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Non-Profit Governance and The Florida Uniform Prudent Management of Institutional Funds Act . The Greater Ft. Lauderdale Tax Council Inc. Hank Raattama January 20, 2012. Overview of Presentation. It is an overview of Governance and FUPMIFA – The posted power point has detail

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Non-Profit Governance and The Florida Uniform Prudent Management of Institutional Funds Act


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    1. Non-Profit Governance and The Florida Uniform Prudent Management of Institutional Funds Act The Greater Ft. Lauderdale Tax Council Inc.Hank Raattama January 20, 2012

    2. Overview of Presentation • It is an overview of Governance and FUPMIFA – The posted power point has detail • It is designed to provide a platform to discuss the topics with the organization or board that needs to know • For the advisor – an approach to teaching • For the board member – your responsibility 22838715.PPT

    3. Governance • What is Governance? • The systems and processes concerned with ensuring the overall direction, effectiveness, supervision, safeguard of assets, mission and accountability of an organization 22838715.PPT

    4. Governance • Who Is Interested in Governance? • Senate Finance Committee/House Ways and Means • Internal revenue service • State attorneys general • Donors • Media 22838715.PPT

    5. Governance • What Is Good Governance? • A process or procedure that identifies the problem and suggests a solution while the problem can be fixed, that is, before it is a problem. • No Cookie Cutter • Define good by describing failures – in other words does the system deal with potential problems, like embezzlement 22838715.PPT

    6. Governance So Why Implement Good Governance Practices? • Makes Sense – nice to have when media calls about a problem or issue or theft • Improve the organization’s outcomes • The IRS Is Looking – following is statement Sarah Hall Ingram, Commissioner of IRS Tax Exempt & Government Entities (TEGE) made on April 21, 2010 If you have no governance practices, no procedures, your board isn't looking at the 990, you don't seem to have a compensation committee, and there is no infrastructure or process, I am going to worry. If governance practices are in place, that certainly lowers my priorities of going in and talking to you. 22838715.PPT

    7. Governance • The Board's Responsibility • All corporate powers must be exercised by or under the authority of, and the affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation. Section 617.0801, Fla. Stat. • In other words, the directors are required to govern. With this authority goes responsibility and liability. All directors should read and understand this responsibility. 22838715.PPT

    8. The Board’s Standard of Conduct. Florida Statutes provide: • A director shall discharge his duties as a director, including his duties as a member of a committee: • in good faith; • with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and • in a manner he reasonably believes to be in the best interest of the corporation. • Section 617.0830, Fla. Stat. • Duty of Obedience – Act in conformity with the law and governing documents. • These laws will be part and parcel governance. Duty of Care Duty of Loyalty 22838715.PPT

    9. Governance • Board Protection • Business Judgment Rule §617.0830, Fla. Stat. [Governance and comply with the preceding slide] • Statutory Immunity §617.0834, Fla. Stat. • D&O Insurance • Indemnity §617.0831, Fla. Stat. • Florida Volunteer Protection Act §768.1355 Fla. Stat. 22838715.PPT

    10. Governance • Areas of Board Attention • Financial Accountability and Internal Controls – Sarbanes §404 Model • Conflict of Interest §4941, §4958, §501(c)(3) & Form 1023 (June 2006) • Compensation - §4958 • IRS Rebuttable Presumption • 990 Part VII and Schedule J (Compensation Information) • Guidestar • Investments – Process see FUPMIFA discussion • Terrorist and Foreign Grants • Handbook on Counter-Terrorism Measures: What U.S. Non Profits and Grant Makers Need to Know www.independentsector.org • Chapter 496 – Solicitation of Funds • FBAR – TD F 90-22.1 (see FACTA) • there are others? 22838715.PPT

    11. Governance IRS Governance Check Sheet – see irs.gov The IRS Will Ask These Questions – Are You Prepared? • Control – Who controls the organization – Board Makeup and engagement? • IRS – ROO – Review of Operations – does your organization do what it said it would do in its application for exempt status (Form 1023) (where is your 1023) • Board – This goes to board composition • Independent • Term • Number of members with voting rights • Diversity • Skill sets of members • How often does the board meet and is the number consistent with articles & bylaws • Are board members related through either family or business – if yes, the number 22838715.PPT

    12. Governance • Organizational Documents – Is the structure consistent with the organization's documents • Articles • Bylaws • Are organizational documents provided to the board • Were all changes reported to IRS • Policies and Practices • Mission statement – does the organization have a current mission statement and is it followed • Conflicts of Interest policy • Record of adherence? • Regular evaluation of conflicts policy? 22838715.PPT

