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, an overview of 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 uniform act that governs the management of institutional funds donated to charitable institutions. The purpose of UPMIFA is to protect the assets of nonprofit institutions from misuse and loss. UPMIFA focuses on providing guidance for investment decision-making, providing rules for spending from endowment funds, and providing rules for the modification of donor restrictions.
Discussions around UPMIFA are increasingly centered on strategic and prudent approaches to investment and spending. These include deliberations on how to balance donor intent with organizational mission, managing endowment funds under varying economic conditions, and achieving generational equity through careful planning of endowment spending.
Nonprofits are encouraged to adopt spending policies that are not only aligned with donor intent but also flexible enough to accommodate economic changes, thereby preserving the endowment's principal over time. 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?
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) applies to charitable institutions, which generally includes nonprofit organizations that have been established for charitable, religious, educational, scientific, literary or other similar purposes. Organizations can include:- 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.
It's important to note that UPMIFA was adopted on a state-by-state basis, so not all states have adopted it yet, and the specifics of the law may differ slightly from state to state depending on local laws and regulations. You can check to see if your state has enacted UPMIFA and find the bill information here.
What Are the Key Components of UPMIFA?
UPMIFA’s main objective is to ensure that charitable funds are managed prudently. It's designed to provide the boards of charitable organizations the flexibility to manage their funds in the most efficient and effective manner possible, while still maintaining the principle of “prudent management.”Because the Uniform Prudent Management of Institutional Funds Act is adopted individually by each state, the requirements vary depending on where your organization is located. Generally, the key components of UPMIFA include:
- Prudent management of institutional funds: UPMIFA requires that all qualifying 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.
- Investment policies: UPMIFA requires all qualifying 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.
- 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.
- Annual independent audit: UPMIFA requires all qualifying nonprofit institutions to have an independent audit done each year that includes a review of the organization's financial management practices.
- 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.
- 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.
Discussions on prudent and sustainable endowment management and generational equity underscore the need for nonprofits to adjust their policies. This ensures the endowment's long-term value, especially during economic uncertainty. The goal is that future beneficiaries receive equivalent value, accounting for inflation and changes in economic conditions, without compromising the fund's longevity.
Several nonprofit leaders and stakeholders have already used UPMIFA to better align their investment funds with their organizations’ values. In December 2020, graduates of Boston College filed a complaint with the Massachusetts Attorney General. This complaint alleged the college's decision not to sell its investments in fossil fuels went against its responsibilities under UPMIFA.
Note: This is only an overview of some of the key components of UPMIFA. Consult with a legal professional to find out if you need to and how you can stay in compliance with UPMIFA.
How is UPMIFA Different From UMIFA?
UMIFA, which was adopted by 47 states, was approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1972. The NCCUSL approved UPMIFA as a replacement for UMIFA in 2006, and the act is adopted by states individually.
UPMIFA has been adopted by most states and updated UMIFA in many ways. Let's dive into a few of the key differences.
Historic Dollar Value vs Purchasing Power of Principal
One key 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.
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. UPMIFA emphasizes "prudence" by focusing on preserving the original purchasing power of the fund, not just the original dollars contributed to the fund.
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.
7 Factors for Spending Policy Construction
UPMIFA created stricter guidance around the need for creating spending policies for invested institutional funds. UPMIFA outlines seven factors that institutions should consider when crafting their spending policies. These factors help organizations strike a crucial balance: preserving the endowment's value for future generations while using its returns to fulfill their charitable goals in the present. The 7 factors are:
- Duration of endowment fund
- Purpose of the institution and its endowed funds
- General economic conditions
- Potential effects of inflation or deflation
- Expected total returns of the endowment
- Organizational resources
- Organizational investment policy
Investment Standards
Before UPMIFA, endowment investments followed a "prudent man" standard. This meant prioritizing the safety of the principal amount, even if it limited growth. UPMIFA changed this by introducing "modern portfolio theory." This allows for a wider range of investment options, including strategies that aim for both protecting the principal and generating some growth over time. There is still a strong emphasis on prudent management, striking a balance between safety and potential for future growth.
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). Model acts are proposed laws that are meant to be adopted by individual states, rather than being enforced as a federal law. Each state has the option to adopt UPMIFA or its own version of it, so it's implemented at the state level rather than being 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:
- Determine if UPMIFA applies to your organization and situation: UPMIFA doesn't apply to every nonprofit organization. To determine if and how UPMIFA applies to your organization, consult with your legal representative.
- 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.
- 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.
- 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. An ideal spending policy statement will support your organizational goals and vision for impact while fulfilling donor intent.
- 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.
- Educate staff and board members: Institutions should ensure that all staff and board members are aware of and trained on UPMIFA and its requirements.
- Seek legal advice: Leaders should consult with legal experts to ensure that their policies, procedures and investment strategies are in compliance with UPMIFA.
- 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."
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.
What Penalties Can 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:
- 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.
- 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.
- 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.
- 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.
- 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.
UPMIFA, while adopted across most states, has seen variations in its implementation. Each state can modify provisions of the law to better suit local requirements. This means that nonprofits need to be keenly aware of their specific state's version of UPMIFA and any recent changes that might impact their investment and spending policies.
Keep Your Nonprofit Compliant With UPMIFA
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is an act 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 how the laws and regulations surrounding UPMIFA affect them to ensure compliance, avoid penalties, and protect their assets.
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This blog is for informational purposes only and is not meant as financial, legal, or tax advice. Please seek professional advice from qualified tax, legal, and/or financial professionals before making any financial decisions.
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