What Every Nonprofit Should Know About the Uniform Prudent Management of Institutional Funds Act

As a nonprofit leader, you have probably heard of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). But are you familiar with what it includes and who needs to follow it? Don’t let your organization pay the penalty of being noncompliant with this important act. This post covers the key components of the law and its goals, who it applies to, the steps organizations should take to ensure compliance with the act, and potential penalties for noncompliance.

What Is the Uniform Prudent Management of Institutional Funds Act?

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a law that governs the management of institutional funds donated to charitable institutions. It was passed at the federal level in 2006. The goal of UPMIFA is to protect the assets of nonprofit institutions from misuse and loss. 

UPMIFA updates the Uniform Management of Institutional Funds Act of 1972 by incorporating modern portfolio theory and permitting total-return investing. It allows for the broadest possible range of investment options for managing institutional funds, including contemporary investment strategies such as total-return investing and also permits endowments to be used for a broader range of purposes.

Under UPMIFA, all nonprofit institutions are required to adopt written investment policies that comply with the minimum standards set by the act. These policies include: a risk management strategy; procedures for monitoring investments; and a process for periodically reviewing the effectiveness of these policies and deciding whether any changes need to be made. In addition, UPMIFA also includes provisions for improving financial reporting practices by nonprofit organizations. Institutions are required to prepare annual financial reports and provide them to the regulatory agencies that oversee them upon request.

In summary, UPMIFA is a law designed to protect the assets of nonprofit organizations by ensuring that they are managed in a prudent manner, as well as to improve transparency and accountability in financial reporting practices.

Who Does UPMIFA Apply To?

• Charities and nonprofits that are organized and operated for the benefit of the public.
• Educational institutions such as schools and universities.
• Religious institutions such as churches and synagogues.
• Health care institutions such as hospitals and clinics.
• Cultural institutions such as museums and art galleries. 

What Are the Key Components of UPMIFA?

1. Prudent management of institutional funds: UPMIFA requires that all nonprofit institutions manage their funds in a prudent manner. This includes considering the purposes, terms, distribution requirements and other circumstances of each fund, as well as economic conditions, investment strategies, risk and the role that each investment or course of action plays within the overall investment portfolio.
2. Investment policies: UPMIFA requires all nonprofit institutions to adopt written investment policies that comply with the minimum standards set by the act. These policies should include a risk management strategy, procedures for monitoring investments and a process for periodically reviewing the effectiveness of these policies and deciding whether any changes need to be made.
3. Financial reporting: UPMIFA also includes provisions for improving financial reporting practices by nonprofit organizations. Institutions are required to prepare annual financial reports and provide them to the regulatory agencies that oversee them upon request.
4. Annual independent audit: UPMIFA requires all nonprofit institutions to have an independent audit done each year that includes a review of the organization's financial management practices.
5. Spending policies: UPMIFA allows for a broader range of spending, but it still requires the organization to have a clear spending policy that is reviewed and updated regularly, taking into account the role of each investment within the overall portfolio, the wishes of the donor, and the needs of the institution and the fund.
6. Diversification: UPMIFA allows an institution to invest its funds in a diversified manner and not limit it to only invest in certain types of assets, as long as it is done in a prudent manner in accordance with the terms of the fund, in line with the organization’s missions and values, and following the organization's investment policy.

How is UPMIFA Different From UMIFA?

The main difference between UPMIFA (the Uniform Prudent Management of Institutional Funds Act) and its predecessor, UMIFA (the Uniform Management of Institutional Funds Act), is that UPMIFA replaces the requirement to maintain the "historic dollar value" of contributions with a requirement to preserve the purchasing power of the principal over the long term. Additionally, UPMIFA includes the "charitable purpose doctrine," which stipulates that investments must align with an organization's overall social mission.

UMIFA, which was adopted by 47 states, was approved by the National Conference of Commissioners on Uniform State Laws in 1972. Under UMIFA, organizations were allowed to spend from endowment funds up to the amount of appreciation above the "historic dollar value" (HDV), but could not spend below HDV. 

The National Conference of Commissioners on Uniform State Laws approved UPMIFA as a replacement for UMIFA on July 13, 2006. UPMIFA emphasized "prudence" by focusing on preserving the original purchasing power of the fund, not just the original dollars contributed to the fund. According to UPMIFA, "Subject to the intent of a donor expressed in the gift instrument, an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established."

As an example, before UPMIFA was adopted in North Carolina, the North Carolina Symphony had $6.9 million in its endowment. In 2009, the organization desperately needed funding, but was unable to spend any of its endowment. Due to a market downturn, the market value of the endowment fell below historic dollar value. Under UMIFA, this restricted the withdrawal of any funds. Even though they had millions of dollars sitting in the bank account, the symphony continued to struggle financially because they could not access their endowment. The state of North Carolina has since adopted UPMIFA.

Is the Uniform Prudent Management of Institutional Funds Act a Law? 

