The National Conference of Commissioners on Uniform State Laws developed UPMIFA back in 2007. Over the ensuing years, it’s been adopted by every state but Pennsylvania. Prior to UPMIFA, most states had implemented the Uniform Management of Institutional Funds Act which the Commissioners released in 1972. UPMIFA helped to modernize the old law by:
- Clarifying the duties of those who manage and invest charitable funds;
- Applying modern portfolio investment theory;
- Eliminating the concept of historic dollar value; and
- Updating the requirements for releasing and modifying donor imposed restrictions on charitable funds.
It’s important to note, however, that individual states often modify some provisions of a uniform model act. So, whenever we’re talking about UPMIFA, we must speak in generalities. Each state’s specific law needs to be factored into any assessment.
Investment duties under the scope of UPMIFA
UPMIFA applies to any organization that’s operated solely for charitable purposes—including nonprofit corporations, trusts that are wholly devoted to charitable purposes, and government entities holding funds exclusively for charitable purposes. It doesn’t apply to a trust, however, if the trustee itself is a for-profit corporation or individual. And it applies to the investment management of all funds—regardless of whether they were gifted before or after the law’s adoption.
While certainly not a comprehensive list, the following are a few of UPMIFA’s key mandates for those who manage and invest charitable funds?
- Your organization must consider the charitable purposes of the institution and the purposes of the fund. If a donor has restricted the use of the fund, the donor’s intent is paramount.
- Each person (including directors and managers) who manage and invests the fund must act in good faith and with the care of an ordinarily prudent person. If a person has special skills or expertise, they’re expected to use those skills or that expertise in carrying out their management or investment duties.
- Each person has a duty to minimize costs. This duty doesn’t preclude the hiring of an investment advisor as long as the costs incurred are appropriate under the circumstances. In some cases, it may be appropriate to pool funds for investment and management.
- Each person also has a duty to investigate the accuracy of information before making decisions. If something seems questionable, the organization should postpone the decision until facts can be verified. For example, a charitable organization has a responsibility to be assured of the accuracy of all information associated with a particular grant request.
- Management and investment decisions should be made in the context of the investment portfolio as a whole and as part of an overall investment strategy. Generally, the organization must diversify its assets; a lack of diversification is only deemed appropriate under exceptional circumstances. It also may be necessary to dispose of unsuitable assets.
Even though there’s flexibility in the type of investments in which an organization can invest under UPMIFA, charitable organizations that are private foundations should keep in mind the restrictions Congress imposes on private foundations. For example, a private foundation cannot make an investment that jeopardizes the carrying out of any of the organization’s exempt purposes. A qualified investment professional can provide invaluable assistance in determining what investments are reasonable in the marketplace and whether your organization may want to avoid certain investments.
Endowment spending limitations
Under UPMIFA, an endowment fund is defined as a fund that cannot be spent in its entirety all at once. We sometimes think of an endowment as a fund that’s expected to last in perpetuity. But an endowment can be much shorter. For example, an endowment could be expected to continue for six months, sixty years, or any other length of time. Some endowments last until an objective is met, without specifying a time. The time horizon will depend entirely on the intent of the donor.
Before UPMIFA, a charitable organization was expected to preserve an endowment by maintaining the fund’s historic dollar value (i.e., the aggregate value of the contributions to the fund, valued at the time of contribution). You were allowed to spend amounts above historic dollar value.
In-house or outsourced investment management?
While concerns regarding potential liability under UPMIFA may incline your organization to retain investment responsibility in-house, delegating investment decisions to a competent, professional investment advisor who’s familiar with the law may actually help mitigate your risk. A nonprofit that’s properly delegated investment or management decisions cannot be held liable for the decisions or actions of the advisor.
When selecting an advisor, you must act in good faith and with the care of an ordinarily prudent person in identifying the advisor’s duties, and in reviewing the advisor’s actions. Only management and investment decisions can be delegated—you can’t delegate expenditure decisions.
