The New York Prudent Management of Institutional ... - NYCLA

2.5 TRANSITIONAL ANd NON-TRANSITIONAL MCLE CREdITS: This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2.5 Transitional and Non-Transitional credit hours: 0.5 Ethics; 2 Professional Practice.

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The New York PrudeNT MaNageMeNT of INsTITuTIoNal fuNds acT: whaT NoN-ProfITs

Need To kNowPrepared in connection with a Continuing Legal Education course presented

at New York County Lawyers’ Association, 14 Vesey Street, New York, NY scheduled for February 17, 2011.

P r o g r A m C o - s P o N s o r :

NYCLA Nonprofit Organizations Committee

P r o g r A m C h A I r :

Lester Nelson, Esq.

F A C u L t Y :

Jillian P. Diamant, Simpson Thacher & Bartlett LLPJohn Sare, Patterson Belknap Webb & Tyler LLP

david A. Shevlin, Simpson Thacher & Bartlett LLP

Information Regarding CLE Credits and Certification What You Need to Practice Immigration Law Successfully: Getting Your Client

the Right Non Immigrant Visa and “Green Card” Tuesday, February 15, 2011, 6:00PM – 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of each day. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iv. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

v. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving . The time will be verified by the Program Assistant. If it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

vi. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

The New York Prudent Management of Institutional Funds Act: What Non-Profits Need to Know

Thursday, February 17, 2011 6:00 PM – 8:05 PM

AGENDA Program Chair: Lester Nelson, Esq. Panel: Jillian P. Diamant, Simpson Thacher & Bartlett LLP

John Sare, Patterson Belknap Webb & Tyler LLP David A. Shevlin, Simpson Thacher & Bartlett LLP

5:30 PM – 5:55 PM Registration 5:55 PM – 6:00 PM Introductions and Announcements 6:00 PM – 8:05PM Discussion

Continuing Legal Education Institute

14 Vesey Street, New York, N.Y. 10007

New York Prudent Management of Institutional Funds Act: What Non-Profits Must Know

Thursday, February 17, 2011, 6:00PM – 8:05PM

COURSE MATERIALS Section Enactment of the New York Prudent Management of Institutional Funds Act 1 Enactment of the New York Prudent Management of Institutional Funds Act 2 Affecting New York Non-Profit Institutions New York Version of UPMIFA Creates Flexibility as well as New Burdens 3 For Non-Profits

Enactment of the New York Prudent Management of Institutional Funds Act

David A. ShevlinJillian P. Diamant

February 17, 2011

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IntroductionOn September 17, 2010, New York State enacted the New York Prudent Management of Institutional Funds Act (“NYPMIFA” or the “Act”), its version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”).

UPMIFA was drafted by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) and has been enacted in 47 states, now including New York.

Public charities, private foundations, social welfare organizations, other entities incorporated under the N-PCL and certain trusts will be governed by the Act.

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IntroductionAmong other things, the Act provides:

a standard of conduct for managing and delegating authority with respect to “institutional funds;”

rules of construction for appropriating from an “endowment fund;” and

rules for release or modification of restrictions on institutional funds.

The Act makes clear that whenever it imposes any obligation on, or requires any action to be taken by, an institution, that obligation is imposed on, and that action must be authorized by, the governing board of the institution.

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DefinitionsThe Act applies to all organizations defined as “institutions”under the Act. An institution is

a person, other than an individual, organized and operated exclusively for charitable purposes;

a trust that had both charitable and noncharitable interests, after all noncharitable interests have terminated; or

any corporation described in subparagraph five of paragraph (a) of section 102 (Definitions) of the N-PCL.

We believe that an institution not formed under the laws of New York State will not be subject to the Act because of the internal affairs doctrine. Instead, we believe a court would apply the version of UPMIFA enacted in the institution’s state of formation.

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DefinitionsSection 102(a)(5) of the N-PCL defines “corporation” as a corporation

formed under this chapter, or existing on its effective date and theretofore formed under any other general statute or by any special act of this state, exclusively for a purpose or purposes not for pecuniary profit or financial gain, for which a corporation may be formed under this chapter, and

no part of the assets, income or profit of which is distributable to, or inures to the benefit of, its members, directors or officers except to the extent permitted under this statute. Section 201 of the N-PCL allows for formation of Type A, C, and D corporations, which in general, are not charitable (e.g., those formed for non-pecuniary civic, social, or fraternal purposes).

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Definition of “Institution”: FAQsQuestion: Does NYPMIFA apply to Type A, C, and D corporations (which may be exempt from tax under IRC Section 501(c)(4) and not 501(c)(3))?

Answer: We believe that NYPMIFA applies to all corporations incorporated under the N-PCL, including Type A, B, C and D corporations.

Question: Does NYPMIFA apply to institutions operating in New York but incorporated under the laws of another state?

Answer: We believe that an institution not formed under the laws of New York State will not be subject to NYPMIFA because of the internal affairs doctrine. Instead, we believe a court would apply the version of UPMIFA enacted in the institution’s state of formation.

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DefinitionsThe term “institution” includes a trust that had both charitable and non-charitable interests, after all non-charitable interests have terminated. The term “institutional fund” is defined as a fund held by an institution, but does not include a fund held for an institution by a trustee that is not an institution.

It is our understanding that UPMIFA is intended to apply to only those trusts where the trustee of the trust is a charity. The NCCUSL commentary to the definition of “institution”states: “the term institution includes a trust organized and operated exclusively for charitable purposes, but only if a charity acts as trustee. This approach leaves unchanged the coverage of UMIFA.”

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Definition of “Institution”: FAQs Question: If a bank is the trustee for a charitable remainder trust (“CRT”), and the non-charitable interests have terminated, does NYPMIFA govern the funds held by the CRT?

Answer: We believe that NYPMIFA does not govern the funds held by a CRT where the trustee is a bank.

Question: After the funds are paid out by the CRT to the charitable remainderman, are the funds governed by NYPMIFA?

Answer: We believe that, after the funds are paid out by the CRT to the charitable remainderman, the funds are governed by NYPMIFA if the charitable remainderman is an institution formed under the laws of New York State.

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DefinitionsAn “endowment fund” is defined as an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. An endowment fund does not include assets that an institution itself designates as not expendable on a current basis.

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Standard of Conduct in Managing and Investing an Institutional Fund: Prudence Standard

The Act requires that those responsible for managing an institutional fund act “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” This is similar to language in prior law. However, the Act provides far greater specificity and requires consideration of the following factors in managing and investing an institutional fund:


general economic conditions;

the possible effect of inflation or deflation;

the expected tax consequences, if any, of investment decisions or strategies;

the role that each investment or course of action plays within the overall investment portfolio of the fund;

the expected total return from income and the appreciation of investments;

other resources of the institution;

the needs of the institution and the fund to make distributions and to preserve capital; and

an asset’s special relationship or special value, if any, to the charitable purposes of the institution.

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This prudence standard and the required considerations may be modified by a specific direction in a written gift instrument. For example, a donor could require that the governing board consider additional factors in managing and investing an institutional fund.


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Standard of Conduct in Managing and Investing an Institutional Fund: Prudence Standard –

FAQs

Question: Is the Board required to record its consideration of each of the factors in managing and investing an institutional fund?

Answer: The Act does not explicitly require an institution to keep a contemporaneous record describing the consideration that was given to each factor. However, we believe that it would be appropriate for an institution to record that these factors were considered.

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Standard of Conduct in Managing and Investing an Institutional Fund: Diversification

Except as otherwise provided in a gift instrument, the Act provides that an institution must diversify the investments of an institutional fund unless the institution prudently determines that, because of special circumstances, the purposes of the fund are better served without diversification.

In addition, an institution must review a decision not to diversify an institutional fund as frequently as circumstances require, and at least annually. Some commentators argue that it is unclear whether a court would enforce a provision in a gift instrument that requires non-diversification.

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Standard of Conduct in Managing and Investing an Institutional Fund: Investment Policy

The Act requires institutions to adopt a written investment policy that reflects the requirements of the Act. The investment policy must be taken into consideration when appropriating funds for expenditure from an endowment fund.

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Appropriation for Expenditure: Factors to Consider

One of the Act’s most important changes to prior law is the elimination of the concept of “historic dollar value.”Instead, the Act provides that an institution may appropriate so much of an endowment fund as the institution determines, subject to the intent of the donor expressed in a gift instrument, is prudent for the uses, benefits, purposes and duration for which the endowment fund is established. The Act provides the following eight factors that institutions must consider, if relevant, when making decisions as to expenditure or accumulation of endowment funds:

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the duration and preservation of the endowment fund;

the purposes of the institution and the endowment fund;

general economic conditions;

the possible effect of inflation and deflation;


other resources of the institution;

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; and

the investment policy of the institution.

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NYPMIFA has an additional factor not included in UPMIFA: that the institution, where appropriate and circumstances would otherwise warrant, consider “alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution.”

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Appropriation for Expenditure: Factors to Consider –

FAQs

Question: What steps should an institution take to comply with this additional factor?

Answer: We believe that unlike the factor requiring institutions to consider “other resources of the institution,”this factor requiring institutions to consider “alternatives to expenditure of the endowment fund” may require consideration of possible alternatives that are not current resources of the institution. Such alternatives may include efficiencies or cost-cutting. We expect the Attorney General’s office to issue further guidance on this question.

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A gift instrument may set forth a specific spending level, rate or amount, or otherwise explicitly modify or override the appropriation provisions of the Act. For example, a gift instrument could provide that the institution must spend 5% of the value of an institutional fund each year. Generally, under the Act an institution will continue to comply with specific restrictions contained in existing gift instruments.

The terms “income,” “interest,” “dividends,” or “rents, issues or profits,” or “to preserve the principal intact” do not limit the authority to appropriate for expenditure.

The Act requires that an institution keep a contemporaneous record describing the consideration given by the governing board or committee to each of the factors enumerated.

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Appropriation for Expenditure –

FAQsQuestion: Is the record-keeping requirement met through a description in the minutes of the consideration given by the governing board (or committee) to each factor?

Answer: We believe that this description in the minutes would meet the record-keeping requirement.

Question: Must the governing board (or committee) consider each factor, and document its consideration, on a fund-by-fund basis, or may a decision be made and documented to appropriate from multiple similarly-situated endowment funds simultaneously (e.g., by application of a specific spending rate to many funds)?

Answer: We believe that the governing board may appropriate from multiple similarly-situated endowment funds simultaneously (e.g., by application of a specific spending rate).

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Appropriation for Expenditure –

FAQsQuestion: If an institution may make one decision to appropriate from multiple endowment funds, how should this be documented?

Answer: We believe that the governing board (or a committee) may describe, in the minutes of its meeting, the consideration given to each of the factors enumerated in section 553 in determining the spending rate to be applied to multiple endowment funds and need not repeat the factors for each separate fund.

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7% Rebuttable Presumption of Imprudence

Expenditure in any year of greater than 7% of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than five years immediately preceding the year of appropriation, creates a rebuttable presumption of imprudence.

Appropriation permitted under law or under the terms of the specific gift instrument is exempt from this presumption.

Appropriation of less than 7% of the fair market value of an endowment fund does not create a presumption of prudence.

The presumption in the Act applies only to appropriation from gift instruments executed on or after the effective date of the Act.

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7% Rebuttable Presumption of Imprudence

The comments to UPMIFA state that the presumption may be rebutted by the institution if circumstances in a particular year make expenditures above that amount prudent.

In addition, the comments to UPMIFA state “If sufficient evidence establishes, by the preponderance of the evidence, the facts necessary to raise the presumption of imprudence, then the institution will have to carry the burden of production of (i.e., the burden of going forward with) other evidence that would tend to demonstrate that its decision was prudent. The existence of the presumption does not shift the burden of persuasion to the charity.”

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7% Rebuttable Presumption of Imprudence –

FAQs

Question: How may an institution meet the burden of production to demonstrate that it has prudently appropriated in excess of 7%?

Answer: We believe the Board may document in the minutes its decision-making process.

Question: Does the 7% presumption apply to funds that are not underwater, such that the presumption of imprudence would apply to appropriation solely of income and appreciation?

Answer: We believe that the 7% presumption applies to endowment funds whether or not underwater and would apply to an appropriation solely of income and appreciation.

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7% Rebuttable Presumption of Imprudence –

FAQs

Question: If a decision to appropriate is made prior to enactment of NYPMIFA, but the appropriated funds are expended after enactment of NYPMIFA, is the decision to appropriate subject to the standards of NYPMIFA or prior law? For example, if a decision to appropriate was made in June, 2010, for the 2011 fiscal year, is the decision evaluated in light of NYPMIFA or prior law?

Answer: We believe that if a decision to appropriate is made prior to enactment of NYPMIFA, then prior law should be applied to that decision, regardless of when the funds are expended. For example, if a decision to appropriate was made in June 2010, then prior law applied, and the institution is not required to reevaluate the decision in light of NYPMIFA at the time such funds are expended.

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Appropriation & NoticeWith respect to a gift instrument executed by the donor before the effective date of the Act, an institution must provide 90 days advance notice to the donor, if available, before appropriating from the applicable endowment fund for the first time.

Question: May an institution appropriate during the 90 days after enactment, so long as it does not invade original dollar value?

Question: May an institution appropriate during the 90 days after notice is given, so long as it does not invade original dollar value?

Question: Is notice required if an institution does not plan to invade historic dollar value?

Answer: We are awaiting guidance from the Attorney General on these questions.

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Appropriation & NoticeThe Act specifies that notification should be substantially in the form of boxes that the donor may check providing either that (1) the institution may spend as much of the endowment gift as is prudent, or (2) the institution may not spend below the original dollar value of the endowment gift.

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Appropriation & Notice -

FAQsQuestion: If a donor has chosen option 2, does the prudence standard set forth in NYPMIFA apply to appropriation of income and appreciation from the endowment funds established by the donor? If not, what prudence standard does apply to appropriations of income and appreciation from these endowment funds?

Answer: We believe that if a donor has chosen option 2, then the prudence standard set forth in NYPMFIA should apply to the decision to appropriate. However, the institution may only appropriate income and appreciation and may not invade original dollar value.

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Appropriation & Notice –

FAQsQuestion: Does the donor’s choice of option 1 or option 2 affect the application of the 7% rebuttable presumption of imprudence?

Answer: No, in either case, the 7% presumption or imprudence would not apply. The 7% presumption only applies to gift instruments executed on or after the effective date of NYPMIFA, while the notification provision of 553(e)(1) (and donor’s ability to thereby prohibit an institution from invading original dollar value) applies only to gift instruments executed before the effective date of NYPMIFA.

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Appropriation & NoticeIf the donor does not respond within 90 days from the date notice was given, the institution will not be subject to the original dollar value limitation. If the donor does respond, the institution must follow the donor’s direction.

For purposes of the Act, the term “donor” is defined as the person or entity that grants or transfers property to an institution pursuant to a gift instrument, or a person or entity designated in the applicable gift instrument to act in the place of the donor, but does not otherwise include the person’s executors, heirs, successors, assigns, transferees or distributees. A donor is “available” if the donor (i) is living or, if the donor is not a natural person, is in existence and conducting activities, and (ii) can be identified and located with reasonable efforts.

