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Article
Nov. 27, 2017 · Authored by Patty Mayer
It’s essential that individuals on investment committees, or who play a part in overseeing a foundation or endowment’s investments, understand they’re acting in a fiduciary capacity — and the responsibilities of their role.
These individuals can help ensure a not-for-profit organization’s funds are managed and invested responsibly — and legally — by taking the time to understand their fiduciary duty as well as the organization’s unique investment policies and procedures.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a good place to start when determining the responsibilities of a fiduciary. UPMIFA states that it provides “guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations and imposes additional duties on those who manage and invest charitable funds.”
UPMIFA also specifically provides several items an investment committee must consider when making investment decisions regarding its organization’s assets:
Charitable purpose
An investment committee must consider the charitable purposes of the organization and the fund, subject to the intent of a donor. For example, if a donor establishes an endowment to fund a scholarship, that money can’t be used to help fund a new campus building.
Prudent management
A committee must manage the fund prudently, an act that requires a reasonable standard of care and a commitment to act in good faith. UPMIFA provides further clarification around what prudent management entails, noting which factors an investment committee must consider.
Key Considerations
Third-party investor verification and fees
An investment committee must only incur costs that are appropriate and reasonable and make an effort to verify facts relevant to the management and investment of the fund.
Managing charitable organizational funds in a prudent manner isn’t an easy task. To help board members who may not be experienced investors, a not-for-profit may hire an external investment manager. This doesn’t absolve committee members of their fiduciary duty, however — an investment committee must still verify the information provided by its investment managers and understand how and why specific assets are invested.
Fees paid to those advisors should be reasonable when compared with industry averages.
A charitable organization’s board should verify that the not-for-profit has adequate policies and procedures, known as an investment policy statement (IPS), in place to protect its assets.
An IPS helps ensure the investment committee and any investment managers who’ve been hired are on the same page and managing portfolios according to UPMIFA guidelines. It should be regularly reviewed by the investment committee to verify it meets the organization’s needs and goals.
If an organization doesn’t have an IPS, it’s common for the investment committee to draft one. Hired investment advisors often will assist in this process.
Key components
It’s important for board members and investment committee members to understand their responsibilities as fiduciaries. It’s also imperative that an organization has well-defined roles and structures in place — including a well-drafted IPS — to help these individuals perform their roles.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
