What every nonprofit should know about UPMIFA

Foundations and Endowments

(Part II)

In Part I of this two part series, we provided an overview of UPMIFA provisions that every nonprofit must carefully consider in managing and investing their organization’s funds. In this second part, we’ll conduct a more detailed exploration into specific sections of UPMIFA and the important guidance it offers to investment stewards.

As a quick reminder, UPMIFA was developed by the National Conference of Commissioners on Uniform State Laws, and adopted in some form by every state (except Pennsylvania). However, because many state legislatures modified provisions of the law, make sure you’re familiar with your state’s specific version of UPMIFA.

UPMIFA provides new standards and guidelines for charitable institutions (replacing the Uniform Management of Institutional Funds Act that was enacted back in 1972).

The new law:

1.      Eliminates the concept of historic dollar value, which is the aggregate of contributions to the fund, valued at the time of the contribution. Under UMIFA, an underwater endowment fund—one that had dipped below its historic dollar value—could distribute income only. Under UPMIFA, charities are no longer restricted by historic dollar value; however, spending decisions must be prudent.

2.      Sets forth specific standards of conduct for investment decisions, as well as rules for accumulation versus expenditure of income.

3.      Outlines specific ways to modify or eliminate restrictions imposed by donors.

While UPMIFA applies to all nonprofits, it only applies to your ‘institutional funds’—defined as those funds held by your organization for charitable purposes, excluding any program-related assets held to achieve a charitable purpose but not primarily for investment.

Interpreting standards and rules for managing and investing assets

Section 3 of UPMIFA lists various expectations regarding standards and rules that must be considered when managing and investing applicable assets. The following are several key provisions that anyone acting in the role of a fiduciary steward with a charitable organization should be intimately familiar with:

  • “May incur only costs that are appropriate and reasonable” UPMIFA, Section 3(c)(1)—You should know the total cost for managing and administering your organization’s investment assets. This includes both explicit, account level costs as well as imbedded expenses such as those associated with mutual funds. There’s no ideal level or pre-specified threshold since different nonprofits will use different mixes of active and passive investment strategies which may have widely differing costs.
  • “General economic conditions” UPMIFA, Section 3(e)(1)(A)—It’s incumbent upon your nonprofit to be aware of current economic conditions when making decisions about the management of investment assets. Consider the change in interest rates during the last decade. The current return for a portfolio’s allocation to fixed income has changed significantly. The outlook for fixed income investments could also change materially over the next ten years.
  • “Role of each investment or course of action” UPMIFA, Section 3(e)(1)(D)—Individual investments and investment strategies should always be considered within an overall portfolio framework. How will proposed changes to investment allocations affect a portfolio’s potential for return and exposure to risk?
  • “Expected total return” UPMIFA, Section 3(e)(1)(E)—There’s an expectation that you will periodically review the expected returns of your organization’s investment assets. This can easily be done during an annual review of your investment policy statement in conjunction with your investment advisor’s current capital market assumptions (or through economic outlook information obtained from publicly available sources).
  • “Within a reasonable time after receiving property” UPMIFA, Section 3(e)(5)—All charitable organizations should have a gift acceptance policy. UPMIFA establishes an expectation that, unless otherwise restricted, the proceeds of gifts are transitioned into your portfolio and invested in a timely manner as guided by the organization’s investment policy.

Standards of prudence for the appropriation or accumulation of endowment assets

Section 4 of UPMIFA sets portfolio construction standards for the appropriation or accumulation of endowment assets. These seven ‘Standards of Prudence’ require you to carefully consider:

  • The duration and preservation of the endowment fund
  • The purposes of the institution and the endowment fund
  • General economic conditions
  • The possible effect of inflation or deflation
  • The expected total return from income and the appreciation of investments
  • Other resources of the institution
  • The investment policy of the institution

Note the similarity between the Standards of Conduct in Section 3 and the Rules of Construction in Section 4. The coordination of these two is central to UPMIFA’s direction to fiduciary stewards of charitable organizations. Section 4(d) also provides spending guidance—establishing a method of calculating the rate of expenditure, and asserting that an annual expenditure amount in excess of 7% may be considered imprudent. However, it should be noted that only ten states have adopted this specific standard. Additionally, Section 4(d)(2) states that a distribution amount of less than 7% doesn’t create a presumption of prudence. You need to be fully aware of the amount and rate at which you’re distributing assets—ideally in conjunction with your portfolio’s estimated returns.

Strategies for meeting UPMIFA mandates

Often, nonprofit directors bring extensive expertise to the board; but rarely is that experience investment related. If your board has little to no investment expertise, Section 5 of UPMIFA allows your organization to delegate the task of managing investment assets. It goes even further—indemnifying the organization from the actions of a manager to whom this responsibility has been delegated. While Section 5(a)(3)(e) doesn’t preclude you from delegating these responsibility to someone internally, the decision to manage investment assets internally should be carefully weighed.

Additionally, there may be occasions where you wish to change an original gift designation that has become impractical to abide by. UPMIFA generally allows such modifications. But since various states have modified and augmented the general language of UPMIFA, make sure to review the specific statute of the state that governs the gift. Generally, a donor’s restriction may be released or modified by:

  • The donor’s written consent;
  • Court approval; or
  • Consent by the state’s Attorney General.

Perhaps most importantly, be extra judicious when it comes to matters of fiduciary duty. Under general theories of fiduciary duty, both ‘insiders’ employed by the nonprofit and board members may be subject to personal liability for violating UPMIFA. Generally, donors can’t file suit, but a state Attorney General can and will if warranted. Board members who serve without compensation, however, are usually protected from monetary liability by a state’s charitable immunity statute.

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.