Review Endowment Fund Policies for Legal Compliance

Organizations with endowment funds commonly set forth standards for managing, investing, and appropriating these funds in their bylaws or other policies.  Unless an organization actively monitors developments in this area of the law, it is possible that its policies or bylaws do not accurately reflect current legal standards.  In Illinois, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) governs the management, investment, and expenditure of endowment funds.  UPMIFA changed the legal standards governing endowment funds from the more rigid standards of prior law.  It would be prudent for organizations with endowment funds to review their policies and bylaws to ensure that these documents provide the appropriate legal standards for endowment funds.

As an initial matter, organizations should determine if their endowment funds are subject to UPMIFA standards.  Some organizations may use the term “endowment fund” imprecisely to refer to amounts that the organization has set aside for savings.  The terms of the gift instruments by which the organization received donations to the fund determine if the fund is subject to UPMIFA.  If the fund is subject to UPMIFA, the organization must 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.”  UPMIFA lists several factors that the organization must consider in managing and investing.  In addition, UPMIFA requires investment diversification and decisions about management and investment of an asset to be made in the context of the organization’s overall portfolio of investments.

Appropriating expenditures from the fund is subject to a similar standard of good faith and the care of an ordinarily prudent person.  UPMIFA also provides a list of factors that the organization must consider in deciding whether to appropriate for expenditure or accumulate.  Appropriation is more flexible under UPMIFA because UPMIFA eliminated the “historic dollar value” restriction on appropriation.  An organization risks violating UPMIFA if its bylaws or policies require appropriation of a given amount or percentage of its endowment fund each year.  This is because what is prudent for an appropriation may change from year to year, and the organization needs the flexibility to consider relevant factors.

Another significant change UPMIFA provides is that it broadens the circumstances under which the organization may obtain a release or modification of donor restrictions.

Organizations that hold endowment funds should periodically review their bylaws and investment policies to verify that they are in compliance with applicable legal standards.  It is especially important to review these standards following a major change in the law, such as the enactment of UPMIFA.  David L. Bea & Associates is experienced at reviewing bylaws and other policies of exempt organizations and advising them of needed changes.  If you have any questions, please do not hesitate to contact us.

The foregoing article was provided for general information.  Seek specific legal advice for your situation.

© 2011 David L. Bea & Associates