    13. Governance • Whistle Blower Policy • Sarbanes Oxley 18 USC § 1513 • Florida §448.101-105 Fla. Stat. • Compensation – Intermediate Sanctions • IRC § 4958 rebuttable presumption • Independent persons decide • Comparable compensation data is used • Contemporaneous documentation of compensation decision • Document Retention Policy • Sarbanes Oxley 18 USC § 1519 22838715.PPT

    14. Governance • Does the organization maintain minutes ? • Board • Committees • Contemporaneous • Content – record decisions not discussion – novel ? • IRS will review minutes • Fundraising • Is compensation based on percentage of amount raised? • Are fundraising cost reasonable? • Does the organization communicate with donors? • Florida Chapter 496 – Solicitation of Funds • Donor Privacy Policy 22838715.PPT

    15. Governance • Investments – Passive • Written investment policy statement • Rules of the road for investing • Florida Uniform Prudent Management of Institutional Funds Act (FUPMIFA) • Madoff and due diligence – Part of Investment Policy • Private Foundations - Will the IRS conclude a Madoff type investment is per se imprudent and therefore a taxable jeopardy investment see IRC Section 4944 22838715.PPT

    16. Governance • Hedge Fund Investments - Offshore Blocker Corporations TD F 90-22.1 Foreign Bank Account Report (FBAR) and FACTA and 1040 Schedule B report of foreign accounts owned or over which one (including officers and directors) has signatory authority Notice IRS 2011 – 66 postpones filing for people with authority until 6/30/2012 • 2011 Offshore Voluntary Disclosure Initiative (OVDI) –See IRS.gov • Joint Ventures -- Did the organization participate in a joint venture or similar arrangement with a taxable entity – if yes is there a written policy to safeguard exempt status? 22838715.PPT

    17. Governance Finances • Has the organization implemented Internal controls – protect assets see Sarbanes Oxley §404? • External audit • Management letter – who reviews and is there compliance? • Who reviews the financial audit? • Is there an independent audit committee? 22838715.PPT

    18. Governance • Is a regular finance report provided to the board (or committee) and if so how often? • 990 (2011) part VI, line 11: Are 990s reviewed by the board prior to filing ? Answer yes only if the Final 990 is provided each voting member of the governing body prior to filing • Record Keeping Generally – Is record keeping adequate or did it hinder audit and governance review – i.e, is there a paper trail for the IRS? 22838715.PPT

    19. Governance • Governance Guidance – many sites, like Independent Sector Panel on the NonProfit Sector – 10/18/07 Principles For Good Governanceand Ethical Practices:A Guide for Charities and Foundationswww.nonprofitpanel.orgSee the "reference" version 22838715.PPT

    20. Governance • From the Nonprofit Panel – 33 Principles of Governance - a Roadmap • www.indepependentsector.org /nonprofitpanel • A charitable organization must comply with all applicable federal laws and regulations, as well as applicable laws and regulations of the states and the local jurisdictions in which it is based or operates. If the organization conducts programs outside the United States, it must also abide by applicable international laws, regulations and conventions that are legally binding on the United States. • A charitable organization should have a formally adopted, written code of ethics with which all of its directors or trustees, staff and volunteers are familiar and to which they adhere. • A charitable organization should adopt and implement policies and procedures to ensure that all conflicts of interest, or the appearance thereof, within the organization and the board are appropriately managed through disclosure, recusal, or other means. 22838715.PPT

    21. Governance • A charitable organization should establish and implement policies and procedures that enable individuals to come forward with information on illegal practices or violations of organizational policies. This "whistleblower" policy should specify that the organization will not retaliate against, and will protect the confidentiality of, individuals who make good-faith reports. • A charitable organization should establish and implement policies and procedures to protect and preserve the organization's important documents and business records. • A charitable organization's board should ensure that the organization has adequate plans to protect its assets – its property, financial and human resources, programmatic content and material, and its integrity and reputation – against damages of loss. The board should review regularly the organization's need for general liability and directors' and officers' liability insurance, as well as take other actions necessary to mitigate risks. 22838715.PPT

    22. Governance • A charitable organization should make information about its operations, including its governance, finances, programs and activities, widely available to the public. Charitable organizations also should consider making information available on the methods they use to evaluate the outcomes of their work and sharing the results of those evaluations. • A charitable organization must have a governing body that is responsible for reviewing and approving the organization's mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies. • The board of a charitable organization should meet regularly enough to conduct its business and fulfill its duties. 22838715.PPT

