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TO BE PUBLISHED IN THE OFFICIAL REPORTS
 

OFFICE OF THE ATTORNEY GENERAL
 

State of California
 

DANIEL E. LUNGREN
 

Attorney General
 

OPINION : 

: No. 95-807 

of : 

: June 19, 1996 

DANIEL E. LUNGREN : 

Attorney General : 

: 

GREGORY L. GONOT : 

Deputy Attorney General : 

: 

LAURENCE M. WATSON, ACTING COUNTY COUNSEL, COUNTY OF 

ORANGE, has requested an opinion on the following question: 

May the treasurer of a general law county grant to a contract investment manager, who 

is not a deputy of the treasurer, discretionary authority to invest funds on deposit with the treasurer? 

CONCLUSION 

The treasurer of a general law county may grant to a contract investment manager, who 

is not a deputy of the treasurer, discretionary authority to invest funds on deposit with the treasurer, 

provided that the treasurer exercises prudence in the selection of the manager and imposes suitable 

safeguards to prevent abuse in the exercise of discretion by the manager. The treasurer would remain 

responsible for any investment decisions made by the manager. 

ANALYSIS 

The question presented for resolution concerns the ability of a county treasurer to 

contract with an investment manager for the purpose of investing funds which are in the custody of the 

treasurer. The manager would select, purchase, and sell individual securities. We conclude that such 

an arrangement would not violate state law if the treasurer exercises prudence in the selection of the 

manager and imposes safeguards to prevent abuse in the exercise of discretion by the manager. The 

treasurer would remain responsible for any investment decisions made by the manager. 

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Government Code section 270001 provides that "[the] county treasurer shall receive 

and keep safe all money belonging to the county and all other money directed by law to be paid to him 

and apply and pay it out, rendering the account as required by law." Section 27000.1 states: 

"The board of supervisors may, by ordinance, delegate to the county treasurer 

the authority to invest or reinvest the funds of the county and funds of other depositors 

in the county treasury . . . . The county treasurer shall thereafter assume full 

responsibility for those transactions until the board of supervisors, by ordinance, 

revokes its delegation of authority. . . ." 

Section 27000.3 provides: 

"The county treasurer is a trustee and therefore a fiduciary subject to the 

prudent investor standard. When investing, reinvesting, purchasing, acquiring, 

exchanging, selling, and managing public funds, the county treasurer shall act with 

care, skill, prudence, and diligence under the circumstances then prevailing, that a 

prudent person acting in a like capacity and familiarity with those matters would use in 

the conduct of funds of a like character and with like aims, to safeguard the principal 

and maintain the liquidity needs of the county and the other depositors. Within the 

limitations of this section and considering individual investments as part of an overall 

investment strategy, a trustee is authorized to acquire investments as authorized by law. 

Nothing in this chapter is intended to grant investment authority to any person or 

governing body except as provided in Sections 53601, 53607, and 53635."2 

Section 27000.5 states: 

"When investing, reinvesting, purchasing, acquiring, exchanging, selling, and 

managing public funds, the primary objective of the county treasurer shall be to 

safeguard the principal of the funds under his or her control. The secondary objective 

shall be to meet the liquidity needs of the depositor. The third objective shall be to 

achieve a return on the funds under his or her control." 

When a county invests surplus funds, the board of supervisors must establish a county 

treasury oversight committee. (' 25131.) The treasurer must annually prepare for the committee an 

investment policy which includes: 

"(a) A list of securities or other instruments in which the county treasurer 

may invest, according to law, including the maximum allowable percentage by type of 

security. 

1 All section references are to the Government Code unless otherwise indicated. 

2 The requirements of sections 53607 and 53635 are discussed below. 

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"(b) The maximum term of any security purchased by the county treasury. 

"(c) The criteria for selecting security brokers and dealers from, to, or 

through whom the county treasury may purchase or sell securities or other instruments. 

The criteria shall prohibit the selection of any broker, brokerage, dealer, or securities 

firm that has, within any consecutive 48-month period following January 1, 1996, made 

a political contribution in an amount exceeding the limitations contained in Rule-G37 

of the Municipal Securities Rulemaking Board, to the local treasurer, any member of 

the governing board of the local agency, or any candidate for those offices. 

". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ." (' 27133.) 

While the committee has oversight responsibility, it may not "direct individual investment decisions, 

select individual investment advisors brokers, or dealers, or impinge on the day-to-day operations of the 

county treasury." (' 27137.) 

Historically the Legislature placed numerous restrictions upon the investment of local 

public funds. (See Stats. 1967, ch. 1026, ' 1; Stats. 1949, ch. 81, ' 1.) Differing requirements were 

made applicable to the investment of local funds needed for immediate use, surplus funds needed for 

future use, and specialized funds such as those contributed under an employee deferred compensation 

plan. (See 57 Ops.Cal.Atty.Gen. 534, 539-542 (1974).) Recently investment opportunities have been 

broadened by the Legislature and given substantially similar treatment. (See, e.g., '' 53601, 53609, 

53635.) 

