Title: UNIFORM LAW COMMISSION Uniform Prudent Management of Institutional Funds Act (
1Webinar UPMIFA June 30, 2009
2Non-Profit Endowments MasteringStaff
Position FAS 117-1Uniform Law Commission,
Uniform Prudent Management of Institutional
Funds Act(UPMIFA) and FSP FAS 117-1
- Barry C. Hawkins, Shipman Goodwin LLP,
bhawkins_at_goodwin.com
3Introduction
- 1. UPMIFA (2006) Replaces UMIFA (1972)
- (which was the law in 48 states) as the primary
source of law governing the investment,
management and expenditure of donor generated
dollars. - 2. Economic Impact
- A. 1.4 Trillion Dollars in 2004
- B. 5.2 of G.D.P. in the U.S.
- C. Employment Significance
- D. Types of NPOs and Endowment Funds
4Common Misconceptions
- 1. Board restricted or quasi-endowment
- This money is set aside for investment and is
to be used for the construction of a new library
after it reaches 10,000,000. - 2. Pooled investments vs. separate use,
restrictions. - 3. Creditor reliance, borrowing capacity and
insolvency risk. The types of donor restrictions
are highly significant to those who read and rely
upon the financial reports of any NPO.
5Legal Obligations of the Board of an NPO
- 1. Prudently manage and invest the funds to
maximize the return of assets (at least for
endowment funds). - 2. Spend a portion of return on investment for
current needs of the NPO and retain the balance
in investments to provide for future needs, being
mindful of inflation and the long term viability
of an endowment fund. - 3. Abide by the restrictions imposed by the
donors on a separate fund by fund basis. - 4. Follow state law (UMIFA/UPMIFA) which supplies
standards if not specified by donor.
6Examples of Endowment Restrictions
- 1. This money should be kept intact and the
income from it is for Bowdoin College. - True endowment No use restriction
- 2. This money should be kept intact and the
income from it is for the purchase of books for
the Bowdoin College Library. - True endowment, combined with use restriction
- 3. This money should be kept intact for the
period of 10 years, during which the income from
it should be used only for the purchase of books
for the Bowdoin College Library, and thereafter
the money may be used for the general use of
Bowdoin College. - Endowment for a term of years, and thereafter
the money has no time or use restriction. - Almost any combination is possible in this
highly flexible concept of restriction.
7UMIFA
- Allowed pooled or total return analysis of the
portfolio. - Allowed investment in equity and other
alternative investments. - Allowed NPOs to delegate investment authority to
professional managers. - Allowed NPOs to adopt spending plans that
recognized and spent both realized and unrealized
appreciation. - Required spending plan to be prudent but required
maintenance of historic dollar value as a legal
requirement.
8The Creation Process for UPMIFA
- 1. 2001 Study Committee Uniform Law Commission
- 2. The prior adoption of Uniform Prudent Investor
Act in 46 states clearly indicated need to extend
modern trust standards to NPOs organized as
corporations. - 3. Drafting Committee 2002-2006
- A. Timing
- B. Process
- 4. Since July 2006, UPMIFA has been adopted in 35
jurisdictions, a near record pace, with 10 more
adoptions in process and expected in the next two
months. Six of the remaining eight jurisdictions
are likely to have such legislation in 2010,
leaving only Pennsylvania and Puerto Rico without
UPMIFA. Neither of them ever adopted UMIFA.
9The New LawWhat Does UPMIFA Do?
- 1. Prudence is adopted as the articulated
standard for investment management and
expenditure. UPIA standards for the trust world
are extended to charitable corporations. - 2. Elimination of HDV and substitution of
multi-faceted prudence standards become the
linchpin of legal authorization for endowment
expenditures. A prudent spending policy must be
adopted by each NPO. - 3. Greatly improved standards for modifying or
eliminating restrictions imposed by donors, which
have become outmoded, wasteful or impracticable.
10The Elimination of HDV As A Bright Line
Restriction
- Boards may now adopt spending policies that will
go below (invade) HDV if it is prudent to do so. - The Standards to be considered
- 1. Duration and preservation of endowment fund
- 2. Purposes of the institution and the fund
- 3. General economic conditions
- 4. The possible effect of inflation/depletion
- 5. Expected total return from income and
appreciation - 6. Other resources of the institution
- 7. The investment policy of the institution
- The key is to maintain long-term viability and
short-term flexibility.
11Other Possibilities Within Endowed Spending
Authorization.
- 1. The bracketed 7 presumption of
- imprudence in Section 4d
- A. Available if bright line is still desired
- B. Limited acceptance
- C. Three-year rolling average determination
- D. No presumption of prudence below 7
- 2. The small fund exception in comments
- A. under 2 million
- B. 60 days notification to regulator
- C. Will they know about the requirement?
12(No Transcript)
13Release Or Modification Of Restrictions
- What is new?
- Clearer, more articulated language. Under UMIFA
it was unclear that would happen if a court
released a restriction because it was
impracticable or wasteful. Under UPMIFA modern
cy pres and deviation concepts from trust law are
mandated to NPOs. - Section 6(d) allows a new departure for small
(less than 25,000), old (more than 20 years)
60 days prior notice to charitable regulator.
14UPMIFAAccounting Rules And FSP FAS 117-1
- 1. Section 4A of UPMIFA specifies that unless
donor specifically provides to the contrary in
the gift instrument, the assets in an endowment
fund are donor-restricted assets until they are
appropriated for expenditure by the institution. - 2. Note This does not require the institution to
determine what portion of the endowment is
permanently restricted, which is an accounting
concept, not a legal requirement. - 3. Note Legally, endowment funds are always
restricted, either for time, purpose or for both,
and become unrestricted only when appropriated
for expenditure by the institution. -
15UPMIFAAccounting Rules And FSP FAS 117-1 (Cont.)
- 4. Reconciliation of FSP FAS 117-1 with Sect. 4a
of UPMIFA? - (a) They apply different concepts
- (b) The law (enactment of UPMIFA by state
statute) trumps a contrary interpretation by FASB - 5. To the extent that FSP FAS 117-1 requires
strict adherence to HDV or changing other asset
classifications to restore HDV level, the two
are essentially in conflict and cannot be
reconciled.
16UPMIFAAccounting Rules And FSP FAS 117-1 (Cont.)
- 6. What are the options available to a NPO?
- (a) Contest the FSP FAS 117-1 requirements, by
court action, persuasion or regulatory
interpretation - (b) Live with FSP FAS 117-1 by acting as though
it governs instead of statutory law and adopt a
spending policy which identifies what portion of
endowment the NPO believes it is obligated to
retain permanently. - (c) Take concerted action to have FASB adopt a
new classification scheme for non-profit
accounting for endowment funds.
17Concluding Concerns and Issues
- 1. Remember overarching rule This is a default
statute. Donor restrictions govern. - 2. How to draft around UPMIFA
- 1099781 v.1
18Thank you!
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