    23. Governance • The board of a charitable organization should establish its own size and structure and review these periodically. The board should have enough members to allow for full deliberation and diversity of thinking on governance and other organizational matters. Except for very small organizations, this generally means that the board should have at least five members. • The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial and gender perspectives), experience, and organizational and financial skills necessary to advance the organization's mission. 22838715.PPT

    24. Governance • A substantial majority of the board of a public charity, usually meaning at least two-thirds of the members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to anyone described above (as a spouse, sibling, parent or child), or reside with any person so described. • The board should hire, oversee, and annually evaluate the performance of the chief executive officer of the organization, and should conduct such an evaluation prior to any change in that officer's compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living. 22838715.PPT

    25. Governance • The board of a charitable organization that has paid staff should ensure that the positions of chief staff officer; board chair, and board treasurer are held by separate individuals. Organizations without paid staff should ensure that the positions of board chair and treasurer are held by separate individuals. • The board should establish an effective, systematic process for educating and communicating with board members to ensure that they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively. • Board members should evaluate their performance as a group and as individuals no less frequently than every three years, and should have clear procedures for removing board members who are unable to fulfill their responsibilities. 22838715.PPT

    26. Governance • The board should establish clear policies and procedures setting the length of terms and the number of consecutive terms a board member may serve. 22838715.PPT

    27. Governance • The board should review organizational and governing instruments no less frequently than every five years. • The board should establish and review regularly the organization's mission and goals and should evaluate, no less frequently than every five years, the organization's programs, goals and activities to be sure they advance its mission and make prudent use of its resources. • Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. A charitable organization that provides compensation to its board members should use appropriate comparability data to determine the amount to be paid, document the decision and provide full disclosure to anyone, upon request, of the amount and rational for the compensation. 22838715.PPT

    28. Governance • A charitable organization must keep complete, current, and accurate financial records. Its board should receive and review timely reports of the organization's financial activities and should have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization's size and scale of operations. • The board of a charitable organization must institute policies and procedures to ensure that the organization (and, if applicable, its subsidiaries) manages and invests its funds responsibly, in accordance with all legal requirements. The full board should review and approve the organization's annual budget and should monitor actual performance against the budget. • A charitable organization should not provide loans (or the equivalent, such as loan guarantees, purchasing or transferring ownership of a residence or office, or relieving a debt or lease obligation) to directors, officers, or trustees. 22838715.PPT

    29. Governance • A charitable organization should spend a significant percentage of its annual budget on programs that pursue its mission. The budget should also provide sufficient resources for effective administration of the organization and, if it solicits contributions, for appropriate fundraising activities. • A charitable organization should establish clear, written policies for paying or reimbursing expenses incurred by anyone conducting business or traveling on behalf of the organization, including the types of expenses that can be paid for or reimbursed and the documentation required. Such policies should require that travel on behalf of the organization is to be undertaken in a cost-effective manner. • A charitable organization should neither pay for nor reimburse travel expenditures for spouses, dependents or others who are accompanying someone conducting business for the organization unless they, too, are conducting such business. 22838715.PPT

    30. Governance • Solicitation materials and other communications addressed to donors and the public must clearly identify the organization and be accurate and truthful. • Contributions must be used for purposes consistent with the donor's intent, whether as described in the relevant solicitation materials or as specifically directed by the donor. • A charitable organization must provide donors with specific acknowledgments of charitable contributions, in accordance with IRS requirements, as well as information to facilitate the donor's compliance with tax law requirements. 22838715.PPT

    31. Governance • A charitable organization should adopt clear policies, based on its specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus or other interests. • A charitable organization should provide appropriate training and supervision of the people soliciting funds on its behalf to ensure that they understand their responsibilities and applicable federal, state and local laws, and do not employ techniques that are coercive, intimidating, or intended to harass potential donors. • A charitable organization should not compensate internal or external fundraisers based on a commission or a percentage of the amount raised. • A charitable organization should respect the privacy of individual donors and, except, when disclosure is required by law, should not sell or otherwise make available the names and contact information of its donors without providing them an opportunity at least once a year to opt out of the use of their names. 22838715.PPT

    32. Florida Uniform Prudent Management of Institutional Funds (FUPMIFA) 22838715.PPT

    33. June 2011 • On June 17, 2011, Governor Scott signed into law the Florida Uniform Prudent Management of Institutional Funds Act (FUPMIFA) HB 599-2011. FUPMIFA imposes investment standards on Florida Charities. All Florida Charities should review their investments and investment policies to insure compliance with FUPMIFA. • The Challenge • “Managing a portfolio is as demanding a specialty as stomach surgery or nuclear engineering. There is no more reason to expect the ordinary individual serving as trustee (or director) to possess the requisite investment experience than to expect the ordinary citizen to possess experience in gastro entomology or atomic science.” • John Langbein, Professor Yale University 22838715.PPT

