Maryland Uniform Prudent Management of Institutional Funds Act

On April 14, 2009, Governor O'Malley signed into law the Maryland Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA replaces the Maryland Uniform Management of Institutional Funds Act (UMIFA), which since 1974 has governed the management and investment of funds held by charitable organizations, provided rules regarding spending from endowment funds held by such organizations, and allowed for the release of donor-imposed restrictions on the use and management of charitable funds. The new rules instituted by UPMIFA are intended to update the standards that apply to managing and investing charitable funds, modernize the rules governing expenditures from endowment funds, and bring greater efficiency to the process of modifying restrictions on charitable funds.

Applicability
Except with respect to the new spending rules, which apply only to "endowment funds," UPMIFA governs the administration of virtually all funds held by charitable organizations, regardless of form. Excluded from UPMIFA's coverage are "program-related assets" (i.e., non-investment assets used to accomplish the charity's purposes) and funds in which a non-charitable beneficiary has an interest. With respect to charitable trusts, only those that have a charity as Trustee are subject to UPMIFA.

UPMIFA applies to charitable funds in existence on the date of enactment, as well as those created thereafter.

Investment and Management of Charitable Funds
The new law retains UMIFA's standard of care applicable to the management and investment of charitable funds, requiring the exercise of ordinary business care and prudence under the then-prevailing facts and circumstances. However, UPMIFA attempts to provide more specific guidance and standards for fund managers. In particular, UPMIFA requires that fund managers minimize costs and investigate all facts relevant to a particular decision or action. Charitable institutions also must consider, subject in all cases to the intent of the donor as expressed in a gift instrument, a number of specific factors in making investment decisions, including general economic conditions, the possible effect of inflation or deflation, tax consequences, the needs of the charity both to make distributions and preserve capital, the expected income and appreciation of fund investments, other resources of the charity, and the special relationship or value, if any, of a particular asset to the general purposes of the institution. Decisions about individual investments shall be made in the context of the fund's portfolio as a whole, and as part of an investment strategy having "risk and return objectives reasonably suited to the fund and to the institution." UPMIFA further obligates charitable institutions to diversify fund investments unless, because of "special circumstances," not diversifying would better serve the purposes of the fund.

Like UMIFA, UPMIFA allows institutions to delegate the management and investment of a charitable fund to an external agent. UPMIFA requires that charities exercise prudence in selecting an agent, establishing the scope and terms of the delegation, and monitoring the agent's performance. While UPMIFA imposes upon agents a duty of care in carrying out delegated duties, the institution is not relieved of liability for its agent's actions or its own duty of care with respect to the investment and management of charitable funds.

In light of UPMIFA's more detailed management and investment standards, charitable institutions should review their investment portfolios, costs, strategies and policies, as well as their relationships with external agents to insure compliance with the new law. Any such review, together with any actions or decisions taken in response thereto, should be documented.

Endowment Spending
The more significant change brought about by UPMIFA concerns the rules on spending from "endowment funds." For purposes of the statute, an "endowment fund" is a fund held by a charitable organization that, under the terms of the gift instrument (which includes solicitation materials), cannot be spent down in its entirety on a current basis. The definition of "endowment fund" does not include otherwise unrestricted funds set aside for endowment by a charity's governing board, which are commonly known as "board-designated" or "quasi-" endowment, or funds restricted solely as to purpose. Rather, UPMIFA's endowment spending rules are intended to cover only funds subject to donor-imposed spending restrictions, including contributions made with a reasonable belief that the funds would be held as endowment (e.g., in response to an endowment fundraising appeal).

Moreover, UPMIFA's spending rules are subject in all cases to the intent of the donor as expressed in the relevant gift instrument. Accordingly, if a gift instrument directs that a specific dollar amount or percentage of an endowment fund be distributed each year, the donor-imposed restriction will govern. However, language in a gift instrument limiting distributions to "income" or a general direction to "preserve principal intact" will not by itself be sufficient to avoid the application of the spending rules described below. In sum, UPMIFA's emphasis on the gift instrument will require charities to examine gift agreements, memoranda of understanding, letters accompanying gifts, bequest language, and solicitation materials to determine whether a fund is subject to the new spending rules, as well as a conscious effort to craft future gift instruments that, to the extent desired, are not covered by UPMIFA.

UPMIFA eliminates the "historic dollar value" concept used in UMIFA, which permitted the prudent expenditure of the income and net appreciation of an endowment fund over the aggregate value of the contributions to the fund when made. In its place, UPMIFA permits a charity to spend so much of an endowment fund as it deems prudent. In making this determination, the charity shall consider the following factors:

• The duration and preservation of the fund;



• The purposes of the charity and the fund;



• General economic conditions;



• The possible effect of inflation or deflation;



• The expected total return from investments (income and appreciation);



• Other resources of the charity; and



• The charity's investment policy.