UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT
SECTION 1. SHORT TITLE. This [act] may be cited as the Uniform Management of
Institutional Funds Act.
SECTION 2.
DEFINITIONS. In this [act]:
(1) “Charitable purpose” means
the relief of poverty, the advancement of education or religion, the promotion
of health, the promotion of governmental purposes, or another purpose the
achievement of which is beneficial to the community.
(2) “Endowment fund” means an institutional fund, or
any part thereof, not wholly expendable by the institution on a current basis
under the terms of a gift instrument. The term includes two or more endowment
funds collectively managed. The term does not include assets of an institution
designated by the institution as an endowment fund for its own use.
(3) “Gift instrument” means a record or records under
which property is granted to, transferred to, or held by an institution as an
institutional fund. The term includes an institutional solicitation in the form
of a record from which an institutional fund results if the solicitation
indicates the intent of the institution that the solicitation constitute a gift
instrument and another record does not supersede the solicitation.
(4) “Institution” means:
(A)
a person, other than an individual, organized and operated exclusively for
charitable purposes,; The term includes
(B)
a government, or governmental subdivision, agency, or instrumentality to the
extent that it holds funds exclusively for a charitable purpose.;
The
term also includes
(C) a trust
that has both charitable and noncharitable interests after all noncharitable
interests have terminated.
(5) “Institutional fund” means a fund held by an institution exclusively for charitable
purposes. The term includes two or more institutional funds collectively
managed. The term does not include:
(A)
program-related assets;
(B) a fund
held for an institution by a trustee that is not an institution; or (C) 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.
(6)
“Person” means an individual, corporation, business trust, estate, trust,
partnership, limited liability company, association, joint venture, public
corporation, government, or governmental
subdivision, agency, or instrumentality, public corporation, or
any other legal or commercial entity.
(7)
“Program-related asset” means an asset held by an institution primarily to
accomplish a charitable purpose of the institution and not primarily for
appreciation or producing income.
(8)
“Record” means information that is inscribed on a tangible medium or that is
stored in an electronic or other medium and is retrievable in perceivable form.
Preliminary Comment
Subsection
(1). Charitable Purpose. The
definition of charitable purpose uses the same formulation as that in UTC § 405
and Restatement (Third) of Trusts § 28 (2003). The definition is the standard
legal definition of charitable purposes, developed from the definition of
charity set forth in the English Statute of Charitable Uses, enacted in
1601. Some 17 states have created
statutory definitions of charitable purpose for other purposes. See,
e.g., [PA]. 10 Pa. Cons. Stat.
§ 162.3
(2005) (setting
forth a
definition of charitable purpose within the Solicitation of Funds for
Charitable Purposes Act. The
definition includes the
words “humane,” “patriotic,” social welfare and advocacy,” and “civic.”) The definition in subsection (1) applies for
purposes of this Act and does not affect other definitions of charitable
purpose.
Subsection
(2). Endowment fund. An endowment fund is an institutional fund or a part
of an institutional fund that is not wholly expendable by the institution on a
current basis. A restriction on use that makes a fund an endowment
fund arises from the terms of a gift instrument. If an institution has more than one endowment
fund, under Section 3 the institution can manage and invest some or all
endowment funds together. Section 4 and
Section 6 must be applied to individual funds and cannot be applied to a group
of funds that may be managed collectively for investment purposes.
An
institution may manage several funds together if the funds all have the same
purpose. These funds would be considered one endowment fund for purposes of
this Act.
Board-restricteddesignated
funds are institutional funds but not endowment funds. The rules on
expenditures and modification of restrictions in this Act do not apply to
restrictions placed by an institution on an otherwise unrestricted fund held by
the institution for its own benefit. The institution may be able to change
these restrictions itself, subject to internal rules and to the fiduciary
duties that apply to those that manage an institution.
If an institution transfers assets designated
as an endowment to another institution, subject to the
restriction that the other institution hold the assets as an endowment,
then the second institution will hold the assets that
fund as an endowment fund.
Subsection (3). Gift instrument.
The term gift instrument refers to the records that establish the terms of a
gift and may consist of more than one document. As used in this definition,
“record” is an expansive concept and means a writing in any form, including
electronic. The term includes a will, deed, grant, conveyance, agreement, or
memorandum, and also includes writings that do not have a donative purpose. For
example, under some circumstances the bylaws of the institution, minutes of the
board of directors, or canceled checks could be a gift instrument or be one of
several records constituting a gift instrument.
Solicitation materials may
constitute a gift instrument. For example, a solicitation that suggests in
writing that any gifts received pursuant to the solicitation will be held as an
endowment may be integrated with other writings and may be considered part of
the gift instrument. Whether the terms of the solicitation become part of the
gift instrument will depend upon the circumstances of the gift and whether a
subsequent writing superseded the terms of the solicitation. Each gift received in
response to a solicitation will be subject to any restrictions indicated in the
gift instrument that applies to that gift.
For example, if an initial gift establishes an endowment fund, and then
the charity solicits additional gifts “to be held as part of the Charity X
Endowment Fund,” those additional gifts will each be subject to the restriction
that the gifts be held as part of the endowment fund.
The term gift instrument also includes
matching funds provided by an employer or some other person. Whether matching funds are treated as part of the
endowment fund or otherwise will depend on the terms of the matching gift.
The term gift
instrument also and includes
an appropriation by a legislature or other public or governmental body for the
benefit of an institution.
Subsection (4). Institution. The
Act applies generally to institutions organized and operated
exclusively for charitable purposes. By
defining institution as a person, the term includes charitable organizations
created as nonprofit corporations, trusts, unincorporated associations,
governmental subdivisions or agencies, or any form of entity, however
organized, that is organized and operated exclusively for charitable purposes.
The term includes a trust organized and operated exclusively for charitable
purposes, but only if a charity acts as trustee. This approach leaves unchanged the coverage
of UMIFA (1972). The exclusion of
“individual” from the definition of institution is not intended to exclude a
corporation sole.
In many
respects, changes in trust law have caught up with the provisions in UMIFA, so
the exclusion of certain trusts from UMIFA (200-) does not mean that many of
the rules of UMIFA (200-) will not apply to those trusts. Prudent investor standards apply to trustees
of charitable trusts in states that have adopted UPIA, trustees can use the
doctrines of cy pres and deviation to modify trust provisions, and the Uniform
Principal and Income Act, where enacted, permits allocation between principal
and income to facilitate total-return investing. Charitable trusts not included in UMIFA (200-),
primarily those managed by corporate trustees, will lose the benefits of
UMIFA’s endowment spending rule and the provision permitting a charity to apply
cy pres, without court supervision, for modifications to a small, old
fund. Enacting jurisdictions may choose
to incorporate these rules into existing trust statutes to provide the benefits
to charitable funds managed by corporate trustees.
The definition of institution
includes governmental organizations that hold funds exclusively for the
purposes listed in the definition. Some organizations created by state
government may fall outside the definition due to the way in which the state
created the organizations. Because state arrangements are so varied, creating a
definition that encompasses all charitable entities created by states is not
feasible. States should consider the core principles of UMIFA (200-) for
application to governmental institutions. For example, the control over a state
university may be held by a State Board of Regents. In that situation, the
state may have created a governing structure by statute or in the state
constitution so that the university is, in effect, privately chartered. The
Drafting Committee does not intend to exclude these universities from the
definition of institution, but additional state legislation may be necessary to
address particular situations.
Subsection (5). Institutional
Fund. The term institutional fund includes any fund held by an institution
for its own use, benefit, or
charitable purposes, whether expendable currently or subject to restrictions.
The term does not include a fund held by a trustee that is not an institution.
Some institutions combine assets from multiple funds for
investment purposes. Typically each fund
is assigned units representing the value of the individual fund. The assets can then be invested collectively,
permitting more efficient investment and improved diversity of the overall
portfolio. The collective fund makes
annual distributions to the individual funds based on the units held by each
fund. For purposes of Section 3 [and
Section 5], the collective fund is considered one institutional fund. Section 6 applies to each fund individually
and not to the collective fund.
