W. Scott Simon
Last month’s column explained that the Chicago-based National Conference of Commissioners on Uniform State Laws (the same group that brought us the Uniform Prudent Investor Act) published the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in July. UPMIFA governs the investment conduct of trustees of non-profit money such as foundations and endowments.
Much of the language of the Uniform Prudent Investor Act was copied into the text of UPMIFA. This month’s column, which maintains the respite from my (so far) four-part series on nonfiduciary investment consultants, will continue the comparison begun in last month’s column of some of the more important provisions common to UPMIFA and the Uniform Prudent Investor Act.
Duties to Retain Prudent Assets or Dispose of Imprudent Assets
UPMIFA Section 3(e)(5)
“Within a reasonable time after receiving property, an institution shall make and implement 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, distribution requirements, and other circumstances of the institution and the requirements of this [act].”
Commentary to section 3 of UPMIFA notes, in part: “This subsection requires the institution to make a decision but does not require a particular outcome. The institution may consider a variety of factors in making its decision, and a decision to retain the property either for a period of time or indefinitely may be a prudent decision.”
UPIA Section 4
“Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this [Act].”
Commentary to UPIA Section 4 states, in part: “The criteria and circumstances identified in Section 2 of this Act [i.e., section 2 is the heart of the UPIA which contains the standard of prudent conduct] as bearing upon the prudence of decisions to invest and manage trust assets also pertain to the prudence of decisions to retain or dispose of inception assets under this section.”
UPMIFA Section 5
“(a) Subject to any specific limitation set forth in a gift instrument or in law other than this [act], 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, in:
(1) selecting an agent;
(2) establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund; and
(3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the scope and terms of the delegation.
(b) In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation.
(c) An institution that complies with subsection (a) 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) An institution may delegate management and investment functions to its committees, officers, or employees as authorized by law other than this [act].]”
“Section 5 incorporates the delegation rule found in UPIA § 9.” “The drafters of UPMIFA “decided to put Section 5 in brackets because many states may already provide delegation authority through other statutes. If other delegation authority exists, then an enacting state should enact UPMIFA without Section 5. Enacting delegation rules that duplicate existing rules could be confusing and could potentially create conflicts. For charitable trusts, UPIA provides the same delegation rules as those in Section 5. For nonprofit corporations, nonprofit corporation statutes may provide these rules. A state enacting UPMIFA must be certain that its laws authorize delegation, either through other statutes or by enacting Section 5. Of course, all delegations require the exercise of reasonable care, skill, and caution and adequate supervision. Further, decision makers cannot delegate the authority to make decisions concerning expenditures and can only delegate management and investment functions. In making decisions concerning delegation, the institution must be mindful of Section 3(c)(1) of UPMIFA [which] directs the institution to incur only reasonable costs in managing and investing an institutional fund.”
UPIA Section 9(a)-(d)
“(a) A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:
(1) selecting an agent;
(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and
(3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.
(b) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.
(c) A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.
(d) By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.”
No Hindsight Allowed
UPMIFA Section 7
“Compliance with this [act] is determined in light of the facts and circumstances existing at the time a decision is made or action is taken, and not by hindsight.”
UPIA Section 8
“Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.”
Commentary to section 8 of UPIA explains: “Trustees are not insurers. Not every investment or management decision will turn out in the light of hindsight to have been successful. Hindsight is not the relevant standard. In the language of law and economics, the standard is ex ante, not ex post.”
Application to Existing Institutional Funds/Trusts
UPMIFA Section 8
“This [act] applies to institutional funds existing on or established after the effective date of this [act]. As applied to institutional funds existing on its effective date, this [act] governs only decisions made or actions taken after that date.”
Commentary to section 7 of UPMIFA notes, in part: “Like UMIFA, UPIA, the Uniform Principal and Income Act of 1961, and the Uniform Principal and Income Act of 1997, UPMIFA applies retroactively to institutional funds created before and after enactment of the statute.”
UPIA Section 11
“This [Act] applies to trusts existing on and created after its effective date. As applied to trusts existing on its effective date, this [Act] governs only decisions or actions occurring after that date.”
Duty of Impartiality
The duty of impartiality doesn’t exist in UPMIFA, but it does in section 6 of UPIA. The reason for this, according to commentary to section 3 of UPMIFA, is that the duty of impartiality doesn’t “make sense when applied to charities created as nonprofit corporations:” “Under UPIA, a trustee must treat the current beneficiaries and the remainder beneficiaries impartially, subject to alternative direction from the trust document. A nonprofit corporation typically creates one charity. The institution may serve multiple beneficiaries, but those beneficiaries do not have enforceable rights in the institution in the same way that beneficiaries of a private trust do. Of course, if a charitable trust is created to benefit more than one charity, rather than being created to carry out a charitable purpose, then UPIA will apply the duty of impartiality to that trust.”
UPIA Section 6
“If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.”
UPMIFA Standards Apply to Both Charitable Trusts and Corporations
UPMIFA is clear that standards for investing and managing institutional charitable funds will be the same regardless of whether a charity is organized as a trust or a non-profit corporation, or in some other way. The Panel on the Non-Profit Sector (convened by the Independent Sector, a leadership forum of approximately 550 charities such as Olive Crest – Homes & Services for Abused Children, foundations such as the Rockefeller Foundation and corporate giving programs such as BellSouth Corporation) is in accord. The Panel recommends: “Charitable organizations should work with their state legislatures to amend state laws to ensure that the prudent investor standard of care for investment decisions, as set forth in the Restatement of Trusts (Third) and the Uniform Prudent Investor Act, is made applicable to all charitable organizations, whether formed as trusts or corporations.”
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. The author’s views expressed in this article do not necessarily reflect the views of Morningstar.