Florida’s Uniform Prudent Management of Institutional Funds Act (the “Act”) (Fla. Stat. Sec. 617.2104), replaces the Florida Uniform Management of Institutional Funds Act (Fla. Stat. Sec. 1010.10) and expands its application to include all charitable institutions and not only those associated exclusively with educational purposes The Act is based on the Uniform Management of Institutional Funds Act promulgated by the National Conference of Commissioners on Uniform Laws, which has already been adopted in some form by 47 other states. The Governor is expected to sign the Act into law soon, and when that happens, Florida’s not-for-profit law will be consistent with the laws of most other states.
Generally, the Act governs conduct in the management and investment of institutional funds, the expenditure or accumulation of endowment funds and the release or modification of restrictions on the management or investment of institutional funds and the charitable purposes of such funds. This post will cover the rules regarding the management and investment of institutional funds and a later post will cover endowments and the modification of restrictions on institutional funds.
With respect to the management and investment of institutional funds, the Act expands investment authority provided to charitable institutions and adopts many of the concepts found in the Prudent Investor Act (Florida’s Prudent Investor Act is found at Fla. Stat. Sec. 518.11). First and foremost, the institution must adhere to the intent of the donor as expressed in a gift instrument, which instrument can override many of the rules concerning the management and investment of an institutional fund.
A gift instrument is not only a record of the donor, but can also be an institutional solicitation under which property is transferred to an institution as an institutional fund. An “institutional fund” is a fund held by an institution for charitable purposes, but does not include program-related assets (i.e., assets held to accomplish a charitable purpose and not primarily for investment). Thus, if a charity solicits funds for an endowment to accomplish a particular charitable purpose, then the use of the funds will be restricted to that charitable purpose. It is important in representing a donor making a lifetime charitable gift or carrying out the intent of a donor with respect to a testamentary gift to have a properly drafted gift agreement to protect the interests of the donor.
Under the Act, the institution must consider the charitable purposes of the institution as well as the purposes of the institutional fund in the management and investment of the institutional fund, and must make a reasonable effort to verify facts relevant to the management and investment of the fund.
Each person responsible for the investment and management of an institutional fund owes a duty of loyalty to the institution and must manage and invest the fund in good faith and with care an ordinarily prudent person in a like position would exercise under similar circumstances. It is interesting that this language appears to embrace the old prudent person rule, but the intent of the Act is to modernize the prudence standard by incorporating features of modern investing. Thus, many of the prudent investor rules are also set forth in the Act.
In accordance with the principles of modern investing, the Act provides:
(i) An institution may invest in any kind of property or type of investment consistent with the Act.
(ii) Management and investment decisions must be made not in isolation but rather in the context of the institutional funds portfolio of investments as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the fund and to the institution.
(iii) An institution must diversify fund investments, unless the institution reasonably and prudently determines under the Act that the purposes of the fund are better served without diversification. Diversification is a well settled principle of modern investing and an institution that determines a fund is better without diversification should do so cautiously.
(iv) An institution may incur only the costs that are appropriate and reasonable in relation to the assets, the purposes of the institution and the skills available to the institution.
(v) An institution must make and carry out decisions concerning the retention of disposition of a gift or to rebalance the portfolio within a reasonable time after receiving property.
(vi) An institution must consider the following factors:
(a) General economic conditions.
(b) Possible effect of inflation or deflation.
(c) Expected tax consequences of investment decisions or strategies.
(d) The role that each investment or course of action plays within the overall investment portfolio.
(e) The expected total return.
(f) Other resources of the institution.
(g) The needs of the institution and the fund to make distributions and to preserve capital.
(h) The special relationship or special value of an asset to the charitable purposes of the institution.
It is important for an institution to prepare an investment policy statement that addresses not only the specifically enumerated factors above but also the donor’s intent and the purposes of the fund. The investment policy statement should be regularly reviewed and updated as necessary.
If a person has special skills or expertise (or is selected in reliance on those skills), that person has a duty to use those skills or that expertise in managing and investing institutional funds. An institution that does not have the appropriate skills or expertise to manage or invest the fund may be under a duty to delegate such functions to a person with the requisite skills or expertise.
The management and investment functions may be delegated to an external agent if it is prudent to do so, provided the delegation does not conflict with any limitation in the gift agreement. In that event, the agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation. The institution must act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances in selecting the agent, establishing the scope and terms of the delegation and periodically reviewing the agent’s actions. Here again, it is important to document the steps taken in the selection process and the periodic review of the agent’s actions. Also, the institution should document the scope and terms of the delegation.
In summary, the Act expands the management and investment authority of a charitable institution and provides specific guidance to comply with modern investing principles. It also protects the interests of donors, but as will be described in a later post, provides some flexibility to modify or reform restrictions on institutional funds.