Assets held by an institution
primarily for program-related purposes are not subject to UMIFA (200-). Assets used to carry out a charity’s program
should not be subject to the same investment standards that apply to assets
held primarily for investment purposes. For
example, a university may purchase land adjacent to its campus for future development. The purchase might not meet prudent investor
standards, but the purchase may be appropriate because the university needs to
build a new dormitory. The classroom buildings,
administration buildings, and dormitories held by the university all have value
as property, but the university does not hold those buildings for investment
purposes. The Act excludes from the
prudent investor norms those assets that a charity uses to conduct its
charitable activities, but does not exclude assets that have a tangential tie
to the charitable purpose of the institution but are held primarily for
investment purposes.
A fund held by an institution is not
an institutional fund if any beneficiary of the fund is not an institution. For
example, a charitable remainder trust held by a charity as trustee for the
benefit of the donor during the donor’s lifetime, with the remainder interest
held by the charity, is not an institutional fund. However, this subsection
treats as an institution a charitable remainder trust that continues to operate
for charitable purposes after the termination of the noncharitable interests.
The Act will have only a limited effect on a charitable remainder trust during
the period required to complete the distribution of the trust’s property after
the noncharitable interest ends. The prudence norm will apply to the actions of
the trustee, but the trustee will make decisions about investment and
management of funds knowing that the trust will distribute its assets and not
continue indefinitely.
Subection (6). Person.
The Act uses as the definition of person the definition approved by the
National Conference of Commissioners on Uniform State Laws. The definition of institution uses the term
person, but to be an institution a person must be organized and operated
exclusively for charitable purposes. A
person with a commercial purpose cannot be an institution. Thus, although the definition of person
includes “business trust” and “any other . . . commercial entity,” the Act does
not apply to an entity organized for business purposes and not exclusively for
charitable purposes. Further, the definition of person includes trusts, but
only trusts managed by charities can be institutional funds. UMIFA (200-) does not apply to trusts managed
by corporate trustees or by individual trustees.
If a governing instrument provides
that a fund will revert to the donor if, and only if, the institution ceases to
exist or the purposes of the fund fail, then the fund will be considered an
institutional fund until such contingency occurs.
Subsection (7). Program-related
asset. Although UMIFA (200-) does
not apply to program-related assets, if program-related assets serve, in part,
as investments for an institution, then the institution should identify categories
for reporting those investments and should establish investment criteria for
the investments that are reasonably related to achieving the institution’s
charitable purposes. For example, a
program providing below-market loans to inner-city businesses may be “primarily
to accomplish a charitable purpose of the institution” but also can be
considered, in part, an investment. The
institution should create reasonable credit standards and other guidelines for
the program to increase the likelihood that the loans would be repaid.
Subsection (8). Record. This
definition was added to clarify that the definition of instrument includes
electronic records as defined in Section 2(8) of the Uniform Electronic
Transactions Act (1999).
SECTION 3. STANDARD OF CONDUCT IN
MANAGING AND INVESTING
INSTITUTIONAL
FUND.
(a) Subject to the intent
of a donor expressed in a gift instrument, an institution, Iin
managing and investing an institutional fund, an institution shall consider the
terms of the gift instrument, the charitable purposes of the
institution, and the purposes of the
institutional fund.
(b)
In addition to complying with the duty of loyalty
imposed by law other than this [act], each person responsible for managing and
investing an institutional fund shall 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.
(c)
In managing and investing an institutional fund, an institution may:
(1)
may incur only costs that are appropriate
and reasonable in relation to the assets, the purposes of the institution, and
the skills available to the institution.; and
(d2) An institution shall
make a reasonable effort to verify facts relevant to the management and
investment of the fund of an institutional
fund.
(ed)
Subsections (f) through (k) are default rules
and may be expanded, restricted, eliminated, or otherwise altered by the terms
of a gift instrument. Except as otherwise provided by a gift
instrument, the following rules apply:
(f1) In managing and investing an
institutional fund, the following factors, if relevant, must be considered:
(1A)
general economic conditions;
(2B)
the possible effect of inflation or deflation;
(3C)
the expected tax consequences, if any, of investment decisions or strategies;
(4D)
the role that each investment or course of action plays within the overall
investment portfolio of the fund;
(5E)
the expected total return from income and the appreciation of investments;
(6F)
other resources of the institution;
(7G)
the needs of the institution and the fund to make distributions and to preserve
capital; and
(8H)
an asset’s special relationship or special value, if any, to the charitable
purposes of the institution.
(g2)
Management and investment decisions about an individual asset must be made not
in isolation but rather in the context of the institutional fund’s portfolio of
investments as a whole and as a part of an overall investment strategy having
risk and return objectives reasonably suited to the fund and to the
institution.
(h3)
An institution, subject to law other than this act, subject
to any specific limitations set forth in the gift instrument or in other law
applicable to the institution, may
invest in any kind of property or type of investment consistent with the
standards of this section.
(i4)
An institution shall diversify the investments of an institutional fund unless
the institution reasonably determines that, because of special circumstances,
the purposes of the fund are better served without diversifying.
(j5)
Within a reasonable time after receiving property, an institution shall make
and implement decisions concerning the retention or disposition of the property
or to rebalance a portfolio, in order to bring the institutional fund into
compliance with the purposes, terms, distribution requirements, and other
circumstances of the institution and the requirements of this [act].
(k6)
An individual who has special skills or expertise, or is named in reliance upon
the individual’s representation that the individual has special skills or
expertise, has a duty to use those special skills or that expertise in managing
and investing institutional funds.
Preliminary
Comment
Purpose
and Scope of Revisions. This section adopts the prudence standard for
investment decision making. The section directs directors or others responsible
for managing and investing the funds of an institution to act as a prudent
investor would, using a portfolio approach in making investments and
considering the risk and return objectives of the fund. The section lists the
factors that commonly bear on decisions in fiduciary investing and incorporates
the duty to diversify investments absent a conclusion that special
circumstances make a decision not to diversify reasonable. Thus, the section
follows modern portfolio theory for investment decision making. Section 3
applies to all funds held by an institution, regardless of whether the
institution obtained the funds by gift or otherwise and regardless of whether
the funds are restricted.
The
Drafting Committee discussed at great length the standard that should govern
nonprofit managers. UMIFA (1972) states the standard as “ordinary business care
and prudence under the facts and circumstances prevailing at the time of the
action or decision.” Since the decision in Stern v. Lucy Webb Hayes National
Training School for Deaconesses, 381 F. Supp. 1003 (1974), the trend has
been to hold directors of nonprofit corporations to a standard similar to the
corporate standard but with the recognition that the facts and circumstances
considered include the fact that the entity is a charity and not a business
corporation.
The
language of the prudence standard adopted in UMIFA (200-) is derived from the
RMNCA and from the prudent investor rule of UPIA. The standard is consistent
with the business judgment standard under corporate law, as applied to
charitable institutions. That is, a manager operating a charitable
organization under the business judgment rule would look to the same factors as
those identified by the prudent investor rule. The standard for prudent
investment set forth in Section 3 first states the duty of care as articulated
in the RMNCA. The standard then provides
more specific guidance for those managing and investing institutional funds by
incorporating language from UPIA. The
factors and rules derived from UPIA are consistent with good practice under
current law applicable to nonprofit corporations.
Trust
law norms already inform managers of nonprofit corporations. The Preamble to UPIA explains: “Although the Uniform Prudent Investor Act by
its terms applies to trusts and not to charitable corporations, the standards
of the Act can be expected to inform the investment responsibilities of
directors and officers of charitable corporations.” See
also, Restatement (Third) of Trusts:
Prudent Investor Rule § 379, Comment b, at 190 (1992) (stating “absent a
contrary statute or other provision, the prudent investor rule applies to investment
of funds held for charitable corporations.”).
Trust precedents have always been helpful but not binding authority in
corporate cases.
The
Drafting Committee decided that by adopting language of from both the
RMNCA and UPIA, UMIFA (200-) could clarify that the same standards of prudent
investing apply to all charitable institutions.
Although principal trust authorities, UPIA § (2)(a), Restatement (Third)
of Trusts §337, UTC § 804, and Restatement (Second) of Trusts § 174 (prudent
administration) use the phrase “care, skill and caution,” the Drafting
Committee decided to use the more familiar corporate formulation as found in
RMNCA. The standard also appears in
Sections 3, 4 and 5 of UMIFA (200-). The
Drafting Committee does not intend any substantive change to the UPIA standard
and believes that “reasonable care, skill, and caution” are implicit in the
term “care” as used in the RMNCA. The
Drafting Committee included the detailed provisions from UPIA, because the
Committee believed that the greater precision of the prudence norms of the
Restatement and UPIA, as compared with UMIFA (1972), could helpfully inform
managers of charitable institutions. For
an explanation of the Prudent Investor Act, see John H. Langbein, The Uniform Prudent Investor Act and the
Future of Trust Investing, 81 Iowa L. Rev. 641 (1996).