    34. History In the beginning – Harvard College v. Armory, 9 Pick. (26 Mass) 446 (1830) – the prudent man rule: • "All that is required of a trustee to invest is, that he shall conduct himself faithfully and exercise sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." • Legal lists • Each investment considered on its own merit – even though overall positive return. • This is not MPT Harry Markowitz • 1952 – Journal of Finance – Efficient Frontier • 1992 – Nobel Prize in Economics • Modern Portfolio Theory (MPT) • Mean Variance Optimization (MVO) • Total Return – spending is not limited to income, includes corpus • Diversification – Select group of uncorrelated assets Efficient Frontier 16% • Small Cap • Non US • Lg Cap • Corp Bonds • Govt Bonds Return • T Bills 30% 0 Standard Deviation Risk 22838715.PPT

    35. History • Uniform Management Institutional Funds Act (UMIFA) • 1972 – National Conference of Commissioners on Uniform State Laws • Historic Dollar Value spending limit • Apply MPT – eliminate individual asset test – look at entire portfolio • Permit delegation • Employee Retirement Security Act of 1974 (ERISA) §404(a) • Prudent Man standard of care • MPT • Delegation • Uniform Prudent Investor Act – 1994 (UPIA) • American Law Institute 3d Restatement of Trusts – Prudent Investor Act-1992 • §518.10-14 Fla. Statutes – 1993 FUPIA • Modern Portfolio Theory (MPT) • Applies to a fiduciary managing money – a charitable trust 22838715.PPT

    36. History • Fiduciary Accounting Income – Total Return enacted Florida 2003 • Treasury Reg. §1.643(b)-1 IRS recognizes Modern Portfolio Theory in states that adopt the UPIA • §738.104 (Power to Adjust) & §738.1041 (Total Return Unitrust) - distribution. • Fiduciary Accounting rules apply to charitable trusts. • Uniform Prudent Management of Institutional Funds Act (UPMIFA) 2006 • Uniform Law Commission fka National Conference of Commissioners on Uniform Laws. • Continues MPT • Eliminate Historic Dollar Value – Address endowment spending 22838715.PPT

    37. History • Florida Uniform Prudent Management of Institutional Funds Act (FUPMIFA) • July 1, 2012 – effective date • Fla. Stat. §617.2104, HB 599 (2011) • 98% ± UPMIFA • Fla. Stat. § 1010.10 –repealed - This is history 22838715.PPT

    38. What Does FUPMIFA Require? • In a very general sense, FUPMIFA requires each subject institution to prudently manage its funds. FUPMIFA sets out a standard of conduct that must be followed. The investment requirements apply to all funds, not only endowments. FUPMIFA also provides guidelines for distributions from endowments. The investment and distribution guidelines are very similar conceptually to UMIFA ERISA, UPIA, §1010.10 Fla. Stat., total return concepts of investments (aka modern portfolio theory or MPT) and everything Markowitz, Sharpe et al. teach. Prior to FUPMIFA there was no statutory investment guidance for a Florida charity that was not subject to FUPIA or Fla. Stat. § 1010.10. 22838715.PPT

    39. To Whom Does FUPMIFA Apply? • FUPMIFA applies to an individual, corporation business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government or government subdivision, agency or instrumentality or any other legal or commercial entity operated exclusively for charitable purposes – generally referred to as institution. • Charitable purpose means the relief of poverty, advancement of education or religion, the promotion of health, the promotion of a government purpose or any other purpose which benefits the community. • FUPMIFA does not apply to an individual or a trust subject to § 518.11 or when donor mandates FUPMIFA does not apply. • § 617.2104(2)(d). 22838715.PPT

    40. Penalty – Failure to Apply FUPMIFA? • ?? • Florida AG? 22838715.PPT

    41. What is the FUPMIFA Investment Standard of Conduct? Following are statutorily mandated investment standards that "institutions" must follow: • Subject to the gift agreement consider the charitable purpose of the institution and the institutional fund [not only an endowment] §617.2104(3)(a) • Manage in good faith and with the care of an ordinary prudent person §617.2104(3)(b) • Incur only reasonable costs and verify facts §617.2104(3)(c) • Pooling of investment assets is permitted §617.2104(3)(d) • Decisions made NOT in isolation but rather in the context of the entire portfolio and as part of an overall investment strategy (and investment may go bad) §617.2104(3)(e)2 • May invest in any kind of property (no legal list) §617.2104(3)(e)3 • Diversify investments unless the institution "reasonably and prudently" determines the purpose of the Fund is better served without diversification. §617.2104(3)(e)4 • Evaluate whether to keep in-kind contributions – Gift Review Policy §617.2104(3)(e)5 22838715.PPT

