1. Regulating Endowments under UPMIFA
Terry M. Knowles
Assistant Director
NH Attorney General

2. Uniform Prudent Management of Institutional Funds Act
Drafted and Adopted by the National Conference of Commissioners on Uniform State Laws
UPMIFA has been enacted in 48 states and the District of Columbia
Legislation pending in the State of Mississippi

3. Uniform Commissioners
“UPMIFA modernizes the rules governing expenditures from endowment funds, both to provide stricter guidelines on spending from endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.” NCCUSL Prefatory notes to UPMIFA

4. UPMIFA and Historic Dollar Value
UPMIFA eliminates historic dollar value as an absolute constraint on appropriation for expenditure.
While under UPMIFA underwater spending is not prohibited there are new rules that must be followed by the institution before making an appropriation for expenditure.
NCCUSL intentionally added the word prudent to the former UMIFA in enacting UPMIFA

5. Spending Policies
Appropriation for Expenditure or Accumulation of Endowment Fund; Rules of Construction. –     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. (Emphasis added)

6. 7% Rule
Some states, including New Hampshire, establish a maximum percentage which may be appropriated for expenditure by the institution.
If an institution exceeds 7% there is a rebuttable presumption of imprudence.

7. Is the 7% Limit a Safe Harbor?
The answer is no.
The three-year rolling average calculation, prudent management of the portfolio, adherence to the UPMIFA standards, and short and long-term goals and objectives must be taken into consideration by the institution when establishing a spending policy.

8. Prudence
How is a “prudent” standard established in those states which do not have the “7%” rule?
What elements should a charity regulator consider in deciding whether or not to bring an action against an institution which has adopted an overly aggressive spending policy threatening the perpetual nature of the endowment? 

9. Understanding UPMIFA
UPMIFA does not transform permanently restricted funds into unrestricted funds.
From former Attorney General now Senator Kelly Ayotte’s 2005 letter to the Uniform Commissioners:
“A well-established body of law affirms the attorney general’s standing to supervise and enforce charitable trusts.” Bogert’s Trusts and Trustees Second Edition

10. Appropriation for Expenditure: UPMIFA Standards
In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider the following factors:        (a) The duration and preservation of the endowment fund;       

11. Duration and Preservation
“Prudence would call for the retention of sufficient gains to maintain purchasing power in the face of inflation and to guard against potential losses.”
The Law and the Lore of Endowment Funds by Cary and Bright 1969

12. Appropriation for Expenditure (continued)
(b) The purposes of the institution and the endowment fund;        (c) General economic conditions;        (d) The possible effect of inflation or deflation;        (e) The expected total return from income and the appreciation of investments;        (f) Other resources of the institution; and        (g) The investment policy of the institution.

13. Enforcement
How does an AG exercise his/her parens patriae power in enforcing donor intent in these situations?
“UPMIFA Standard of Conduct in Managing and Investing Institutional Funds. –     In addition to complying with the duty of loyalty imposed by law other than this chapter, each person responsible for managing and investing an institutional fund shall 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.”   

14. Uniform Trust Code
“A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

15. Uniform Trust Code
  A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. “

16. What to look for
An aggressive spending policy resulting in an escalation of underwater appropriation for expenditure over time
FAS requires disclosure of the institution’s policy for the appropriation of endowment assets for expenditure
An outdated investment policy or
Lack of an investment policy

17. What to look for
Documentation that confirms the institution is conforming (or not conforming) with the seven required elements in UPMIFA in determining whether to appropriate or accumulate
Gift instruments – some institutions do not have the records necessary to categorize the funds held by the entity

18. What to look for
The overall financial health of the institution and its governance practices
Is the endowment being used in a manner contrary to the intent of the donor for purposes of covering operating losses?
Does the board of directors or board of trustees understand UPMIFA?

19. From The Law and the Lore Revisited by Cary and Bright
“Prudence after all is still prudence, no matter how you define principal and income.”