Subsection (b) of Section 3 reminds
those managing and investing institutional funds that the duty of loyalty will
apply to their actions, but Section 3 does not state the loyalty standard that
applies. The Drafting Committee was
concerned that different standards of loyalty may apply to directors of
nonprofit corporations and trustees of charitable trusts. The RMNCA provides that under the duty of
loyalty a director of a nonprofit corporation should act “in a manner the
director reasonably believes to be in the best interests of the
corporation.” RMNCA § 8.30. The trust law articulation of the loyalty
standard uses “sole interests” rather than “best interests.” As the Restatement of Trusts explains, “[t]he
trustee is under a duty to the beneficiary to administer the trust solely in
the interest of the beneficiary.”
Restatement (Second) of Trusts § 170 (1). Although the standards for loyalty, like the
standard of care, are merging, see Evelyn
Brody, Charitable Governance: What;s Trust Law Got to do
With It? Chi.-Kent L. Rev. (2005); John H. Langbein [cite
to new article]the Drafting Committee concluded that incorporating
the duty of loyalty into UMIFA (200-) was unnecessary. Thus the duty of loyalty under nonprofit
corporation law will apply to charities organized as nonprofit corporations,
and the duty of loyalty under trust law will apply to charitable trusts.
Section 3 has
incorporated the provisions of UPIA with only a few exceptions. UPIA applies to private trusts and thus is
entirely default law. A settlor of a
private trust has complete control over trust provisions. Because UMIFA (200-) applies to charitable
organizations, UMIFA (200-) makes the duty of care, the duty to minimize costs,
and the duty to investigate mandatory.
The duty of loyalty is mandatory under other law. Other than these duties, the provisions of
Section 3 are default rules. A gift instrument or the governing instruments of
an institution can modify these duties, but the charitable purpose doctrine
limits the extent to which an institution or a donor can restrict these duties. In addition, subsection (a) of Section 3 requires
a decision maker to consider the terms of the gift instrument, reminds the decision
maker that the intent of a donor expressed in a gift instrument will control
decision making. Further, the decision
maker must consider the charitable purposes of the
institution and the purposes of the institutional fund for which decisions are
being made. These factors are specific
to charitable organizations, but UPIA § 2(a) states the duty to consider
similar factors in the private trust context.
UMIFA
(200-) does not include the duty of impartiality, stated in UPIA § 6, because a
charitable institution will not have more than one beneficiary. the duty under UPIA
did not make sense when applied to charities created as nonprofit
corporations. Under UPIA, a trustee must
treat the current beneficiaries and the remainder beneficiaries impartially,
subject to alternative direction from the trust document. A nonprofit corporation typically creates one
charity. The institution may serve
multiple beneficiaries, but those beneficiaries do not have enforceable rights
in the institution in the same way that beneficiaries of a
private trust do.
Of course, if a charitable trust is created to benefit more than one
charity, rather than being created to carry out a charitable purpose, then UPIA
will apply the duty of impartiality to that trust.
In other respects, the Drafting
Committee made changes to language from UPIA only where necessary to make the
language appropriate for charitable institutions. No material differences are intended. Subsection (f)(4)(d)(1)(D)
of UMIFA (200-) Section 3 does
not include a clause that appears at the end of UPIA § 2(c)(4) (“which may
include financial assets, interest in closely held enterprises, tangible and
intangible personal property, and real property.”). The Drafting Committee deemed this clause
unnecessary for charitable institutions.
The language of subsection (f)(7)(d)(1)(G)
reflects a modification of the language of UPIA § (2)(c)(7). In subsection (h) a reminder that terms of the
gift instrument control was added to the formulation of UPIA § 2(e). Other minor modifications to the
UPIA provisions make the language more appropriate for charitable institutions.
The
duties imposed by this section apply to those who govern an institution,
including directors and trustees, and to those to whom the directors or managers
delegate responsibility for investment and management of institutional
funds. The standard applies to officers
and employees of an institution and to agents who invest and manage
institutional funds. Volunteers who work with an institution will be
subject to the duties imposed here, but state and federal statutes may provide
reduced monetary liability for persons who act without compensation. UMIFA does not affect the application of
those monetary liability shield statutes.
Subsection (a). Donor Intent and Charitable Purposes. Subsection (a) states the overarching
direction to consider provided by
the donor’s intent as expressed in the terms of the gift instrument and the
duty to consider the charitable purposes of the institution and of
the institutional fund. A donor’s
intent is always important guidance for the charity, but the direction to
consider the terms of the gift instrument A
charity must comply with restrictions imposed on a gift by a donor, but the
emphasis in the Act on giving effect to donor intent
does not mean that the donor can or should control the
management of the institution. The UPIA
counterpart of subsection (a) is UPIA § 2(a).
Subsection (b).
Duty of Loyalty. Subsection
(b) reminds those managing and investing institutional funds that the duty of
loyalty will apply to their actions, but Section 3 does not state the loyalty
standard that applies. The Drafting
Committee was concerned that different standards of loyalty may apply to
directors of nonprofit corporations and trustees of charitable trusts. The RMNCA provides that under the duty of
loyalty a director of a nonprofit corporation should act “in a manner the
director reasonably believes to be in the best interests of the
corporation.” RMNCA § 8.30. The trust law articulation of the loyalty
standard uses “sole interests” rather than “best interests.” As the Restatement of Trusts explains, “[t]he
trustee is under a duty to the beneficiary to administer the trust solely in
the interest of the beneficiary.” Restatement
(Second) of Trusts § 170 (1). Although
the standards for loyalty, like the standard of care, are merging, see Evelyn Brody, Charitable Governance: What’s
Trust Law Got to do With It? Chi.-Kent L. Rev. (2005); John H. Langbein, Questioning the Trust Law
Duty of Loyalty: Sole Interest or Best Interest, 114 Yale
L.J. 929 (2005), the Drafting Committee concluded that incorporating the duty
of loyalty into UMIFA (200-) was unnecessary.
Thus the duty of loyalty under nonprofit corporation law will apply to
charities organized as nonprofit corporations, and the duty of loyalty under
trust law will apply to charitable trusts.
Subsection
(b). Duty of Care. This sSubsection (b)
also applies the duty of care to performance of investment duties.
The language derives from § 8.30 of the RMNCA.
This Ssubsection
(b)
states the duty to act in good faith, “with the care an ordinarily
prudent person in a like position would exercise under similar
circumstances.” Although the language in
the RMNCA and in UMIFA (200-) is similar to that of § 8.30 of the Model
Business Corporation Act (3d ed. 2002), the standard as applied to persons
making decisions for charities is informed by the fact that the institution is
a charity and not a business corporation.
Thus, in UMIFA (200-) the references to “like position” and “similar
circumstances” mean that the charitable nature of the institution affects the
decision making of a prudent person acting under the standard set forth in
subsection (b). The duty of care involves
considering the factors set forth in subsection (fd)(1).
Subsection
(c)(1). Duty to Minimize Costs.
Subsection (c)(1) tracks the language of UPIA § 7
and requires an institution to minimize costs. An institution may prudently
incur costs by hiring an investment advisor, but the costs incurred should be
appropriate under the circumstances. See UPIA § 7 cmt.; Restatement
(Third) of Trusts: Prudent Investor Rule § 227, cmt. M, at 58 (1992);
Restatement (Second) of Trusts § 188 (1959). The duty is consistent with the
duty to act prudently under § 8.30 of the RMNCA.
Subsection
(dc)(2).
Duty to Investigate. This subsection incorporates the traditional fiduciary
duty to investigate, using language from UPIA § 2(d). The subsection requires
persons who make investment and management decisions to investigate the
accuracy of the information used in making decisions.
Subsection
(fd)(1).
Prudent Decision Making. Subsection (fd)(1)
takes much of its language from UPIA § 2(c). In making decisions about whether
to acquire or retain an asset, the institution should consider the
institution’s mission, its current programs, and the desire to cultivate
additional donations from a donor, in addition to factors related more directly
to the asset’s potential as an investment.