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Appropriation & NoticeNotice is not required where:

the gift instrument permits appropriation without regard for original dollar value,

the gift instrument limits the institution’s ability to appropriate in accordance with the necessary limiting language (e.g., a specific spending rate), or

the gift was received as the result of an institutional solicitation and was not accompanied by a separate statement from the donor expressing a limitation on the use of the funds (e.g., the donor sent a check in response to the institution’s request that the donor contribute to a capital campaign).

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Delegation of Management and Investment

Under prior law and the Act, those responsible for managing institutional funds may delegate authority for investment decisions to external investment advisors or managers.

The Act provides that an institution must act in good faith with the care that an ordinarily prudent person in a like position would exercise in:

selecting, continuing or terminating an agent, and assessing the agent’s independence;

establishing the scope and terms of the delegation, including the payment of compensation; and

monitoring the agent’s performance and compliance with the scope and terms of the delegation.

Delegation of Management and Investment

An agent must act with reasonable care, skill and caution.

The requirement of prior law that each contract pursuant to which authority is delegated to an external agent may be terminated by the institution at any time, without penalty, upon not more than 60 days notice, has been retained.

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Delegation of Management and Investment –

FAQs

Question: What steps should an institution take in selecting, continuing or terminating an agent, including assessing the agent’s independence, including any conflicts of interest such agent has or may have?

Answer: We believe the institution should request and review information regarding the agent’s experience, personnel, track record and proposed compensation as compared to appropriate peers and do other customary due diligence as required. In addition, the institution should have a conflict of interest policy and follow the policy in selecting the agent. This would generally require that the institution determine if any of its officers or directors are officers or directors of or have a substantial financial interest in the agent. If so, the material facts as to the director’s or officer’s interest should be disclosed to the governing board (or committee) and such person should abstain from the vote to select or terminate the agent.

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FAQs

Question: What steps should an institution take to establish the scope and terms of the delegation, including the payment of compensation, consistent with the purposes of the institution and the institutional fund?

Answer: We believe that the governing board (or committee) should enter into a written agreement with the agent, setting forth the scope and terms (including terms of compensation) of the engagement.

Question: What steps should an institution take to monitor an agent’s performance and compliance with the scope and terms of the delegation

Answer: We believe that the governing board (or committee) should receive and review regular reports on the agent’s performance.

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FAQs

Question: Can the governing board delegate to a committee of the board the authority to appropriate from an endowment fund?

Answer: Section 712 of the N-PCL states that the governing board may designate committees, each of which may have all of the authority of the board, except for certain prohibited activities listed in the N-PCL. Appropriation from an endowment fund is not one of the listed prohibited activities. Therefore, we believe that the governing board may delegate the authority to appropriate from an endowment fund to a committee.


FAQs

Question: Can the governing board delegate to an external agent the authority to appropriate from an endowment fund?

Answer: NYPMIFA does not specifically discuss delegation of the authority to appropriate from and endowment fund to an external agent. Section 551(d) of NYPMIFA states that the obligations of NYPMIFA are imposed on the governing board. Therefore, we believe that the authority to appropriate from an endowment fund is a core board function that may be delegated to a board committee but not to an external agent.

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FAQs

NYPMIFA specifies in the definition of “institution” in section 551 that the governing board retains responsibility for compliance with the provisions of NYPMIFA. Section 554 of NYPMIFA states that an institution that complies with the requirements for prudent delegation to an agent is not liable for the decisions or actions of an agent to which the function was delegated.

Question: Does NYPMIFA change prior law that appropriate delegation relieves the Board of liability for acts or omissions of those to whom such responsibilities are delegated?

Answer: We believe that NYPMIFA does not change prior law.

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Release or Modification of RestrictionsUnder prior law, an institution could seek release of restrictions placed upon a gift by obtaining the authorization of the donor.

Where release by the donor was not possible due to the donor’s death, disability, unavailability or impossibility of identification, an institution, upon prior notice to the Attorney General, could seek court release if the restriction was obsolete, inappropriate or impracticable.

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Release or Modification of RestrictionsUnder the Act, an institution may seek court release or modification of a restriction regarding the management or investment of an institutional fund, even if the donor is available, if the restriction is impracticable or wasteful, impairs management or investment, or if, because of circumstances not anticipated by the donor, a modification or release would further the purposes of the fund. To the extent practicable, any modification must be made in accordance with the donor’s probable intention.

In addition, if a particular purpose or restriction contained in a gift instrument becomes impossible, impracticable, unlawful or wasteful, a court may modify the purpose or restriction on use in a manner consistent with the purposes of the gift instrument. An institution seeking court release of a restriction must provide notice of the application to the Attorney General and donor, and the Attorney General and the donor will have an opportunity to be heard.

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Release or Modification of Restrictions: Small, Old Funds

If an institution determines that a restriction on the management, investment or purpose of an institutional fund is unlawful, impracticable, impossible to achieve or wasteful, after 90 days notice to the Attorney General and the donor (if the donor is available), the institution may release or modify arestriction contained in a gift instrument if:

the fund has a total value of less than $100,000;

more than 20 years have elapsed since the fund was established; and

the institution uses the property in a manner consistent with the purposes expressed in the gift instrument.

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Effective DateThe Act went into effect on September 17, 2010.

The new prudence factors apply to investment and appropriation decisions made after the effective date.

In general, the Act applies to institutional funds created before, on or after the effective date.

However, (i) the 7% rebuttable presumption of imprudence applies only to funds executed on or after the effective date of the statute; and (ii) notification of donors is required prior to appropriation only with respect to gift instruments executed by the donor prior to the effective date of the statute.

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Changes to Other Provisions of Law The Act amends subdivision 2 of section 174-b of the New York Executive Law to require that solicitations for an endowment fund include a statement that, unless otherwise restricted by the gift instrument, the institution may expend so much of an endowment fund as it deems prudent after considering the factors required by the Act.

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Action StepsGoverning Board: Governing boards should be educated as to the substance and impact of the Act. The governing board is ultimately responsible for compliance with the Act and must make decisions regarding the management and investment of institutional funds and appropriation from endowment funds.

Policies and Procedures: Institutions should promptly update policies and procedures related to the investment and management of institutional funds to comply with the Act.

All institutions should adopt and follow a written investment policy that reflects the prudence standards of the Act.

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Action StepsProcedures should be put in place in order to

notify existing donors regarding the ability to appropriate;

appropriate funds in accordance with the prudence standards of the Act;

comply with the rules regarding delegation to external agents; and

revise solicitation materials relating to endowment funds.

Institutions may wish to develop or revise gift acceptance policies and model gift agreements in light of the requirements.

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Action StepsIn addition, institutions must maintain records and appropriately manage three new categories of endowment funds:

endowment funds governed by the default rules of the Act;

endowment funds continuing to be subject to the concept of original dollar value; and

endowment funds subject to specific donor restrictions, such as a specified spending rate.

Financial Statements: Institutions should discuss with outside advisors the impact of any changes in the classification of endowment funds as (i) restricted; (ii) temporarily restricted; and (iii) unrestricted.

Additional InformationFor additional information on this topic, please see our website at http://www.simpsonthacher.com/siteContent.cfm?contentID=4&itemID=80&focusID=1062

This presentation is for general informational purposes and should not be regarded as legal advice, Furthermore, the information contained in this presentation does not represent, and should not be regarded as, the view of any particular client of Simpson Thacher & Bartlett LLP. Neither this presentation nor the lawyers who authored it are rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this presentation to any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection with the use of this publication.

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http://www.simpsonthacher.com/siteContent.cfm?contentID=4&itemID=80&focusID=1062

http://www.simpsonthacher.com/siteContent.cfm?contentID=4&itemID=80&focusID=1062

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Enactment of the New York Prudent Management of Institutional Funds Act Affecting New York Not-For-Profit Institutions September 20, 2010

On September 17, 2010, New York State enacted the New York Prudent Management of Institutional Funds Act (“NYPMIFA” or the “Act”), its version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). UPMIFA was drafted by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) and has been enacted in 47 states, now including New York.

The intent of UPMIFA is to update those provisions of the Uniform Management of Institutional Funds Act (“UMIFA”), drafted in 1972 and incorporated into law in New York State in 1978, that have proven outdated or difficult to administer. UPMIFA applies to charitable institutions other than trusts (unless the trustee of the trust is a charity). UPMIFA retains some of UMIFA’s provisions, but updates sections on investment conduct, expenditure of funds, delegation of management and investment, and release or modification of restrictions. Both UPMIFA and UMIFA provide default rules for the construction and interpretation of gift instruments. As these are default rules, they can be overridden by an express provision in a gift instrument.

Under UMIFA, charitable institutions generally were required to maintain the “historic dollar value” of each endowment fund, meaning that the institution could appropriate for expenditure only a prudent portion of any appreciation in the endowment fund over the original dollar value, and of any income earned on the endowment fund, but could not appropriate the original dollar value of the endowment fund. Under UPMIFA, a detailed prudence standard governs appropriation from endowment funds, and there is no longer a requirement to maintain original dollar value.

This memorandum discusses the significant changes to the New York Not-For-Profit Corporation Law (the “N-PCL”) resulting from the enactment of the Act. In Appendix A, we provide several hypothetical situations illustrating the impact that enactment of the Act may have on institutions formed pursuant to New York law. In Appendix B, we provide sample Board minutes recording a hypothetical decision to appropriate from an endowment fund. In Appendix C, we provide a model letter for compliance with the notification provisions of the Act relating to appropriation.

I. NYPMIFA.

The Act applies to all organizations defined as “institutions” under the Act. An institution is (i) a person, other than an individual, organized and operated exclusively for charitable purposes; (ii) a trust that had both charitable and noncharitable interests, after all noncharitable interests

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Memorandum – September 20, 2010

have terminated; or (iii) any corporation described in subparagraph five of paragraph (a) of section 102 (Definitions) of the N-PCL. Therefore, public charities, private foundations, social welfare organizations and other entities incorporated under the N-PCL will be governed by the Act. We believe that an institution not formed under the laws of New York State will not be subject to the Act because of the internal affairs doctrine. Instead, we believe a court would apply the version of UPMIFA enacted in the institution’s state of formation. In addition, as discussed below, the Act only applies to funds held by charitable trusts where the trustee is itself an “institution.”

Among other things, the Act provides (i) a standard of conduct for managing and delegating authority with respect to “institutional funds;” (ii) rules of construction for appropriating from an “endowment fund;” and (iii) rules for release or modification of restrictions on institutional funds.

An “institutional fund” is defined as a fund held by an institution, but does not include program-related assets, funds held by charitable trusts where the trustee itself is not an institution or a fund in which a beneficiary that is not an institution has an interest (other than an interest that could arise upon violation or failure of the purposes of the fund). An “endowment fund” is defined as an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. An endowment fund does not include assets that an institution itself designates as not expendable on a current basis.

The Act makes clear that whenever it imposes any obligation on, or requires any action to be taken by, an institution, that obligation is imposed on, and that action must be authorized by, the governing board of the institution.1

A. Section 552. Standard of Conduct in Managing and Investing an Institutional Fund.

1. Prudence Standard.

The Act requires that those responsible for managing an institutional fund act “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” This is similar to language in prior law. However, the Act provides far greater specificity and requires consideration of the following factors in managing and investing an institutional fund:

general economic conditions; the possible effect of inflation or deflation; the expected tax consequences, if any, of investment decisions or

strategies;

1 Although the governing board retains responsibility for compliance with the provisions of the Act, the Act

does allow for delegation both to external agents and to internal constituents such as committees and employees. The delegation provisions specify that appropriate delegation relieves the board of liability for acts or omissions of those to whom such responsibilities are delegated.

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the role that each investment or course of action plays within the overall investment portfolio of the fund;


other resources of the institution; the needs of the institution and the fund to make distributions and to

preserve capital; and an asset’s special relationship or special value, if any, to the charitable

purposes of the institution.

In addition, an institution may incur only those costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution, and must make a reasonable effort to verify facts relevant to the management and investment of the institutional fund. This prudence standard and the required considerations may be modified by a specific direction in a written gift instrument. For example, a donor could require that the governing board consider additional factors in managing and investing an institutional fund.

The Act does not explicitly require an institution to keep a contemporaneous record describing the consideration that was given to each factor.2 However, we believe that it would be appropriate for an institution to record that these factors were considered.

2. Diversification.

Except as otherwise provided in a gift instrument, the Act provides that an institution must diversify the investments of an institutional fund unless the institution prudently determines that, because of special circumstances, the purposes of the fund are better served without diversification. In addition, an institution must review a decision not to diversify an institutional fund as frequently as circumstances require, and at least annually.3

3. Investment Policy.

The Act requires institutions to adopt a written investment policy that reflects the requirements of the Act. As discussed below, the investment policy must be taken into consideration when appropriating funds for expenditure from an endowment fund.

B. Section 553. Appropriation for Expenditure or Accumulation of Endowment Fund; Rules of Construction.

One of the Act’s most important changes to prior law is the elimination of the concept of “historic dollar value.” Instead, the Act provides that an institution may appropriate so much

2 Contrast with section 553 (Appropriation for Expenditure or Accumulation of Endowment Fund; Rules of

Construction) of the Act. Section 553 requires an institution to keep a record of the factors considered when appropriating from an endowment fund.

3 Some commentators argue that it is unclear whether a court would enforce a provision in a gift instrument that requires non-diversification. See John H. Langbein, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments, 90 B.U. L. Rev. 375 (2010).

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of an endowment fund as the institution determines, subject to the intent of the donor expressed in a gift instrument, is prudent for the uses, benefits, purposes and duration for which the endowment fund is established. The Act provides the following eight factors that institutions must consider, if relevant, when making decisions as to expenditure or accumulation of endowment funds:

the duration and preservation of the endowment fund; the purposes of the institution and the endowment fund; general economic conditions; the possible effect of inflation and deflation; the expected total return from income and the appreciation of

investments; other resources of the institution; 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; and

the investment policy of the institution.

We believe that the governing board (or a committee) may appropriate from multiple similarly-situated endowment funds simultaneously (e.g., by application of a specific spending rate to many funds).

The Act requires that an institution keep a contemporaneous record describing the consideration given by the governing board or committee to each of the factors enumerated. We believe that the record-keeping requirement may be met through a description in the minutes of the consideration given by the governing board or committee to the relevant factors.4 Where an institution applies a spending rate, we believe the minutes should reflect the consideration given to each of the factors in determining the spending rate to be applied to multiple endowment funds and need not repeat the factors for each separate fund.

1. Limitation on the Ability to Appropriate for Expenditure.

A gift instrument may set forth a specific spending level, rate or amount, or otherwise explicitly modify or override the appropriation provisions of the Act. For example, a gift instrument could provide that the institution must spend 5% of the value of an institutional fund each year. Generally, under the Act an institution will continue to comply with specific restrictions contained in existing gift instruments.

