"Compliance With NYPMIFA: What's Next?"
We thought it would be helpful to follow up our recent client memorandum on the New York Prudent Management of Institutional Funds Act (NYPMIFA) with a summary of the steps needed for your organization to come into compliance with, and to take advantage of, the new law. We would be happy to help you prepare any of the documents described below and also to work with you in educating your board about the new requirements.
I. With Respect to Investment Management
Creation or Revision of Investment Policy
NYPMIFA requires organizations to adopt a written investment policy. The investment policy should reflect NYPMIFA’s detailed guidance on prudent investing as well as the new law’s rules on investment strategy and delegation of investment management, as follows:
1. The Eight-Factor Prudence Standard for Managing and Investing. The policy should set forth the eight prudence factors for investing specified in NYPMIFA and should explain that the governing board must consider the purposes of the organization as well as the purposes for which the fund was established when managing and investing an institutional fund. The policy should specifically state that each person responsible for managing and investing a fund must do so in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
2. Diversification Requirement. The policy should include the new requirement that a fund’s investments be diversified unless the organization’s governing board determines that, due to special circumstances, the purposes of the fund are better served without diversification. The policy also should provide that any decision not to diversify must be reviewed by the organization’s governing board at least annually.
3. Overall Investment Strategy. The policy should provide that management and investment decisions about a specific asset must be made in the context of the portfolio of investments in which the fund is invested and as part of an overall investment strategy in light of return objectives “reasonably suited” to the charity and the fund. The policy also should reflect the rule that organizations are required, within a reasonable time after receiving property, to make and carry out decisions regarding retaining or disposing of the property, or rebalancing the organization’s portfolio in order to bring the fund into compliance with NYPMIFA, and to take into consideration the organization’s other circumstances, including, for example, its distribution requirements and/or general liquidity needs.
4. Delegation of Investment Management. The policy should provide that investment management authority may be delegated internally to an organization’s committees, officers or employees, or to external agents.
The policy should make clear that if the organization delegates such authority to an external agent, the governing board must exercise its duty of care in selecting, continuing or terminating such an external agent, including assessing the agent’s independence (including any conflicts of interest); establishing the scope of the delegation; setting the agent’s compensation; and monitoring the agent’s performance.
II. With Respect to Endowments
Notice to Donors
To take advantage of the new endowment spending rules of NYPMIFA in connection with funds in existence before September 17, 2010, an organization must give any available donors of such funds the opportunity to opt out of the new rules. Organizations must provide 90 days’ notice to any available donor (i.e., living person or existing and active corporation or other entity that can be identified and located with reasonable efforts) before applying the new rules to a fund for the first time. However, notice need not be given to donors where: (1) the gift instrument already permits appropriation without regard to the fund’s historic dollar value; (2) the gift instrument specifically prescribes — as discussed further below — the organization’s authority to appropriate or accumulate funds; or (3) where the endowment funds were received as part of a general solicitation and the donor did not specifically restrict the gift further.
It is important to note that if a donor has merely identified a gift as an "endowment" or restricted spending only to the gift’s interest or income generally, or has used similarly broad terms, this will not be sufficient to restrict a gift so as to exclude it from the donor notification rules or the new spending rules of NYPMIFA that are set out in Section 553(A) of the Not-for-Profit Corporation Law. A specific restriction, such as the provision of a spending rate or other numeric limitation or a specific modification or override of the NYPMIFA rules is required; otherwise, the new rules will apply.
As set forth in NYPMIFA, the notice must include substantially the following language:
Please check box #1 or #2 below and return to the address shown above:
______ #1. The institution may spend as much of my gift as may be prudent.
______ #2. The institution may not spend below the original dollar value of my gift.
If you check box #1 above, the institution may spend as much of your endowment gift (including
all or part of the original value of your gift) as may be prudent under the criteria set forth
in Article 5-A of the Not-for-Profit Corporation Law (The New York Prudent Management of Institutional Funds Act).
If you check box #2 above, the institution may not spend below the original dollar value of your endowment gift but may spend the income and the appreciation over the original dollar value if it is prudent to do so. The criteria for the expenditure of endowment funds set forth in Article 5-A of the Not-for-Profit Corporation Law (The New York Prudent Management of Institutional Funds Act) will not apply to your gift.
During the 90 day notice period, the donor may modify the gift instrument — with or without the consent of the organization — to prohibit application of NYPMIFA’s spending rules. If the donor does not respond within the 90 days, the new spending rules will apply to the gift. Organizations must keep records of the actions taken in compliance with these notice requirements.
Creation or Revision of Endowment Policy
Organizations subject to NYPMIFA may wish to create an endowment policy, or revise any existing policy, to reflect the new provisions of the law. Even if such a policy is not in place, your board should be educated regarding the new NYPMIFA provisions affecting endowments as described below. If a policy is put in place, it should include the following NYPMIFA points:
1. Appropriation of Endowment Funds. The endowment policy should set forth the requirement for acting prudently when an organization wishes to appropriate, i.e., make available for expenditure, endowment fund assets. Under NYPMIFA, such prudence includes consideration of eight specific factors, all of which should be listed in the policy. (Please note that these factors are slightly different from the eight factors required for prudent investing. Both lists of factors are set forth in our earlier memorandum.) The policy also should set forth the requirement that the organization keep a “contemporaneous record” of each decision to appropriate funds for expenditure, e.g., minutes of the meeting of the governing board at which such decision was made, identifying and describing briefly the nature and extent of the consideration given to each of the eight factors.