Subsection (fd)(31)(C)
reflects the fact that some organizations will invest in taxable investments
that may generate unrelated business taxable income for income tax purposes.
Assets held primarily for program-related purposes are not
subject to UMIFA (200-). The management of those assets will continue to be
governed by other laws applicable to the institution. Other assets may not be
held primarily for program-related purposes but may have both investment
purposes and program-related purposes. Subsections (a) and (f)(8)(d)(1)(H)
indicate that a prudent decision maker can take into consideration the
relationship between an investment and the purposes of the institution and of
the institutional fund in making an investment that may have a program-related
purpose but not be primarily program-related. The degree to which an
institution uses an asset to accomplish a charitable purpose will affect the
weight given that factor in a decision to acquire or retain the asset.
Subsection (gd)(2).
Portfolio Approach. This subsection reflects the spread of portfolio theory
in modern investment practice. The language comes from UPIA § 2(b), which
follows the articulation of the prudent investor standard in Restatement
(Third) of Trusts: Prudent Investor Rule § 227(a) (1992).
Subsection (hd)(3).
Broad Investment Authority. Consistent with the portfolio theory of
investment, this subsection permits a broad range of investments. The language derives from UPIA § 2(e).
Section 4
of UMIFA (1972) indicated that an institution could invest “without restriction
to investments a fiduciary may make.”
The committee removed this language from subsection (hd)(3)
as unnecessary because states no longer have legal lists restricting fiduciary
investing to the specific types of investments identified in statutory lists.
Subsection (hd)(3)
also provides that terms of a gift instrument or other
law applicable to institutions may limit
the authority under this subsection. In addition, all of subsection (d) is subject
to contrary provisions in a gift instrument, and a gift instrument may restrict
the ability to invest in particular
assets. For example, the
gift instrument for a particular institutional fund might preclude the
institution from investing the assets of the fund in companies that produce
tobacco products.
Subsection (id)(4).
Duty to Diversify. This subsection assumes that prudence requires
diversification but permits an institution to determine that nondiversification
is appropriate under the circumstances applicable to a fund. A decision to retain property due to “special
circumstances” must be made based on the needs of the charity and not solely
for the benefit of a donor. A decision
to retain property in the hope of obtaining additional contributions from the
same donor may be considered made for the benefit of the charity, but the
appropriateness of that decision will depend on the circumstances. This subsection derives its language from
UPIA § 3. See UPIA § 3 cmt. (discussing the rationale for
diversification); Restatement (Third) of Trusts: Prudent Investor Rule § 227
(1992).
Subsection (jd)(5).
Disposing of Unsuitable Assets. This subsection imposes a duty on an
institution to review the suitability of retaining property contributed to the
institution within a reasonable period of time after the institution receives
the property. Subsection (jd)(5)
requires the institution to make a decision but does not require a particular
outcome. The institution may consider a
variety of factors in making its decision, and a decision to retain the
property either for a period of time or indefinitely may be a prudent decision.
Section 4(2) of UMIFA (1972)
specifically authorized an institution to retain property contributed by a
donor. The comment explained that an institution
might retain property in the hope of obtaining additional contributions from
the donor. This concept continues under
UMIFA (200-), because the potential for developing additional contributions by
retaining property contributed to the institution is one of the “other
circumstances” the institution may consider in deciding whether to retain or
dispose of the property. The institution
must weigh the potential for obtaining additional contributions with all other
factors that affect the suitability of retaining the property in the investment
portfolio.
The language of subsection (jd)(5)
comes from UPIA § 4, which restates Restatement (Third) of Trusts: Prudent
Investor Rule § 229 (1992), which itself took language from Restatement
(Second) of Trusts § 231 (1959). See UPIA § 4 cmt.
Subsection (kd)(6).
Special Skills or Expertise. Subsection (kd)(6)
states the rule provided in UPIA § 2(f) requiring a trustee to use the
trustee’s own skills and expertise in carrying out the trustee’s fiduciary
duties. The comment to RMNCA § 8.30 describes the existence of a similar rule
under the law of nonprofit corporations. Section 8.30(a)(2) provides that in
discharging duties a director must act “with the care an ordinarily prudent
person in a like position would exercise under similar circumstances. . .
.” The comment explains that”[t]he
concept of ‘under similar circumstances’ relates not only to the circumstances
of the corporation but to the special background, qualifications, and
management experience of the individual director and the role the director
plays in the corporation.” After
describing directors chosen for their ability to raise money, the comment notes
that “[n]o special skill or expertise should be expected from such directors
unless their background or knowledge evidences some special ability.”
The intent of subsection (d)(6) is
that Aa
person managing or investing institutional funds must use the person’s own
judgment and experience, including any particular skills or expertise, in
carrying out the management or investment duties. For example, if a charity names a person as a
director in part because the person is a lawyer, the lawyer’s background may
allow the lawyer to recognize legal issues in connection with funds held by the
charity. The lawyer should identify the
issues for the board, but the lawyer is not expected to provide legal
advice. See ALI Principles of Corporate Governance, Council Draft No. 2
(Nov. 18, 2004) § 315 (Duty of Care), cmt. b.
UMIFA (1972) contained two provisions
that authorized investments in pooled or common investment funds. UMIFA (1972)
§§ 4(3), 4(4). The Drafting Committee concluded that Section 3(hd)(3)
of UMIFA (200-) authorizes these investments. The decision not to include the
two provisions in UMIFA (200-) implies no disapproval of such investments.
SECTION 4.
EXPENDITURE OF ENDOWMENT FUND; RULES OF CONSTRUCTION.
(a) Subject to the
intent
of a donor expressed in a the terms of the gift
instrument and to subsection (d), an institution
may expend 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, consistent with the
goal of conserving the purchasing power of the endowment fund. In
making its determinations on expenditures and accumulations, the institution
shall act in good faith, with the care that an ordinarily prudent person in a
like position would exercise under similar circumstances, and shall consider,
if relevant, the following factors:
(1) the duration and preservation of the endowment fund;
(2) the purposes of the institution and the endowment fund;
(3) general economic conditions;
(4) the possible 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.
(b) The following rules
of construction apply to gift instruments existing on or created after the
effective date of this [act]:
(1b)
To limit the authority to expend or accumulate funds under subsection (a), a
gift instrument must specifically state the limitation.
(2c)
Terms in a gift instrument designating a gift as an endowment, or a direction
or authorization in the gift instrument to use only “income”, “interest”,
“dividends”, or “rents, issues, or profits”, or “to preserve the principal
intact”, or similar words, create an endowment fund of indefinite long-term
duration but do not otherwise limit the authority to expend or
accumulate under subsection (a).
(d) The
expenditure in any one year of an amount greater than seven percent of the fair
market value of the endowment fund, calculated on the basis of market values
determined at least quarterly and averaged over a period of three or more
years, creates a rebuttable presumption of imprudence. This subsection does not limit the authority
to make expenditures as permitted under law other than this [act] or the gift
instrument. This subsection does not
create a presumption of prudence for expenditure of an amount less than or
equal to seven percent of the fair market value of the endowment fund.
Preliminary
Comment
Purpose and Scope of Revisions. This section revises
the provision in UMIFA (1972) that permitted the expenditure of appreciation of
an endowment fund to the extent the fund had appreciated in value above the
fund’s historic dollar value. UMIFA (1972) defined historic dollar value to
mean the value of all contributions to the fund. The new approach abandons the
use of historic dollar value as a floor for expenditures and provides more
flexibility to the institution in making decisions about whether to expend any
part of an endowment fund. As under UMIFA (1972), the
act applies a prudence standard applies to
the process of making decisions about expenditures from an endowment fund. The
expenditure rule of Section 4 applies only to the extent that a donor and an
institution have not reached some other agreement about spending from an
endowment. If a gift instrument sets
forth specific requirements for spending, then the charity must comply with
those requirements. However, if the gift
instrument uses more general language, for example directing the charity to
“hold the fund as an endowment” or “retain principal and spend income,” then
Section 4 provides a rule of construction to guide the charity.
One
of the difficulties addressed by UMIFA (1972) and UMIFA (200-) is that the
definition of “income” has changed over time.
