UPMIFA: Endowments & Compliance

Adopted: July 2006
Effective (for New York): September 17, 2010
New York’s version of the Act referred to as: NYPMIFA

To preface, the Uniform Management of Institutional Funds Act (UMIFA) was enacted in 1972 (and adopted by the State of New York in 1978).  The law afforded a uniform governing the investment, management and expenditure of endowment funds by charitable organizations as well as by other nonprofit entities, such as higher education institutions. UMIFA was enacted largely because charities, financial and legal counsel, did not know how to define “income” in the context of an endowment. Many looked to trust law, which generally defines “income” as including interest, dividends and the like, but define gains as “principal.” Thus, many charities invested endowments in income producing investments such as bonds and high-dividend stocks, but passed by investments with favorable growth prospects if they presented a low yield or return. Consequently, long-term total yield suffered.  Advocates of UMIFA thought charities should be able to spend a prudent portion of the gains earned by an endowment.

UMIFA was the first act to:

  • Allow pooled or total return analysis of the portfolio
  • Allow investments in equity and other alternative investments
  • Allow NPOs to delegate investment authority to professional managers
  • Allowed NPOs to adopt spending plans that recognized and spend both realized and unrealized appreciation.
  • Required spending plan to be prudent also required maintenance of “Historic Dollar Values” (i.e., if a donor contributed a $100,000 gift to an endowment, $100,000 had to be maintained and directors needed to alter their spending plans accordingly). Net appreciation of the institutional funds could be appropriated only in accordance with the prudently established standards set forth by the board of directors.
    Please note, to spend below the historic dollar value, institutions needed to request a lift in restrictions from the donor or obtain court approval or approval from the Attorney General of New York.

NYPMIFA replaces and updates key provisions of UMIFA governing the spending of endowment funds; remember, endowment funds are not “wholly” spendable due to donor-imposed restrictions. Unlike the previous act, the NYPMIFA applies to all NY not-for-profit corporations, corporations formed under the Religious Corporations Law and education corporations as defined in Education Law 216-a.
Under NYPMIFA, institutions are now permitted to spend endowment funds below their original dollar amount (“Historic Dollar Value”) without court approval or Attorney General review if the institution’s board of directors concludes that such spending is prudent. Because boards of directors are afforded broader authority to spend donor-restricted endowments, NY established additional requirements:

  • Boards must consider alternatives before authorizing appropriation from an endowment fund.
  • Notice must be given to “available” donors of endowment funds who executed the gift before September 17, 2010, allowing these donors to opt out of the new rule permitting institutions to spend below their historic dollar value (i.e. donor may continue to impose the maintenance of the historic dollar value of the endowment fund).
    • A donor is considered “available” if the donor can be found with reasonable efforts and is living (if an individual) or conducting activities (if an entity). Institutions are required document and retain all of their efforts to locate donors.
    • The written notice to the “available” donor must provide two (2) options: the institution may spend as much of the gift as may be prudent or the institution may not spend below the original dollar value of the gift.
    • If the donor does not respond in 90 days, the new spending provisions set forth in NYPMIFA will apply to the donor’s endowment gift, unless: the gift already permits spending below historic dollar value, gift expressly limits spending set forth in the NYPMIFA; or the donor made the gift in response to a donation solicitation, but did not include a separate statement restricting use of funds.
    • Notice serves two (2) objectives*: to provide the donor with information about the change in the law with regard to an institution’s authority to appropriate for expenditure below the historic dollar value; to give the donor an opportunity to clarify or amend the terms of the donor’s gift with regard to such appropriations.

*Withholding notice altogether would deprive the donor of the mandated opportunity to clarify or amend the terms of the gifts.

Managing and Investing Institutional Funds

ALL PERSONS 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 IN SIMILAR CIRCUMSTANCES.
According to provisions set forth in the Act, to satisfy the standard of prudence, institutions must:

  • Make a reasonable effort to verify facts relevant to the management and investment of the fund.
  • Only incur costs that are reasonable and appropriate.
  • Adopt a written investment policy that sets forth guidelines on investments and delegation of management and investment functions.
  • Consider the following:
    • general economic conditions;
    • possible effect of inflation or deflation;
    • the expected tax consequences, if any, of investment decisions or strategies;
    • the role that each investment or course of action plays within the overall investment portfolio of the fund;
    • the expected total return from income and the appreciation of investments;
    • other resources of the institution;
    • the needs of the institution and the fund to make distributions and to preserve capital; and an
    • asset’s special relationship or special value, if any, to the purposes of the institution.