2. Rebuttable Presumption of Imprudence.

Expenditure in any year of greater than 7% of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than five years immediately preceding the year of appropriation, creates a rebuttable presumption of imprudence. Appropriation permitted under law or under the terms

4 Please see Appendix B for sample board minutes relating to appropriation from an endowment fund.

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of the specific gift instrument is exempt from this presumption. Appropriation of less than 7% of the fair market value of an endowment fund does not create a presumption of prudence. Although not clearly addressed in the Act, the comments to UPMIFA state that the presumption may be rebutted by the institution if circumstances in a particular year make expenditures above that amount prudent. Decisions to appropriate in an amount greater than 7% should be documented in detail in the minutes of the meeting at which the decision was taken.5 Notably, the presumption in the Act applies only to appropriation from gift instruments executed on or after the effective date of the Act.

3. Notification.

With respect to a gift instrument executed by the donor before the effective date of the Act, an institution must provide 90 days advance notice to the donor, if available, before appropriating from the applicable endowment fund for the first time. The Act specifies that notification should be substantially in the form of boxes that the donor may check providing either that (i) the institution may spend as much of the endowment gift as is prudent, or (ii) the institution may not spend below the original dollar value6 of the endowment gift.7 We believe that if the donor chooses the second option, the prudence standard of the Act applies, but the institution may not spend below the original dollar value. If the donor does not respond within 90 days from the date notice was given, the institution will not be subject to the original dollar value limitation. If the donor does respond, the institution must follow the donor’s direction. Notice is not required where (i) the gift instrument permits appropriation without regard for original dollar value, (ii) the gift instrument limits the institution’s ability to appropriate in accordance with the necessary limiting language (e.g., a specific spending rate), or (iii) the gift was received as the result of an institutional solicitation and was not accompanied by a separate statement from the donor expressing a limitation on the use of the funds (e.g., the donor sent a check in response to the institution’s request that the donor contribute to a capital campaign).

For purposes of the Act, the term “donor” is defined as the person or entity that grants or transfers property to an institution pursuant to a gift instrument, or a person or entity designated in the applicable gift instrument to act in the place of the donor, but does not otherwise include the person’s executors, heirs, successors, assigns, transferees or distributees. A donor is “available” if the donor (i) is living or, if the donor is not a natural person, is in existence and conducting activities, and (ii) can be identified and located with reasonable efforts.

C. Section 554. Delegation of Management and Investment Functions.

Under prior law and the Act, those responsible for managing institutional funds may delegate authority for investment decisions to external investment advisors or managers. The Act

5 We recommend that institutions review the comments attached to UPMIFA regarding the burden of

production relating to the rebuttable presumption of imprudence. See http://www.law.upenn.edu/bll/archives/ulc/umoifa/2006final_act.htm.

6 We note that the Act uses the term “original dollar value” which we believe is synonymous with “historic dollar value,” the term used by prior law.

7 Please see Appendix C for a model notification letter relating to appropriation.

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provides that an institution must act in good faith with the care that an ordinarily prudent person in a like position would exercise in (i) selecting, continuing or terminating an agent, and assessing the agent’s independence; (ii) establishing the scope and terms of the delegation, including the payment of compensation; and (iii) monitoring the agent’s performance and compliance with the scope and terms of the delegation. An agent must act with reasonable care, skill and caution. The requirement of prior law that each contract pursuant to which authority is delegated to an external agent may be terminated by the institution at any time, without penalty, upon not more than 60 days notice, has been retained.

A governing board also may delegate management and investment functions to its committees, officers or employees, in accordance with the prudence standard set forth in the Act.

D. Section 555. Release or Modification of Restrictions on Management, Investment or Purpose.

Under prior law, an institution could seek release of restrictions placed upon a gift by obtaining the authorization of the donor. Where release by the donor was not possible due to the donor’s death, disability, unavailability or impossibility of identification, an institution, upon prior notice to the Attorney General, could seek court release if the restriction was obsolete, inappropriate or impracticable.

Under the Act, an institution may seek court release or modification of a restriction regarding the management or investment of an institutional fund, even if the donor is available, if the restriction is impracticable or wasteful, impairs management or investment, or if, because of circumstances not anticipated by the donor, a modification or release would further the purposes of the fund. To the extent practicable, any modification must be made in accordance with the donor’s probable intention. In addition, if a particular purpose or restriction contained in a gift instrument becomes impossible, impracticable, unlawful or wasteful, a court may modify the purpose or restriction on use in a manner consistent with the purposes of the gift instrument. An institution seeking court release of a restriction must provide notice of the application to the Attorney General and donor, and the Attorney General and the donor will have an opportunity to be heard.

In addition, if an institution determines that a restriction on the management, investment or purpose of an institutional fund is unlawful, impracticable, impossible to achieve or wasteful, after 90 days notice to the Attorney General and the donor (if the donor is available), the institution may release or modify a restriction contained in a gift instrument if (i) the fund has a total value of less than $100,000; (ii) more than 20 years have elapsed since the fund was established; and (iii) the institution uses the property in a manner consistent with the purposes expressed in the gift instrument. The Act provides that notice to the Attorney General must contain (A) an explanation of (i) the institution’s determination that the restriction meets the requirements set forth in the Act (e.g., less than $100,000, 20 years since the fund’s establishment and use of the property consistent with the gift instrument) and (ii) the proposed release or modification; (B) a copy of a record of the institution approving the release or modification; and (C) a statement of the proposed use of the institutional fund after such release or modification.

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E. Effective Date.

The Act went into effect on September 17, 2010. The new prudence factors apply to investment and appropriation decisions made after the effective date. In general, the Act applies to institutional funds created before, on or after the effective date. However, (i) the 7% rebuttable presumption of imprudence applies only to funds executed on or after the effective date of the statute; and (ii) notification of donors is required prior to appropriation only with respect to gift instruments executed by the donor prior to the effective date of the statute.

F. Accounting Concerns.

New guidelines issued by the Financial Accounting Standard Board for charitable institutions incorporated in states that have enacted UPMIFA require that, for financial statement purposes, all earnings on endowment funds are to be classified as temporarily restricted until appropriated.

Previously, such earnings were classified as “unrestricted.” In some instances, such reclassifications may impact debt covenants and have other implications. In addition, various disclosures regarding spending from endowment funds may need to be included in the financial statements. Institutions should discuss these implications and disclosures with their accountants.

G. Changes to Other Provisions of Law: Institutional Solicitations.

The Act amends subdivision 2 of section 174-b of the New York Executive Law to require that solicitations for an endowment fund include a statement that, unless otherwise restricted by the gift instrument, the institution may expend so much of an endowment fund as it deems prudent after considering the factors required by the Act.

II. Action Steps.

The following steps should be taken by all institutions subject to the Act:

A. Governing Board.

Governing boards should be educated as to the substance and impact of the Act. The governing board is ultimately responsible for compliance with the Act and must make decisions regarding the management and investment of institutional funds and appropriation from endowment funds.

B. Policies and Procedures.

Institutions should promptly update policies and procedures related to the investment and management of institutional funds to comply with the Act. All institutions should adopt and follow a written investment policy that reflects the prudence standards of the Act. Procedures should be put in place in order to (i) notify existing donors prior to appropriating below original dollar value from their endowment funds for the first time; (ii) appropriate funds in accordance with the prudence standards of the Act; (iii) comply with the rules regarding

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delegation to external agents; and (iv) revise solicitation materials relating to endowment funds. Institutions may wish to develop or revise gift acceptance policies and model gift agreements in light of the requirements. In addition, institutions must maintain records and appropriately manage three new categories of endowment funds: (i) endowment funds governed by the default rules of the Act; (ii) endowment funds continuing to be subject to the concept of original dollar value; and (iii) endowment funds subject to specific donor restrictions, such as a specified spending rate.

C. Financial Statements.

Institutions should discuss with outside advisors the impact of any changes in the classification of endowment funds as (i) restricted; (ii) temporarily restricted; and (iii) unrestricted.

The text of the Act can be found at http://assembly.state.ny.us/leg/?default_fld=&bn=A07907%09%09&Summary=Y&Text=Y.

Appendices: Appendix A: Hypothetical Examples of the Application of NYPMIFA Appendix B: Sample Board Minutes Appendix C: Model Notification Letter Relating to Appropriation

* * *

For more information, please contact one of the following members of Simpson Thacher & Bartlett LLP’s Exempt Organizations Group:

Victoria B. Bjorklund (212) 455-2875 [email protected]

David A. Shevlin (212) 455-3682 [email protected]

Jennifer I. Reynoso (212) 455-2287 [email protected]

Jennifer L. Franklin (212) 455-3597 [email protected]

Jillian P. Diamant (212) 455-3303 [email protected]

This memorandum is for general informational purposes and should not be regarded as legal advice. Furthermore, the information contained in this memorandum does not represent, and should not be regarded as, the view of any particular client of Simpson Thacher & Bartlett LLP. Please contact your relationship partner if we can be of assistance regarding these important developments. The names and office locations of all of our partners, as well as additional memoranda, can be obtained from our website, www.simpsonthacher.com.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are

rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to

any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in

connection with the use of this publication.


www.simpsonthacher.com

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Appendix A Examples of the Application of the New York Prudent Management of

Institutional Funds Act

1. Reporting.

Institution A is incorporated and operates in New York State. Institution A reports the value of its endowment fund as $200 million. At the close of Institution A’s fiscal year, the New York Attorney General asks Institution A to report on the spending rate applied to its endowment fund. While this question is phrased as if there is only one endowment fund, in fact an endowment consists of numerous funds which may be grouped by donor restrictions or spending rules.

Though many donors have given to Institution A’s endowment fund, the specific terms of the individual gift instruments govern spending by each fund, and the New York Prudent Management of Institutional Funds Act (“NYPMIFA,” or the “Act”) provides the default spending rule when the gift instrument is silent. Some donors to Institution A’s endowment fund included particular spending restrictions in their gift instruments with Institution A, and the Act’s default terms will not apply to those gifts.8 With respect to gift instruments that do not contain specific spending restrictions, however, the default terms of the Act will govern. For those gifts, which make up $125 million of the endowment fund, Institution A applied its general spending rate policy, and appropriated for expenditure at 5%. In its report to the Attorney General, therefore, Institution A reports that it applied its 5% spending rate with respect to $125 million of its endowment fund. Institution A also reports that its appropriation from the remaining $75 million of its endowment fund is in accordance with the terms of the donor restrictions contained in specific gift instruments.

2. Retroactivity.

In 1990, Donor D made a $500,000 endowment fund gift to Institution C, incorporated in New York, then a UMIFA state. There are no specific restrictions on the gift, except that it is designated for the endowment fund. Donor D died in 2005, and New York enacted NYPMIFA in 2010. Through 2010, Institution C limited its spending of Donor D’s fund in order to preserve intact the fund’s historic dollar value. In 2011, Institution C prudently allocates for expenditure an amount that takes Donor D’s gift below its original dollar value. Donor D’s family files a complaint with the Attorney General’s office alleging that Institution C has violated the terms of Donor D’s gift by appropriating funds for expenditure such that the gift is reduced to below its original dollar value. Because the original gift instrument contained no specific provisions as to the spending rate to apply to Donor D’s gift, and because Donor D passed away in 2005 so that

8 Note that the Act provides that terms in a gift instrument designating a gift as an endowment, or a direction

or authorization in the gift instrument to use only “income, “interest,” “dividends,” or “rents, issues or profits,” or “to preserve the principal intact,” or words of similar import, will create an endowment fund but will not otherwise limit the authority to appropriate for expenditure. See section 553(c).

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no notice was required to be given before appropriating under the Act for the first time, the Attorney General’s office correctly informs Donor D’s family that the Act now governs the terms of Donor D’s gift and that Institution C may prudently appropriate even if that prudent appropriation causes the value of the fund to decrease below its historic dollar value.

Donor E also made an endowment fund gift to Institution C in 1990. The facts are the same as above, except that the gift instrument between Donor E and Institution C contains a specific restriction on spending, limiting Institution C’s spending on Donor E’s gift to a maximum rate of 3% annually. The Act does not change the rate applicable to Donor E’s fund, and Institution C may continue to spend in accordance with the terms of the gift instrument.

3. 7% Presumption of Imprudence.

The board of trustees of D University (chartered in New York) votes in 2008 to appropriate for expenditure funds from an endowment to construct a new building on D University’s campus. D University maintains an endowment fund in which it has pooled contributions to support construction and operation of the building. In order properly to fund construction, the board of trustees prudently appropriates 8% from this endowment fund, and ensures that the appropriation will not take the endowment fund below its historic dollar value. Construction on the building begins, and the board of trustees remains careful to prudently appropriate for expenditure amounts that do not take the endowment fund below its historic dollar value, but total 8%, annually. Construction on the building is completed at the end of 2009.

New York then enacts NYPMIFA, including the 7% presumption of imprudence for endowment spending. A donor makes an endowment gift in October 2010, the purpose of which is to construct a new building adjacent to the one completed in 2009. The board of trustees of D University votes to appropriate for expenditure funds from the new endowment to build this new building. Although D University’s board of trustees needs to appropriate for expenditure 8% of the endowment fund’s value for construction of the new building, the appropriation will be presumed imprudent, even though it will not take the new endowment fund below original dollar value. The board of trustees prudently decides that, rather than not initiating construction on the building or shifting funds from unrestricted funds, it will appropriate for expenditure amounts from the endowment fund created in 2010 at a rate of 8% annually. In order to rebut the presumption of imprudence, the board of trustees records the reasons for its decision in writing. The board includes in contemporaneous minutes of its meeting its determination that this spending rate is prudent, including specific consideration of the eight factors set forth in section 553(a) of the Act.

4. Bond Covenants under the Act.

Assume that D University, chartered in New York, is planning a bond offering in connection with construction of the new building. Under the prior law of UMIFA, the income and appreciation earned on D University’s endowment funds was treated, for accounting purposes, as an unrestricted asset of D University. When New York enacted NYPMIFA, the accounting treatment of these funds changed. After NCCUSL promulgated UPMIFA, the Financial Accounting Standards Board issued FASB Staff Position FAS 117.19 (“FASB 117.1”), which 9 See http://www.fasb.org/pdf/fsp_fas117-1.pdf.

http://www.fasb.org/pdf/fsp_fas117-1.pdf�

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includes an important change to accounting standards in response to the new provisions of UPMIFA. Under FASB 117.1, the income and appreciation earned on D University’s endowment fund is instead treated as temporarily restricted assets (and remain so classified until appropriated for expenditure by D University’s board of trustees).

While this may appear to be a minor change, consider D University’s planned bond offering. Many bond covenants contain language as to the issuer’s “unrestricted” assets. Because a significant portion of D University’s assets are held in endowment funds, the transition from UMIFA to NYPMIFA resulted in the reclassification for accounting purposes of a large amount of D University’s assets from unrestricted to temporarily restricted and could affect the bond covenants in the planned offering.