Prior to the promulgation of UMIFA (1972), “income” for trust accounting
purposes meant interest and stock dividends but not capital gains, even
realized capital gains. UMIFA (1972)
addressed this problem by including a construction provision, construing
“income” in gift instruments to include a prudent amount of capital gains, both
realized and unrealized. This rule of
construction, applied to the term “income” and to other similar expressions in
a gift instrument, likely carried out the intent of the donor who used the
term, while permitting the charity to invest in a manner that could generate
better returns for the fund.
UMIFA
(200-) also applies a rule of construction to terms like “income” or
“endowment.” The assumption in the Act
is that a donor who uses one of these terms intends to create a fund that will
generate sufficient gains to be able to
make ongoing distributions from the fund while at the same time preserving the
purchasing power of the fund. Because
historic dollar value under UMIFA (1972) was
a number fixed in time, the use of that approach may not have adequately
captured the intent of a donor who wanted the
endowment fund to continue to maintain its value in current dollars.
UMIFA
(200-) requires the persons making spending decisions for an endowment fund to focus
on the purposes of the endowment fund and not the
purposes of the institution more generally, as was the case under UMIFA
(1972). When the institution considers
the purposes and duration of the fund, the institution will give priority to
the donor’s general intent that the fund be maintained indefinitely. Although the Act does not require that a
specific amount be set aside as “principal,” the Act assumes that the charity
will act to preserve “principal” (i.e., to maintain the purchasing power of the
fund) while spending “income” (i.e. making a distribution each year that
represents a reasonable spending rate, given investment performance and general
economic conditions).
Subsection
(a). Expenditure of Endowment Funds. Subsection
(a) uses the RMNCA articulation of the standard of care for decision making
under Section 4. The change in language
does not reflect a substantive change.
The comment to Section 3 more fully describes this standard of care.
Section 4 permits expenditures from an endowment fund to
the extent the institution determines that the expenditures are prudent after
considering the factors listed in subsection (a). These factors emphasize the importance of
keeping in mind the intent of the donor and the purposes of the institution and
of the endowment fund, while also considering economic conditions. As under
UMIFA (1972), determinations under Section 4 do not depend on the
characterization of assets as income or principal and are not limited to the
amount of income and unrealized appreciation.
The rule in Section 4 is permissive, however, and an institution may
continue to make spending decisions under trust accounting principles if it
prefers.
Institutions have operated effectively under UMIFA (1972)
and have operated more conservatively than the historic dollar value rule would
have permitted. Institutions have no incentive to spend everything the law may
permits them to spend, and good practice has
been to provide for modest expenditures while maintaining the purchasing power
of a fund. Institutions have followed this approach even though UMIFA (1972)
does not require an institution to maintain a fund’s purchasing power and
allows an institution to spend any amounts in a fund above historic dollar
value, subject to the prudence standard. The Drafting Committee concluded that
eliminating historic dollar value and providing institutions with more
discretion would not lead to depletion of endowment funds. Instead, UMIFA
(200-) should encourage institutions to establish a spending approach that will
be responsive to short-term fluctuations in the value of the fund. Section 4
allows an institution to maintain appropriate levels of expenditures in times
of economic downturn or economic strength. In some years, accumulation rather
than spending will be prudent, and in other years an institution may
appropriately make expenditures even if a fund has generated no investment
return that year.
Several
levels of safeguards exist to prevent institutions from depleting endowment
funds or diverting funds from the purposes for which they were created. In
comparison with UMIFA (1972), UMIFA (200-) provides greater direction to the
institution with respect to making a prudent determination about spending from
an endowment. UMIFA (1972) told the decision maker to consider “long and short
term needs of the institution in carrying out its educational, religious,
charitable, or other eleemosynary purposes, its present and anticipated
financial requirements, expected total return on its investments, price level
trends, and general economic conditions.”
UMIFA (200-) clarifies that in making spending decisions the institution
should focus on the fact that the fund is an endowment and should attempt to
ensure that the value of the fund endures while still providing that some
amounts be spent for the purposes of the endowment fund. In UMIFA (200-) prudent decision making
emphasizes the endowment aspect of the fund, rather than the overall purposes
or needs of the institution.
In
addition to the guidance provided by Section 4, other safeguards exist. Donors can restrict gifts
and can provide specific instructions to donee institutions as to appropriate
uses for assets contributed. Within institutions, fiduciary duties govern the
persons making decisions on expenditures. Those persons must operate with the
best interests of the institution in mind and in keeping with the intent of
donors. If an institution diverts an institutional fund from the charitable
purposes of the institution, the state attorney general can enforce the
charitable interests of the public. By relying on these safeguards while
providing institutions with adequate discretion to make decisions on
appropriate expenditures, the Act creates a standard that takes into
consideration the diversity of the charitable sector. The committee expects
that industry standards will continue to evolve and inform institutions as the
institutions apply this standard.
Section 4 provides guidance on factors
to consider in exercising discretion but does not take away discretion by
providing a safe harbor for spending within a range based on percentages of the
assets of the fund. The Committee concluded that specifying a range for
appropriate distributions was unwise because a fixed range could not take into
account the factors listed in subsection (a) or changes in market conditions. A
fixed range that might be appropriate for some charities under current economic
conditions would be unlikely to remain appropriate over time. Institutions have
done a good job of developing spending policies under UMIFA (1972) and should
be able to continue to develop spending policies that take into consideration
the specific needs of a particular fund. Prudent decision making after
considering all the factors is the standard under UMIFA (200-). A safe-harbor
would simply create a new standard that could not take into account the needs
of individual institutions and funds.
The changes
from UMIFA (1972), and in particular the deletion of historic dollar value, are
not intended to make any portion of an endowment fund unrestricted assets from a legal standpoint. An endowment fund is restricted because of
the donor’s intent that it not be spent in the current year and the intent that
the fund continue to maintain its value for a long time. Spending decisions are subject to that
general restriction as well as to the restriction that any decision to spend
must be prudent, made after considering the factors set forth in Section 4(a). Regardless of the treatment of endowment fund
from an accounting standpoint, legally an endowment fund
should not be considered unrestricted. All assets in an
endowment fund are permanently restricted funds and should not be treated as
unrestricted funds for accounting purposes or otherwise. The Drafting Committee discussed the fact
that Financial Accounting Standards 117 and 124 have treated endowment funds as
at least partially unrestricted. The
Drafting Committee concluded that UMIFA (200-) could not address an accounting
issue and that the Financial Accounting Standards Board should reconsider the
accounting standards applicable to charitable institutions. The power over expenditures held by a board
of directors or others managing an institution must be exercised in a fiduciary
capacity, and the fiduciary duties of loyalty and purpose and the prudence
standard restrict the power to make spending decisions. Until the managers exercise the power, the
funds in an endowment account remain restricted.
The term “endowment fund” includes funds that may last in
perpetuity but also funds that are created to last for a fixed term of years or
until the institution achieves a specified objective. Section 4 requires the
institution to consider the intended duration of the fund in making
determinations about spending. For example, if a donor directs that a fund be
spent over 20 years, Section 4 will guide the institution in making
distribution decisions. The institution would amortize the fund over 20 years
rather than try to maintain the fund in perpetuity. For an endowment fund of limited duration,
spending at a rate higher than rates typically used for endowment spending will
be both necessary and prudent.
Subsection
(c). Rule of Construction. Donor’s intent must be respected in the
process of making decisions to expend endowment funds. Section 4 does not allow
an institution to convert an endowment fund into a non-endowment fund nor does
the section allow the institution to ignore a donor’s intent that a fund be
maintained as an endowment. Rather, subsection (c) provides rules of
construction to assist institutions in interpreting donor’s intent. Subsection
(c) assumes that if a donor wants an institution to spend “only the income”
from a fund, the donor intends that the fund both support current expenditures and
be preserved indefinitely. The donor is
unlikely to be concerned about designation of returns as “income” or
“principal” under accounting principles. Rather the donor likely assumes that
the institution will use modern investing strategies like total-return
investing to generate enough funds to distribute while maintaining the
long-term viability of the fund. Subsection (c) is an intent effectuating
provision that provides default rules to construe donor’s intent.
