Michael J. Cooney, Esq. July 7, 2010 Investment Responsibilities in Light of NY UPMIFA This document is intended as an information source for the clients and friends of Nixon Peabody LLP. The content should not be construed as legal advice, and readers should not act upon information in this publication without professional counsel. Copyright 2010 Nixon Peabody LLP, all rights reserved.
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What is the Nature of Charitable Fund Investment Today? Donors have choices among charities and are mobile Charities operate across a number of jurisdictions Charitable fund managers hail from a number of jurisdictions Investments are made world-wide But the laws on the management of institutional funds are still largely local 3
UPMIFA Uniform Prudent Management of Institutional Funds Act Approved on July 13, 2006, by the National Conference of Commissioners on Uniform State Laws Current version S.4778-C/A.7907-D Impacts the management (including delegation), investment and expenditure of charitable funds 4
5 Uniform Prudent Management of Institutional Funds Act
Prudent Investor Standard Manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances A person with special skills or expertise, whether inside or outside, must use them (including those selected in reliance on such a representation) 6
Prudent Investor Standard NY Twist Requirement to adopt a written investment policy Guidelines on: > investments > delegation of investment management Done... in accord with the standards of this article. 7
Gift Asset Liquidation Decide within a reasonable time after receipt Retain, dispose, rebalance Bring the fund into compliance with the purposes, terms, and distribution requirements of the institution 8
UPMIFA Investing Requirements Corporation s charitable purposes Financial requirements of the institution and fund to make distributions and preserve capital Expected total return from income and the appreciation of investments Possible effect of inflation or deflation General economic conditions 9
Additional UPMIFA Considerations Expected tax consequences Role that each investment or course of action plays within the overall investment portfolio of the fund Other resources of the institution An asset s special relationship or special value, if any, to the charitable purposes of the institution 10
Portfolio Theory Decisions about an individual asset made not in isolation but rather in the context of the investment portfolio as a whole and as a part of an overall investment strategy having reasonably suited risk and return objectives Duty to diversify, unless institution reasonably determines that special circumstances exist 11
Portfolio Theory NY Twist Decision not to diversify must be reviewed As frequently as circumstances require At least annually Be specific about diversification in minutes, and each time recite basis for lack of diversification 12
Exclusions from Institutional Funds Program-related assets A fund held for an institution by a trustee that is not an institution A fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund 13
Delegation Standard Ordinarily prudent person in a like position Selecting, continuing or terminating an agent Establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund Periodically reviewing the agent s actions in order to monitor the agent s performance and compliance with the scope and terms of the delegation 14
Effect of Delegation By making an effective delegation, the institution is not liable for the decisions or actions of an agent to which the function was delegated In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation Must make a reasonable effort to verify facts relevant to management and investment 15
Effect of Delegation NY Twist Each contract pursuant to which authority is so delegated shall provide that it may be terminated by the institution at any time, without penalty, upon not more than 60 days notice An effective delegation requires an assessment of the agent s independence, including conflicts of interest Clarity that ability to delegate to committees, officers or employees remains intact 16
Charges Against Funds Only costs that are appropriate and reasonable in relation to: the assets the purposes of the institution the skills available to the institution 17
Endowment Restrictions Prohibit the fund from being wholly expended on a current basis Principal be maintained intact and only income used currently Contrast to quasi-endowment funds Tax treatment no diminution in deduction 18
Slicing the Endowment Fund Income Amount expended Investment gains Present value of HDV Historic dollar value 19
Historic Endowment Investing Income Present value of HDV Investment gains Historic dollar value 20
Investment of Endowment Income Amount expended/ total return Investment gains Historic dollar value 21
Rules of Construction Use only income... Expend the interest... Pay the dividends earned... Spend the rents, issues, or profits... Preserve the principal intact... None of the above! 22
Rules of Construction NY Twist Terms setting forth a specific spending level, rate, or amount, or explicitly modifying of overriding gain recharacterization will limit the authority of the institution Donor s can still control spending 23
Endowment Spending Policy Duration and preservation of the fund Purposes of the institution and the fund General economic conditions Possible effect of inflation or deflation Expected total return from income and the appreciation of investments Other resources of the institution Investment policy of the institution 24
Endowment Spending Policy NY Twist Where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution Compare other relevant endowment factors 25
Appropriating Endowment Gains Assets donor-restricted until expenditure Historic dollar value yields to general prudence Massachusetts rule on maximum annual appropriation for expenditure creating a rebuttable presumption of imprudence, but no presumption of prudence for appropriations of a lesser amount 26
Appropriating Endowment Gains NY Twist For old and cold funds: Must provide 90 days notice to donor (if available) Who may, with the consent of the institution, clarify or amend the gift instrument to prohibit the use of gain recharacterization Specific notice language in statute 27
Release of Restrictions Upon written donor consent By court where impracticable or wasteful, impairs management of investment of fund, of will further purposes in circumstances not anticipated by the donor By court for purpose or restriction where unlawful, impracticable, impossible to achieve, or wasteful Special rule for funds < $100K and > 20 years old 28
Donor Standing in New York Required notice on application of total return to existing endowment funds Required notice on court-ordered modification of restriction on the management or investment of a fund Required notice on court-ordered modification of use restriction Required notice on small, old-and-cold funds Donor may consent to release or modification, in whole or in part, a restriction contained in a gift instrument 29
Financial Covenants FAS 117-1 requirements Board s interpretation of the law governing endowment funds Detailed endowment information reporting; Form 990 as well Shift of assets among established categories Bond covenants and the effects of change 30
UPMIFA To-Do List Advancement Provide notice to donors of endowment funds Amend standard forms Include required disclosure for any endowment solicitation Investment Adopt written investment policy Recite specific criteria for investment and total return in a contemporaneous record Acknowledge lack of diversification 31
UPMIFA To-Do List Governing Board Need to keep accurate accounts Treasurer s annual report to members/board Review of existing restricted accounts to establish whether changes are needed Review of veracity of internal reporting systems Establish approach with donors and donor inquiries 32
CLE Information Attendance CLE/CPE Verification CODE: NPCLE 07072010 Send forms to: Vanessa York vyork@nixonpeabody.com 33
Thank You! Questions? Michael J. Cooney Partner Nonprofit Organizations Higher Education New York City office: 212-224-7343 Rochester office: 585-263-1534 mcooney@nixonpeabody.com Twitter: @nixonpeabodyllp 34
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