PRECURSORS TO EFFECTIVE ENDOWMENT INVESTING Darren B. Moore B - PowerPoint PPT Presentation

PRECURSORS TO EFFECTIVE ENDOWMENT INVESTING Darren B. Moore B OURLAND , W ALL & W ENZEL , P.C. 301 Commerce Street, Suite 1500 Fort Worth, Texas 76102 (817) 877-1088 (817) 877-1636 (facsimile) E-mail: dmoore@bwwlaw.com

WHAT IS AN ENDOWMENT? • Do no r’ s vie w • Ac c o unta nt’ s vie w • Bo a rd’ s vie w • L a wye r’ s vie w • “T rue ” e ndo wme nts vs. “Qua si-e ndo wme nts”

RATIONALES FOR HAVING AN ENDOWMENT • I nte rg e ne ra tio na l e q uity • Co ve r re ve nue sho rtfa lls • Assure c o ntinua tio n o f missio n/ re puta tio n/ va lue s

COMMON LAW FIDUCIARY DUTIES Duty o f Ca re Duty o f L o ya lty Duty o f Ob e die nc e 4

REASONABLY PRUDENT Pr udent Not pr udent

DEVELOPMENT OF THE LAW OF PRUDENCE Mo de rn Prude nt Man Po rtfo lio E ng lish Rule Rule T he o ry/ T o tal Re turn Po lic ie s

THE “LEGALIZATION” OF MODERN PORTFOLIO THEORY 1969 •PF I nve stme nt Rule s 1974 •E RI SA 1972 •UMI F A 1994 •Unifo rm Prude nt I nve sto r Ac t 1994 •Unifo rm Princ ipa l & I nc o me Ac t 2006 •UPMI F A

UPIA • “A truste e sha ll inve st a nd ma na g e trust a sse ts a s a pr udent inve sto r wo uld, by c o nside ring the purpo se s, te rms, distrib utio n re q uire me nts, a nd o the r c irc umsta nc e s o f the trust.” • I n sa tisfying the Prude nt I nve sto r Rule , the truste e must e xe rc ise r easonable car e, skill and caution • I nve stme nt a nd ma na g e me nt de c isio ns re g a rding individua l a sse ts must b e e va luate d in the c o nte xt o f the por tfolio as a whole , a nd a s pa rt o f a n o ve ra ll inve stme nt stra te g y ha ving r isk and r etur n objectives r easonably suited to the tr ust 8

UPIA • T ruste e sha ll diver sify the inve stme nts o f the trust unle ss the truste e re a so na b ly b e lie ve s tha t spe c ia l c irc umsta nc e s ne c e ssita te o the rwise • T ruste e ma y delegate ma na g e me nt/ inve stme nt func tio ns, b ut must e xe rc ise re a so na b le c a re , skill a nd c a utio n in: • Se le c ting a n a g e nt • E sta b lishing the sc o pe / te rms o f de le g a tio n (c o nsiste nt with trust te rms/ purpo se ) • Pe rio dic a lly re vie wing a g e nt’ s a c tio ns to mo nito r pe rfo rma nc e / c o mplia nc e with de le g a tio n te rms • Ag e nt o we s duty o f re a so na b le c a re to c o mply with the te rms o f the de le g a tio n 9

UPMIFA • Unifo rm la w g o ve rning ma na g e me nt, inve stme nt, a nd e xpe nditure o f funds he ld b y c ha rita b le o rg a niza tio ns within its sc o pe . • I nte nde d to mo de rnize the rule s fo r e xpe nditure s fro m endowment funds a nd upda te pro visio ns g o ve rning the re le a se a nd mo dific a tio n o f re stric tio ns o n c ha rita b le funds. • Sta nda rd o f Ca re : Ordina ry b usine ss c a re a nd pr udence unde r the fa c ts a nd c irc umsta nc e s pre va iling a t the time o f the a c tio n/ de c isio n • Prude nc e sta nda rd c o nsiste nt with the UPI A 10

UPMIFA • E ndo wme nt spe nding re stric tio ns a pply to c e rta in e ndo wme nts (va rying de pe nding o n size o f e ndo wme nt) • Re quire s diver sification , unle ss spe c ia l c irc umsta nc e s e xist • Must e va lua te inve stme nt in c o nte xt o f por tfolio as a whole • Ve rify fa c ts (due dilig e nc e ) • Ca n delegate inve stme nt/ ma na g e me nt o f fund 11

