In a long-awaited clarification for private foundations, the IRS recently issued Notice 2015-62 regarding the application of Section 4944’s prohibition on jeopardizing investments to mission-related investments (“MRIs”). In specifically addressing MRIs in the context of jeopardizing investments, the IRS has given some breathing room to foundations around making investments that don’t qualify as program-related investments (“PRIs”) but also aren’t purely profit-motivated investments.
Specifically, Notice 2015-62 states that MRIs will not be considered a jeopardizing investment—essentially a risky investment that could jeopardize the foundation’s ability to achieve its charitable purposes—so long as foundation managers exercise the requisite ordinary business standard of care and prudence in making investment decisions. The Notice further elaborates that foundation managers may specifically take into consideration the investment’s relationship to the foundation’s charitable purposes and may choose an investment that pays a lesser rate of return than it could obtain from an investment unrelated to the foundation’s charitable purposes. The IRS notes that this conforms with state investment standards reflected in laws like the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), which is enacted in most states (including Colorado). All in all, the IRS is acknowledging what socially responsible investors have known for a long time—that a reasonable and prudent investor may be willing to accept less in earnings in order to further a charitable goal.
As background, the statute and regulations have long provided an exception to the definition of jeopardizing investments for PRIs, which are investments made (1) with the primary purpose of furthering an organization’s charitable purposes; (2) with no significant purpose of income production or capital appreciation; and (3) with no lobbying or political activity purposes. Further, regulations were proposed in 2012 that provide updated examples of the different forms that PRIs can take, which has given foundations a lot of comfort in that realm.
However, MRIs essentially occupy a middle ground between PRIs and more traditional, purely profit-motivated investment. So while PRI guidance has been updated, foundations have been left wondering where MRIs fit into the overall picture. Under Section 4944, a foundation is required to invest in a reasonable and prudent manner to protect and preserve the foundation’s assets and insure liquidity when needed. Given that most MRIs have below market returns and have a higher degree of risk involved, the concern was that an MRI could be found to violate this requirement—and given their profit motivation, they don’t fit within the PRI exception.
The update of the PRI regulations and the issuance of Notice 2015-62 around MRIs is welcome news to the many commentators who in recent years have argued that Section 4944 is outdated with respect to the modern private foundation that seeks to leverage the amount of good it can do by investing in MRIs. Although some may argue the IRS hasn’t yet gone far enough, these developments will have private foundations that make mission-motivated investments breathing a collective sigh of relief.