Who Guides Your Investment Policies?
The Uniform Prudent Management of Institutional Funds Act, or UPMIFA, has been adopted in New York State, and is now considered law. It governs the management and investment of funds held by nonprofit organizations and addresses four specific areas:
- Standards of conduct for prudently managing and investing institutional funds
- Rules that boards must follow in deciding whether to appropriate from or accumulate endowment funds
- Standards for delegating management and investment functions to outside agents
- Rules pertaining to the lifting or modification of donor restrictions on management and investment of institutional funds, and on or restrictions on use of such funds
It includes, among other things, the role that each investment or investment transaction plays within the overall investment portfolio of the fund, and an asset’s relationship or value to the charitable purposes of an institution. New York imposes special requirements, such as a mandated written investment policy with provisions on issues, such as diversification particular to New York law.
There is something called the prudent man rule, which generally consists of federal and state regulations requiring trustees and portfolio managers to make financial decisions in the manner that a prudent man would, that is, with intelligence and discretion. The prudent man rule requires care in the selection of investments, often cited as putting greater emphasis on preservation than on growth, but does not put a limit on investment alternatives. For many years, this meant an equity to fixed income portfolio ratio of not greater than 60:40. However, over the years, modern portfolio theories have modified this concept.
So What Exactly is Prudent Investing?
Unfortunately, the answer is not so clear, and a lot of it is left to the discretion of the nonprofit board. Often bad policy only becomes known when something goes wrong. The definition of prudent investing is different for every organization, and may depend on the laws of the state a business operates in. UPMIFA requires that in managing and investing an institutional fund, the board must consider (among other factors):
- General economic conditions.
- The possible effects of inflation.
- 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.
- The expected total return from income and the appreciation of investments.
- Other investments held by the institution.
- The ability to make necessary distributions and to preserve capital.
Since these factors are subject to the discretion of the fiduciary, there are a few preliminary questions to ask before moving forward with an investment plan. These are matters of significant responsibility and should be made with careful consideration by the Board. It’s advised to also consult an investment advisor and a professional knowledgeable in legal matters for non-profit organizations. You may wish to begin by establishing an informed investment committee of the Board to oversee these responsibilities.
If your company has concerns about its investment portfolio, it is wise to consult with professionals, as mishandling of a nonprofit’s portfolio can have dire consequences.