D University should examine the specific language in its bond covenants for the planned offering, and seek advice from bond counsel to ensure that it can comply with the covenants given these changes.10

5. Notification Prior to Appropriation under the Act.

Institution L, incorporated in New York, has 6,000 donors who have contributed to its endowment fund since Institution L was formed in 1900. Following enactment of NYPMIFA, Institution L reviews the records of its 6,000 donors in order to address the notification requirements of the Act prior to the need to appropriate. 3,000 of its donors are known to have died. Of the 3,000 remaining donors, Institution L has on record addresses for 2,500 donors. Institution L sends notice as required under the Act to these 2,500 donors, and receives 1,500 responses within 90 days. 750 donors reply that the Act should apply, and 750 reply that the original dollar value should be maintained. Institution L makes a record of those 750 funds to which the original dollar value limitation still applies, and makes a record of the 1,750 funds to which the original dollar value limitation no longer applies. Institution L appropriates prudently when necessary from those endowment funds for which 750 respondents indicated that the Act should apply, and from those endowment funds for which 1,000 donors did not respond within the 90-day period. Institution L conducts internet searches for the current addresses of the 500 donors for which Institution L does not have an address on record. Where addresses can be found, Institution L sends notice as required under the Act, and follows the direction given in donor responses. Where addresses cannot be found through basic internet searches, Institution L appropriates prudently when necessary from the applicable endowment funds.

10 See National Association of College and University Business Officers, “NACUBO Webcast Addresses

Underwater Endowments,” available at http://www.nacubo.org/x7427.xml.

http://www.nacubo.org/x7427.xml�


Appendix B Sample Excerpt of Minutes of a Meeting of the Board of Directors

Regarding Appropriation from an Endowment Fund

Hypothetical Example

: A charity’s determination to appropriate for expenditure from (i) an individual endowment fund established by a single donor prior to the enactment of NYPMIFA a total of $500,000, and (ii) an endowment fund consisting of numerous individual endowment funds established by a variety of donors prior to the enactment of NYPMIFA a total of $800,000.

[INSERT NAME OF ORGANIZATION]

Minutes from a Meeting of the Board of Directors

[INSERT DATE]

A meeting of the Board of Directors (the “Board”) of [INSERT NAME OF

ORGANIZATION] (the “Charity”) was held on [INSERT DATE] at [INSERT LOCATION]. The

following directors were present, constituting a quorum: [LIST ATTENDING DIRECTORS].

[INSERT OTHER BUSINESS ADDRESSED AT THE MEETING]

The Treasurer of the Charity, [INSERT NAME OF INDIVIDUAL], presented to the Board the recommendation that the Board approve an appropriation for expenditure from the Donor A Scholarship Endowment Fund in the amount of $500,000, by application of a spending rate of 6% to the Donor A Scholarship Endowment Fund.

Appropriation from Donor A’s Endowment Fund

First, the Treasurer explained the need of the Charity for the funds. The Treasurer reported that the funds were needed to fulfill the Charity’s commitment to providing scholarships to qualified students. The Treasurer indicated there had been a decrease in the value of the Donor A Scholarship Endowment Fund. However, the Charity’s scholarship commitments had not decreased. The Treasurer informed the Board that the restriction contained in the written gift instrument applicable to the Donor A Scholarship Endowment Fund stated that the fund could be used only for scholarship purposes, but did not include a specific spending rate. The Treasurer told the Board that the original donor of the Donor A Scholarship Endowment Fund died a number of years ago and is therefore not available to receive notice of this proposed first-time appropriation from the Donor A Scholarship Endowment Fund. The donor did not designate a person in the gift instrument to act in the place of the donor.

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The Board then discussed the Treasurer’s request for the appropriation. The Board considered the following eight factors in making its decision to appropriate from the endowment fund:

1. The duration and preservation of the endowment fund: The Board noted that the Donor A Scholarship Endowment Fund is of perpetual duration and that the current need to support students who have been awarded scholarships must be balanced against the need for scholarship funds in the future.

2. The purposes of the Charity and the endowment fund: The Board noted the educational purposes of the Charity, and its commitment to providing education to qualified students regardless of need. The Board noted that the applicable gift instrument limited Donor A Scholarship Endowment Fund’s use to scholarships.

3. General economic conditions: The Board discussed the economic conditions that led to the recommendation that the funds be appropriated from the Donor A Scholarship Endowment Fund. The Board discussed the current market volatility and the fact that a market upswing in the near future is unlikely.

4. The possible effect of inflation and deflation: The Board discussed the possible effect of inflation and deflation on the Donor A Scholarship Endowment Fund and the purchasing power of the Donor A Scholarship Endowment Fund.

5. The expected total return from income and the appreciation of investments: The Board discussed the Treasurer’s report on the performance of the Donor A Scholarship Endowment Fund. The Board discussed the impact the appropriation would have on the purchasing power of the Donor A Scholarship Endowment Fund.

6. Other resources of the Charity: The Board discussed the possibility of using resources from other funds to cover the Charity’s current scholarship obligations, and the Treasurer reported on the limited availability of other funds.

7. 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 Charity: The Board discussed how costs had already been cut and determined that further cost-cutting would negatively impact programs. The Board then discussed the possibility of using a line of credit to cover the costs of the Charity’s scholarship program, and of initiating a solicitation campaign to raise new funds for the scholarship program. The Board determined that no further lines of credit were likely to be available and that the initiation of a solicitation campaign would not address current needs, although it would be advisable to consider in the future when donors may be more receptive to new solicitations.

8. The investment policy of the Charity: The Board reviewed the Charity’s investment policy, and determined that the proposed appropriation is consistent with the return goals of the investment policy.

After further discussion, upon motion duly made and seconded, the Board unanimously:

RESOLVED, that the Board of Directors hereby approves the appropriation of 6% of the average value of the Donor A Scholarship Endowment Fund, measured as of the last day of the

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calendar quarter for the twenty calendar quarters preceding the date hereof, to provide student scholarships in the current fiscal year.

Next, the Treasurer presented to the Board the recommendation that the Board approve an appropriation for expenditure from the Charity’s General Endowment Fund in the amount of $800,000, by application of a spending rate of 6.5% to the General Endowment Fund.

Appropriation from General Endowment Fund

First, the Treasurer explained that the Charity’s General Endowment Fund was comprised of 200 individual endowment funds the donors of which were available and had been given the required 90 days advance notice that the Charity wished prudently to appropriate. These donors responded to the notice with confirmation that the Charity could prudently appropriate from their individual endowment funds without regard to the original dollar value of those funds. Next, the Treasurer reported to the Board on the need of the Charity for the funds. The Treasurer indicated that the funds were needed to fund the Charity’s operations for the current fiscal year. The Treasurer indicated that there had been a decrease in the value of the Charity’s General Endowment Fund, and that the budget had been cut significantly. The Treasurer informed the Board that the restrictions contained in the written gift instruments applicable to the Charity’s General Endowment Fund stated that the funds could be used for operational purposes, but did not include specific spending rates.

The Board then discussed the Treasurer’s request for the appropriation. The Board considered the following eight factors in making its decision to appropriate from the Charity’s General Endowment Fund:

1. The duration and preservation of the endowment fund: The Board noted that the Charity’s General Endowment Fund is of perpetual duration and that the current need to support operations must be balanced against the need for funds in the future.

2. The purposes of the Charity and the endowment fund: The Board noted the charitable purposes of the Charity, and that the applicable gift instruments allowed the Charity’s General Endowment Fund to be used for operations.

3. General economic conditions: The Board discussed the economic conditions that led to the recommendation that the funds be appropriated from the Charity’s General Endowment Fund. The Board discussed the current market volatility, and the fact that a market upswing in the near future was unlikely.

4. The possible effect of inflation and deflation: The Board discussed the possible effect of inflation and deflation on the Charity’s General Endowment Fund, and the purchasing power of the Charity’s General Endowment Fund.

5. The expected total return from income and the appreciation of investments: The Board discussed the Treasurer’s report on the performance of the

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Charity’s General Endowment Fund. The Board discussed the impact that the appropriation would have on the purchasing power of the General Endowment Fund.

6. Other resources of the Charity: The Board discussed the possibility of using resources from other funds to cover the Charity’s current operations, and the Treasurer reported on the limited availability of other funds.

7. 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 Charity: The Board discussed how costs had already been cut and determined that further cost-cutting would negatively impact programs. The Board then discussed the possibility of using a line of credit to cover the costs of the Charity’s operations, and of initiating a solicitation campaign to raise new funds for operations. The Board determined that no further lines of credit were likely to be available, and that the initiation of a solicitation campaign would not address current needs, although it would be advisable to consider in the future when donors may be more receptive to new solicitations.

8. The investment policy of the Charity: The Board reviewed the Charity’s investment policy, and determined that the proposed appropriation is consistent with the return goals of the investment policy.

After further discussion, upon motion duly made and seconded, the Board unanimously:

RESOLVED, that the Board of Directors hereby approves the appropriation of 6.5% of the average value of the Charity’s General Endowment Fund, measured as of the last day of the calendar quarter for the twenty calendar quarters preceding the date hereof, to fund operations in the current fiscal year.


Appendix C Sample Notification Letter11

[DONOR NAME]

[ADDRESS] [CITY], [STATE] [ZIP] Dear [NAME]:

The [NAME OF CHARITY] (“Charity”) has benefited greatly from your gift of an endowment fund. Your gift has enhanced our ability to offer our services and programs. We wish to inform you that on September 17, 2010, the Governor signed into law the New York Prudent Management of Institutional Funds Act (“NYPMIFA”). NYPMIFA contains important updates and changes to the law governing use of endowed funds by charitable institutions like Charity.

Under prior law, charitable institutions were prohibited from expending certain amounts from endowment funds when the value of those funds dropped below their “historic dollar value.” The “historic dollar value” of the endowment fund was defined as the dollar value of each of the contributions made to the endowment fund by the donor.

Under NYPMIFA, the “historic dollar value” concept has been eliminated. In its place, NYPMIFA states that a charitable institution may allocate for expenditure each year so much of the endowment fund as the charitable institution determines is prudent.

Charity plans to follow the terms of NYPMIFA in making decisions as to annual allocations for expenditure from endowment fund gifts. This would allow Charity to expend amounts from its endowment funds even when market values decline below the endowment funds’ historic dollar values.

Under the terms of NYPMIFA, Charity is required to notify you of the changes occasioned by NYPMIFA and provide you with the options below.

Please check the box next to your preferred option, below.

[ ] Charity may apply the terms of NYPMIFA to my gift and appropriate for expenditure so much of the gift as Charity determines is prudent.

[ ] Notwithstanding the provisions of NYPMIFA, I direct that Charity not spend below the original dollar value of my gift. I understand and agree that the terms of NYPMIFA will apply 11 Please note that this notification letter only needs to be sent to donors of funds in existence prior to

September 17, 2010, only once at least 90 days before appropriating from their institutional fund for the first time.

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to the management and investment of my gift, and that Charity may spend the income and appreciation over the historic dollar value if it is prudent to do so.

Please return this letter to us within ninety days in the enclosed envelope. If you do not respond within ninety days, the terms of NYPMIFA will apply to your gift.

Should you have any questions about NYPMIFA, or about how the terms of NYPMIFA will apply to your endowment gift, please contact [NAME] at [PHONE NUMBER].

We thank you, again, for your support of Charity.

Sincerely yours, ________________________ [INSERT NAME, TITLE]

QUESTIONS ARISING FROM ENACTMENT OF THE NEW YORK PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT (“NYPMIFA”)

I. Definition of “Institution”

A. Section 551 of NYPMIFA defines an “institution” as (1) a person, other than an individual, organized and operated exclusively for charitable purposes; (2) a trust that had both charitable and non-charitable interests, after all non-charitable interests have terminated; or (3) any corporation described in subparagraph five of paragraph (a) of section 102 (definitions) of the N-PCL. Section 102(a)(5) of the N-PCL defines “corporation” as “a corporation (1) formed under this chapter, or existing on its effective date and theretofore formed under any other general statute or by any special act of this state, exclusively for a purpose or purposes not for pecuniary profit or financial gain, for which a corporation may be formed under this chapter, and (2) no part of the assets, income or profit of which is distributable to, or inures to the benefit of, its members, directors or officers except to the extent permitted under this statute.” Section 201 of the N-PCL allows for formation of Type A, C, and D corporations, which in general, are not charitable (e.g., those formed for non-pecuniary civic, social, or fraternal purposes).

Question: Does NYPMIFA apply to Type A, C, and D corporations (which may be exempt from tax under IRC Section 501(c)(4) and not 501(c)(3))?

Answer: We believe that NYPMIFA applies to all corporations incorporated under the N-PCL, including Type A, B, C and D corporations.

Question: Does NYPMIFA apply to institutions operating in New York but incorporated under the laws of another state?

Answer: We believe that an institution not formed under the laws of New York State will not be subject to NYPMIFA because of the internal affairs doctrine. Instead, we believe a court would apply the version of UPMIFA enacted in the institution’s state of formation.

B. The term “institution” includes a trust that had both charitable and non-charitable interests, after all non-charitable interests have terminated. The term “institutional fund” is defined as a fund held by an institution, but does not include a fund held for an institution by a trustee that is not an institution. It is our understanding that UPMIFA1 is intended to apply to only those trusts where the trustee of the trust is a charity. The NCCUSL2 commentary to the definition of “institution” states: “the term institution includes a trust organized and operated exclusively for charitable purposes, but only if a charity acts as trustee. This approach leaves unchanged the coverage of UMIFA.”3

1 Uniform Prudent Management of Institutional Funds Act.

2 National Conference of Commissioners on Uniform State Laws.

3 Uniform Management of Institutional Funds Act.

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Question: If a bank is the trustee for a charitable remainder trust (“CRT”), and the non-charitable interests have terminated, does NYPMIFA govern the funds held by the CRT?

Answer: We believe that NYPMIFA does not govern the funds held by a CRT where the trustee is a bank.

Question: After the funds are paid out by the CRT to the charitable remainderman, are the funds governed by NYPMIFA?

Answer: We believe that, after the funds are paid out by the CRT to the charitable remainderman, the funds are governed by NYPMIFA if the charitable remainderman is an institution formed under the laws of New York State.

II. Standard of Conduct in Managing and Investing an Institutional Fund

A. NYPMIFA requires that those responsible for managing an institutional fund act “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” NYPMIFA also requires consideration of the following factors in managing and investing an institutional fund (i) general economic conditions; (ii) the possible effect of inflation or deflation; (iii) the expected tax consequences, if any, of investment decisions or strategies; (iv) the role that each investment or course of action plays within the overall investment portfolio of the fund; (v) the expected total return from income and the appreciation of investments; (vi) other resources of the institution; (vii) the needs of the institution and the fund to make distributions and to preserve capital; and (viii) an asset’s special relationship or special value, if any, to the charitable purposes of the institution.

Question: Is the Board required to record its consideration of each of the factors in managing and investing an institutional fund?

Answer: NYPMIFA does not explicitly require an institution to keep a contemporaneous record describing the consideration that was given to each factor. However, we believe that it would be appropriate for an institution to record that these factors were considered.

B. Except as otherwise provided in a gift instrument, NYPMIFA provides that an institution must diversify the investments of an institutional fund unless the institution prudently determines that, because of special circumstances, the purposes of the fund are better served without diversification.

Question: Under section 552 of NYPMIFA, may a donor restrict the manner in which an institution invests an endowment fund? For example, may a Board prudently determine to accept a gift where the gift instrument requires the gift funds to be invested in an investment fund managed by the donor?

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Answer: We understand that commentators have questioned whether courts will enforce a direction not to diversify in the trust context.4

Question: May a Board prudently determine to accept a gift where the gift instrument requires the gift funds to be invested solely in Treasury bonds?

