This is the fourth post in an ongoing series on private foundation issues. For the first post on self-dealing issues, click here; for the second post on mandatory distributions, click here; and for the third post on grantmaking considerations, click here.
We’ve focused recently on foundation issues that are fairly well-known, such as self-dealing and grantmaking considerations. Some may be less familiar with the rules around jeopardizing investments, which put some limits around how foundations invest their assets. Many private foundations have endowments, and could have concerns around just how limiting the rules are. However, rest assured that it isn’t terribly complicated to keep your foundation’s investments within the lines.
What is a Jeopardizing Investment? An investment where it is determined that foundation managers failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term needs of the foundation to carry out its exempt purposes.
Are Any Investments Flat-Out Prohibited? There is no category of investment that is per se prohibited. However, close scrutiny is applied to investments like trading securities on margin; trading in commodities futures; investments in working interests in oil and gas; and the purchase of puts, calls, straddles, warrants and short selling.
What About Program-Related Investments? Foundations sometimes make investments that are geared toward accomplishing charitable purposes rather than financial return. These types of investments, known as program-related investments or PRIs, are excluded from the definition of jeopardizing investments. They must meet the following requirements:
- The investment must have as a primary purpose the accomplishment of one or more of the foundation’s charitable purposes;
- The investment cannot have as a significant purpose the production of income or the appreciation of property; and
- The investment cannot be for lobbying or political purposes.
PRIs commonly take the form of below-market or interest free loans, though they can be made as guarantees, letters of credit and equity investments. The IRS issued regulations in the last few years that include many updated PRI examples that provide much-needed clarity for this area. See our earlier post for more details.
What Is the Connection to UPMIFA? The jeopardizing investment rules do not take the place of any investment requirements under state law. Here in Colorado, the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) governs nonprofit investment, among other things. It requires those responsible for the funds to invest in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances. It also lists factors that must be considered by an organization, including:
- General economic conditions;
- The possible effect of inflation or deflation;
- The expected tax consequences, if any, of investment decisions or strategies;
- The role that each investment or course of action plays within the overall investment policy of the fund;
- The expected total return from income and the appreciation of investments;
- Other resources of the organization;
- The needs of the organization and the fund to make distributions and to preserve capital; and
- An asset’s special relationship or special value, if any, to the charitable purpose of the organization.
For questions on private foundation issues, contact us at firstname.lastname@example.org or email@example.com.