We may assume for our purposes that the county treasurer has been given the necessary 

authority by the board of supervisors to invest the county's funds, that a county treasury oversight 

committee has been established in the county, and that the treasurer will comply with all statutory 

requirements relating to the investment of the funds. 

Except insofar as the treasurer's powers may be exercised by a deputy,3 the governing 

statutes do not expressly provide for any further grant of discretion with respect to the investment of 

county funds. Here we are given that the manager would not be a deputy of the treasurer. Since no 

express statutory authority allows a treasurer to grant discretion regarding investment decisions to such 

an "outside" manager, may the authority to do so be implied? We believe the answer to this question 

may be determined by examining the scope of the treasurer's authority as a trustee of the county's funds. 

3 The county treasurer "may appoint as many deputies as are necessary for the prompt and faithful discharge of the 

duties of his office." (' 24101.) "Whenever the official name of any principal officer is used in any law conferring 

power or imposing duties or liabilities, it includes deputies." (' 24100; see also '' 7, 1194; 70 Ops.Cal.Atty.Gen. 710, 

715, 718-719 (1980).) 

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Section 27000.3 denominates the treasurer as a "trustee," thereby making him "a 

fiduciary subject to the prudent investor standard." The prudent investor standard is set forth in the 

Restatement Third of Trusts section 227. As applicable herein, section 227 states: 

"The trustee is under a duty to the beneficiaries to invest and manage the funds 

of the trust as a prudent investor would, in light of the purposes, terms, distribution 

requirements, and other circumstances of the trust. 

". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

"(c) In addition, the trustee must: 

"(1) conform to fundamental fiduciary duties of loyalty (' 170) and 

impartiality (' 183); 

"(2) act with prudence in deciding whether and how to delegate authority 

and in the selection and supervision of agents (' 171); and 

"(3) incur only costs that are reasonable in amount and appropriate to the 

investment responsibilities of the trusteeship (' 188). 

"(d) The trustee's duties under this Section are subject to the rule of ' 228, 

dealing primarily with contrary investment provisions of a trust or statute." 

The Restatement rule, section 171, governing a trustee's authority in granting discretion to others in 

performing his responsibilities is as follows: 

"A trustee has a duty personally to perform the responsibilities of the 

trusteeship except as a prudent person might delegate those responsibilities to others. 

In deciding whether, to whom and in what manner to delegate fiduciary authority in the 

administration of a trust, and thereafter in supervising agents, the trustee is under a duty 

to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would 

act in similar circumstances." 

A comment to this Restatement rule explains "fiduciary duty" and "discretion" as regards a delegation 

of responsibility: 

"A trustee stands in a fiduciary relationship to the beneficiaries of the trust and 

therefore is under a duty personally to perform the responsibilities of the trusteeship 

except as it would be prudent, under the circumstances, to delegate to agents the 

making of decisions or the performance of acts of administration." (' 171, com. a; 

emphasis added.) 

The prudent investor standard is also set forth in the Uniform Prudent Investor Act 

(Prob. Code, '' 16045-16054). Probate Code section 16052, subdivision (a), states: 

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"A trustee may delegate investment and 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 overall performance and compliance 

with the terms of the delegation."4 

The use of agents by a trustee may be necessary because "[m]any duties of the trustee 

require special skills and knowledge which the trustee does not possess so that he could not be expected 

to perform such work without advice and aid." (Bogert, Trusts (6th ed. 1987) ' 92, p. 331.) In a 

comment regarding the prudent investor standard, the Restatement Third of Trusts states: 

"The trustee is not required personally to perform all aspects of the investment 

function. The trustee must not, however, abdicate the responsibilities of the office and 

must not delegate unreasonably. Prudent behavior in this matter, as in other aspects of 

prudent investment management, cannot be reduced to a simple, objective formula. 

"With professional advice as needed, the trustee personally must define the 

trust's investment objectives. The trustee must also make the decisions that establish 

the trust's investment strategies and programs, at least to the extent of approving plans 

developed by agents or advisers. Beyond these generalizations, expressed in terms that 

are necessarily imprecise, there is no invariant formula concerning functions that are to 

be performed by the trustee personally. 

"Many factors affect the nature and extent of prudent and therefore permissible 

delegation. These factors include the almost infinite variety that exists in trustees and 

trusteeships, as well as in investment objectives and techniques and in the types, 

circumstances, and goals of trusts. For example, it would be impractical for delegation 

decisions not to take account of the scale of a trust's operations and the nature of the 

trustee's operating structure. Corporate trustees necessarily act through their 

employees; between that situation and the individual who acts as a trustee or co-trustee, 

however, there are many variations of trusteeship, encompassing, for example, 

institutional governing bodies, law firms, and panels of individuals operating with the 

support of full-time staff. 

