North Carolina has recently adopted the Uniform Prudent Management of Institutional Funds Act (the “Act”) to govern the investment and spending of funds held by charities and governmental organizations for charitable purposes.  The new law updates and significantly revises the standards governing such funds, providing institutions with greater flexibility.  

The Act applies to funds that have been given to an institution to be held for charitable purposes that are not fully currently expendable because of restrictions contained in their gift instrument, i.e. endowments.  It sets forth a prudent man standard to govern the management and investment of such funds.  Subject to the intent of the donor, the Act allows an institution to consider a number of factors, including:   

• general economic conditions,
• the possible effect of inflation or deflation,
• the expected tax consequences of investment decisions,
• the role that each investment plays within the overall investment of the fund’s portfolio,
• the expected total return from income and appreciation,
• other resources of the institution,
• the needs of the institution and the fund, and
• an asset’s special relationship, if any, to the charitable purposes of the institution.

Of great significance are the changes allowed by the Act relative to the spending of funds.  Under prior law, an institution could not expend endowment funds if the fund’s value fell below its “historic dollar value.”  This meant that in poor economic times, many endowment funds could not be used at all for their charitable purposes, but were instead required to be held until their values increased.  Now, under the Act, a prudence standard allows an institution to expend monies from a fund even if it falls below its historic dollar value.  Subject to the intent of a donor, an institution must look at a number of factors to determine whether it should spend money from a fund.  These factors include:

• the duration and preservation of the endowment fund,
• the purposes of the institution and the endowment fund,
• general economic conditions,
• the possible effect of inflation or deflation,
• the expected total return from income and appreciation,
• other resources of the institution, and
• the investment policy of the institution.   

It is important to note, however, that an institution may not take action in this regard that would be contrary to the donor’s intent.  

Another significant change in the law allows institutions in certain limited circumstances to release or modify a restriction on a fund without seeking the prior consent of the donor or a court.  If an institution determines that a gift restriction is impracticable, impossible to achieve or wasteful, it may after giving notice only to the attorney general, release or modify the restriction if the fund has a value less than $100,000, is more than ten years old and continues to be used in a manner consistent with its charitable purposes.  

The Act also permits institutions to delegate management and investment functions to an outside agent under a prudent care standard.  That standard should be used in selecting an agent, establishing the scope and terms of the delegation, and in periodically reviewing the agent’s actions.  An institution that complies with these standards is not liable for the actions of such an agent.  

In conclusion, the Act makes substantial changes to allow for greater flexibility by institutions in making decisions regarding the management and investment of its charitable funds.