"New York State Attorney General Issues Guidance on the New York Prudent Management of Institutional Funds Act"
We provided to you in previous memoranda an analysis of the substantive provisions of the New York Prudent Management of Institutional Funds Act (NYPMIFA or the Act) and an outline of the steps that organizations should take to comply with this new law.1 NYPMIFA, which is codified primarily in the new Article 5-A of the New York Not-for-Profit Corporation Law (the N-PCL), Sections 550 through 558, makes significant changes to the rules governing how New York nonprofit organizations may manage and invest their funds and spend from their endowment funds.2
On March 17, 2011, the New York State Attorney General's Charities Bureau issued guidance on NYPMIFA titled "A Practical Guide to the New York Prudent Management of Institutional Funds Act" (the Guide). The Guide provides an overview of NYPMIFA as well as guidance on the practical application of certain key provisions. NYPMIFA is a modified version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and includes several unique provisions not found in UPMIFA or the versions of UPMIFA adopted by other states. While the Guide does not have the weight of law or regulation, it reflects the Attorney General's interpretation of NYPMIFA and, therefore, provides organizations with important guidance as to how the Attorney General will enforce NYPMIFA and, in particular, its unique provisions. Accordingly, we thought it would be helpful to summarize for you the Attorney General's interpretation of key provisions of NYPMIFA, as presented in the Guide.
1. Notifying Donors of the New Endowment Spending Rules (N-PCL Section 553(e)(1))
(a) When Must Donor Notice Be Given?
NYPMIFA's new spending rules eliminate the prohibition found in prior law on spending below the historic dollar value of an endowment fund and allow an organization to "appropriate for expenditure"3 as much of an endowment fund, including principal, as the governing board, exercising its duty of care, finds prudent, taking into consideration eight specific factors set forth in the Act. NYPMIFA imposes a notice requirement with respect to endowment funds in existence before September 17, 20 I 0. Organizations must give all "available" donors of such funds, with a few exceptions, 90 days notice before applying NYPMIFA's new endowment spending rules to the fund for the first time4. The notice must give the donor the opportunity to opt in or out of NYPMIFA's new spending rules, i.e., it must allow the donor to direct that the organization may either spend as much of his or her gift as may be prudent or not spend below the original dollar value of his or her gift.5 If the donor does not respond within 90 days to the notice, NYPMIFA's new spending rules will apply to the donor's gift.
Questions have been raised as to whether this donor notice provision, which is unique to NYPMIFA, requires an organization to give notice to donors if the organization does not intend to take advantage of the new endowment spending rules, i.e., the organization has no present intention to appropriate below the historic dollar value of any of its endowment funds. It is the Attorney General's view that, unless one of the exceptions applies, notice must be given to all available donors of endowment funds in existence prior to September 17, 2010, before the organization makes any further appropriations from those endowment funds, even if the organization has no present intention to appropriate below historic dollar value.6
Given the Attorney General's interpretation of the donor notice requirement, organizations should begin now, if they have not already done so, to (i) identity donors requiring notice and make reasonable efforts to locate any such donors whose current address is unknown; (ii) prepare and send the donor notice; and (iii) develop and implement procedures to track donor responses and ensure that adequate and accurate records of actions taken to comply with the donor notice requirement are maintained.
(b) Appropriations for Expenditure Authorized Between September 17, 2010 and Issuance of the Guide
The Attorney General notes in the Guide that if, prior to the issuance of the Guide, an organization, acting in good faith, appropriated from endowment funds subject to the notice requirement without first having sent the 90 day notice to donors, the organization should promptly send the notice to donors. If a donor, in response to the notice, directs that the organization may not spend below historic dollar value, the organization must restore the fund to its historic dollar value if any pre-notice appropriation reduced the fund below its historic dollar value.
(c) May the Organization Appropriate Endowment Funds During the 90 Day Notice Period?
Organizations also have questioned whether they must wait until the 90 day notice period is completed before appropriating funds for expenditure. It is the Attorney General's view that an organization may not appropriate below the historic dollar value of an endowment fund during the 90 day notice period unless the donor has returned the notice and has indicated that NYPMIFA's new spending rules are to apply to the fund. During the notice period, an institution may appropriate the income and net appreciation over historic dollar value if it is prudent to do so under NYPMIFA's prudence standard.
