AB 2912 imposes several new re- quirements cov- ering fidelity in- surance, fund transfers, and the re- view of fi- nancials.
Fidelity Insurance
Community associations must purchase fidelity in- surance in an amount equal to or exceeding current reserves, plus three months of assessments. Some- times this is referred to as a “fidelity bond” but what is actually being purchased is an insurance policy that covers employee dishonesty (fidelity) plus non- employee theft. Employee dishonesty coverage pro- tects an association against dishonest acts such as embezzlement committed by an employee (as de- fined by the policy). Te definition of “employee” for this purpose needs to be broadened to include the board of directors as non-compensated employ- ees of the association, as well as the community manager and management company.
Computer and funds transfer fraud coverage pro- tects against dishonest acts committed by third par- ties. Unlike a typical local embezzler who would be inclined to steal a little bit at a time to avoid detection, these individuals don’t live in the associa- tion, are not on the board, and have no emotional connection to the community. Depending on their geographic location, they may feel they are unlikely to be tracked down and prosecuted for the crime. As a result, they are more likely to transfer as much money as they can, as quickly as they can.
Management companies should carry their own fi- delity insurance to protect against losses resulting from the dishonest acts of management company employees. Actual and potential claims should be timely reported to the association’s insurance carrier or the association may lose coverage.
Te cost of the required insurance coverage should come down over time, as more and more associa- tions throughout California sign up. Make sure to shop around and that your association is working with an insurance agent who is knowledgeable about the industry.
20 Fund Transfers
Te bill prohibits transfers of funds greater than $10,000 or 5% of an asso- ciation’s total combined reserve and operating account deposits, whichever is lower, without prior written approval from the board.
Transfer Not Defined - AB 2912 does not define “transfer.” As initially written, it expressly referenced “electronic transfers.” Te word “electronic” was removed as the bill was making its way through the Senate, leading some to argue the bill applies more broadly than to just “electronic” trans- fers. However, the Digest from the Senate Floor Analysis still referred to the purpose of the bill as to prohibiting “electronic transfers from homeowner association (HOA) accounts without prior board approval.” Other types of transfers likely include wire transfers, telephone transfers, etc., which may help to explain the omission of the word “electronic.” However, a plain lan- guage interpretation of the word “transfer,” coupled with other statutory language related to written checks, supports the conclusion that the law does not apply to check disbursements to third parties. While it may not be strictly required, associations may choose to broadly construe the approval requirement to include debits of any kind, which would be a sound business practice and further effectuate the intent of the law.
Recurring Expenses - If there are routine budgeted transfers on a recurring basis requiring approval (e.g., property taxes, water bills, power bills, contri- butions to reserves), a board could approve those transfers well in advance. For example, the board could approval all of its budgeted utility transfers at the beginning of each year, for the entire year. However, a carte blanche reso- lution of the board purporting to give prior written approval for all trans- fers, without any specific limitations or timeframes, would clearly violate the spirit of the law would likely be determined to be a violation of the law.
Written Approval - Since the law requires prior written approval, minutes will not be an effective tool to evidence the approval, since the minutes of any given meeting would not be approved until the next meeting. As a re- sult, some other documentation, such as a board resolution, should be used. Transfers out of reserves still require two signatures.
Delegation - Te law does not specify whether boards can delegate the ap- proval requirement to an executive committee. Under the Corporations Code executive committees may have “the authority of the board.” Howev- er, there are arguments on both sides. Delegating the approval requirement undermines the intent of the law. Terefore, the conservative approach is not to delegate the approval authority to an executive committee.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32