    42. What is the FUPMIFA Investment Standard of Conduct? • FUPMIFA specifically requires persons selected to manage funds who possess special investment skills, apply those skills. Board members, advisory boards, and others who are managing funds should read FUPMIFA. §617.2104(3)(e)6 • FUPMIFA requires the person investing assets do so prudently and (unless a gift agreement provides otherwise) requires the following factors be considered when investing all funds (not just endowments): §617.2104(3)(e)1 • general economic conditions • inflation / deflation • tax consequences, if any • the role of each investment in the overall portfolio • expected total return • other resources of the charity • other resources of the charity • needs of the charity, both and long term • an asset's special relationship to the charity • the role of diversification • General Rule – Manage Risks 22838715.PPT

    43. What are the Expenditure Guidelines for Endowments? • An endowment is a fund that the donor (not the charity) specifies is not wholly expendable by the charity. For example, a gift where the donor says here is $1,000, but you may only spend the income is a fund that is not wholly expendable by the charity. Typically this is called an endowment. Notwithstanding what the donor said about spending only income, FUPMIFA allows the charity to spend a portion of such a fund (for example an income only fund or an endowment) based on factors that it must take into consideration when appropriating funds for expenditure unless the donor specifically limits expenditures. The factors are: • the duration of the endowment • the purpose of the endowment • general economic conditions • inflation / deflation • expected [total return] (income and appreciation) • other resources of the institution • the charity's investment policy • The donor can limit the authority to appropriate only by specifically so stating in the gift agreement. • NOT purchasing power §617.2104(4) • Written Spending Policy – what does it say? 22838715.PPT

    44. FUPMIFA and Delegation of Investment Functions An institution may "prudently delegate" an investment function to an external agent, such as an investment manager. § 617.2104(5) • good faith selection of agent • review periodically agent's actions • set scope and terms of delegation • Gift agreement may prohibit delegation • The external agent is subject to Florida law • The institution that complies with prudent delegation not liable for the acts of the external agent if delegation in accordance with FUPMIFA • May delegate investment functions to committees, officers and employees of the institution • Written agreement with external agent – recite statute and prudence 22838715.PPT

    45. Does FUPMIFA Impact Donor Imposed Restrictions on Uses or Investments of Contributions? Yes. FUPMIFA permits donor restrictions to be modified in certain circumstances. FUPMIFA does not deal with standing to enforce gifts (i.e., does a donor have standing to enforce a gift agreement). § 617.2104(6) Modification is permitted as follows: • Donor Consent – permitted but can't change purpose of gift (gift tax - completed gift concern) • No Donor Consent • Gift $0-$100,000 – restriction has become "impractical or wasteful, impairs the management, investment, or use of the fund or because of circumstances not anticipated by the donor or modification of a restriction will further the purpose of the fund" • $100,000-$250,000 – restriction is "unlawful, impractical or impossible to achieve or wasteful" the institution may modify if: 22838715.PPT

    46. Does FUPMIFA Impact Donor Imposed Restrictions on Uses or Investments of Contributions? • the attorney general is notified • more than 20 years have elapsed since the Fund was established • the fund is used for a charitable purpose consistent with the gift instrument • any size – Circuit Court in which institution is located if restriction has become "impractical, wasteful, if it impairs the management on investment of the Fund or if because of circumstances not anticipated by the donor or modification of the restriction will further the purposes of the Fund. Notify Attorney General. • any size – Circuit Court in which institution is located if restriction is "unlawful, impracticable, impossible to achieve or wasteful." Notify the Attorney General. See §736.04113 and §736.0412 22838715.PPT

    47. Audited Statements • See FAS 117-1 as codified by ASC 958-205 • Beginning 2008 audited statements of charities subject to an UPMIFA statute must expand disclosures about investments and investment process. For example the following are disclosures a charity board may decide to include in its Footnotes: • A description of its endowment spending policies • return objectives • risk parameters • relation of return, spending and risk policies • strategy to achieve objectives • Details about endowment investment policy 22838715.PPT

    48. What to Do Now? • Each Florida Not-for-Profit §501(c)(3) should read FUPMIFA and then revise its investment policy statement accordingly. This assumes there is a written investment policy statement — which should be the case. • A paper trail, showing a full investment management system is a lifesaver if the fiduciary (director or trustee) is called upon to defend (donors, media, AG, IRS, etc.) an investment loss or lack of performance. 22838715.PPT