(d) Effect of Donor's Choice to Opt in or Opt Out
The donor notice provision of NYPMIFA, N-PCL Section 553(e)(l), states that if a donor, in response to the donor notice, directs that the organization may not spend below the original dollar value of the donor's gift,"... [t]he criteria for the expenditure of endowment funds set forth in article 5-a of the not-for-profit corporation law" will not apply to the gift. Organizations have questioned whether this language means that the prudence standard for decisions to appropriate from an endowment fund set forth in 553(a) does not apply to endowment funds where the donor, in response to the donor notice, directs that the organization may not spend below original dollar value. In the Guide, the Attorney General states its view that the prudence standard for making decisions to appropriate endowment funds for expenditure set forth in N-PCL Section 553(a) applies to endowment fund spending decisions even if the donor, pursuant to the 90-day notice requirement, directs that the organization may not apply NYPMIFA's new spending rules to the donor's gift. Accordingly, regardless of which option the donor has chosen in response to the notice, the governing board still must determine if any appropriation from the endowment fund is prudent after considering the eight prudence factors set forth in N-PCL Section 553(a), and the board's decision in that regard must be documented in a contemporaneous record.
(e) Determining if a Donor Is Available
NYPMIFA requires organizations to give notice to a donor if the donor "is then available." A donor is available if the donor is an individual who is living, or a corporation or other entity that is in existence and conducting activities, and the donor can be identified and located with reasonable efforts. The Guide expresses the Attorney General's view that reasonable efforts to locate an address for a donor would include conducting Internet searches and contacting known associates of the donor, such as the attorney who represented the donor in connection with the gift. The Attorney General also notes in the Guide that, if the donor of a particular fund is not known, the organization should make reasonable efforts to identify the donor, but no guidance is given on what such efforts would entail.
2. Making and Documenting Decisions to Appropriate Endowment Funds for Expenditure (N-PCL Section 553(a))
(a) Considering the Eight Prudence Factors
NYPMIFA requires an organization's governing board, when making a decision to appropriate endowment funds for expenditure, to act in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances and to consider, if relevant, each of eight factors specified in the Act.7 If a factor is determined to be relevant, the board should consider how the factor affects the determination as to whether or not to appropriate or how much to appropriate. The Guide notes that the nature and extent of a board's consideration of each of the factors likely will vary from institution to institution based on the institution's size, purposes, programs, financial condition and other considerations. NYPMIFA further requires that each decision to appropriate endowment funds for expenditure must be documented in a contemporaneous record, as discussed below.
The Guide also provides some insight into the meaning of the one prudence factor that is unique to New York, i.e., the requirement to consider "where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution." The Attorney General believes that this factor requires the board to identify particular alternatives to spending from an endowment fund and
to discuss to what extent these steps are feasible as an alternative to spending, including the impact such alternatives would have on the organization's operations and programs. Examples of such alternatives noted in the Guide include fundraising efforts, expense reductions, sale of non-essential assets or reductions in non-essential staff. The board's consideration of this factor should be documented in the contemporaneous record.
(b) Making Appropriation Decisions for Similarly Situated Endowment Funds
It is the Attorney General's view that NYPMIFA contemplates that decisions to appropriate from endowment funds are to be made on a "fund-by-fund basis" and documented in a separate contemporaneous record for each fund. In the Guide, the Attorney General concedes that this requirement could prove quite onerous for larger organizations having numerous endowment funds, such as community funds and colleges and universities. The Attorney General expresses the view that the board may make a single decision to appropriate from multiple endowment funds and document that decision in a single contemporaneous record, provided that the endowment funds are "similarly situated." The Guide further provides that a determination as to whether funds are similarly situated may be based on factors such as the purposes of the funds as stated in the gift instruments, the spending restrictions imposed by the gift instrument, the duration of funds, the financial condition of the funds, whether funds are invested similarly and "such other factors as may be relevant under the circumstances." The Attorney General also notes that a decision to treat funds as similarly situated "should be made with care to ensure that any decision to appropriate from the funds collectively would be justified" if the eight prudence factors were applied to each fund individually.