Example: if one spouse established an endowed fund with $1 million, the historic dollar value would be $1 million. If the other spouse then added $500,000 to the fund at their death, the historic dollar value would climb to $1.5 million. If at any time the fund’s current value falls below the historic dollar value, the investment options and spending from the endowment fund would be limited (typically to spending only income). If, subsequently, the fund’s value grew significantly in excess of its historic dollar value, any spending and investment restrictions would be removed.
UPMIFA takes a different approach. You’re expected to maintain an endowment fund’s purchasing power. Spending decisions should aim to preserve purchasing power for the expected life of the fund. Of course, a donor can provide specific instructions that may modify these obligations. But UPMIFA emphasizes the endowment aspect of the fund—rather than the overall purposes and needs of your organization. A competent investment advisor should be able to help you come up with a plan to sustain the purchasing power of the fund while also helping achieve the purposes of the fund.
Most individual states don’t specify any spending cap—just that your organization’s spending be deemed prudent. But some states do restrict how much can be prudently spent. They presume that spending in excess of a specified cap is no longer prudent. Depending on the state, that cap may be 5-9% of a three-year rolling average of value.
Since UPMIFA is a state law, each state’s attorney general is generally charged with enforcement. Although it’s theoretically possible, most donors don’t have legal standing to enforce UPMIFA violations. Co-trustees, co-directors or members of the nonprofit, however, may be able to bring suit to enforce a remedy for violation.
Let’s take a look at a few cases where nonprofits have encountered difficulties resulting from a failure to follow fiduciary best practices as now defined in UPMIFA:
- In 2009, New Jersey filed suit against an organization alleging financial mismanagement and excessive spending of an educational institution’s endowment investments. The attorney general and the organization eventually settled, with the charity agreeing to make changes to its governing practices. After 22 years of service, it appears that the president was forced to resign.
- In 2012, New York filed suit against a charitable organization to force the removal of its directors and charging the organization with fiscal mismanagement. The attorney general alleged that the organization improperly borrowed against an endowment to cover expenses. In the case settlement, the nonprofit was required to make changes to its board, reduce its expenses, and find a new president.
- And recently, a number of student, faculty, alumni, and community groups have been using UPMIFA as a lever to force university endowments to divest from fossil fuels In December 2020, Boston College alumni lodged a complaint with the Massachusetts attorney general, asserting that the university endowment’s refusal to divest from fossil fuels violated UPMIFA. Harvard University students, faculty, and alumni followed suit in March 2021—arguing that fossil fuel investments violate the duties of loyalty, prudence, and charitable.
While some states actively audit charities, most rely on insiders or members of the public to bring forward questions about a charity’s activities. Whether or not they publicize their activities, varies from state to state.
But keep in mind—whether genuine or simply alleged—any claim of mismanagement can seriously impair your nonprofit’s fundraising efforts. Your organization will be best served by having a thoughtful investment policy that’s reviewed frequently. Make sure you memorialize in writing the reasons for any investment decisions. When you have questions, consult with your state’s attorney general. And take time to be thoughtful and proactive early in the planning stages.
About Truist Foundations and Endowments Specialty Practice
Truist has more than a century of experience working with not-for-profit organizations. Fiduciary stewardship is the heart of our culture. We’re not just a provider, but an invested partner—sharing responsibility for prudent management of not-for-profit assets. Our client commitment, not-for-profit experience, and fiduciary culture are significant advantages for our clients and set us apart. The Foundations and Endowments Specialty Practice works exclusively with not-for- profit organizations. Our institutional teams include professionals with extensive not-for-profit expertise. These professionals are actively engaged in the not-for profit community and are able to share best practices that are meaningful to their clients. Team members offer guidance and advice tailored to the various subsets of the not-for-profit community, including trade associations and membership organizations. Our Practice delivers comprehensive investment advisory, administration, planned giving, custody, trust and fiduciary services to trade associations, educational institutions, foundations, endowments and other not-for profit clients across the country.
Have additional questions regarding UPMIFA or looking for specific investment guidance?
Contact your Truist relationship manager or investment advisor or call us at 866-223-1499.