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Law Change Could Give Foundations More Investment Freedom
The current rule--the Uniform Management of Institutional Funds Act (UMIFA)--prohibits spending that would take foundations below their historic dollar value.
Wide-ranging changes to the act that governs the investment and management of foundations were approved last month at the National Conference of Commissioners on Uniform State Laws in Hilton Head, S.C. And if the commissioners succeed in getting their changes passed into law by state legislatures across the country, foundations and endowments could have more investment freedom.
The current rule--the Uniform Management of Institutional Funds Act (UMIFA)--prohibits spending that would take foundations below their historic dollar value. As a consequence, many smaller foundations have tended to invest in cash equivalents such as certificates of deposit so they could have money to spend and not run afoul of the law by dipping into their corpus. "It had a way of distorting investment," said Barry Hawkins, chairman of the UMIFA Drafting Committee and a partner in Connecticut law firm Shipman & Goodwin LLP. The new act proposes to abolish historic dollar value thus permitting nonprofits to diversify their portfolios and pursue investments that would produce greater long-term returns.
The updated rules, the Uniform Prudent Management of Institutional Funds Act (UPMIFA), dictate that nonprofits can dip into their corpus so long as spending is prudent. It suggests that spending more than 7% of a fund's market value in one year would be imprudent.
UPMIFA also allows foundations with less than $25,000 to alter donor restrictions that have become obsolete, even if the donor is unavailable. The nonprofits no longer have to take legal action to do this, although they must provide 60 days' advance notice to their attorney general.
After UMIFA was proposed in 1972, it took six years to get it enacted in 47 of the states. Hawkins' committee's target is to get the new law passed in all 50 states and the District of Columbia, Puerto Rico and the Virgin Islands in three years. Hawkins hopes UPMIFA will be adopted first in states with large populations, such as Florida, Texas, Michigan, Ohio and New Jersey, to "get some momentum going." Members of the drafting committee will work to educate legislators and Hawkins has been asked to address the National Association of Charitable Officials in Nashville in October.