Therefore, we question whether the courts would enforce this provision.

Answer: We understand that commentators have questioned whether courts will enforce a direction not to diversify. Therefore, we question whether the courts would enforce this provision, and we believe that the result could vary with the financial climate at the time the case might be brought. We believe it more likely that a court would uphold a provision requiring investment in Treasuries than the provision requiring investment in a fund managed by a donor, but institutions need guidance on how the New York Attorney General expects institutions to assess these types of restrictions.

III. Appropriation for Expenditure

A. UPMIFA requires that an institution consider seven prudent management criteria in deciding whether to appropriate or accumulate endowment funds. An additional factor was included in section 553 of NYPMIFA: that the institution, where appropriate and circumstances would otherwise warrant, consider “alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution.”

Question: What steps should an institution take to comply with this additional factor?

Answer: Institutions would welcome guidance from the Attorney General on this question.

B. NYPMIFA requires that an institution keep a contemporaneous record describing the consideration given by the governing board to each of the factors enumerated in section 553.

Question: Is the record-keeping requirement met through a description in the minutes of the consideration given by the governing board (or committee) to each factor?

Answer: We believe that this description in the minutes would meet the record-keeping requirement.

Question: Must the governing board (or committee) consider each factor, and document its consideration, on a fund-by-fund basis, or may a decision be made and documented to appropriate from multiple similarly-situated endowment funds simultaneously (e.g., by application of a specific spending rate to many funds)?

Answer: We believe that the governing board may appropriate from multiple similarly-situated endowment funds simultaneously (e.g., by application of a specific spending rate).

4 See John H. Langbein, Burn the Rembrandt? Trust Law’s Limit on the Settlor’s Power to Direct Investments, 90

B.U.L. Rev. 375 (2010).

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Question: If an institution may make one decision to appropriate from multiple endowment funds, how should this be documented?

Answer: We believe that the governing board (or a committee) may describe, in the minutes of its meeting, the consideration given to each of the factors enumerated in section 553 in determining the spending rate to be applied to multiple endowment funds and need not repeat the factors for each separate fund.

C. Section 553 of NYPMIFA states that expenditure in any year of greater than 7% of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than five years immediately preceding the year of appropriation, creates a rebuttable presumption of imprudence. The comments to UPMIFA state that the presumption may be rebutted by the institution if circumstances in a particular year make expenditures above that amount prudent. In addition, the comments to UPMIFA state “If sufficient evidence establishes, by the preponderance of the evidence, the facts necessary to raise the presumption of imprudence, then the institution will have to carry the burden of production of (i.e., the burden of going forward with) other evidence that would tend to demonstrate that its decision was prudent. The existence of the presumption does not shift the burden of persuasion to the charity.”

Question: How may an institution meet the burden of production to demonstrate that it has prudently appropriated in excess of 7%?

Answer: We believe the Board may document in the minutes its decision-making process.

Question: Does the 7% presumption apply to funds that are not underwater, such that the presumption of imprudence would apply to appropriation solely of income and appreciation?

Answer: We believe that the 7% presumption applies to endowment funds whether or not underwater and would apply to an appropriation solely of income and appreciation.

D. The effective date of NYPMIFA is the date of enactment.

Question: If a decision to appropriate is made prior to enactment of NYPMIFA, but the appropriated funds are expended after enactment of NYPMIFA, is the decision to appropriate subject to the standards of NYPMIFA or prior law? For example, if a decision to appropriate was made in June, 2010, for the 2011 fiscal year, is the decision evaluated in light of NYPMIFA or prior law?

Answer: We believe that if a decision to appropriate is made prior to enactment of NYPMIFA, then prior law should be applied to that decision, regardless of when the funds are expended. For example, if a decision to appropriate was made in June 2010, then prior law applied, and the institution is not required to reevaluate the decision in light of NYPMIFA at the time such funds are expended.

IV. Appropriation and Notice

A. Under section 553 of NYPMIFA, with respect to a gift instrument executed by the donor before the effective date of NYPMIFA, an institution must provide 90 days advance notice to

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the donor, if available, before appropriating from the applicable endowment fund for the first time.

Question: Does the 90-day notice requirement prevent any appropriation from a previously existing fund for a period of 90 days after NYPMIFA is passed? That is, does the notice requirement apply to the first instance of any appropriation from an endowment fund after enactment of NYPMIFA, including appropriation of solely income and appreciation, or does it only apply prior to the first instance of an appropriation where the institution is invading original dollar value?

Answer: We believe that notice should be required only prior to the first instance of the institution invading original dollar value. Stated differently, we believe that an institution should be able to prudently appropriate from its endowment during the 90 days after enactment, so long as it does not invade original dollar value. If an institution is not allowed to appropriate for 90 days, many New York institutions are likely to experience cash-flow crises and will be looking for relief from the Attorney General. While we are advising clients to give notice ASAP to start the 90-day period and receive and categorize funds by donor response, we believe that institutions should be permitted to appropriate but not invade during the 90-day period.

B. Section 553 specifies that notification should be substantially in the form of boxes that the donor may check providing either that (i) the institution may spend as much of the endowment gift as is prudent under NYPMIFA’s standards, or (ii) the institution may spend in accordance with NYPMIFA’s prudence standard but may not spend below the original dollar value of the gift. NYPMIFA includes a sample explanation for donors, stating “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 N-PCL. 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 of it is prudent to do so. The criteria for the expenditure of endowment funds set forth in Article 5-A of the N-PCL will not apply to your gift.”

Question: If a donor has checked box #2, does the prudence standard set forth in NYPMIFA apply to appropriation of income and appreciation from the endowment funds established by the donor? If not, what prudence standard does apply to appropriations of income and appreciation from these endowment funds?

Answer: We believe that if a donor has checked box #2, then the prudence standard set forth in NYPMFIA should apply to the decision to appropriate. However, the institution may only appropriate income and appreciation and may not invade original dollar value.

Question: Does the donor’s choice of box #1 or box #2 affect the application of the 7% rebuttable presumption of imprudence?

Answer: No, in either case, the 7% presumption or imprudence would not apply. The 7% presumption only applies to gift instruments executed on or after the effective date of NYPMIFA, while the notification provision of 553(e)(1) (and donor’s ability to thereby

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prohibit an institution from invading original dollar value) applies only to gift instruments executed before the effective date of NYPMIFA.

Question: Does an institution run the risk of inappropriate practice of law if the donor asks the institution for explanation of NYPMIFA?

Answer: We believe that institutions should inform donors of the law in a manner substantially similar to that set forth in NYPMIFA and should recommend that donors ask any additional technical questions of their personal counsel.

V. Delegation of Management and Investment

A. Section 554 of NYPMIFA states that an institution may delegate to an external agent the management and investment of an institutional fund to the extent that the institution could prudently delegate under the circumstances. The institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in (1) selecting, continuing or terminating an agent, including assessing the agent’s independence including any conflicts of interest such agent has or may have; (2) establishing the scope and terms of the delegation, including the payment of compensation, consistent with the purposes of the institution and the institutional fund; and (3) monitoring the agent’s performance and compliance with the scope and terms of the delegation.

Question: What steps should an institution take in selecting, continuing or terminating an agent, including assessing the agent’s independence, including any conflicts of interest such agent has or may have?

Answer: We believe the institution should request and review information regarding the agent’s experience, personnel, track record and proposed compensation as compared to appropriate peers and do other customary due diligence as required. In addition, the institution should have a conflict of interest policy and follow the policy in selecting the agent. This would generally require that the institution determine if any of its officers or directors are officers or directors of or have a substantial financial interest in the agent. If so, the material facts as to the director’s or officer’s interest should be disclosed to the governing board (or committee) and such person should abstain from the vote to select or terminate the agent. See section 715 of the N-PCL.

Question: What steps should an institution take to establish the scope and terms of the delegation, including the payment of compensation, consistent with the purposes of the institution and the institutional fund?

Answer: We believe that the governing board (or committee) should enter into a written agreement with the agent, setting forth the scope and terms (including terms of compensation) of the engagement.

Question: What steps should an institution take to monitor an agent’s performance and compliance with the scope and terms of the delegation

Answer: We believe that the governing board (or committee) should receive and review regular reports on the agent’s performance.

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Question: Can the governing board delegate to a committee of the board or an external agent the authority to appropriate from an endowment fund?

Answer: Section 712 of the N-PCL states that the governing board may designate committees, each of which may have all of the authority of the board, except for certain prohibited activities listed in the N-PCL. Appropriation from an endowment fund is not one of the listed prohibited activities. Therefore, we believe that the governing board may delegate the authority to appropriate from an endowment fund to a committee. NYPMIFA does not specifically discuss delegation of the authority to appropriate from and endowment fund to an external agent. Section 551(d) of NYPMIFA states that the obligations of NYPMIFA are imposed on the governing board. Therefore, we believe that the authority to appropriate from an endowment fund is a core board function that may be delegated to a board committee but should not be delegated to an external agent.

B. NYPMIFA specifies in the definition of “institution” in section 551 that the governing board retains responsibility for compliance with the provisions of NYPMIFA. Section 554 of NYPMIFA states that an institution that complies with the requirements for prudent delegation to an agent is not liable for the decisions or actions of an agent to which the function was delegated.

Question: Does NYPMIFA change prior law that appropriate delegation relieves the Board of liability for acts or omissions of those to whom such responsibilities are delegated?

Answer: We believe that NYPMIFA does not change prior law.

VI. Release and Modification of Restrictions

A. Section 555 of NYPMIFA states that if an institution determines that a restriction on the management, investment or purpose of an institutional fund is unlawful, impracticable, impossible to achieve or wasteful, after 90 days notice to the Attorney General and the donor (if the donor is available), the institution may release or modify a restriction contained in a gift instrument if (1) the fund has a total value of less than $100,000; (2) more than 20 years have elapsed since the fund was established; and (3) the institution uses the property in a manner consistent with the purposes expressed in the gift instrument.

Question: Does the term “property” mean any asset (including cash and securities) held in the applicable endowment fund?

Answer: We believe that the term property includes any asset (including cash and securities) held in the applicable endowment fund.

Question: In what ways, if any, has donor standing has changed with the enactment of NYPMIFA?

Answer: We believe donor standing has not changed with the enactment of NYPMIFA.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are

rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to

any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in

connection with the use of this publication.

S T A T E OF N E W Y O R K

7907--D

2009-2010 Regular Sessions

IN ASSEMBLY

April 28, 2009

Introduced by M. of A. BING, BRODSKY, ROSENTHAL, CASTRO, DenDEKKER, FIELDS, SCHIMMINGER, ESPAILLAT -- Multi-Sponsored by -- M. of A. DelMONTE, MAYERSOHN, MENG, MILLMAN, TITONE -- read once and referred to the Committee on Corporations, Authorities and Commissions -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee -- reported and referred to the Commit- tee on Codes -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee -- recommitted to the Committee on Corporations, Authorities and Commissions in accordance with Assembly Rule 3, sec. 2 -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee -- reported and referred to the Committee on Codes -- reported and referred to the Committee on Rules -- Rules Committee discharged, bill amended, ordered reprinted as amended and recommitted to the Committee on Rules

AN ACT to amend the not-for-profit corporation law, the religious corporations law, the estates, powers and trusts law, the surrogate's court procedure act and the executive law, in relation to adopting a prudent management of institutional funds standard; and to repeal certain provisions of the not-for-profit corporation law relating thereto

THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEMBLY, DO ENACT AS FOLLOWS:

Section 1. The not-for-profit corporation law is amended by adding a new article 5-A to read as follows:

ARTICLE 5-A

PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT

Section 550. Short title. 551. Definitions. 552. Standard of conduct in managing and investing an institutional fund. 553. Appropriation for expenditure or accumulation of endowment fund; rules of construction. 554. Delegation of management and investment functions. 555. Release or modification of restrictions on management, investment, or purpose. 556. Reviewing compliance. 557. Application to existing institutional funds. 558. Relation to electronic signatures in global and national commerce act.

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S 550. Short Title.

This article may be known and may be cited as the "New York Prudent Management of Institutional Funds Act".

S 551. Definitions.

As used in this article:

(a) "Charitable purpose" means the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community including any purpose that is charitable under the laws of the state of New York.

(a-1) "Donor" means the person who grants or transfers property to an institution pursuant to a gift instrument, or a person designated in the applicable gift instrument to act in the place of the donor, but does not otherwise include the person's executors, heirs, successors, assigns, transferees, or distributees.

(b) "Endowment fund" means an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution may designate as an endowment fund for its own use, consistent with the terms of the applicable gift instrument.

(c) "Gift instrument" means a record or records, including an institutional solicitation, under which property is granted to, transferred to, or held by an institution as an institutional fund.

(d) "Institution" means: (1) a person, other than an individual, organized and operated exclusively for charitable purposes; (2) a trust that had both charitable and noncharitable interests, after all noncharitable interests have terminated; or (3) any corporation described in subparagraph five of paragraph (a) of section 102 (definitions). Whenever any provision of this article imposes any obligation on, or requires any action to be taken by, an institution, such obligation is imposed on, and such action shall be authorized by, the governing board of such institution.

(e) "Institutional fund" means a fund held by an institution. This term shall not include: (1) program-related assets; (2) a fund held for an institution by a trustee that is not an institution; or (3) a fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund.

(f) "Notice" means information given by an institution as required by this article. An institution will be considered to have given notice if notice is given personally in writing or sent to the recipient's last known address on record with the institution, or, if no address is on record with the institution, if the institution makes reasonable efforts to attempt to find and notify the recipient. If the notice is mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid. If the notice is delivered by electronic means, such as via facsimile or email, such notice is given when the notice is sent.

(g) "Person" means an individual, corporation, business trust, estate, trust, partnership, Limited Liability Company, association, joint venture, or any other legal entity.

(h) "Program-related asset" means an asset held by an institution not for investment under the terms of the gift instrument, but primarily to accomplish a programmatic purpose of the institution.

(i) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(j) A donor is "available" if such donor (1) is living or, if the donor is not a natural person, is in existence and conducting activities; and (2) can be identified and located with reasonable efforts.

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(k) "External agent" means an independent investment advisor, investment counsel or manager, bank, or trust company.

S 552. Standard of conduct in managing and investing an institutional fund.

(a) Subject to the intent of a donor expressed in a gift instrument, an institution, in managing and investing an institutional fund, shall consider the purposes of the institution and the purposes of the institutional fund.

(b) In addition to complying with the duty of loyalty imposed by law other than this article, 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.

(c) In managing and investing an institutional fund, an institution consistent with section 717 (Duty of directors and officers):

(1) May incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution; and

(2) Shall make a reasonable effort to verify facts relevant to the management and investment of the fund.

(d) An institution may pool two or more institutional funds for purposes of management and investment.

(e) Except as otherwise provided by a gift instrument, the following rules apply:

(1) In managing and investing an institutional fund, the following factors, if relevant, must be considered: (A) general economic conditions; (B) the possible effect of inflation or deflation; (C) the expected tax consequences, if any, of investment decisions or strategies; (D) the role that each investment or course of action plays within the overall investment portfolio of the fund; (E) the expected total return from income and the appreciation of investments; (F) other resources of the institution; (G) the needs of the institution and the fund to make distributions and to preserve capital; and (H) an asset's special relationship or special value, if any, to the purposes of the institution.