(c) Presumption of Imprudence
NYPMIFA provides that the appropriation for expenditure of more than 7 percent of the fair market value of an endowment fund in any one year creates a rebuttable presumption of imprudence. This provision is applicable only to gifts where the gift instrument was executed on or after NYPMIFA's enactment on September 17, 2010. The Guide confirms what is already clearly articulated in NYPMIFA-an appropriation of 7 percent or less of the value of an endowment fund in any one year does not create a presumption of prudence. The Guide also expresses the attorney General 's view that setting an endowment spending rate of 7 percent or less per year will not, in itself, guarantee that the presumption of imprudence will not be triggered. This is because this provision of NYPMIFA requires that fair market value be calculated based on the fund's fair market value averaged over at least five years immediately preceding the year in which the appropriation is made (or the life of the fund if the fund has been in existence less than five years). The Attorney General recommends that all organizations review their endowment spending policies in light of the presumption of imprudence.
(d) Contemporaneous Documentation
As noted above, NYPMIFA requires an organization to keep a contemporaneous record of each decision to appropriate endowment funds for expenditure. A separate contemporaneous record is required for each endowment fund or, as discussed above, each group of similarly situated endowment funds. The Guide notes that the form in which appropriation decisions are documented "is less important than the substance." The Attorney General believes that to fulfill this record keeping requirement, the record of each decision to appropriate should discuss each of the eight prudence factors and the substance of the consideration that the board gave to each factor. The Attorney General has indicated that "it is not sufficient to state in a conclusory fashion that the board considered a particular factor;
rather, the record should describe the substance of the consideration given to each factor." If a factor was found to be irrelevant, the record should explain the reason for that determination. The Guide notes that appropriation decisions may be documented in minutes of the board meeting at which they are made or, as an alternative to minutes, boards may wish to develop a record to be used specifically to document decisions to appropriate endowment funds for expenditure. Such records should be maintained as part of the organization's permanent records. To be contemporaneous, the record should be created at the time the board makes the decision or immediately thereafter. The Guide also notes that if a board relied on advice or information from lawyers, investment advisers, accountants or other professionals in making a decision to appropriate endowment funds for expenditure, the organization may, but is not required to, incorporate all or part of such written advice in the contemporaneous record. The Attorney General specifically states in the Guide that the Charities Bureau may request production of these contemporaneous records "in the exercise of the Attorney General's supervisory authority over institutions."
3. Managing and Investing Funds (N-PCL Sections 552 and 554)
(a) Investment Policy
NYPMIFA requires organizations to adopt a written investment policy. In the Guide, the Attorney General expresses the view that the nature and contents of an investment policy will vary from organization to organization based on a variety of factors, such as the organization's resources and purposes, the nature and scope of the organization's activities and the types of investments it holds. However, the Attorney General does identify the following examples of subjects generally appropriate for inclusion in an investment policy: general investment objectives; asset allocation and diversification; acceptable levels of risk; permitted and prohibited investments; procedures for monitoring investment performance, delegating investment management, and selecting and evaluating external agents; investment manager accountability; and processes for reviewing investment policies and strategies.
(b) Delegating Investment Management Authority to External Agents
NYPMIFA permits the delegation of investment management authority to external agents, such as investment managers or advisers. The governing board must exercise its duty of care in selecting, continuing or terminating 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. In the Guide, the Attorney General takes the position that this provision requires an organization to follow its conflict of interest policy when selecting, continuing or terminating an external agent. Under such policy, an organization’s officers and directors should be required to disclose whether they have any financial interest in the external agent or any other material business or personal relationships with the agent. If such a relationship exists, the organization's board should consider whether the relationship would reasonably be expected to interfere with the organization’s ability to provide objective oversight of the external agent or to obtain independent objective advice from the external agent.
4. Release or Modification of Gift Restrictions (N-PCL Section 555)
(a) Donor Consent
NYPMIFA expands the options available to organizations to obtain relief from donor restrictions that have become obsolete, wasteful or impracticable, or impossible to effect. Under prior law, if a donor was living and could be located, the donor's written consent was needed to release a restriction on the donor's gift. If the donor was deceased or could not be located or identified, the organization needed court approval, on notice to the Attorney General, to release the restriction. Under NYPMIFA, an organization still may release, or may modify, a restriction upon consent of the donor. However, an organization also now may seek court approval to modify a restriction even if a donor is available and has not consented. The organization must notify available donors and the Attorney General of its application to the court and both of these parties must be given the opportunity to be heard.8 In the Guide, the Attorney General recommends that, in light of the financial and administrative burdens associated with bringing a court action to modify or release a restriction, organizations first seek donor consent to such a modification or release. If such consent is granted, court approval to modify or release the restriction will not be needed.