4 A county treasurer's conduct may be measured under the principles applicable to trustees expressed in the Probate 

Code. (See Prob. Code, ' 15003, subd. (c).) 

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"The trustee's authority to delegate is not confined to acts that might reasonably 

be described as `ministerial.' Nor is delegation precluded because the act in question 

calls for the exercise of considerable judgment or discretion. The trustee's decisions 

with regard to delegation are themselves matters of fiduciary judgment and 

responsibility falling within the sound discretion of the trustee. 

"As in other matters of fiduciary discretion . . ., the trustee must not abuse the 

discretion to delegate. Accordingly, a court may substitute its judgment for that of the 

trustee in a matter of delegation if and only if the trustee has acted unreasonably, or has 

unreasonably failed to act. Similarly, a trustee's liability in a matter of delegation 

depends on a failure to exercise the required degree of care, skill, or caution. 

"In deciding what as well as whether to delegate and in selecting, instructing, 

and supervising agents, the trustee has a duty to the beneficiaries to act as a prudent 

investor would act under the circumstances. The trustee must exercise care, skill, and 

caution in establishing the scope and specific terms of any delegation, and must keep 

reasonably informed in order to monitor the execution of investment decisions or plans. 

"In all of these matters the trustee has a duty to the beneficiaries to take account 

of all relevant circumstances. These include the knowledge, skill, facilities, and 

compensation of both the trustee and the prospective agents. Also of importance are 

such considerations as the size of the trust estate and the burdens and complexity of 

both the assets to be managed and the strategies to be implemented. Active 

investment strategies, for example, especially in low efficiency markets such as real 

estate and venture capital, are likely to require the hiring of agents with special skills 

not possessed by many trustees, often not even by professional or corporate 

fiduciaries." (' 227, com. j, pp. 39-40, emphasis added.) 

The prudent investor standard requires a trustee to act in accordance with applicable 

statutes. Section 228 of the Restatement Third of Trusts provides: 

"In investing the funds of the trust, the trustee 

"(a) has a duty to the beneficiaries to conform to any applicable statutory 

provisions governing investment by trustees . . . ." 

As previously indicated, upon receiving authority from the board of supervisors to invest county funds, 

the treasurer assumes full responsibility for that function. (' 27000.1.) However, it is contemplated 

by the Legislature that the treasurer, in making investments for the county (' 53607), will employ 

necessary financial advisors, consultants, and managers in carrying out his responsibilities. Section 

53635, for example, provides in part: 

". . . A local agency purchasing or obtaining any securities described in this 

section, in a negotiable, bearer, registered, or nonregistered format, shall require 

delivery of all the securities to the local agency, including those purchased for the 

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agency by financial advisors, consultants, or managers using the agency's funds, by 

book entry, physical delivery, or by third-party custodial agreement. . . ." (Emphasis 

added.)5 

We believe that given (1) the relatively large amount of funds which may be 

administered by a county treasurer, (2) the degree of skill required for investing in the complex forms of 

securities described in section 53635, (3) the section 27133 requirement for annual preparation by the 

treasurer of an investment policy to control investment decisions (including the maximum allowable 

percentage by type of security), and (4) the section 27134 requirement for an annual audit which "may 

include issues relating to the structure of the investment portfolio and risk," a county treasurer may 

grant the authority in question under the prudent investor standard, assuming he has exercised prudence 

in the selection of the manager and has imposed suitable safeguards to prevent abuse in the exercise of 

discretion by the manager. Of course, in contracting with an investment manager, the treasurer may 

not abdicate his responsibility for the investment of county funds. 

We conclude that the treasurer of a general law county may grant to a contract 

investment manager, who is not a deputy of the treasurer, discretionary authority to invest funds on 

deposit with the treasurer provided that the treasurer exercises prudence in the selection of the manager 

and imposes suitable safeguards to prevent abuse in the exercise of discretion by the manager. The 

trustee would remain responsible for any investment decisions made by the manager. 

* * * * * 

5 Wholly aside from the issue of granting discretion to a manager to invest county funds, we note that a county 

board of supervisors may contract for investment advice under the terms of section 53060: 

"The legislative body of any public or municipal corporation or district may contract with 

and employ any persons for the furnishing to the corporation or district special services and advise in 

financial, economic, accounting, engineering, legal, or administrative matters if such persons are 

specially trained and experienced and compensation to perform the special services required. 

". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

"The legislative body of the corporation or district may pay from any available funds such 

compensation to such persons as it deems proper for the services rendered." 

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