As subsection (b)
explains, a donor who wants to specify spending guidelines can do
so, but must do so specifically. For example, a donor might require that a
charity spend between three and five percent of an endowed gift each year,
regardless of investment performance or other factors. If the charity agrees to the restriction in
accepting the gift, the restriction will, subject to public policy, govern
spending decisions by the charity. Another
donor might want to limit expenditures from an endowment gift to accounting
income and not want the institution to be able to expend appreciation. An instruction to “pay only the income” will
not be specific enough, but an instruction to “pay only interest and dividend
income earned by the fund and not to make other distributions of the kind authorized
by Section 4 of UMIFA” should be sufficient.
If a donor indicates that the rules on investing or expenditures under
Section 4 do not apply to a particular fund, then as a practical matter the
institution will probably invest the fund separately. Thus, a decision by a
donor to require specific expenditure rules will likely also have consequences
in the way the institution invests the fund.
As a rule of construction, subsection
(c) applies retroactively. Retroactive application is appropriate because subsection
(c) does not alter the substance of an existing contract, but rather serves as
a default rule that implements donor’s intent. The Colorado Supreme Court
recently considered the question of retroactive application of a default
statute involving the donative aspect of an insurance contract. See In
re Estate of DeWitt, 54 P. 3d 849 (Colo. 2002). In holding that the statute did
not violate the Contracts Clause, the court cited approvingly from a statement
prepared by the Joint Editorial Board for Uniform Trusts and Estates Acts (the
“JEB”). JEB Statement Regarding the Constitutionality of Changes in Default
Rules as Applied to PreExisting Documents, 17 Am. Coll. Tr. & Est. Couns.
Notes 184 app. II (1991). The JEB
Statement explains why retroactive application of default statutes is
appropriate and is not unconstitutional and states, “The JEB is aware of no
authority for the application of the Contracts Clause to state legislation
applying altered rules of construction or other default rules to pre-existing
documents in any field of law, and especially not in the field of estates,
trusts, and donative transfers.” Id. at 4 (citing J. Nowak & R.
Rotunda, Constitutional Law § 11.8, at 394 et seq. (4th ed. 1991)).
The Drafting Committee considered concerns
that retroactive application of the construction provision might alter the
intent of a donor who contributed money to an endowment fund with the
understanding that the institution could never spend the actual amount
contributed (the historic dollar value).
Although the Committee agreed that in some cases a donor might have
specifically considered the concept of historic dollar value, the Committee
concluded that the construction provision in UMIFA (200-) would effectively
carry out the intent of most donors.
The Drafting Committee was also
concerned that retaining the historic dollar value concept for endowment funds
in existence before the enactment of UMIFA (200-) would require institutions to
manage endowment funds separately. For
example, an institution with an endowment fund for scholarships would have to
create a new fund for post-enactment contributions. Managing two funds would result in economic
inefficiencies and greater administration cost for the institution. Further, an institution with a fund created
under UMIFA (1972) with a value below historic dollar value might choose to
invest in assets that produce trust accounting income rather than
appreciation. Choosing investments based
on the characterization of the income could reduce the long-term yield of the
fund and, by doing so, contravene the intent of the
donors who contributed to the fund.
The
Drafting Committee debated at length whether to include a presumption of
imprudence for spending above a fixed percentage of the value of the fund. The Drafting Committee decided to include a
presumption in the Act, but wanted these Comments to include a discussion of
the advantages and disadvantages of including a presumption in the Act.
Some
who commented on the Act viewed the presumption as linked to the retroactive
application of the rule of construction of subsection (c). Donors who contributed to endowment funds
under UMIFA (1972) may have assumed that the historic dollar value of their
gifts would be subject to a no-spending rule under the statute. UMIFA (200-) deletes the concept of historic
dollar value, and the presumption of imprudence may serve to assure donors that
spending from an endowment fund will be limited.
Decision Not to Include a Presumption of Imprudence. The Drafting Committee considered including in
UMIFA (200-) a presumption of imprudence for spending above seven percent of
the asset value of the fund. The
Drafting Committee considered several potential benefits of including such a
provision. A presumption might curb the
temptation Those
in favor of the presumption of imprudence argued that the presumption
will curb the temptation a charity might have to spend endowment assets too rapidly. Although the presumption would be rebuttable,
and spending above the identified percentage might, in some years and for some
charities, be prudent, institutions would will likely be reluctant to authorize spending above
seven percent. In addition, Tthe presumption would will give the attorney general guidance in enforcing
the prudence standard.
The Drafting Committee also heard
arguments against including a presumption of imprudence in the statute. A fixed percentage in the statute might be
perceived as a safe harbor and could lead institutions to spend more than is
prudent. Although the provision should
not imply that spending below seven percent is will
be considered prudent, some charities might interpret the statute
in that way. Decision makers might be
pressured to spend more than is prudent, or might be willing to make spending
decisions without adequate analysis.
Perhaps the biggest problem with
including a presumption in the statute is the difficulty of picking a number
that will be appropriate given the range of institutions and charitable
purposes and the fact that economic conditions will change over time. Under current economic conditions, a spending
rate of seven percent is too high for most funds, but in a period of high
inflation, seven percent might be too low.
In making a prudent decision as to how much to spend from an endowment
fund, each institution must consider a variety of factors, including the
particular purposes of the fund, the wishes of the donors, changing economic
factors, and whether the fund will receive future donations.
A presumption also
could make spending on major projects more difficult. For example, a charity might spend only one
percent for three years as it saved its endowment for a new building and then
spend 20 percent in the fourth year for construction costs. Such a spending decision might be prudent for
the charity, but its board might be reluctant to authorize spending that a
statute presumes to be imprudent.
The Drafting Committee
concluded that the best approach was to draft the Act without the presumption
but to include statutory language for the presumption in the Comments. Each enacting state can
then should make its own determination as
to whether to include the presumption when the state enacts UMIFA (200-). And whether or not a statute includes the
presumption, governing boards must remember that prudence controls decision
making. and that eEach
governing board must make decisions on expenditures based on the circumstances
of the particular charity.
The recommended
statutory language for a presumption of imprudence follows. It would be inserted as subsection (b).
Optional
Presumption of Imprudence.
[(b) The expenditure in
any one year of an amount greater than seven percent of the fair market value
of the endowment fund, calculated on the basis of market values determined at
least quarterly and averaged over a period of three or more years, creates a
rebuttable presumption of imprudence.
This subsection does not limit the authority to make expenditures as
permitted under law other than this [act] or the terms of the gift
instrument. This subsection does not
create a presumption of prudence for expenditure of an amount less than or
equal to seven percent of the fair market value of the endowment fund.]
Rebuttable
Presumption of Imprudence. Although
prudence will dictate the amount an institution should spend, optional
subsection (bd) creates
a rebuttable presumption of imprudence if expenditures in one year exceed seven
percent of the assets of an endowment fund.
The subsection applies a three-year rolling average in determining the
value of the fund for purposes of calculating the seven-percent amount. Endowment spending will rarely exceed seven
percent, but an institution can rebut the presumption of imprudence if
circumstances in a particular year make expenditures above that amount
prudent. The concept and the language
for the presumption of imprudence comes from Mass. Gen. L. ch. 180A, § 2 (2004). Massachusetts enacted this rule in 1975 as
part of its UMIFA statute. New Mexico
adopted the same presumption in 1978. N.M.S.A. § 46-9-2 (C) (2004).
If sufficient evidence establishes, by a preponderance of
the evidence, the facts necessary to raise the presumption of imprudence, then
the institution will have a burden of production of going forward with evidence
to meet or rebut the presumption. The
existence of the presumption does not shift the burden of persuasion to the
charity.
The
Drafting Committee discussed the fact that expenditures from an endowment fund
may include distributions for charitable purposes, amounts used for management
of the fund, and the costs of fundraising for the fund. Amounts used to pay fund expenses will be
deducted from the fund before the institution computes seven percent of the
fund’s value. Thus the seven percent will
be applied to the net value of the fund and administrative expenses will not be
included in computing the expenditures from the fund. However, the costs of administration and
fundraising are factors that prudent decision makers consider. Thus, high costs or fees could be considered
imprudent, regardless of whether total spending exceeds seven percent of the
fund’s value.
The presumption of
imprudence does not create an automatic safe harbor. Expenditures at six
percent might well be imprudently high. Indeed, evidence discussed by the
Drafting Committee suggests that few funds can sustain spending at a rate above
five percent. As the
optional subsection indicates,
spending less than seven percent of the value of an endowment fund will not
necessarily be considered prudent.