(2) Management and investment decisions about an individual asset must be made not in isolation but rather in the context of the institutional fund's portfolio of investments as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the fund and to the institution.

(3) Except as otherwise provided by law other than this article, an institution may invest in any kind of property or type of investment consistent with this article.

(4) An institution shall diversify the investments of an institutional fund unless the institution prudently determines that, because of special circumstances, the purposes of the fund are better served without diversification. An institution shall review a decision not to diversify as frequently as circumstances require, but at least annually.

(5) Within a reasonable time after receiving property, an institution shall make and carry out decisions concerning the retention or disposition of the property or to rebalance a portfolio, in order to bring the institutional fund into compliance with the purposes, terms, and distribution requirements of the institution as necessary to meet other circumstances of the institution and the requirements of this article.

(6) A person that has special skills or expertise, or is selected in reliance upon the person's representation that the person has special skills or expertise, has a duty to use those skills or that expertise in managing and investing institutional funds.

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(f) Each institution shall adopt a written investment policy setting forth guidelines on investments and delegation of management and investment functions in accord with the standards of this article.

S 553. Appropriation for expenditure or accumulation of endowment fund; rules of construction.

(a) 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. Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution. 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, if relevant, the following factors:

(1) The duration and preservation of the endowment fund;

(2) The purposes of the institution and the endowment fund;

(3) General economic conditions;

(4) The possible effect of inflation or deflation;

(5) The expected total return from income and the appreciation of investments;

(6) Other resources of the institution;

(7) 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; and

(8) The investment policy of the institution.

For each determination to appropriate for expenditure, the institution shall keep a contemporaneous record describing the consideration that was given by the governing board to each of the factors enumerated in this paragraph.

(b) To limit the authority to appropriate for expenditure or accumulate under paragraph (a) of this section, a gift instrument must specifically state the limitation. Terms in a gift instrument setting forth a specific spending level, rate, or amount, or explicitly modifying or overriding the provisions of paragraph (a) of this section, will limit the authority of the institution to appropriate for expenditure or accumulate under paragraph (a) of this section.

(c) Terms in a gift instrument designating a gift as an endowment, or a direction or authorization in the gift instrument to use only "income," "interest," "dividends," or "rents, issues, or profits," or "to preserve the principal intact," or words of similar import:

(1) Create an endowment fund of permanent duration unless other language in the gift instrument limits the duration or purpose of the fund; and

(2) Do not otherwise limit the authority to appropriate for expenditure or accumulate under paragraph (a) of this section.

(d) A rebuttable presumption of imprudence shall apply to gift instruments executed upon or after the effective date of this article as follows: the appropriation for expenditure in any year of an amount greater than seven percent of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than five years immediately preceding the year in which the appropriation for expenditure is made, creates a rebuttable presumption of imprudence. For an endowment fund in existence for fewer than five years, the fair market value of the endowment fund must be calculated for the period the endowment fund has been in existence. This subsection does not:

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(1) Apply to an appropriation for expenditure permitted under law other than the chapter of the laws of 2010 that enacted this article or by the gift instrument; or

(2) Create a presumption of prudence for an appropriation for expenditure of an amount less than or equal to seven percent of the fair market value of the endowment fund.

(e) (1) With respect to a gift instrument executed by the donor before the effective date of this article an institution must provide ninety days notice to the donor, if the donor is then available, before applying paragraph (a) of this section for the first time, during which time the donor may clarify or amend the gift instrument to prohibit the application of paragraph (a) of this section. Such notice shall include a form for use by the donor, which shall contain language substantially as follows:

Attention, Donor:

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 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 prudent management of institutional funds act) will not apply to your gift.

If the donor does not respond within ninety days from the date notice was given, paragraphs (a), (b), and (c) of this section shall be applied.

(2) This paragraph shall not apply if: (A) the gift instrument permits appropriation for expenditure from the endowment fund without regard for the fund's historic dollar value; (B) the gift instrument limits the institution's authority to appropriate for expenditure in accordance with paragraph (b) of this section; or (C) the gift consists of funds received as a result of an institutional solicitation without a separate statement by the donor expressing a restriction on the use of funds.

(f) When an institution acts pursuant to paragraph (a) or (e) of this section, it shall keep a record of such action.

S 554. Delegation of management and investment functions.

(a) Subject to any specific limitation set forth in a gift instrument or in law other than this article, an institution may delegate to an external agent the management and investment of an institutional fund to the extent that an institution could prudently delegate under the circumstances. An institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances as required by section seven hundred seventeen of this chapter, in:

(1) Selecting, continuing or terminating an agent, including assessing the agent's independence including any conflicts of interest such agent has or may have;

(2) Establishing the scope and terms of the delegation, including the payment of compensation, consistent with the purposes of the institution and the institutional fund; and

(3) Monitoring the agent's performance and compliance with the scope and terms of the delegation.

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(b) In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care, skill and caution to comply with the scope and terms of the delegation.

(c) An institution that complies with paragraph (a) of this section is not liable for the decisions or actions of an agent to which the function was delegated.

(d) By accepting delegation of a management or investment function from an institution that is subject to the laws of this state, an agent submits to the jurisdiction of the courts of this state in all proceedings arising from or related to the delegation or the performance of the delegated function.

(e) Each contract, if any, pursuant to which authority is so delegated shall provide that it may be terminated by the institution at any time, without penalty, upon not more than sixty days notice.

(f) An institution may delegate management and investment functions to its committees, officers, or employees as authorized by the laws of this state other than this article, as set forth in, inter alia, section 514 (Delegation of investment management).

(g) Nothing in this article shall impair the operation of section 717 (Duty of directors and officers).

S 555. Release or modification of restrictions on management, investment, or purpose.

(a) If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.

(b) A court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the donor, if available, and the attorney general of the application, and the attorney general and such donor must be given an opportunity to be heard. To the extent practicable, any modification must be made in accordance with the donor's probable intention.

(c) If a particular purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the purposes expressed in the gift instrument. The institution shall notify the donor, if available, and the attorney general of the application, and the attorney general and such donor must be given an opportunity to be heard.

(d) (1) If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, ninety days after notification to the attorney general, may release or modify the restriction, in whole or part, if:

(A) The institutional fund subject to the restriction has a total value of less than one hundred thousand dollars;

(B) More than twenty years have elapsed since the fund was established; and

(C) The institution uses the property in a manner consistent with the purposes expressed in the gift instrument.

(2) Notice to the attorney general shall contain: (A) an explanation of (i) the institution's determination that the restriction meets the requirements set forth in subparagraph one of this paragraph and (ii) the proposed release or modification; (B) a copy of a record of the institution

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approving the release or modification; and (C) a statement of the proposed use of the institutional fund after such release or modification.

(3) If the attorney general does not notify the institution within ninety days, the institution may proceed with the release or modification.

(4) Notice shall also be given to the donor, as defined in paragraph (a-1) of section 551 (Definitions), if available, provided, however, that such notice shall not be required for funds described in clause (B) of subparagraph two of paragraph (e) of section 553 (Appropriation for expenditure or accumulation of endowment fund; Rules of construction).

(e) For purposes of this section, an institution may apply to the following courts to release or modify a restriction contained in a gift instrument:

(1) To the supreme court of the judicial district wherein the institution has its office or principal place of carrying out the purposes for which it was formed; or

(2) Where the applicable gift instrument is a will, to the surrogate's court in which such will is probated.

(f) This section shall not limit the application of the doctrine of cy pres.

S 556. Reviewing compliance.

Compliance with this article shall be determined in light of the facts and circumstances existing at the time a decision is made or action is taken, and not retrospectively.

S 557. Application to existing institutional funds.

This article shall apply to institutional funds existing on or established after the effective date of this article. As applied to institutional funds existing on the effective date of this article, this article shall govern only decisions made or actions taken on or after that date.

S 558. Relation to electronic signatures in global and national commerce act.

This article modifies, limits, and supersedes the electronic signatures in global and national commerce act, 15 U.S.C. section 7001 et seq., but does not modify, limit, or supersede section 101 of that act, 15 U.S.C. section 7001(a), or authorize electronic delivery of any of the notices described in section 103 of that act, 15 U.S.C. section 7003(b).

* * *

S 2. Subparagraphs 13, 14 and 17 of paragraph (a) of section 102, section 512, paragraphs (c) and (d) of section 513, and section 522 of the not-for-profit corporation law are REPEALED.

S 3. The closing paragraph of paragraph (a) and paragraph (b) of section 406 of the not-for-profit corporation law, as added by chapter 331 of the laws of 1971, are amended to read as follows:

Except as provided in paragraph (b), this paragraph applies notwithstanding any other provision of the certificate of incorporation or any direction in [an] A GIFT instrument [referred to in section 513 (Administration of assets received for specific purposes)].

(b) Paragraph (a) shall not apply to the extent that it conflicts with any mandatory direction in [an] A GIFT instrument [by which assets referred to in section 513 were transferred to the corporation] EXECUTED prior to the effective date of this section unless such conflicting direction is removed as impracticable under article eight of the estates, powers and trusts law or in any other manner provided by law. The absence of a specific provision in the [section 513 instrument] GIFT INSTRUMENT for the current use of the principal of the fund, or the presence in such an instrument of a provision, as to the principal of a fund, limited to the principal's being held, invested and reinvested, is not such a conflicting mandatory direction.

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S 4. Section 406 of the not-for-profit corporation law is amended by adding a new paragraph (e) to read as follows:

(E) FOR PURPOSES OF THIS SECTION, THE TERM GIFT INSTRUMENT SHALL HAVE THE MEANING SET FORTH IN SECTION 551 (DEFINITIONS).

S 5. Paragraph (b) of section 513 of the not-for-profit corporation law, as amended by chapter 690 of the laws of 1978, is amended to read as follows:

(b) Except as may be otherwise permitted under article eight of the estates, powers and trusts law or section [522 (Release of restrictions on use or investment)] 555 (RELEASE OR MODIFICATION OF RESTRICTIONS ON MANAGEMENT, INVESTMENT, OR PURPOSE), the governing board shall apply all assets thus received to the purposes specified in the gift instrument AS DEFINED IN SECTION 551 (DEFINITIONS) and to the payment of the reasonable and proper expenses of administration of such assets. The governing board shall cause accurate accounts to be kept of such assets separate and apart from the accounts of other assets of the corporation. Unless the terms of the particular gift instrument provide otherwise, the treasurer shall make an annual report to the members (if there be members) or to the governing board (if there be no members) concerning the assets held under this section and the use made of such assets and of the income thereof.

S 6. Paragraph (a) of section 514 of the not-for-profit corporation law, as added by chapter 690 of the laws of 1978, is amended to read as follows:

(a) Except as otherwise provided by the applicable gift instrument AS DEFINED IN SECTION 551 (DEFINITIONS), the governing board may [(1)] delegate to its committees, officers or employees of the corporation or the fund[, or agents, including investment counsel,] the authority to act in place of the governing board in investment and reinvestment of institutional funds[, (2) contract with independent investment advisors, investment counsel or managers, banks, or trust companies, so to act, and (3) authorize the payment of compensation for investment advisory or management services, advisors, investment counsel or managers, banks or trust companies, so to act] AS DEFINED IN SECTION 551 (DEFINITIONS). Each contract, IF ANY, pursuant to which authority is so delegated, shall provide that it may be terminated by the governing board at any time, without penalty, upon not more than sixty days' notice. SECTION 554 (DELEGATION OF MANAGEMENT AND INVESTMENT FUNCTIONS) SHALL GOVERN EXTERNAL DELEGATION.

S 7. Paragraph (a) of section 717 of the not-for-profit corporation law, as amended by chapter 690 of the laws of 1978, is amended to read as follows:

(a) Directors and officers shall discharge the duties of their respective positions in good faith and with [that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions] THE CARE AN ORDINARILY PRUDENT PERSON IN A LIKE POSITION WOULD EXERCISE UNDER SIMILAR CIRCUMSTANCES. [In the administration of the powers to make and retain investments pursuant to section 512 (Investment authority), to appropriate appreciation pursuant to section 513 (Administration of assets received for specific purposes), and to delegate] THE FACTORS SET FORTH IN SUBPARAGRAPH ONE OF PARAGRAPH (E) OF SECTION 552 (STANDARD OF CONDUCT IN MANAGING AND INVESTING AN INSTITUTIONAL FUND), IF RELEVANT, MUST BE CONSIDERED BY A GOVERNING BOARD DELEGATING investment management of institutional funds pursuant to section 514 (Delegation of investment management)[, a governing board shall consider among other relevant considerations the long and short term needs of the corporation in carrying out its purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions] FOR PURPOSES OF THIS PARAGRAPH, THE TERM INSTITUTIONAL FUND IS DEFINED IN SECTION 551 (DEFINITIONS).

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S 8. Paragraphs (c) and (e) of subdivision 1 of section 2-b of the religious corporations law, paragraph (c) as amended by chapter 623 of the laws of 1992, paragraph (e) as added by chapter 690 of the laws of 1978, are amended to read as follows:

(c) The following provisions of the not-for-profit corporation law shall not apply to religious corporations: subparagraphs (7) and (8) of paragraph (a) of section one hundred twelve, section one hundred thirteen, section one hundred fourteen, section two hundred one, section three hundred three, section three hundred four, section three hundred five, section three hundred six, article four except section four hundred one, section five hundred fourteen, that portion of section five hundred [twenty-two (b)] FIFTY-FIVE (B) AND SECTION FIVE HUNDRED FIFTY- FIVE (C) which reads "[The attorney general shall be notified of the application and shall be given an opportunity to be heard] THE INSTITUTION SHALL NOTIFY THE DONOR, IF AVAILABLE, AND THE ATTORNEY GENERAL OF THE APPLICATION, AND THE ATTORNEY GENERAL AND SUCH DONOR MUST BE GIVEN AN OPPORTUNITY TO BE HEARD", section six hundred five, section six hundred seven, section six hundred nine, section eight hundred four, article nine except section nine hundred ten, article ten except as provided in section eleven hundred fifteen, section eleven hundred two, and article fifteen except paragraph (c) of section fifteen hundred seven.

(e) No action shall be taken by the trustees of an incorporated Roman Catholic church, or of a Ruthenian Greek Catholic church, under section five hundred [twenty-two] FIFTY-FIVE of the not-for-profit corporation law [(Release of restrictions on use or investment)] (RELEASE OR MODIFICATION OF RESTRICTIONS ON MANAGEMENT, INVESTMENT, OR PURPOSE) without the consent of the archbishop or bishop of the diocese to which such church belongs or in case of their absence or inability to act, without the consent of the vicar general or administrator of such diocese.

