New York Charities May Soon Face Unfriendly AG Audits

New York State’s Attorney General has made it clear that nonprofit organizations need to show good-faith compliance with NYPMIFA or face serious consequences

New York’s endowment and investment oversight laws can be confusing for nonprofit organizations.  But, even worse, nonprofits risk penalties for delaying compliance.  When Albany adopted the New York Prudent Management of Institutional Funds Act, or NYPMIFA, in September 2010, the primary objective was to provide flexibility for endowments in coping with the challenging investment climate. Yet at the same time, the law introduced numerous regulations intended to protect donors’ permanent gifts from being mismanaged or used imprudently.

As it turns out, NYPMIFA is proving to be a mixed blessing for the Empire State’s nonprofits. And now Attorney General Eric T. Schneiderman, in a “clarification” memo released in March 2011, has implied that the unofficial grace period for New York nonprofits to come into compliance with NYPMIFA will eventually end.  In fact, it has been fifteen months since the law’s passage, causing many to wonder if acting in good faith has already expired if your institution has not yet implemented NYPMIFA’s various administrative requirements.

Moreover, now that the attorney general’s memo has cleared up many unsettled questions regarding NYPMIFA, it has become apparent that many New York nonprofits remain out of compliance with some or all of the Act.  And the sanctions for not being in compliance with NYPMIFA may be serious, and may even include nonprofits having to refund money to their endowments, monetary fines, and other penalties that the Attorney General reserves in cases of willful noncompliance of the law.

So on the one hand, NYPMIFA is helpful in that it has eliminated the handicap of underwater endowments, those funds whose assets had fallen below their initial value and were therefore forced to curtail spending.  Not until the funds were restored to the original levels could those endowments resume distributing money to beneficiaries and programs.  However, under the new law, NYPMIFA allows underwater endowments to continue spending, provided they stick to the prudent guidelines the Act spells out.  That’s good news, because it lets endowments continue to function without missing sound investment and spending opportunities.

On the other hand, however, NYPMIFA requires nonprofits to abide by a number of arduous new guidelines and administrative procedures in such areas as risk management, endowment operations and donor disclosure.  In fact, NYPMIFA’s added requirements have a similar feel to Sarbanes-Oxley, forcing nonprofits to create and maintain significantly more documentation about their endowments and investments.

For example, the memo makes it very clear that nonprofits must retain all-NYPMIFA related documents, particularly the “contemporaneous” recordings of the Act’s eight-factor analysis for decisions regarding endowment spending rates. The Attorney General may request these at any time and nonprofits are expected to demonstrate good faith in complying and, if not, will face penalties.

The key question for nonprofits is this:  When does this “good faith” grace period run out?  Was it one year after the law was enacted, that this, this past September?  Or is it two years, this coming September? The Attorney General’s memo was mum on the exact timeframe for good faith.

To compound the problem, many nonprofit executives responsible for making sure their organization is NYPMIFA-compliant may not even realize that the requirements exist, much less that they are now central to overseeing endowment funds and other investments.

So what does it take to be NYPMIFA compliant? As an attorney who has worked in the endowment area for over 15 years and has been one of the few writing publically about NYPMIFA’s challenges since its passage, I have identified eleven NYPMIFA stipulations that nonprofit organizations must know about and comply with:

  1. Written investment policy, which applies all funds invested – not just permanent endowments;
  2. Demonstrated use of eight prudent investment factors listed in the statute, along with a few other prudent standards listed in the law;
  3. Written diversification policy for investments;
  4. Written conflicts of interest policy as it pertains to investment oversight;
  5. Proof that “opt-out” notices were sent to available pre-9/17/10 permanent endowment fund donors;
  6. Proof of how you determined which donors were unavailable for opt-out notices;
  7. Unlike other states, New York not only assumes that your nonprofit will use their eight prudent factors for determining how much to spend from a permanent endowment fund, they REQUIRE that the analysis/discussions be recorded contemporaneously and made part of your institutions permanent records;
  8. The Attorney General expects that the contemporaneous recordings of the eight-factor spending rate decisions are not just conclusions but have real substance and even explain why certain factors may be irrelevant;
  9. If you don’t want to record a separate eight factor analysis’ on every single fund, but prefer grouping similar funds, you must have a written “similar fund” policy that says how you are logically and prudently grouping your funds;
  10. Maintain proof that you are not exceeding the 7% presumption of imprudence rule in NYPMIFA (based on 5-year rolling averages); and
  11. Maintain proof that you are disclosing NYPMIFA’s warning notice on all written solicitations – presumably on any printed or electronic communications that involve the promotion of gifts to a permanent endowment fund.

With all of these potential areas of noncompliance with NYPMIFA, you have to wonder: When, if ever, will violation of NYPMIFA become a real issue?

The answer for any given nonprofit is this: It could happen in five months or in five years. Perhaps your organization could find itself squarely in the sights of the attorney general. Why?  One angry endowment donor might complain.  Or – as Attorney Generial Schneiderman has promised – his office may simply ask to see all of your NYPMIFA-related records.  All nonprofits in New York may be subject, at some point, to an audit by the attorney general.

Thus, the question you have to ask yourself is: Do I want to commission my own audit of my organization’s endowments and investments to make sure I’m in compliance  with NYPMIFA or do I want to wait for the attorney general to do it?

Jonathan Gudema, Esq., is an attorney and planned giving consultant who has worked with hundreds of nonprofits since joining the nonprofit community in 1997 and has written extensively on endowment management and NYPMIFA on his blog – www.theplannedgivingblog.wordpress.com.  He recently launched his own firm – Planned Giving Advisors, LLC (https://plannedgivingadvisors.com/) – which offers planned giving consulting and endowment/planned giving audit and compliance services.

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