Indeed, under many circumstances expenditures at six or seven percent
would be imprudently high. Evidence
discussed by the Drafting Committee suggests that few funds can sustain
spending at a rate above five percent. See Roger G. Ibbotson & Rex A. Sinquefield,
Stocks, Bonds, Bills, and Inflation : Historical Returns (1926-1987) (Research
Foundation of the Institute of Chartered Financial Analysts, 1989). Further, spending at a lower rate,
particularly in the early years of an endowment, may result in greater
distributions over time. See DeMarche Associates, Inc, Spending
Policies and Investment Planning for Foundations: A Structure for Determining a
Foundation’s Asset Mix (Council on Foundations: 3d ed. 1999). A presumption of imprudence can serve as a
reminder that spending at too high a rate will jeopardize the long-term nature
of an endowment fund. If an endowment
fund is intended to continue indefinitely, the institution should take special
care to limit annual spending to a level that protects the purchasing power of
the fund.
For a discussion of spending approaches,
see Joel C. Dobris, New Forms of Private Trusts for the Twenty-First
Century—Principal and Income, 31 Real. Prop., Prob. & Tr. J. 1 (1996).
For example, Dobris suggests that spending 5% or 4% of a five-year
moving average of 11 market values might be appropriate. Id., at 39.
The optional
presumption of imprudence
indicates that the terms of the gift instrument can provide additional spending
authority. For example, if a gift
instrument directs that an institution expend a fund over a ten-year period,
exhausting the fund after ten years, spending at a rate higher than seven
percent will be necessary. The section does not require an institution to spend
a minimum amount each year because the prudence standard and the needs of the
institution will be sufficient guidance as to whether accumulation rather than
spending might be appropriate in a particular year.
Spending above seven percent in any one year will not
necessarily be imprudent. For some
endowment funds fluctuating spending rates may be appropriate. Although the Act does not apply the
percentage for the presumption on a rolling basis (e.g., 21 percent over three
years), some endowment funds may prudently spend little or nothing in some
years and more than seven percent in other years.
For example, a charity planning a construction project
might decide to spend nothing from an endowment for three years and then in the
fourth year might spend 20 percent of the value of the fund for construction
costs. The decision to accumulate in
years one through three and then to spend 20 percent in year four might be
prudent for the charity, depending on the other factors. The charity should maintain adequate records
during the accumulation period and should document the decision-making process
in year four to be able to meet the burden of production
associated with the presumption.
Another charity might establish a “capital replacement
fund” designed to provide funds to the institution for repair or replacement of
major items of equipment. Disbursements from this
kind of fund will likely fluctuate, with limited expenditures in some years and
then big expenditures when the charity needs new equipment. The fund would not operate under a relatively
uniform spending rate. Indeed, an
advantage of a capital replacement fund will be its ability to absorb a
significant capital expenditure in a single year without a negative impact on
the operating budget of the institution.
Disbursements might average five percent per year but would vary, with
spending in some years more and in some years less. Even if this fund is an endowment fund subject
to Section 4, spending above seven percent in a particular year could well be
prudent. Subsection (d)
does not preclude spending above seven percent.
A charity creating a capital replacement fund or a
building fund might chose to adopt spending rules for the fund that would not
be subject to UMIFA (200-). Specific
donor intent can supersede the rules of UMIFA.
If the charity creates a gift instrument that establishes appropriate
rules on spending for the fund, and if donors agree to those restrictions, then
the UMIFA rules on spending, including the presumption, will not apply.
[SECTION 5. DELEGATION OF MANAGEMENT
AND INVESTMENT FUNCTIONS.
(a) Subject to
any specific limitation set forth in a gift instrument or in law other than
this [act], an institution may delegate to an external agent the management and
investment of an institutional fund to the extent that an institution could
prudently delegate under the circumstances. An institution shall act in good
faith, with the care that an ordinarily prudent person in a like position would
exercise under similar circumstances, in:
(1) selecting an
agent;
(2) establishing the
scope and terms of the delegation, consistent with the purposes of the
institution and the institutional fund; and
(3) periodically
reviewing the agent’s actions in order to monitor the agent’s performance and
compliance with the scope and terms of the delegation.
(b) 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.
(c) An institution that complies with
subsection (a) is not liable for the decisions or actions of an agent to which
the function was delegated.
(d) By accepting delegation of a management
or investment function from an institution that is subject to the laws of this
state, an agent submits to the jurisdiction of the courts of this state in all
proceedings arising from the delegation.
(e) An institution may delegate to
committees, officers, or employees of the institution as authorized by law
other than this [act].]
Preliminary Comment
The prudent
investor standard in Section 4 depends on the power to delegate. For many investment forms, prudence dictates
diversification and diversification may best be accomplished through pooling
investment vehicles which require delegation.
The Drafting Committee decided to put Section 5 in brackets because many
states may already provide delegation authority through other statutes. If other delegation authority exists, then an
enacting state should enact UMIFA (200-) without Section 5. Enacting delegation rules that duplicate
existing rules could be confusing and could potentially create conflicts. For charitable trusts, UPIA provides the same
delegation rules as those in Section 5.
For nonprofit corporations, nonprofit corporation statutes may provide
these rules. A state enacting UMIFA
(200-) must be certain that its laws authorize delegation, either through other
statutes or by enacting Section 5.
Section 5
incorporates the delegation rule found in UPIA § 9, updating the delegation rules
in UMIFA (1972) § 5. Section 5 permits the decision makers in an institution to
delegate management and investment functions to external agents if the decision
makers exercise reasonable skill, care, and caution in selecting the agent,
defining the scope of the delegation and reviewing the performance of the
agent. Decision makers cannot delegate the authority to make decisions
concerning expenditures and can only delegate management and investment
functions. Subsection (c) protects decision makers who comply with the
requirement for proper delegation from liability for actions or decisions of
the agents.
Section 5 does not
address issues of internal delegation and potential liability for internal
delegation, and subsection (c) does not affect laws that govern personal
liability of directors or trustees for matters outside the scope of Section 5.
Directors will look to nonprofit corporation laws for these rules, while
trustees will look to trust law. See, e.g., RMNCA, § 8.30(b) (permitting
directors to rely on information prepared by an officer or employee of the
institution if the director reasonably believes the officer or employee to be
reliable and competent in the matters presented).
The language of
subsection (c) is similar to that of UPIA § 9(c) and RMNCA § 8.30(d). The decision not to include the terms
“beneficiaries” or “members” in subsection (c) does not indicate a decision
that this section does not create immunity from claims brought by beneficiaries
or members. Instead, a decision maker who complies with section 5 will be
protected from any liability resulting from actions or decisions made by an
external agent.
Subsection (d)
creates personal jurisdiction over the agent. This subsection is not a choice
of law rule.
Subsection (e) notes
that law other than this Act governs internal delegation. Section 5 of UMIFA (1972) included internal
delegation as well as external delegation, due to a concern at that time that
trust law concepts might govern internal delegation in nonprofit corporations.
With the widespread adoption of nonprofit corporation statutes, that concern no
longer exists. The decision not to address internal delegation in UMIFA (200-)
does not suggest that a governing board of a nonprofit corporation cannot
delegate to committees, officers, or employees.
Rather, a nonprofit corporation must look to other law, typically a
nonprofit corporation statute, for the rules governing internal delegation.
SECTION 6. RELEASE OR MODIFICATION OF
RESTRICTIONS ON MANAGEMENT, INVESTMENT, OR
PURPOSE.
(a) In this section, “institutional
fund” includes each fund of two or more institutional funds collectively
managed.
(b) With the donor’s consent in a
record, an institution may release, in whole or in part, a restriction
contained in a gift instrument on the management, investment or purpose of an
institutional fund. A release may not allow a fund to be used for a purpose
other than a charitable purpose of the institution.
(c)
An
[appropriate] court, upon application of an institution, may apply deviation to
modify a restriction contained in a gift instrument on the management or
investment of an institutional fund iIf,
because of circumstances not anticipated by the donor, a modification will
further the purposes of the institutional fund, or if
thea
restriction becomes impracticable or wasteful and impairs the management or
investment of the fund., the court, upon
application of an institution, may modify a restriction contained in a gift
instrument on the management or investment of an institutional fund. The institution shall notify the [Attorney
General], who must be given an opportunity to be heard. To the extent practicable, any modification
must be made in accordance with the donor’s probable intention.
