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Massachusetts Adopts UPMIFA

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Massachusetts Adopts UPMIFA

Massachusetts Adopts the Uniform Prudent Management of Institutional Funds Act

This article was published to the Hurwit & Associates website on September 8, 2009.

Massachusetts recently joined the growing list of states that have adopted the Uniform Prudent Management of Institutional Funds Act ("UPMIFA"). Among other changes the act makes, it:

  • Loosens some restrictions on the use of endowment funds, thus potentially freeing up additional capital for project and other expenditures
  • Clarifies what constitutes management and investment prudence, and
  • Permits, in certain circumstances, the use of donor-restricted funds for purposes other than those for which they are held.

The new rules apply to most funds held for charitable purposes as of June 30, 2009.

Loosening the Restrictions on Endowment Funds

Endowment funds are created from gifts specifying that they are not to be wholly expended on a current basis. Before UPMIFA, unless explicitly allowed by the gift instrument, charities were prohibited from dipping into the principal of such endowments, even where the Fund's value sank so low as to leave nothing available to spend (a so-called "underwater" fund). UPMIFA authorizes the expenditure of endowment funds where such expenditure is prudent under the new standards (discussed below). This change is likely to offer some relief to endowed charities that have been struggling in the recent economic climate. But the statute cautions managers to consider several factors before appropriating endowment funds, such as the possible effect of inflation or deflation, the general economic climate, the duration and purposes of the fund and the other resources available.

Clarification of Prudence Standards

Under prior Massachusetts law, fund managers could run into trouble if they spent more than a set percentage of an endowment fund's value. UPMIFA does away with presumptions based on fixed percentages. Instead, actions will be considered prudent if taken in good faith with a reasonable amount of care. With respect to management and investment of funds in particular, UPMIFA follows "modern portfolio theory," which places high value on diversity and consideration of risk and return objectives. It sets forth a list of factors to be considered in management and investment decisions, such as the needs and resources of the institution, the general economic climate, the possible effect of inflation or deflation and expected tax consequences. The statute also imposes a duty to diversify, and an obligation on managers who have special qualifications to use such skills. UPMIFA permits delegation, as long as reasonable care is taken in selecting, instructing and monitoring the individual or institution to which investment decisions are delegated.

Release or Modification of Donor-Restricted Funds

As under prior law, UPMIFA provides that an institution may release or modify a restriction on the management, investment, purpose or duration of a particular gift if the donor consents to the change in writing. Under the new law, a charitable organization may petition a court to release such a restriction, even without donor consent, where it has become impracticable, wasteful, impairs the management of the fund, or, if due to circumstances not anticipated by a donor, the change will further the purposes of the fund. Release and modification are also authorized where a restriction becomes unlawful or impossible to achieve. The statute allows the Massachusetts Supreme Judicial Court to authorize the Attorney General to hear and approve requests to modify a restricted fund.

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