Furthermore, the NYPMIFA specifies that investments of an institutional fund be diversified; however, the investment of funds may not be diversified if the board of directors of an institution prudently determines that due to unique circumstances the purpose of the fund would be better served without diversification.
The act further specifies that the management and investment of funds may be delegated to an “external agent” to the extent that such a decision is prudent; such delegation would require the external manager to exercise skill and invest in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. If such delegation were to arise, management is required to establish and document provisions for: selecting, continuing or terminating an agent; assess agent’s independence; establish the scope and terms of the delegation; compensation of the agent; means of monitoring performance; and ascertain compliance with the terms of the delegation agreement. It is of equal importance to stress that management must include a clause within the aforementioned agreement for termination of services; said clause must specify that termination may occur at any time, without penalty, with up to 60 days prior notice.

Expenditure of Endowment Funds

Unless stated otherwise in the gift, the assets in an endowment fund are donor-restricted assets. Accordingly, these assets may not be spent until they are “appropriated for expenditure” by the institution and must be spent in accordance with the terms of the gift. Essentially, “appropriation for expenditure” means a decision must be made by the board of directors to release a portion of an endowment fund from the donor-imposed restriction on spending. Appropriate funds are required to be spent immediately; funds can be spent at a later time, or over a period of time, than the original appropriation date.

The Act stresses that decisions to appropriate funds from an endowment for expenditure be done so prudently. To ensure the standard of prudence is met, the institution must consider the following eight (8) factors and make a “contemporaneous record” of each consideration, if relevant (the board of director of an institution must keep a record of each consideration, subsequent actions to appropriate or accumulate; if the factor is irrelevant, the board of director must document this explanation as well; there is to be substance to the explanation):

  • the duration and preservation of the endowment fund;
  • the purposes of the institution and the endowment fund;
  • general economic conditions;
  • the possible effect of inflation and deflation;
  • the expensed total return from income and the appreciation of investments;
  • other resources of the institution;
  • where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution; and
  • the investment policy of the institution.

It is equally important to note that if spending is negligent, administrators of the endowment may be held liable to replenish the funds.

*For endowment gifts made after September 17, 2010, an organization may not appropriate funds in excess of 7% of the fair market value of the fund averaged over a period of the preceding five (5) years (no less).

Release of Donor-Imposed Restrictions

Congruent with the provisions of UPMIFA; the Uniform Prudent Management of Institutional Funds Act adopted by the National Conference of Commissioners on Uniform State laws in July 2006, NYPMIFA permits an entity to contact a donor and obtain written consent releasing or modifying restrictions of the endowment or of management. Unlike UPMIFA, NYPMIFA permits an institution to obtain court order for the release of the restrictions even if the donor does not consent to the release or modification of the gift restriction. Further, an institution may obtain court approval to release or modify the restrictions of the endowment if the restrictions are deemed: unlawful, impossible, impracticable, wasteful or impairs management or investment. If an institution were to seek a release or modification of a restriction through court order, notice must be provided to the donor and Attorney General; both the donor and the Attorney General will have an opportunity to speak during the proceedings. Please note, executors or heirs of a deceased donor are excluded from the definition of “donor”; therefore, they are not entitled to be heard during court processions.

Endowments with fund less than $100,000 and in existence for more than 20 years

If the institution ascertains the restrictions are unlawful, impossible, impracticable, wasteful or impairs management or investment, the institution may release or modify the restriction, in part or whole, without court order 90 days after providing written notice of such actions to the Attorney General; notice must also be given to the donor. The Attorney General may object to the release or modification of the endowment, in part or whole, within 90 days. If the institution has not received notice from the Attorney General is such time, the institution may continue with the release or modification of the endowment restrictions. Be aware, this does not give the institution the right to use the funds as it sees fit; these funds must be used in a manner consistent with the “purposes expressed in the gift.”

Notification must include the following:

  • Explanation of determination that the restriction is unlawful, impossible, impracticable, etc.,
  • Explanation of the proposed release or modification,
  • Copy of a record of the institution authorizing the release or modification, and
  • A statement of the proposed use of the funds after release or modification.

Solicitation of Endowments

Solicitation must include statement that, unless otherwise restricted by the gift, the institution may expend as much of the endowment as it deems prudent after considering the factors set forth under NYPMIFA.