A question was recently posed to our firm asking what is a manager’s obligation to ensure the communities they represent have written investment policies and procedures in place? In short, NAC 116A.630 states that among other items it is a manager’s obligation “ensure that the executive board develops and approves written investment policies and procedures.” Given this obligation, the question then becomes what investment policies and procedures should a community association have in place?
Part of the answer to this question lies in NRS 116.311395.1 which provides that all funds of the association must be deposited or invested at a financial institution either located in the state of Nevada; qualified to conduct business in the state; or has consented to the jurisdiction of the Nevada Courts and the Division. NRS 116.311395.2 further requires that the association’s funds be:
- Deposited, maintained and invested in a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation, the National Credit Union Share Insurance Fund or the Securities Investor Protection Corporation;
- With a private insurer approved pursuant by the Commissioner of Insurance; or
- In a government security backed by the full faith and credit of the US Government.
Pursuant to NAC 116.405, the above-stated categories are among the items the Commission will consider when presented with questions of whether Board members have performed their duties when protecting their Association’s funds. Generally, fiduciary duties owed by a homeowners’ association to its members are limited to those arising from its governing documents and relevant statutory requirements. See, Golden Eagle Land Inv., L.P. v. Rancho Santa Fe Ass’n, 19 Cal. App. 5th 399, 425, 227 Cal. Rptr. 3d 903, 924 (2018). Those requirements include an obligation to protect the Association’s financial interests which is typically the rule for anyone who has control over other people’s money.
Though Nevada law specifies where the association’s funds may be placed on deposit, if an association chooses to invest those funds, what are the board’s parameters? For some association’s answering this question may be as easy as looking to the community’s Declarations of Covenants, Conditions & Restrictions (“Declaration”). For many communities, the Declaration may contain a provision along the following lines:
The Board of Directors shall establish no fewer than two (2) separate Association Maintenance Fund accounts into which shall be deposited all monies paid to the Association, and from which disbursements shall be made, as provided herein, in the performance of functions by the Association under this Declaration. The Association Maintenance Funds may be established as trust accounts at a banking or savings institution and shall include: (1) an Operating Fund for current Common Expenses of the Association, (2) an adequate Reserve Fun for capital improvements replacements, painting and repairs of the Association Property, and for payment of deductible amounts for policies of insurance which the Association obtains, and (3) any other funds which the Board of Directors may establish to the extent necessary under the provisions of this Declaration.
A provision such as this dictates the where and how the community’s assessments should be deposited. Given Nevada law dictates the types of accounts that an association may utilize to protect the community’s operating and reserve accounts (NRS 116.311395), if a community’s Declaration contains such a provision, it provides part of what an association must consider when adopting an investment policy as it details where and how assessments should be deposited. However, where the association’s Declaration does not provide an investment policy, one may be needed and even where such provision are included, other considerations should be taken in to account.
In addition to where the association’s funds must be deposited, those additional considerations should include:
- That a majority of the Board must make all decisions on where to deposit the Association’s funds;
- The maximum size of an individual account, which will likely be to the limits of the insurance provided;
- The maximum term of any investment; and
- The kind of insurance among those provided for under NRS 116.311395 that will prove acceptable.
Our office can assist in drafting an investment policy suited for each individual community’s needs. Please feel free to call us at (702) 529-2559 for further input.