S 9. Paragraph (e) of section 8-1.1 of the estates, powers and trusts law, as amended by chapter 686 of the laws of 1967, is amended to read as follows:

(e) Any accumulation of income from property subject to a disposition in trust for a religious, charitable, educational or benevolent purpose, or otherwise acquired by such trust, shall in all respects, including its reasonableness, amount and duration, be within the jurisdiction of the supreme court or the surrogate's court, as the case may be. In exercising such jurisdiction, (1) any accumulation of income which might otherwise be applied for the purposes of the trust may be prohibited or limited, despite a valid direction therefor in the trust instrument or authority therefor under 8-1.7 and (2) such an accumulation may be authorized by order of the court despite the absence of a direction therefor in the trust instrument. THIS PARAGRAPH SHALL NOT RESTRICT IN ANY MANNER THE ABILITY TO RELEASE OR MODIFY RESTRICTIONS RELATING TO INSTITUTIONAL FUNDS UNDER SECTION 555 OF THE NOT-FOR-PROFIT CORPORATION LAW.

S 10. Paragraph (j) of section 8-1.1 of the estates, powers and trusts law is amended to read as follows:

(j) Whenever a voluntary association or committee has received, by public subscription, a fund for a charitable or benevolent purpose from more than one thousand contributors, a portion of which remains unexpended after the expiration of five years from the time of its receipt, and it appears that a literal compliance with the terms of the subscription is impracticable, the supreme court may make an order directing that such unexpended balance be transferred for administration and application to such domestic corporation as in the judgment of the court will most effectively accomplish the general purpose for which such fund was collected, free from any restriction, limitation or direction upon which the subscription was made; and on the transfer of such fund to the corporation designated in the order, such voluntary association, its officers and trustees, or such committee and its officers shall be fully exonerated and discharged from all liability to account for such fund. THIS PARAGRAPH SHALL NOT RESTRICT IN ANY MANNER THE ABILITY TO RELEASE OR

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MODIFY RESTRICTIONS RELATING TO INSTITUTIONAL FUNDS UNDER SECTION 555 OF THE NOT-FOR-PROFIT CORPORATION LAW.

S 11. Section 8-1.7 of the estates, powers and trusts law is amended by adding a new paragraph (b) to read as follows:

(B) THIS SECTION SHALL NOT RESTRICT IN ANY MANNER THE APPROPRIATION FOR EXPENDITURE OR ACCUMULATION OF ENDOWMENT FUNDS AS SET FORTH IN SECTION 553 OF THE NOT-FOR-PROFIT CORPORATION LAW.

S 12. Subparagraph 1 of paragraph (e) of section 11-2.3 of the estates, powers and trusts law, as added by chapter 609 of the laws of 1994, is amended to read as follows:

(1) the term "trustee" includes a personal representative, trustee, guardian, donee of a power during minority, guardian under article eighty-one of the mental hygiene law, committee of the property of an incompetent person, and conservator of the property of a conservatee, BUT DOES NOT INCLUDE AN INSTITUTIONAL FUND AS DEFINED IN SECTION 551 OF THE NOT-FOR-PROFIT CORPORATION LAW;

S 13. Subdivision 1 of section 2115 of the surrogate's court procedure act, as added by chapter 609 of the laws of 1994, is amended to read as follows:

1. At any time during the administration of a trust and irrespective of the pendency of a particular proceeding, the court with jurisdiction of the trust may review the reasonableness of the costs of a delegation by the trustee under section 11-2.3 of the estates, powers and trusts law AND UNDER SECTION 554 OF THE NOT-FOR-PROFIT CORPORATION LAW.

S 14. Subdivision 2 of section 174-b of the executive law, as amended by chapter 43 of the laws of 2002, is amended to read as follows:

2. Any solicitation used by or on behalf of any charitable organization shall provide a clear description of the programs and activities for which it has requested and has expended or will expend contributions or shall include therein a statement that, upon request, a person may obtain from the organization such a description. IF THE SOLICITATION IS BY AN INSTITUTION SUBJECT TO ARTICLE FIVE-A OF THE NOT-FOR-PROFIT CORPORATION LAW, AND IS FOR AN ENDOWMENT FUND, THE SOLICITATION MUST INCLUDE A STATEMENT THAT, UNLESS OTHERWISE RESTRICTED BY THE GIFT INSTRUMENT PURSUANT TO PARAGRAPH (B) OF SECTION FIVE HUNDRED FIFTY-THREE 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 FIVE HUNDRED FIFTY-THREE OF THE NOT-FOR-PROFIT CORPORATION LAW.

S 15. If any clause, sentence, paragraph, subdivision, section or part of this act shall be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder thereof, but shall be confined in its operation to the clause, sentence, paragraph, subdivision, section or part thereof directly involved in the controversy in which such judgment shall have been rendered. It is hereby declared to be the intent of the legislature that this act would have been enacted even if such invalid provisions had not been included herein.

S 16. This act shall take effect immediately.

September 2010

1133 Avenue of the Americas New York, NY 10036-6710 212.336.2000 www.pbwt.com

NEW YORK VERSION OF UPMIFA CREATES FLEXIBILITYAS WELL AS NEW BURDENS FOR NONPROFITS

UPMIFA has finally come to New York, but with unique features that present significant challenges and

burdens for the state's nonprofit organizations.

Governor David Paterson signed New York's version of UPMIFA into law on September 17, 2010. New York

organizations are now subject to a new standard of prudence governing the investment of institutional

funds, and they have gained new flexibility in making appropriations from endowment funds.

Organizations lobbied hard for the new statute, in part because it will provide them the ability, in

appropriate cases, to spend from an endowment fund that is "underwater" – that is, worth less than

the value of the gifts with which the fund was created.

UPMIFA is the Uniform Prudent Management of Institutional Funds Act, a model act promulgated by the

Uniform Law Commission and since adopted by 46 other states and the District of Columbia. New York's

version of UPMIFA, or NYPMIFA, follows the uniform act in its essentials, but differs from it in significant

ways. Because many readers are familiar with UPMIFA generally, this article focuses on the ways that

NYPMIFA is different from the norm. For a brief summary of UPMIFA fundamentals, please go to the

Appendix on page 8.

NYPMIFA generally applies (a) to not-for-profit corporations and (b) to those wholly charitable trusts

where the trustee is a not-for-profit corporation. Wholly charitable trusts where the trustee is an individual

or a corporate fiduciary are generally (but not entirely) outside the scope of NYPMIFA. Significantly,

NYPMIFA is not limited to not-for-profit corporations with exclusively charitable purposes, commonly

known as Type B corporations and ordinarily classified as Section 501(c)(3) organizations under the

Internal Revenue Code. Rather, NYPMIFA applies even to non-charitable not-for-profit corporations

(that is, Type A, Type C and Type D corporations), which may be classified for tax purposes as social

welfare organizations (Section 501(c)(4) organizations), business leagues and trade associations

(Section 501(c)(6) organizations), and social clubs (Section 501(c)(7) organizations).

Organizations typically look to the state where they are organized for the laws governing their internal

affairs, such as the management of investments and the appropriation of endowment funds. Although

New York's not-for-profit corporation law contains provisions expressly applying a few of its sections to

non-New York organizations that conduct activities in New York, no provision of that type is included

in NYPMIFA. Accordingly, it does not appear that NYPMIFA applies to non-New York corporations

conducting activities in New York State.

TAX-EXEMPTORGANIZATIONS

2

NYPMIFA presents six key action items for organizations covered by it, four having to do with endowment

fund appropriations and two pertaining to prudent investing of institutional funds. All of these items

are discussed in greater detail after this brief summary.

Making Appropriations from Endowment Funds

1) Communicating with "Available" Donors. Generally speaking, if the donor to an endowment fund

is still available and the endowment fund is governed by a gift instrument executed by the donor

before September 17, 2010, an organization may not make an appropriation under NYPMIFA unless

a statutory notice procedure is followed or a specific agreement is reached with that donor.

Therefore, for endowment funds of this type, organizations that want the full flexibility provided

by NYPMIFA should develop a protocol either for sending an appropriate notice to available

donors or for working with available donors to develop mutually agreeable terms for making

appropriations in light of the new law.

2) Documenting Appropriation Decisions. Because NYPMIFA requires documentation of decisions

to make an appropriation from an endowment fund, organizations should develop a system for

(a) analyzing the eight statutory factors that must be considered before making the appropriation

and (b) documenting the consideration given to each factor.

3) Addressing the Presumption of Imprudence. For new endowment fund gifts, organizations

should consider whether and how to modify their forms of gift agreement to limit the effect of

the presumption of imprudence now applicable to the appropriation during the year of more

than 7% of the value an endowment fund created under an instrument executed on or after

September 17, 2010.

4) Updating Endowment Fundraising Materials. Organizations should update their endowment

fundraising materials to include new language required by NYPMIFA.

Prudent Investing of Institutional Funds

5) Updating Investment Policies. Because an organization is now required to have an investment

policy meeting certain statutory standards, organizations should review existing policies to confirm

compliance. An organization with no investment policy must develop one that is consistent with

NYPMIFA's requirements.

6) Assessing the Independence of Agents. An organization that delegates the management or investment

of assets to third-party agents should develop a protocol for assessing the agents' independence.

Provisions Governing Appropriations from Endowment Funds

Opting In or Opting Out of NYPMIFA's Appropriation Regime. In its original form, UPMIFA wouldpermit organizations to appropriate a prudent portion of any endowment fund at any point after thestatute's effective date. NYPMIFA, however, creates an "opt in, opt out" feature that limits theapplication of the new, more flexible appropriation rules for certain existing endowment funds.

Under New York's "opt in, opt out" system, an organization may not make appropriations under NYPMIFA(in particular, appropriations that dip into the original dollar value) from any endowment fund governedby a gift instrument executed by the donor before September 17, 2010, if the donor is "then available,"unless, at least 90 days before doing so, the organization gives the donor a form of notice containinglanguage substantially as follows:

3

New York's Version of UPMIFA

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 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 Prudent

Management of Institutional Funds Act) will not apply to your gift.

If a donor does not respond to the notice within 90 days, or if the donor responds by checking Box #1,

the organization may then avail itself of NYPMIFA's rules for making appropriations from the endowment

fund created by the donor.

The New York statute does not stipulate what legal regime governs appropriation of income and appreciation

before a notice is given and before a reply is received or the 90-day notice period has passed. During

this window, are appropriations from the endowment fund still governed by immediately prior law

permitting income and certain appreciation to be appropriated and spent if the action is prudent?

Because of the disruptive effect of other possible interpretations, organizations will undoubtedly

welcome confirmation by the Attorney General that this question may be answered in the affirmative.

New York's novel "opt in, opt out" feature presents numerous other interpretational questions. For

example, while the statute defines an "available" donor as a donor that is living or extant (if an

organization) that "can be identified and located with reasonable efforts," how much diligence must an

organization conduct to meet the "reasonable efforts" standard? And even though a legally incapacitated

donor might be "available" in some sense, how could such a donor complete the notice form?

Organizations face other questions as well. For example, if a donor checks Box #2, does that mean

that the organization can never spend below the original dollar value of the gift, even if it appropriates

the amount when the fund is "above water"? By framing the text of Box #2 and the explanation of Box #2

in terms of spending rather than appropriation, the new statute raises this issue, which is not trivial for

the many organizations that appropriate funds from their endowments when the annual budget is

adopted but do not spend those funds until later in the fiscal year – at which point the fund could have

dropped below its original dollar value due to market declines. If a donor's decision to check Box #2

imposes greater strictures on the organization than were present even under prior law and assuming

immediately prior law continues to apply, an organization may be better off with donor silence (or a

tailor-made agreement with the donor) than using the statutory form of notice and running the risk a

donor will check Box #2.

The new notice procedure is not necessary to the extent the gift instrument expressly permits spending

below the original dollar value of the endowment fund. In addition, the procedure does not apply to

4

existing endowment funds received as part of a general institutional solicitation (so long as the donor

did not further restrict the gift). Finally, the notice procedure may not be used to override specific

spending restrictions set by the donor.

Organizations should be aware that NYPMIFA applies automatically, and without need of the "opt in,

opt out" procedure, to endowments established by donors who are no longer "available" and to gifts

established under instruments executed by the donor on or after the effective date of NYPMIFA.

However, for newly created endowment funds there are new charitable solicitations requirements

(described below) that affect communications with donors.

Under the new statute, the "opt in, opt out" notice is considered to have been given if it is given

personally in writing or sent to the donor's last known address on record with the organization or, if no

address is on record, if the organization makes reasonable efforts to attempt to find and notify the

donor. If the notice is mailed, it is considered given when it is deposited in the U.S. mail with prepaid

postage. Notice by fax or email is considered given when it is sent. A record of the notices and

responses must be maintained, although the statute does not say for how long. In the absence of

authoritative guidance, an organization may want to revise its document retention policy to require

permanent retention of the copies of the notice and response.

Although organizations will undoubtedly make judgments

about how to interpret New York's "opt in, opt out" rules, it is

already clear that the new statute is in need of clarifying

amendments from the Legislature and/or published guidance

from the New York Attorney General. Nonprofits may wish

to consider whether to clarify the language in the notice,

whether to negotiate specific terms with specific donors in

lieu of following the notice procedures, and whether to use

the notice process to obtain modification of other donor

restrictions, if those have become outdated or unwieldy.

Factors Affecting Appropriations from an Endowment

Fund. UPMIFA enumerates seven factors that an

organization must consider, if relevant, when determining

the amount of an endowment fund it will appropriate.

Those factors are:

(1) the duration and preservation of the endowment fund,

(2) the purposes of the organization and the

endowment fund,

(3) general economic conditions,

(4) the possible effect of inflation or deflation,

(5) the expected total return from income and the

appreciation of investments,

(6) other resources of the organization, and

(7) the investment policy of the organization.

A Caveat about theNotice Procedure

NYPMIFA specifically gives effect to "terms in a

gift instrument setting forth a specific spending

level, rate or amount, or explicitly modifying

or overriding" the new law's default provisions

governing appropriations from endowment

funds. This means that following the "opt in,

opt out" procedure is not sufficient to override

a donor's specific limitation on the level, rate

or amount of spending. For example, if a

donor gave an organization the flexibility to

appropriate and spend "a prudent portion of

this endowment fund, but not more than 6%

per annum of its average asset value over the

preceding three years," that limitation could

not be modified by sending the "opt in, opt

out" notice. Instead, the donor would need

to give a specific consent to the modification,

or if the donor is not available to give the

consent, the organization would need to obtain

judicial relief under the provisions of the new

law governing the release or modification of

donor restrictions.


5

New York has added an eighth factor:

(8) 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 organization.

In other words, New York appears to be mandating, in "appropriate" situations, that the prudence

evaluation include a consideration of what it would mean to the organization if it elected to appropriate

nothing from a given endowment fund or at least to appropriate less than it would ordinarily appropriate

if it simply applied its endowment spending policy. This provision presumably is meant to encourage

organizations to consider curtailing or even eliminating appropriations from endowment funds that, for

example, have suffered market declines. Attorney General guidance on the interpretation of this

provision is needed (e.g., to ascertain if this factor must be considered even when an endowment fund

has appreciated in value).

Presumption of Imprudence. The uniform version of UPMIFA contains an optional provision creating

a rebuttable presumption that an appropriation from an endowment fund in any year greater than 7% of

its fair market value is imprudent. Most states elected not to include this presumption. New York adopted

the presumption, but only with respect to gift instruments executed on or after September 17, 2010.