(d) If a particular charitable
purpose or a restriction contained in a gift instrument on the use of an
institutional fund becomes unlawful, impracticable, impossible to achieve, or
wasteful, an [appropriate] the court,
upon application of an institution, may apply cy pres to modify the purpose of
the fund or the restriction on the use of the fund in a manner consistent with
the charitable purposes expressed in the gift instrument. The institution shall notify the [Attorney
General], who must be given an opportunity to be heard.
(e) If an institution
determines that a restriction contained in a gift instrument on the management,
investment, or purpose of an institutional fund
is unlawful, impracticable, impossible to achieve, or wasteful, then the
institution, [60 days] after notification to the [Attorney
General], the institution may
release or modify the restriction,
or
modify it, in whole or part, if:
(1) the institutional fund subject to
the restriction has a total value of less than [$25,000];
(2) more than [20] years have elapsed
since the fund was established; and
(3)
the institution uses the property in a manner the institution determines, in
good faith, to be consistent with the charitable purposes expressed in the gift
instrument.
Preliminary Comment
Section 6 expands the
rules on releasing or modifying restrictions that are found in Section 7 of
UMIFA (1972). Subsection (b) restates the rule from UMIFA (1972) allowing the
release of a restriction with donor consent. Subsections (c) and (d) make clear that an institution
can always ask a court to apply equitable deviation or cy pres to modify or
release a restriction, under certain circumstances. Subsection (e), a new provision, permits an
institution to apply cy pres on its own for small funds that have existed for a
substantial period of time, after giving notice to the state attorney
general.
Subsection (a). Individual Funds. The rules on modification require that the
institution, or a court applying a court-ordered doctrine, review each
institutional fund separately. Although
the term institutional fund can mean more than one fund for other purposes of
the Act, for purposes of this Section, each fund must be considered
individually.
Subsection (b). Donor
Release. Subsection (b) permits the
release of a restriction if the donor consents. A release with donor consent
cannot change the charitable beneficiary of the fund. Although the donor has
the power to consent to a release of a restriction, this section does not
create a power in the donor that will cause a federal tax problem for the
donor. The gift to the institution is a completed gift for tax purposes, the
property cannot be diverted from the charitable beneficiary, and the donor
cannot redirect the property to another use by the charity. The donor has no retained interest in the
fund.
Subsection (c). Equitable Deviation. Subsection (c) applies the rule of equitable
deviation, modifying the language from UTC § 412 for application in this
section. See also Restatement (Third) of Trusts § 66 (2003). Under deviation, a court modifies
restrictions on the way an institution manages or administers a fund, doing so
in a manner that furthers the purposes of the fund. Deviation implements the donor’s intent. A donor may have a predominate purpose for a
gift and, secondarily, an intent that the purpose be carried out in a
particular manner. Deviation does not
alter the purpose but rather modifies the means of carrying out the purpose.
Sometimes
deviation is needed due to circumstances unanticipated when the donor created a
restriction on a gift. In other
situations a restriction may impair the management or investment of the
fund. Modification of the restriction
may permit the institution to carry out the donor’s purposes in a more
effective manner. A court applying
deviation should attempt to follow the donor’s probable intention in deciding
how to modify the restriction.
Subsection (d). Cy Pres.
A court can modify the purpose of an institutional fund using the
doctrine of cy pres. Under subsection
(d) the focus is on the purpose of the fund rather than on the means of
carrying out the purpose. The term “modify”
encompasses the release of a restriction as well as an alteration of a
restriction and also permits a court to order that the fund be paid to another
institution. A court can apply the
doctrine of cy pres only if the restriction in question has become unlawful,
impracticable, impossible to achieve, or wasteful. This standard, which comes from UTC § 413, updates
the circumstances under which cy pres may be applied by adding “wasteful” to
the usual common law articulation of the doctrine. Any change must be made in a manner
consistent with the charitable purposes expressed in the gift instrument. See
also Restatement (Third) of Trusts § 67 (2003).
Subsection
(d) is intended make the case law under cy pres applicable to institutions
covered by UMIFA (200-) and does not limit the doctrine of cy pres. In addition to requesting that a court apply
cy pres to modify a restriction, an institution may seek court assistance
otherwise, for example by requesting the dissolution of the institution.
Subsection (e)
permits an institution to release or modify a restriction using a cy pres
approach but without court approval if the amount of the institutional fund
involved is small and if the institutional fund has been in existence for more
than 20 years. The Drafting Committee determined that under some circumstances
a restriction may no longer make sense but the cost of a judicial cy pres proceeding
will be too great to warrant a change in the restriction. The Committee
discussed at length the parameters for allowing an institution to apply cy pres
itself, without court supervision. The Committee drafted subsection (e) to
balance the needs of an institution to operate efficiently for its charitable
purposes and the need to protect donors’ wishes. The subsection assumes that an
institutional fund with a value of $25,000 or less is sufficiently small that
the cost of a judicial proceeding will be out of proportion with the need to
change the restriction. The Committee included a requirement that the
institutional fund be in existence at least 20 years because it seemed
reasonable to require additional safeguards for donors’ intent for some period
of time after the creation of the institutional fund. The 20-year
period begins to run from the date of inception of the fund and not from the
date of each gift to the fund. The amount and the number of years have been
placed in brackets to signal to enacting jurisdictions that they may wish to
designate a higher or lower figure.
As under judicial cy
pres, an institution acting under subsection (e) must change the restriction in
a manner that is in keeping with the intent of the donor and the purpose of the
fund. For example, if the value of a fund is too small to justify the cost of
administration of the fund as a separate fund, the term “wasteful” would allow
the institution to combine the fund with another fund with similar purposes. If
a fund had been created for nursing scholarships and the institution closed its
nursing school, the institution might appropriately decide to use the fund for
other scholarships at the institution. In using the authority granted under
subsection (e), the institution must make a good faith determination of which
alternative use for the fund reasonably approximates the original intent of the
donor. The institution cannot divert the fund to an entirely different use. For
example, the fund for nursing scholarships could not be used to build a
football stadium.
The
Drafting Committee decided not to require an institution acting under
subsection (e) to give notice to the donors who had contributed to the
fund. Subsection (e) can only be used
for an old and small fund. For such a
fund, locating multiple donors may be prohibitively expensive, and notice by
publication is not likely to be effective in providing actual notice to the
donors. Good practice dictates notifying
known donors of any change considered by the institution. The Drafting Committee concluded that an
institution’s concern for donor relations would serve as a sufficient incentive
for following that practice when donors can be located. In other circumstances, the attorney general
can protect the interests of the donors and the public.
SECTION 7. REVIEWING COMPLIANCE. Compliance with this
[act] is determined in light of the facts and circumstances existing at the
time a decision is made or action is taken, and not by hindsight.
SECTION 8. APPLICATION TO EXISTING INSTITUTIONAL FUNDS. This
[act] applies to institutional funds existing on or established after the
effective date of this [act]. As applied to institutional funds existing on its
effective date, this [act] governs only decisions made or actions taken after
that date.
SECTION 9. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND
NATIONAL COMMERCE ACT. This [act] modifies, limits, and supersedes the
federal Electronic Signatures in Global and National Commerce Act (15 U.S.C.
Section 7001 et seq.) but does not modify, limit, or supersede Section 101 of
that act (15 U.S.C. Section 7001(a)) or authorize electronic delivery of any of
the notices described in Section 103 of that act (15 U.S.C. Section 7003(b)).
SECTION 10. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In
applying and construing this Uniform Act, consideration must be given to the
need to promote uniformity of the law with respect to its subject matter among
states that enact it.
SECTION 11. EFFECTIVE DATE. This [act] takes effect .
. . .
SECTION 12. REPEAL. The following acts and parts of
acts are repealed:
(a) [The Uniform Management of Institutional
Funds Act]
The ideas and conclusions set forth in this draft,
including the proposed statutory language and any comments or reporter’s notes,
have not been passed upon by the National Conference of Commissioners on
Uniform State Laws or the Drafting Committee.
They do not necessarily reflect the views of the Conference and its
Commissioners and the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used
to ascertain the intent or meaning of any promulgated final statutory proposal.