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is not a federal law, but rather a model act created by the National Conference of Commissioners on Uniform State Laws (NCCUSL). This act provides guidance for state laws related to the management of institutional funds by charitable organizations. Model acts are proposed laws that are meant to be adopted by individual states, rather than being enforced as a federal law.

States can adopt UPMIFA in its entirety or modify it to suit the specific needs of their state. As of today, most states in the U.S. have adopted some version of UPMIFA, but there are a few exceptions. Because UPMIFA is a model act, the specifics of the law may differ slightly from state to state. It's important to consult with a lawyer or legal expert to understand how the law applies to your specific organization.

How Can Organizations Remain Compliant With the Uniform Prudent Management of Institutional Funds Act?

As each act varies from state to state, it’s important to consult with your financial advisor and legal team to ensure you are in compliance with the correct UPMIFA requirements. In general, many states include similar provisions. A good place to start is ensuring your organization is compliant with the following: 

1. Adopt written investment policies: Organizations are required to adopt written investment policies that comply with the minimum standards set by UPMIFA. These policies should include a risk management strategy, procedures for monitoring investments and a process for periodically reviewing the effectiveness of these policies, among other key best practices.
2. Conduct an annual independent audit: Institutions are required to have an independent audit done each year. This audit must include a review of the organization's financial management practices.
3. Develop and maintain a clear spending policy statement: Organizations are required to develop and maintain a clear spending policy that is reviewed and updated regularly. This policy should take into account the wishes of the donor, the role of each investment within the overall portfolio and the needs of the institution and the fund.
4. Prepare and file annual financial reports: Organizations are required to prepare annual financial reports and provide them to the regulatory agencies that oversee them upon request.
5. Educate staff and board members: Institutions should ensure that all staff and board members are aware of and trained on UPMIFA and its requirements.
6. Seek legal advice: Leaders should consult with legal experts to ensure that their policies, procedures and investment strategies are in compliance with UPMIFA.
7. Review policies and procedures regularly: Policies and procedures should be periodically reviewed and updated to ensure they are adapting to changes in both the charitable sector and the financial market.

Rebeka Mazzone, CPA, recommends: "[Today's boards] ... need to consider what spending rules would be reasonable and appropriate in relation to the assets available, the wishes of the donor, the role that each investment or course of action plays within the overall investment portfolio, and the needs of the institution and the fund to make distributions and to preserve capital."

       - Rebeka J. Mazzone, CPA, "Talking to Your Board About UPMIFA," Accounting Management Solutions White Paper

To avoid steep penalties, nonprofit organizations should remain compliant with UPMIFA. Remember, each state’s UPMIFA is slightly different, so it is important to consult with your financial advisor and legal team to ensure you are in compliance with UPMIFA in your state. 

When choosing an investment advisor, look for one with an Accredited Investment Fiduciary (AIF®) designation. To receive this accreditation, advisors must learn and comply with the fiduciary standards of care developed by the Foundation for Fiduciary Studies. At Carnegie Investment Council, our AIF® designated advisors are held to a standard that other non-accredited advisors may not meet. You can feel comforted knowing they are upholding the highest standards of care for investment advisors.

What Penalties Come From Failing to Maintain Compliance With UPMIFA?

Penalties for violating the Uniform Prudent Management of Institutional Funds Act vary depending on your state and the specific circumstances of the violation. In some cases, an organization may be able to take corrective actions to address the noncompliance, which could help mitigate the penalties they are facing. It's important for organizations to be aware of the specific requirements for UPMIFA in the state they operate in. 

Common penalties include:

1. Monetary penalties. Organizations can be subject to fines or penalties if they fail to comply with UPMIFA. The amount of the fine will depend on the state and the nature of the violation.
2. Legal actions. Organizations that fail to comply with UPMIFA can be subject to legal action by the state, regulatory agencies or private individuals. This could include civil or criminal charges being brought against the organization or its staff and board members.
3. Loss of tax-exempt status or licenses. Organizations risk losing their tax-exempt status or various licenses if they violate UPMIFA. This would impact their ability to receive tax-deductible donations, be exempt from paying taxes on income and, in some cases, be able to operate at all.
4. Damage to reputation. A breach of UPMIFA can cause a loss of trust in your organization, which can make it difficult to attract new donors or volunteers.
5. Required reporting. Organizations that fail to comply with UPMIFA may be required to file time-consuming reports outlining the circumstances of noncompliance and the steps they have taken to address the issues.

Keep Your Nonprofit Compliant With UPMIFA

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a law that was designed to protect the assets of nonprofit organizations and to improve transparency and accountability in financial reporting practices. It is crucial for nonprofit organizations to familiarize themselves with the laws and regulations surrounding UPMIFA to ensure compliance, avoid penalties and protect their assets.

An advisor with the AIF® designation is well acquainted with UPMIFA and how it applies to unique nonprofit scenarios. Carnegie Investment Counsel has AIF® professionals on staff who can assist your organization with developing an investment policy statement (IPS) consistent with UPMIFA guidelines. Schedule a meeting with Carnegie Investment Counsel now to see how our commitment to placing your organization's best interest at the heart of our work can lead to financial success.

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