Investment committees of nonprofit corporations will feel the effects of the evolving market conditions.
A review of current economic developments leads to the following perspectives on how the investment committees of nonprofit corporations may be affected by evolving market conditions and related regulatory responses.
The expectation is that investment committees will be particularly diligent during the current financial crisis. Such diligence can be manifested by the following:
Approaching investment advisers for guidance as to prudent investment strategies in the turbulent marketplace and for an explanation of past and current economic performance (which likely will be negative)
Understanding the ramifications for the nonprofit of recent consolidations and reorganizations within the financial services community
Full Board Oversight
Full board oversight of, and regular interaction with, the investment committee is particularly crucial during periods of market turmoil. The board is ultimately responsible for monitoring and understanding the impact of such turmoil on the organization's investment portfolio. It may be advisable to form a working group from the governing board, executive committee and investment committee to closely monitor the organization's investments during the economic downturn.
Confirm Compliance with UPMIFA
The Uniform Prudent Management of Institutional Funds Act (UPMIFA), in various forms, has been adopted in multiple states. This statute codifies the requirement of prudent investment by charitable organizations. During this economic downturn, it will be crucial for tax-exempt organizations to work with their general counsel to confirm that their investments and investment decision making comply with UPMIFA and consider the impact that this statute may have on ongoing investment decisions during a recession.
Committee, Staff Qualifications
Even before the recent financial crisis, concerns arose from multiple sources regarding the sophistication, background and training of investment committee members and investment management staff of nonprofit organizations. The board should join with the investment committee in reviewing the qualifications (and disinterest) of existing committee members and staff, and the sufficiency of the selection and hiring process, on an ongoing basis.
The investment committee should anticipate an increased volume of questions on investment performance from donors, governmental agencies, the media and the general public. The staff and the governing board should be prepared to answer any questions regarding the performance of the organization's investments. In this regard, consistency is important and any statement should be carefully vetted by both counsel and investment advisers.
Dealing with Extraordinary Losses
If the organization has suffered extraordinary investment losses, the investment committee may wish to recommend major steps to preserve remaining capital and to address any inquiries from major donors and state attorneys general. This could include board inquiry into the performance of existing investment managers, and whether asset allocation and board and committee procedures should be reformed to avoid additional losses.
Constant communication between the board, investment committee, finance committee and officers about the effects of losses on other obligations, e.g., bond financing covenants and pension funding requirements, is crucial.
Increased Attorney General Scrutiny
The state attorney general has primary regulatory jurisdiction with respect to preservation of nonprofit assets and the related exercise of fiduciary duties. Accordingly, it is reasonable to expect increased attorney general interest in the investment performance of nonprofits during the current market turmoil. Particular scrutiny may be prompted by disclosures of extraordinary losses, exceptionally aggressive investment decisions, and lack of board oversight of the committee and of investment advisors.
Investment committees should recognize the relationship between investment management practices and preservation of federal tax-exempt status. The Internal Revenue Service (IRS) has expressed interest from a compliance perspective in investments by charities in "complicated or sophisticated" financial products that require financial investment expertise. Specific IRS focus is placed on written policies and procedures governing such investments, and on the terms of compensation arrangements with investment advisors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.