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Understanding UPMIFA. Is your Nonprofit in Compliance?

Drew Harper, CFA, CFP®

Sr. Wealth Advisor

Summary

Your primer on the Uniform Prudent Management of Institutional Funds Act, the law, and how to avoid penalties for noncompliance.

Woman leaning against railing

Every nonprofit has a fiduciary obligation to its donors, membership, and benefactors. At Mercer Advisors, we seek to equip all nonprofits with the knowledge and resources to serve all three at the highest levels. To that end, here we explain the Uniform Prudent Management of Institutional Act (UPMIFA), its key requirements, and how to avoid penalties for noncompliance.

 

What is UPMIFA?

Passed at the federal level in 2006, UPMIFA is a law that governs institutional donations to charitable organizations and nonprofits like universities, foundations, and healthcare institutions.1 The act replaced the previous Uniform Management of Institutional Funds Act (UMIFA) of 1972 and was enacted to modernize and update guidelines for the management of charitable assets. Since many states have adopted variations of UPMIFA, the specifics of the law might vary depending on local laws and regulations. (Find out where your state stands here).

Broadly speaking, similar provisions exist across most states in the United States and organizations can ensure compliance with UPMIFA by:

  • Establishing written investment policies that outline the minimum standards for the asset management strategy, the process for monitoring investments, and for periodic reviews.
  • The act requires an annual audit of the organization’s financial management practices.
  • Financial reports should be prepared and filed annually.
  • Employees and board members should have some training in UPMIFA
  • An organization should have periodic reviews of policies and procedures to stay current with changing economic and market conditions.
  • The organization should also develop and maintain a clear spending policy statement: See below.

 

Managing and investing assets

When it comes to managing and investing assets, organizations want to consider eight specific factors (Section 3 of UPMIFA)2:

  1. General economic conditions
  2. The possible effect of inflation or deflation
  3. The expected tax consequences, if any, of investment decisions or strategies
  4. The role that each investment or course of action plays within the overall investment portfolio of the fund
  5. The expected total return from income and appreciation of investments
  6. Other resources of the institution
  7. The needs of the institution and the fund to preserve and make distribution of capital
  8. An asset’s special relationship or special value, if any, to the charitable purposes of the institution

 

Spending funds

Relative to spending funds within an endowment, there are seven key factors to consider (Section 3 of UPMIFA)3:

  1. The duration and preservation of the endowment fund
  2. The purposes of the institution and the endowment fund
  3. General economic conditions
  4. The possible effect of inflation or deflation
  5. The expected total return from income and the appreciation of investments
  6. Other resources of the institution
  7. The investment policy of the institution

This last consideration—the investment policy of the institution—is one of the key requirements for maintaining compliance with the act but is often lacking or completely missing when we meet with prospective institutional clients. If you’re not sure if your organization currently complies with the act, we welcome the opportunity to speak with you about specific needs and provide an audit of your existing process and documents, if needed.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.