UPMIFA requires that the fair market value of an endowment fund be calculated as a quarterly (or more

frequent) average over a three-year period or the period of the fund's existence, if shorter. New York

elected to make the calculation period five years or the period of the fund's existence, if shorter. For the

many organizations that calculate their endowment draw using a three-year rolling average or another

methodology that differs from this rule, a special NYPMIFA calculation may be necessary in order to be

assured that the endowment draw will not trigger the presumption of imprudence.

According to the Uniform Law Commission commentary to UPMIFA, the presumption of imprudence

does not shift the burden of proof to the charity, only the burden to produce evidence that supports

the prudence of the decision to make an endowment fund appropriation in excess of the 7% rate. If

New York interprets NYPMIFA in accordance with the UPMIFA commentary, the Attorney General would

still bear the burden of persuading a court that an annual appropriation in excess of the 7% threshold

was imprudent.

One important caveat about the presumption of imprudence: There is no "safe harbor" of prudence for

appropriations of 7% or less, so organizations should not assume that the prudence of an appropriation

decision is established simply by making appropriations at or below the 7% level.

Because this new presumption does not apply to an appropriation permitted under the gift instrument,

organizations may wish to update their endowment gift forms to authorize appropriations that would

not be subject to the presumption of imprudence. For example, the presumption will not apply to a

gift instrument that permits an appropriation in any year in excess of 7% of the fair market value of an

endowment fund under certain specified conditions.

6

Three Statutory Categories ofEndowment Funds

By creating the "opt in, opt out" concept and imposing a presumption

of imprudence in some cases but not all, New York has created at

least three statutory categories of endowment funds, each with a

different legal character. That is in addition to all the subcategories

that donors choose to create through the unique conditions that they

impose. Hence, the price of UPMIFA-style flexibility in New York is a

significant new level of complexity for endowment funds. The statutory

categories are summarized below. The flexibility introduced by the

new law is greatest with respect to endowment funds in the first of

these categories.

Type of Endowment Fund Treatment under NYPMIFA

An endowment fund governed by a gift instrument

executed by the donor before 9/17/2010,

where the donor is not "available," or an

endowment fund received before that date as

part of a general institutional solicitation (so

long as the donor did not further restrict the gift)

An organization may appropriate a prudent

portion of the assets, without any adverse

presumption if the annual appropriation

exceeds 7% of fair market value and without

regard to whether the appropriation consumes

income, appreciation, or the original dollar

value of the gift.


executed by the donor before 9/17/2010

where the donor is "available"

An organization must follow the "opt in, opt out"

notice described above before an appropriation

under NYPMIFA can be made, or the organization

must specifically negotiate mutually agreeable

new terms with the donor.


executed by the donor on or after 9/17/2010

An organization may make appropriations

under NYPMIFA, without regard to traditional

distinctions concerning income, appreciation

and original dollar value, but with a presumption

of imprudence if the annual appropriation

exceeds 7% of fair market value. An organization

must also provide the endowment fund disclosure

statement now required under the charitable

solicitations law.


7

Documenting Decisions to Appropriate. For each determination to make an appropriation from an

endowment fund, New York requires a contemporaneous record describing the consideration given to

each of the eight factors listed above. For an organization with dozens or even hundreds of endowment

funds, many of them held for specific purposes or subject to other specific donor restrictions, this

requirement may present a substantial new burden, because the rationale for spending a particular

portion may not be the same in all cases. Endowment funds subject to similar or identical restrictions,

however, ordinarily could be considered as a group. Organizations will need to develop a process to

address this requirement. This process could include creating templates and checklists to ensure that an

organization is building an adequate record.

Notifying Donors of the Power of Appropriation from Endowment Funds. Also unique to New

York is a provision amending the charitable solicitations law to provide that all endowment fund

solicitations "must include a statement that, unless otherwise restricted by the gift instrument pursuant

to paragraph (B) of section five hundred fifty-three 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 five hundred fifty-three of the not-for-profit corporation law." The consequences

(if any) of failing to include the italicized statement are unstated, but in any event, organizations will

want to make sure that fundraising materials for endowment gifts are modified to include it.

Provisions Governing Investment Management

Investment Policy. Another unique feature of NYPMIFA is a provision requiring organizations to have

a policy "setting forth guidelines on investments and delegation of management and investment

functions in accord with the standards" of the new statute. Even organizations that already have written

investment policies may have to update them to ensure that they are "in accord" with the prudence

standard and other investment standards under the new law. (Those investment standards are described

in the accompanying Appendix concerning UPMIFA.) No deadline is established for organizations to

develop an appropriate investment policy. The requirement to have an investment policy appears to

be applicable even to wholly charitable trusts with an individual, bank or trust company as trustee – even

though such trusts are generally outside the ambit of NYPMIFA.

Selecting Agents to Whom Investment Function is Delegated. NYPMIFA establishes an affirmative

duty to assess the independence of external agents selected to manage and invest institutional funds,

including any conflicts of interest the agent has or may have. In addition to developing a suitable

definition of conflicts of interest in this context, organizations may want to develop procedures for

collecting conflicts information from agents hired to manage and invest institutional funds.

Reviewing Decisions Not to Diversify. NYPMIFA requires that an organization review at least

annually (or more frequently, if circumstances require) any decision not to diversify the assets of an

institutional fund.

For additional information about UPMIFA generally or about NYPMIFA, please contact any member of

our Exempt Organizations practice group.

8

WHAT UPMIFA IS ALL ABOUTBroadly speaking, UPMIFA addresses three main topics: (1) management and investment of

institutional funds; (2) appropriations from endowment funds; and (3) release of donor restrictions on

institutional funds. In one form or another, UPMIFA is now the law in all states (other than Pennsylvania,

Florida and Mississippi) and the District of Columbia.

Who Is Covered by UPMIFA?

UPMIFA applies to the management and investment of an "institutional fund," which means a fund held

by an "institution" other than (a) assets held primarily to accomplish a programmatic purpose (and not

for investment), (b) a fund held for an institution by a trustee that is not an institution (e.g., an

individual or a bank), and (c) assets held for the benefit of a beneficiary that is not an institution (such

as the assets of a charitable remainder trust before the non-charitable interest terminates). The term

"institutional fund" expressly includes a charitable remainder trust after the non-charitable interest

terminates (if the trustee is an institution) and appears to include a wholly charitable estate if the

executor is an institution.

The term "institution" is defined in such a way that it includes all not-for-profit corporations as well

as wholly charitable trusts. However, those funds held for an institution by a trustee that is not an

institution are excluded from the definition of "institutional funds," so as a practical matter wholly

charitable trusts with an individual, bank or trust company as trustee fall outside UPMIFA. Note, though,

that such charitable trusts are subject to similar prudent investor rules on management and investing

under the laws generally applicable to trusts (in New York, Section 11-2.3 of the Estates, Powers and

Trusts Law).

UPMIFA also governs appropriations from "endowment funds." An "endowment fund" is an institutional

fund (or part thereof) that under the terms of the gift instrument is "not wholly expendable on a current

basis," which means that the donor has placed a restriction of some kind on the amount that can be

spent from the fund. Thus, a fund that is restricted only as to purposes, but not as to the amount

that may be spent, would be an institutional fund but not an endowment fund. The reason that the

distinction matters is that some charities – including most private foundations – do not have endowment

funds in this technical sense, which means that they will not be subject to the law's requirements

concerning endowment fund appropriations (though they may wish to be informed about the law if they

plan to be on the giving end of endowment grants). But all institutions, even those without endowment

funds in the technical sense, need to know about the new rules governing how they manage and invest

their institutional funds.

Management and Investment of Institutional Funds

UPMIFA updates prior law to bring it in line with more current conceptions of prudent investing. The

duty of care imposed on those who are responsible for investment of institutional funds remains essentially

the same – the care of an ordinarily prudent person in a like position under similar circumstances. But

APPENDIX

9

UPMIFA establishes detailed guidelines concerning how the duty of care must be exercised. The key

points to understand here are the following:

• Factors to Consider: When managing and investing an institutional fund, an organization must

consider, if relevant: (a) general economic conditions; (b) the possible effect of inflation or

deflation; (c) the expected tax consequences, if any, of investment decisions or strategies;

(d) the role that each investment or course of action plays within the overall investment portfolio

of the fund; (e) the expected total return from income and the appreciation of investments;

(f) other resources of the institution; (g) the needs of the institution and the fund to make

distributions and to preserve capital; and (h) an asset's special relationship or special value, if

any, to the purposes of the institution.

• Appropriate Decision-Making in Context: The organization must make management and

investment decisions about an asset in the context of the overall portfolio as part of an overall

strategy that takes into consideration risk and return objectives appropriate to the institution.

The management costs incurred must also be reasonable and appropriate in relation to the

assets of the organization, its purposes, and the skills available to it.

• Types of Assets: An institution may pool institutional funds for investment purposes and may

invest in any kind of property or investment (unless a gift instrument says otherwise), but the

institution must diversify a fund's investments unless it prudently determines that because of

special circumstances the purposes of the fund are better served without diversification. (As

noted in the accompanying article on the New York-specific aspects of UPMIFA, a decision not

to diversify must be revisited at least once a year by institutions governed by New York law.)

• Delegation of Investment Management: An organization may delegate the management

and investment function to an external agent – and will not be liable for the decisions or actions

of the agent – so long as it exercises prudence in (a) selecting, continuing, or terminating the

agent; (b) establishing the scope and terms of the delegation; and (c) monitoring the agent.

An organization may also delegate these functions to its committees, officers, or employees.

(The accompanying article on New York's version of UPMIFA describes a special requirement in

New York concerning the independence of agents to whom management authority is delegated.)

Endowment Spending

UPMIFA, which was adopted by the National Conference of Commissioners on Uniform State Laws in 2006,

grew out of the economic downturn of 2001 and was designed to address precisely the situation facing

many charities since the economic crisis of 2008, namely, underwater endowment funds. As the

drafters of UPMIFA explain in their prefatory comments, the act is intended to modernize the law and

also to give greater flexibility to charities in coping with fluctuations in the value of endowment funds.

Elimination of Historic Dollar Value. The most pertinent change introduced by UPMIFA in the

endowment area is its elimination of the concept that historic dollar value – that is, the original dollar

value of the fund plus any amounts added by the donor – may not be appropriated for expenditure. In

making this change, the drafters cited, among other reasons, the rule's arbitrariness in fixing value at

the time of the gift, its lack of consideration to issues surrounding inflation, and its meaninglessness

as a benchmark for endowments that have grown significantly. In place of historic dollar value, UPMIFA

expands the prudence standard, giving boards more guidance when making decisions to expend

10

endowment funds. In making a determination to appropriate or accumulate, the new standard requires

the institution 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, the following factors:

(1) the duration and preservation of the endowment fund;

(2) the purposes of the institution and the endowment fund;

(3) general economic conditions;

(4) the possible effect of inflation or deflation;

(5) the expected total return from income and the appreciation of investments;

(6) other resources of the institution; and

(7) the investment policy of the institution.

According to the UPMIFA drafters, these factors emphasize the importance of the intent of the donor,

by which is meant donor intent "as expressed in the gift instrument," rather than the wishes expressed

by the donor at the time the expenditure is made by the organization. Note that any express restrictions

contained in the gift instrument – including a prohibition on spending historic dollar value – must be

honored; the parameters on expenditure set forth by UPMIFA remain default rules. (An eighth factor has

been added in New York, as explained in the accompanying article on the New York-specific aspects of

UPMIFA. New York also limits an organization's flexibility to dip into the historic dollar value or to spend

more than a certain percentage of certain endowment funds, as discussed in the accompanying article.)

Donor or Judicial Release of Restrictions

UPMIFA permits an organization's board to release an endowment restriction upon consent of the donor,

as had also been the case under prior law. UPMIFA expands the circumstances under which judicial

modification of the restriction is appropriate. In addition, UPMIFA introduces a provision that permits

an institution to release or modify a restriction on an endowment fund without court approval, upon 60

days' notice to the Attorney General, in instances where the fund's value is less than $100,000, more

than 20 years have elapsed since its establishment, and the property will be used consistently with the

gift's charitable purposes.

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©2010 Patterson Belknap Webb & Tyler LLP 09/10 #0538

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Faculty Biographies

Jillian P. Diamant

Jillian P. Diamant is an Associate at Simpson Thacher & Bartlett and is the author of Enactment of the New York Prudent Management of Institutional Funds Act Affecting New York Not-For-Profit Institutions, which was published in December 2010. Ms. Diamant is a graduate of Stanford University and University of Pennsylvania Law School and has been admitted to practice in New York since 2008.

John Sare John Sare is a partner in the tax-exempt organizations practice and the personal planning practice of Patterson Belknap Webb & Tyler LLP. Mr. Sare has extensive experience in the representation of museums, colleges, private foundations and other types of exempt organizations. This work includes advising charities on the issues and options they face with respect to their endowment funds and other types of restricted gifts. Mr. Sare also has significant experience representing tax-exempt organizations in connection with inquiries and investigations conducted by the New York State Attorney General’s Office. Mr. Sare also advises individuals and fiduciaries on legal issues involving works of art, charitable giving, estate planning, and the administration of estates and trusts. He teaches the Seminar in Law and the Visual Arts at the Columbia University School of Law. In 2003, he was recognized for Outstanding Pro Bono Service by The Legal Aid Society of New York. Mr. Sare is a co-author of several recent publications, including “Underwater Endowments: Understanding Your Options” (2009), “Impact of the New Form 990 on Conflicts and Disclosure Policies” (2008), and “New IRS Form 990 Changes the Landscape for Public Disclosure by Exempt Organizations” (2008).

David A. Shevlin

Mr. Shevlin is an attorney at Simpson Thacher & Bartlett LLP where he is Senior Counsel in the Exempt Organizations Group. He advises a variety of international and domestic exempt organizations, including all forms of private foundations and public charities. Mr. Shevlin also advises donors to and the governing bodies of exempt organizations. He advises a number of endowed universities, foundations, hospitals and cultural institutions with respect to the investment of their endowments. Mr. Shevlin regularly speaks and writes on topics of relevance to exempt organizations. Mr. Shevlin’s professional associations include membership with the Exempt Organizations Committee of the American Bar Association Section of Taxation, where he serves as Co-Chair of the Sub-Committee on Unrelated Business Taxable Income (UBTI), and was a member of the ABA Coordinating Committee on Nonprofit Governance. Mr. Shevlin also serves as chair of the Exempt Organizations Committee Task Force on the Model Nonprofit Corporation Act. He served on the American Bar Association Task Force that published a guide to the impact of the Sarbanes-Oxley Act of 2002 on nonprofit organizations. Mr. Shevlin also served on the Editorial Board of White on New York Corporations, a leading treatise on New York Corporate Law. Mr. Shevlin serves on the Board of Directors of Doctors Without Borders USA, and is Chairman of the Audit Committee and Secretary of that organization. Mr. Shevlin was has been recognized as a leading practitioner in Chambers USA: America’s Leading Lawyers for Business (2008 – 2010). Mr. Shevlin earned his J.D. at New York University where he graduated magna cum laude and was named a member of Order of the Coif, and earned his B.S. degree from Cornell University, where he was named a Presidential Scholar.

Documents

The New York Prudent Management of Institutional ... - NYCLA