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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Non-Profits Get Their Day |
| by
W. Scott Simon
| 10-05-06 |
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This month's column continues the respite from my (so far) four-part series on non-fiduciary investment consultants. Last month, I warned you to keep your eye on the octopus that is the Uniform Prudent Investor Act because its tentacles have spread far and wide into virtually all fields of trust investment law.
One such field involves non-profits. In July, the Chicago-based National Conference of Commissioners on Uniform State Laws (the same group that brought us the Uniform Prudent Investor Act) published the Uniform Prudent Management of Institutional Funds Act.
Publication of this act now completes the trifecta of modern prudent fiduciary investing: the 1994 Uniform Prudent Investor Act, which governs the investment conduct of trustees of private family trusts, the 1997 Uniform Management Public Employee Retirement Systems Act, which governs the investment conduct of trustees of public pension plans, and the 2006 Uniform Prudent Management of Institutional Funds Act, which governs the investment conduct of trustees of non-profit money such as foundations and endowments.
The Uniform Prudent Investor Act also has an indirect bearing on the investment conduct of trustees of private pension plans subject to the Employee Retirement Income Security Act (ERISA). John H. Langbein, Reporter for the Uniform Prudent Investor Act and Chancellor Kent Professor of Law and Legal History at Yale University law school, explains: "ERISA has always been interpreted with a strong eye on the common law, and it is therefore quite clear that the Uniform Prudent Investor Act will powerfully affect the federal courts in their interpretation of ERISA."
And let's not forget how influential the Uniform Prudent Investor Act has been on the 1997 Uniform Principal and Income Act and the 2000 Uniform Trust Code.
The Uniform Prudent Management of Institutional Funds Act
Commentary to section 3 of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) notes, in part: "This section adopts the prudence standard for investment decision making. The section directs directors or others responsible for managing and investing the funds of an institution to act as a prudent investor would, using a portfolio approach in making investments and considering the risk and return objectives of the fund."
Those Whose Investment Conduct Is Covered by UPMIFA
Commentary to section 3 of UPMIFA notes, in part: "The duties imposed by [UPMIFA] apply to those who govern an institution, including directors and trustees, and to those to whom the directors or managers delegate responsibility for investment and management of institutional funds. The standard applies to officers and employees of an institution and to agents who invest and manage institutional funds. Volunteers who work with an institution will be subject to the duties imposed here, but state and federal statutes may provide reduced monetary liability for persons who act without compensation. UPMIFA does not affect the application of those monetary liability shield statutes."
The Kinds of Institutions Covered by UPMIFA
Commentary to section 1 of UPMIFA notes, in part: "[UPMIFA] applies generally to institutions organized and operated exclusively for charitable purposes. These institutions [include] charitable organizations created as non-profit corporations, trusts, unincorporated associations, governmental subdivisions or agencies, or any form of entity that is organized exclusively for charitable purposes. This reflects the fact that standards for investing and managing institutional funds are and should be the same regardless of whether a charitable organization is organized as a trust, as a non-profit corporation, or in some other manner."
Comparing the Text of the More Important Provisions of UPMIFA and UPIA
Much of the language of the Uniform Prudent Investor Act (UPIA) was copied into the text of UPMIFA as is evident from some of the following more important provisions common to UPMIFA and UPIA.
Fiduciary Standard of Care
UPMIFA Section 3(b)
"In addition to complying with the duty of loyalty imposed by law other than this [act], 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."
UPMIFA adopts the prudence standard for investment decision making. Commentary to section 3 of UPMIFA notes, in part: "The language of the prudence standard adopted in UPMIFA is derived from the [Revised Model Nonprofit Corporation Act] and from the prudent investor rule of UPIA." The prudence standard set forth in section 3(b) of UPMIFA--"in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances"--is taken verbatim from Section 8.30(a)(1)-(2) of the Revised Model Nonprofit Corporation Act ("RMNCA")
That standard "is consistent with the business judgment standard under corporate law, as applied to charitable institutions." (Emphasis in the original.) Commentary to section 3 of UPMIFA notes further: "The standard for prudent investment set forth in Section 3 first states the duty of care as articulated in the RMNCA. The standard then provides more specific guidance for those managing and investing institutional funds by incorporating language from UPIA. The factors and rules derived from UPIA are consistent with good practice under current law applicable to nonprofit corporations."
Commentary to section 3 of UPMIFA notes: "The Drafting Committee decided that by adopting language from both the RMNCA and UPIA, UPMIFA could clarify that the same standards of prudent investing apply to all charitable institutions. Although.UPIA § (2)(a) [and the] Restatement.use the phrase 'care, skill and caution,' the Drafting Committee decided to use the more familiar corporate formulation as found in RMNCA. The Drafting Committee does not intend any substantive change to the UPIA standard and believes that 'reasonable care, skill, and caution' are implicit in the term 'care' as used in the RMNCA. The Drafting Committee included the detailed provisions from UPIA, because the Committee believed that the greater precision of the prudence norms of the Restatement and UPIA.could helpfully inform managers of charitable institutions."
A highly influential commentator, cited in commentary to the UPIA and Reporter's Notes to the Restatement, and in the Prefatory Note to UPMIFA explains: "The modern paradigm of prudence applies to all fiduciaries [emphasis in the Prefatory Note] who are subject to some version of [the prudent man rule], whether under ERISA, the private foundation provisions of the [Internal Revenue] Code [Section 4944], UMIFA, other state statutes, or the common law." The Prefatory Note to UPMIFA explains further: ".UPMIFA combines the approaches taken by UPIA and [the RMNCA]. UPMIFA reflects the fact that standards for managing and investing institutional funds are and should be the same regardless of whether a charitable organization is organized as a trust, as a nonprofit corporation, or as some other entity.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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