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.
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 an act 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.
It applies not only to nonprofit organizations, private foundations, and trusts, but also includes public entities, meaning any kind of entity that is legally organized in a state or a foreign country and is a charity or serves charitable purposes or public benefit. This means that UPMIFA applies to a wide range of charitable institutions and organizations, and requires that all of them adopt written investment policies and comply with the minimum standards set by the act.
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.
UPMIFA specifically governs donor-restricted endowment funds, not every investment account a nonprofit holds. This means it applies to:
UPMIFA normally does not apply to board-designated (or "quasi") endowments. These are funds that a nonprofit’s board has internally designated for long-term investment, but without any donor restriction. Because the board can re-designate these funds at any time (if their policies allow), they fall outside of UPMIFA’s legal requirements.
It also normally doesn’t apply to:
That said, even if not legally required under UPMIFA, many nonprofits choose to apply similar principles (such as prudent investing and responsible spending) to their quasi-endowments for consistency and good governance.
Tip: If you’re unsure whether a specific fund is subject to UPMIFA, review the original donor agreement and consult your legal or financial advisor.
Yes, UPMIFA can apply to churches and religious organizations, but it depends on how the church is structured and how its funds are held.
If a church or religious organization is recognized as a charitable institution under state law (typically holding 501(c)(3) status) and it maintains donor-restricted endowment funds, then UPMIFA likely applies. This includes many churches, synagogues, mosques, and religious ministries that accept restricted gifts or manage long-term investment funds.
UPMIFA does not override religious doctrine or force churches to accept donor restrictions that conflict with their beliefs. However, once a church accepts a donor-restricted gift, it has a fiduciary responsibility to manage that gift in alignment with the donor’s intent and with prudent investment and spending practices outlined in UPMIFA.
Because UPMIFA is a model act adopted individually by states, and churches are subject to varied forms of state regulation, it’s essential to consult legal or financial counsel to understand how the act applies in your specific situation.
Tip: If your church manages an endowment or is considering starting one, it’s a best practice to have a written investment and spending policy that aligns with UPMIFA standards, even if your state law exempts certain religious institutions. If you want help writing either of them, we have a few helpful resources for you:
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:
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.
Need some guidance on writing or updating your Investment Policy Statement? Check out our free on-demand webinar, How to Create an Investment Policy Statement for Your Nonprofit.
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.
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 are required to follow UPMIFA and how your particular organization can stay in compliance with UPMIFA.
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.
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.
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:
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.
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.
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:
Institutions are required to have an independent audit done each year. This audit must include a review of the organization's financial management practices.
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.
Want some help crafting your spending policy? Here is a Spending Policy Template and also an on-demand webinar to help you write your Spending Policy.
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 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.
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 in which they operate.
Common penalties include:
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.
Even well-meaning nonprofit organizations can unintentionally fall out of alignment with UPMIFA. Here are some of the most common pitfalls that may put your endowment, and your board, at risk:
UPMIFA requires institutions to manage and spend funds prudently, which begins with having a clearly written investment policy and a formal spending policy. Without these documents, boards lack the framework to make informed, compliant decisions.
Need help writing an Investment Policy Statement or Spending Policy for your nonprofit? Here are some resources you'll find helpful:
UPMIFA outlines specific factors that must be considered when making decisions about endowment spending. And each state will have their own adoption. Ignoring these, or being unaware of them, can lead to spending practices that may violate the law or conflict with donor intent.
Not all funds are created equal. Donor-restricted endowments must be handled differently than board-designated funds or general reserves. Applying a one-size-fits-all investment or spending approach could result in a breach of fiduciary duty.
Economic conditions, donor expectations, and organizational needs evolve, and your policies should, too. UPMIFA encourages regular reviews to ensure your investment and spending strategies remain aligned with best practices and the law.
Your board plays a critical role in ensuring compliance with UPMIFA. But if they don’t understand their fiduciary duties, or the legal implications of their decisions, your organization could face unnecessary risk. Ongoing education is not just helpful; it’s essential.
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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