Five Laws that Led to Uniformity in Nonprofit Governance

July 26, 2016 |
2 minute read
|

With each state having its own court system, uniformity among the states did not exist. While there was agreement on basic common-law trust principles, variations still emerged.

As the American economy began to function on a more truly national basis in the closing decades of the nineteenth century, it became apparent that users of the legal system – including corporations, financial institutions and trustees – would benefit from a greater degree of legal uniformity among the states, at least with respect to the laws affecting commercial transactions and corporate and nonprofit governance, investment and trust matters.

Volunteer groups of attorneys and lawmakers with the National Conference of Commissioners on Uniform State Laws and the American Bar Association undertook the process of drafting proposed statutes to address areas in which uniform practices were needed. These uniform laws, proposed to the various state legislatures, could be adopted as drafted or – as not infrequently occurred – modified to suit local preferences.   Following are summaries of five of these laws.

Uniform Principal and Income Act

This act was drafted in 1931 to provide procedures for the allocation of assets by trustees and administrators to principal and income, and to govern their proper distribution to beneficiaries, heirs and devisees. Recent amendments have focused on bringing the idea of principal and income into alignment with contemporary total-return investment concepts.

Model Nonprofit Corporation Act (MNCA)

MNCA was drafted in 1952 by the American Bar Association’s Committee on Corporate Laws to help provide a uniform framework for governance of incorporated nonprofits. A 2008 revision of this law by the ABA is still a subject of debate and has not yet been widely adopted.

Uniform Management of Institutional Funds Act (UMIFA)

A major breakthrough in the governance of endowment management came in 1972 with the introduction of UMIFA. Following principles outlined in Modern Portfolio Theory, this statute departed from traditional trust law, establishing the validity of total return investing and enabling fiduciaries to spend from capital appreciation as well as from interest and dividend income. It did, however, retain historic trust law limits on spending from a donor-restricted fund if the value of the fund had fallen below its original level when first donated (its “historic dollar value”).

Uniform Prudent Investor Act (UPIA)

The UPIA was originally adopted in 1994 by the Uniform Law Commission and was then enacted in 41 states and the District of Columbia. Consistent with Modern Portfolio Theory, it provided for a total return approach to investment management. Under the new law, fiduciaries were required to diversify the investments in their portfolio and engage in analysis of risk vs. return. Importantly, performance was to be measured with respect to the entire portfolio rather than to individual investments, as had been required under trust law.

Sarbanes-Oxley Act (SOX)

With the turn of the century, corporate governance scandals in the for-profit sector led to the passage of SOX. Unlike the other statutes mentioned here, SOX was a federal law not dependent on adoption by the states.  Two provisions of SOX applied to nonprofits: prohibitions on retaliation against whistleblowers and on destruction of documents which could be used in an investigation. The potential liability that directors became exposed to as a result of SOX led to a change in the nature of a nonprofit fiduciary’s role.

Uniform Prudent Management Institutional Funds Act (UPMIFA)

UPMIFA was drafted by the Uniform Law Commission and sent for adoption by the states in 2006. It has since been adopted by 49 states and the District of Columbia (Pennsylvania has retained its own law and the UPIA). Combining concepts from UMIFA, UPIA and other sources, it created a comprehensive framework for investment, spending, and management of donor-restricted funds. One of the most important concepts of UPMIFA was the fusion of UMIFA’s endorsement of total return investing and spending with the prudence standard of UPIA.

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