustee delegates to the agent the authority to
perform an act that the trustee is under a duty not to delegate.
(3) Where the trustee does not use reasonable care
prudence in the selection of the agent or the
retention of the agent selected by the trustee.
(4) Where the trustee does not exercise proper
supervision over the agent's conduct in a case where the trustee has
the power to supervise the agent. periodically review
the agent's overall performance and compliance with the terms of the
delegation.
(5) Where the trustee conceals the act of the agent.
(6) Where the trustee neglects to take reasonable steps to compel
the agent to redress the wrong in a case where the trustee knows of
the agent's acts or omissions.
(c) The liability of a trustee for acts or omissions of agents
that occurred before July 1, 1987, is governed by prior law and not
by this section.
(d) This section does not apply to the liability of a trustee for
acts or omissions of an agent delegated investment and management
functions under Section 16052.
SEC. 11. It is the intent of the Legislature in enacting Section
1561.1 of the Financial Code to enable California bank trust
departments and California trust companies to achieve competitive
equality with out-of-state institutions offering trust services to
California residents by enabling banks and trust companies to invest
fiduciary accounts in mutual funds to which the bank acts as an
investment advisor or provides related investment services. The
Legislature finds and declares:
(a) This legislation is necessary to achieve parity with 47 other
states that have enacted similar legislation permitting banks and
trust companies to invest fiduciary accounts in mutual funds for
which the bank or trust company provides advisory services.
(b) Without this legislation, California banks and trust companies
cannot offer this investment service to their existing fiduciary
companies.
(c) It is proper and appropriate to use the investment expertise
of California banks and trust companies for the benefit of their
fiduciary clients.
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