2. Solicitations for Endowment Funds. NYPMIFA requires organizations to make the following disclosure in all solicitations for contributions to an endowment:
Unless otherwise restricted by the gift instrument pursuant to paragraph (B) of Section 553 of the Not-for-Profit Corporation Law, the institution may expend so much of an endowment fund as it deems prudent after considering the factors set forth in paragraph (A) of Section 553 of the Not-for-Profit Corporation Law.
The solicitation disclosure language is designed to alert donors to the fact that unless otherwise specifically restricted by a gift instrument, the organization will be allowed to expend so much of an endowment fund as it deems prudent after considering the eight NYPMIFA prudence factors governing appropriation decisions. Accordingly, all solicitation materials for endowed funds will need to be revised to reflect this new rule, and the policy should include a statement of the rule.
3. The Presumption of Imprudence. NYPMIFA provides that the appropriation for expenditure of more than 7 percent of the fair market value of a new endowment fund (i.e., one created after September 17, 2010) in any one year creates a rebuttable presumption of imprudence. The policy should address this rule. This presumption does not apply to appropriations for expenditure that are specifically authorized under a gift agreement. Accordingly, another way the policy can address this rule is by providing that new endowment gift agreements should, under certain circumstances and where appropriate, specifically allow expenditures in excess of this ceiling. Your organization’s form endowment gift agreement then would need to be revised in this regard.
4. Categories of Endowment Funds. As a result of NYPMIFA, organizations will have several categories of endowment funds, each of which will be treated differently under the new law. The policy should explain the categories of funds held by the organization and how each is treated. Examples of such categories are as follows:
a. Endowment funds governed by the new NYPMIFA spending rules. This category will include funds created after September 17, 2010, that are not specifically restricted by gift agreement. It also will include prior existing funds for which the donor "opts in" to the NYPMIFA spending rules; for which the donor does not respond within 90 days pursuant to the notice provision described above; or where the donor is unavailable and did not specifically restrict spending in the original gift agreement.
b. Endowment funds subject to a specific spending restriction. This category will include funds where the donor specifically restricted spending in the original gift agreement, as well as funds that are clarified or amended by the donor to prohibit the NYPMIFA spending rules pursuant to the notice provision described above.
c. Endowment funds subject to the old historic dollar value requirement. This will include funds for which the donor "opts out" of the NYPMIFA spending rules pursuant to the notice provision described above.
III. Release or Modification of Restrictions
While traditional cy pres relief still is available, NYPMIFA provides new options for organizations seeking relief from donor restrictions that have become obsolete, wasteful, or impracticable or impossible to effect. The new options available, and the steps needed to take advantage of such options, are as follows:
1. Seek Donor Consent. An organization may now modify as well as release a restriction on the management, investment or purpose of a fund if the donor consents in writing to such modification or release.
2. Seek Modification by a Court. An organization may seek court approval to modify a donor restriction on the management or investment of a fund, even if the donor is available. The organization must notify available donors and the attorney general of its application to the court, and both of these parties must be given an opportunity to be heard.
3. Seek Modification or Release of Restrictions on Small, Old Funds. NYPMIFA also permits organizations to modify or release donor restrictions on the management, investment or purpose of funds without obtaining either donor consent or judicial approval where the fund is small — less than $100,000 — and over 20 years old, and the proposed use of the fund after release or modification is consistent with the purposes expressed in the gift instrument. In such cases, the organization must notify the attorney general of its intention to modify or release the restriction. Such notice must include an explanation of the organization’s determination that the fund meets the requirements set forth in NYPMIFA; a statement of the proposed release or modification; evidence of the board approving the release or modification; and a statement of the proposed use of the fund after the release or modification is granted. If the attorney general does not respond within 90 days of such notice, the organization may proceed with the proposed release or modification. With limited exception, the organization also must notify the donor, if available, of the organization’s intention to release or modify the restriction.
IV. With Respect to Accounting Procedures
Compliance with FAS 117-1
The Financial Accounting Standards Board’s (FASB) FAS 117-1 requires organizations subject to an enacted version of the Uniform Prudent Management of Institution Funds Act (such as NYPMIFA) to classify a portion of a donor-restricted endowment fund of permanent duration as permanently restricted assets. The amount that must be classified as permanently restricted should be the amount of the fund that must be retained permanently in accordance with explicit donor stipulations or, in the absence of such stipulations, the amount that the organization’s governing board determines must be retained permanently consistent with the prudence standards of NYPMIFA. FAS 117-1 also requires organizations to classify a portion of the endowment fund that is not classified as permanently restricted net assets as temporarily restricted net assets (time restricted) until such assets are appropriated for expenditure. This means that organizations now will need to classify the income and appreciation from a donor-restricted endowment fund as temporarily restricted, rather than unrestricted (as prior FASB rules permitted), until those funds are appropriated for expenditure by the organization’s board.
FAS 117-1 also requires nonprofit organizations holding endowment funds to include in their financial statements a number of additional disclosures intended to enable readers to better understand the net asset classifications set forth in the financial statements. You should discuss these new rules and procedures with your accountant to ensure proper compliance.
Please let us know what we can do to help your organization comply with these new rules.