Fiduciaries play a crucial role in managing non-profit organizations, balancing the responsibility of furthering the organization’s mission with prudent financial oversight. Their role extends far beyond attending meetings, requiring integrity, thoughtfulness, and proactive engagement in decision-making. Understanding and embracing their fiduciary capacity is essential for those overseeing a non-profit’s investments.
Understanding Fiduciary Responsibility
A fiduciary is legally and ethically bound to act in the best interests of another party. For a non-profit, this means prioritizing the organization’s interests above those of board or committee members or any other individuals. Failure to responsibly execute fiduciary duties can lead to personal liability for negligence.
The Scope of Fiduciary Responsibilities
Fiduciaries need a deep understanding of investment issues and the impact of investment decisions on the organization. Those exercising discretionary authority and control over portfolio management or asset disposition, such as boards of directors, investment committee members, and investment advisors, are considered fiduciaries.
Three Fundamental Fiduciary Duties
Non-profit fiduciaries are required to uphold three primary duties under most state laws:
- Duty of Care: This requires acting with reasonable care, skill, and diligence. Fiduciaries must be excellent stewards of the organization’s assets, making ethical and rational financial decisions. They must attend meetings, stay informed by monitoring budgets and financial reports, and engage in strategic planning.
- Duty of Loyalty: Fiduciaries must act solely in the non-profit’s best interest, avoiding personal gain from their relationship with the organization. They must disclose any potential conflicts of interest and avoid them whenever possible, fostering trust through transparency.
- Duty of Obedience: Fiduciaries must ensure that the organization’s mission and objectives are pursued, adhering to its governing documents and legal requirements. They must steer the organization away from conflicting interests and prevent illegal or unethical activities.
Guidance from the Uniform Prudent Management of Institutional Funds Act (UPMIFA)
To clarify fiduciary responsibilities, the National Conference of Commissioners on Uniform State Laws introduced UPMIFA in July 2006. This act governs the management of funds donated to charitable institutions, providing guidelines for investment management and endowment expenditures. UPMIFA has been adopted by most states, though each state can modify its provisions.
Key Investment Guidelines Under UPMIFA
- Investments should be made in good faith with the care a prudent person would exercise.
- Investment costs should be appropriate and reasonable.
- Decisions must consider the entire portfolio, with risk and return objectives suited to the fund and institution.
Spending Rules and Compliance with UPMIFA
UPMIFA also outlines spending rules for endowments subject to donor restrictions, ensuring funds are used as intended. Considerations for annual spending decisions include portfolio duration, institutional purposes, economic conditions, and expected returns.
To comply with UPMIFA, organizations can:
- Develop a comprehensive Investment Policy Statement.
- Establish and regularly review a formal spending policy.
- Form a strong, educated Investment Committee.
- Hire reputable advisors who accept fiduciary responsibility.
- Monitor performance results through a governance calendar.
Conclusion
Documenting investment decisions and maintaining sound governance practices protect non-profit fiduciaries. Contact us today to learn how we can help your non-profit establish clear objectives and align your investment strategy with your mission while addressing capital preservation needs.
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