(b) Modifying or Releasing Restrictions on Small, Old Funds
Under NYPMIFA, an organization may modify or release donor restrictions on funds without obtaining either donor consent or court approval where the fund is small less than $100,000-and more than 20 years old, and the proposed use of the fund after modification or release is consistent with the purposes expressed in the gift instrument. The organization must give the Attorney General 90 days notice of its intention to modify or release the restriction. If the Attorney General does not respond within 90 days, the organization may proceed with the proposed modification or release. Notice of the proposed modification or release also must be given to the donor, if available.
In the Guide, the Attorney General outlines the process it will follow for reviewing such notices to modify or release restrictions on small, old funds and the documentation it will require to complete its review. The Attorney General advises that organizations first should determine whether or not the donor is available and will consent to the modification or release, thereby obviating the need to notify the Attorney General. If notice to the Attorney General is required because the donor is unavailable or refuses to consent, such notice must include the following: (i) a statement of the organization's determination that the fund meets the requirements as a small, old fund, including an explanation of why the restriction has become unlawful, impracticable, impossible to achieve or wasteful; (ii) a statement of the proposed release or modification; (iii) a statement of the proposed use of the fund after release or modification; (iv) a copy of the minutes, resolution or unanimous written consent of the board approving the release or modification; (v) a copy of the notice provided to the donor, if available, and any other correspondence with the donor regarding the organization's proposed modification or release of the restriction; and (vi) documentation showing that the fund's total value is less than $100,000 and that it is over 20 years old. The Guide notes that the Attorney General's preferred method for receipt of such notices is by e-mail, with all documentation attached as a PDF. The e-mail address for submission of the notice is firstname.lastname@example.org. Notices also may be sent by regular mail to the Charities Bureau office at 120 Broadway, 3rd Fl., New York, NY I 0271.
If the Attorney General has any questions, requires further information or objects to the release, the Attorney General will notify the organization in writing within 90 days. If an organization receives such a notice from the Attorney General, the organization may not modify or release the restriction until the organization receives written notice from the Attorney General stating that the Attorney General's questions or objections have been resolved to the Attorney General's satisfaction.
The Guide is available on the Charities Bureau website at http://\v\vw.charitiesnys.com/nypmita_new.html.
1 See our previous memoranda on NYPMIFA, dated September 22,2010, and November 15, 2010.
2 NYPMIFA's provisions are applicable to New York not-for-profit corporations (as defined in N-PCL Section102(a)(5)), education corporations and, with a few exceptions, religious corporations, associations organized and operated exclusively for charitable purposes, and certain trusts. NYPMIFA's application to trusts is limited to charitable trusts where the trustee is a charity.
3 The Guide notes that, although the term "appropriation" is not defined in NYPMIFA, it generally is understood to mean "a decision by the governing board to release a portion of an endowment fund from the donor-imposed restriction on spending, thus authorizing it to be spent in accordance with the terms of the gift instrument." Endowment funds may be "appropriated for expenditure" on one date and then spent on another date or over a period of time.
4 There are three exceptions to this requirement. NYPMIFA provides that donor notice need not be given where (i) the gift instrument already permits appropriation without regard to the fund's historic dollar value; (ii) the gift instrument specifically limits the organization's authority to appropriate or accumulate funds; or (iii) the endowment funds were received in response to a solicitation by the organization and the donor did not execute a gift agreement or otherwise provide his or her own statement restricting the use of the funds.
5 NYPMIFA uses the term "original dollar value" rather than "historic dollar value." "Original dollar value" is not defined in the Act. In the Guide, the Attorney General expresses the view that the term "original dollar value" is intended to be the "plain-English equivalent" of the term "historic dollar value" as defined in N-PCL Section 102(a)(16).
6 In the Guide, the Attorney General provides several reasons for its position on donor notification. The Attorney General believes that the notice requirement serves the following two policy objectives: (i) to provide donors with information about the change in the law with respect to the organization's authority to spend below historic dollar value and (ii) to give donors the opportunity to clarify or amend the terms of the donor's gift with regard to such appropriation. The Attorney General believes that if notice is not given now or is delayed, these policy objectives would be frustrated.
7 See our September 22, 2010, memorandum for a discussion of the eight factors.
8 Corporations formed under the New York Religious Corporations Law are not required to notify available donors or the Attorney General of the court application and such parties need not be given the opportunity to be heard.