The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a model law that provides guidelines for managing, investing, and spending funds held by charitable organizations, such as endowments. UPMIFA was created by the Uniform Law Commission in 2006 and has since been adopted in most U.S. states. It replaced the earlier UMIFA (Uniform Management of Institutional Funds Act) and introduced modernized standards for how institutions should prudently manage their financial assets.

Key UPMIFA Restrictions and Guidelines:

Prudent Investment Standards

• Duty of Care: UPMIFA requires that those managing and investing institutional funds act with care, skill, prudence, and diligence under the circumstances.
• Diversification: Institutions must diversify their investments unless it is clearly imprudent to do so. This reduces risk and aims to protect the fund's principal.
• Consideration of Economic Factors: When setting investment strategies, managers must consider the overall economic conditions, the potential impact on the fund, and the institution's needs.

Spending Policy

• Prudence in Spending: UPMIFA allows spending from endowment funds but emphasizes prudent spending. This typically involves considering factors like the duration and preservation of the endowment, the institution's purposes, general economic conditions, and the effects of inflation or deflation.
• Spending Rate: UPMIFA does not set a fixed spending rate but allows institutions to determine a prudent spending amount. However, it often suggests spending at most 5-7% of the fund's fair market value annually.

Modification of Restrictions

• Donor Intent: Institutions must adhere to donor-imposed restrictions on using funds. If these restrictions become impracticable, unlawful, or wasteful, UPMIFA provides a process for modifying them with donor consent or, if necessary, through court approval.
• Cy Pres Doctrine: UPMIFA incorporates the Cy Pres doctrine, which allows the modification of restrictions when the original purpose is no longer feasible, as long as the modification aligns as closely as possible with the donor's original intent.

Governance and Oversight

• Delegation of Management: UPMIFA allows institutions to delegate funds management to external advisors but requires that they exercise care in selecting, monitoring, and overseeing these firms.
• Documentation and Accountability: Institutions must document their decisions regarding fund investments and spending, providing a rationale for how they meet UPMIFA’s standards.

Reclassification of Funds

• Underwater Endowments: If the current value of an endowment falls below the original value of the contributions (an "underwater" endowment), UPMIFA allows institutions to continue spending, but they must carefully consider the long-term impact on the endowment.

When Does UPMIFA Apply?

UPMIFA applies whenever a charitable institution manages, invests, or spends funds, especially when those funds are endowed and subject to donor restrictions.

Non-restricted funds are generally not subject to UPMIFA in the same way that restricted funds or endowment funds are. Here's a breakdown:

Restricted Funds (Subject to UPMIFA)

• Endowment Funds: These are typically donor-restricted funds meant to be invested with the principal preserved over time, with only the earnings or a portion of the principal used for specific purposes.
• Donor-Restricted Funds: Any funds where the donor has imposed specific restrictions on their use are subject to UPMIFA's prudent management and investment standards.

Non-Restricted Funds (Not Subject to UPMIFA)

• Operating Funds: These are general funds that an institution can use for any purpose, not subject to specific donor restrictions. UPMIFA does not govern the use of these funds, though institutions may still apply prudent management practices.
• Board-Designated Funds: Even if the board designates funds for a specific purpose, these funds are not legally restricted by donor intent and are typically not subject to UPMIFA. However, the board's decisions are still guided by fiduciary duties.

While UPMIFA provides guidelines for managing restricted funds, it does not apply to non-restricted funds, although institutions should still manage all funds responsibly and follow fiduciary duties.

Summary

UPMIFA’s restrictions focus on ensuring that institutional funds, especially endowments, are managed with prudence, in accordance with donor intent, and with an eye toward their long-term sustainability. These restrictions and guidelines are designed to protect the integrity of the funds and the interests of the institutions and their beneficiaries.