Act No. 9
(H.287)
Uniform Prudent Management of Institutional Funds Act
This act adopts the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which was drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) over a period of four years and was ultimately recommended for enactment by state legislatures in 2006. UPMIFA is designed to replace the existing Uniform Management of Institutional Funds Act (UMIFA), approved by NCCUSL in 1972.
Both investment in assets and expenditure for charitable purposes have grown exponentially in the 35 years since UMIFA was drafted; asset management theory and practice have also advanced. UPMIFA, as an update and successor to UMIFA, establishes a more unified basis for charitable fund management than UMIFA. To date, 30 states have adopted UPMIFA, and 16 more have introduced the act in 2009.
Investment
UPMIFA incorporates the experience gained in the last 35 years under UMIFA by providing stronger guidance for investment management and enumerating a more exact set of rules for investing in a prudent manner. It requires investment "in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." It requires prudence in incurring investment costs, authorizing "only costs that are appropriate and reasonable." Factors to be considered in investing are expanded to include, for example, the effects of inflation. UPMIFA emphasizes that investment decisions must be made in relation to the overall resources of the institution and its charitable purposes. No investment decision may be made in isolation, but must be made in light of the fund's entire portfolio, and as a part of an investment strategy "having risk and return objectives reasonably suited to the fund and to the institution." A c haritable institution must diversify assets as an affirmative obligation unless "special circumstances" dictate otherwise. Assets must be reviewed within a reasonable time after they come into the possession of the institution in order to conform them to the investment strategy and objectives of the fund. Investment experts, whether in-house or hired for the purpose, are held to a standard of care consistent with that expertise.
UMIFA initiated the era of modern portfolio management for charitable institutions. Charitable institutions will have more precise standards to guide them. Courts will have more precise standards with which to measure prudence in the event of a challenge. The result should be more money for programs supported by charitable funds, including endowments.
Expenditure
UMIFA initiated the concept of total return expenditure of endowment assets for charitable program purposes, expressly permitting prudent expenditure of both appreciation and income and replacing the old trust law concept that only income (e.g., interest and dividends) could be spent. Thus, asset growth and income could be appropriated for program purposes, subject to the rule that a fund could not be spent below "historic dollar value."
UPMIFA builds upon UMIFA's rule on appreciation, but it eliminates the concept of "historic dollar value." UPMIFA, instead, provides new guidance on prudence and makes the need for a floor on spending unnecessary. UPMIFA states that the institution "may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established." Seven criteria guide the institution in its yearly expenditure decisions: "1) duration and preservation of the endowment fund; 2) the purposes of the institution and the endowment fund; 3) general economic conditions; 4) effect of inflation or deflation; 5) the expected total return from income and the appreciation of investments; 6) other resources of the institution; and 7) the investment policy of the institution." These standards mirror the standards that apply to investment decisio n-making, thus unifying both investment and expenditure decisions more concretely.
Release or Modification of Restrictions
UPMIFA recognizes and protects donor intent more broadly than UMIFA did, in part by providing a more comprehensive treatment of the modification of restrictions on charitable funds. Sometimes a restriction imposed by a donor becomes impracticable or wasteful or may impair the management of a fund. The donor may consent to release the restriction, if the donor is still alive and able to do so, but if the donor is not available, the charity can ask for court approval of a modification of the restriction. Under UMIFA, the only option with respect to a restriction was release of the restriction. UPMIFA instead authorizes a modification that a court determines to be in accordance with the donor's probable intention. If the charity asks for court approval of a modification, the charity must notify the attorney general, who may participate in the proceeding.
UPMIFA adds a new provision that allows a charity to modify a restriction on a small (less than $50,000) and old (over 20 years old) fund without going to court. If a restriction has become impracticable or wasteful, the charity may notify the attorney general, wait 60 days, and then, unless the attorney general objects, modify the restriction in a manner consistent with the charitable purposes expressed in any documents that were part of the original gift.
Date Signed by the Governor: May 5, 2009
Effective Date: On passage (May 5, 2009, the date on which the governor signed the bill)