STATE LAW STANDARDS OF PRUDENCE • Circ umsta nc e s to c o nside r in whe the r to ma ke a pa rtic ula r inve stme nt (UPI A/ UPMI F A): • Ge ne ra l e c o no mic c o nditio ns • Po ssib le e ffe c t o f infla tio n o r de fla tio n • E xpe c te d ta x c o nse q ue nc e s o f inve stme nt de c isio ns • Ro le tha t e a c h inve stme nt/ stra te g y pla ys within po rtfo lio • E xpe c te d to ta l re turn • Othe r re so urc e s o f the c ha rity • Ne e ds fo r liq uidity, re g ula rity o f inc o me , a nd pre se rva tio n o r a ppre c ia tio n o f c a pita l • An a sse t’ s spe c ia l re la tio nship o r spe c ia l va lue , if a ny, to the purpo se s o f the trust o r to o ne o r mo re o f the b e ne fic ia rie s • T he inve stme nt po lic y sta te me nt o f the c ha rity 12

DRAFTING TIPS COMMON TO ALL POLICIES • I nvo lve the Bo a rd (the y’ re a do pting it!) • Use unde rsta nda b le la ng ua g e / de fine te rms • Co o rdina te te rms with pro visio ns o f g o ve rning do c ume nts • Do n’ t try to b e No stra da mus • Do n’ t c re a te so me thing yo u wo n’ t fo llo w • Cre a te a syste m fo r a nnua l re vie w a nd upda te a s ne c e ssa ry

SETTING A SPENDING POLICY • Wha t a re the o b je c tive s to b e me t? (ra tio na le s fo r e ndo wme nt) • Wha t a re the c ha rity’ s funding ne e ds? • Co nside r smo o thing b y inc luding use o f ro lling a ve ra g e fo r c a lc ula ting va lue o f e ndo wme nt

CREATING AN INVESTMENT POLICY STATEMENT • Wha t is the purpo se / o b je c tive o f the e ndo wme nt? • Wha t a re the c o nstra ints o r g ua rdra ils to sta y within? • Wha t type o f inve stme nt struc ture / a sse t a llo c a tio n ma ke se nse b a se d o n o b je c tive s/ c o nstra ints/ risk to le ra nc e ? • Ho w will the c ha rity mo nito r pe rfo rma nc e ? • Wha t will b e the ro le s o f the Bo a rd? T he I nve stme nt Co mmitte e ? T he o utside pro fe ssio na ls? • Wha t will b e the pro c e ss to re vie w the po lic y fo r c o mplia nc e a nd ne c e ssa ry a djustme nt?

WE HAVE AN IPS, NOW WHAT? 1. Se le c t a ppro pria te inve stme nt ma na g e rs • Ba c kg ro und c he c ks/ I nte rvie ws/ Re fe re nc e c he c ks • Ana lyze o pe ra tio na l/ b usine ss struc ture 2. Mo nito r the inve stme nt pe rfo rma nc e pe r the I PS (utilize a ppro pria te b e nc hma rks) • Ask q ue stio ns/ se e k to unde rsta nd stra te g y a nd risks • Co nside r ho w risk is b e ing ma na g e d in re la tio n to o b je c tive s 3. Re b a la nc e a s a ppro pria te o ve r time 4. Pe rio dic a lly re vie w po lic y 5. F o llo w c o nflic t o f inte re st po lic y in inve sting

T he info rma tio n se t fo rth in this o utline sho uld no t b e c o nside re d le g a l a dvic e , b e c a use e ve ry fa c t pa tte rn is uniq ue . T he info rma tio n se t fo rth he re in is so le ly fo r purpo se s o f disc ussio n a nd to g uide pra c titio ne rs in the ir thinking re g a rding the issue s a ddre sse d he re in. No n-la wye rs a re a dvise d to c o nsult a n a tto rne y b e fo re unde rta king a ny issue s a ddre sse d he re in. Unle ss o the rwise sta te d he re in, pursua nt to re q uire me nts pre sc rib e d b y the I nte rna l Re ve nue Se rvic e unde r Circ ula r 230 fo r ta x pra c titio ne rs, Bo urla nd, Wa ll & We nze l P.C. must info rm yo u tha t a ny U.S. fe de ra l ta x a dvic e o r o pinio ns c o nta ine d in this pa pe r a re no t inte nde d o r writte n to b e use d, a nd c a nno t b e use d, fo r the purpo se o f a vo iding pe na ltie s unde r the I nte rna l Re ve nue Co de o r pro mo ting , ma rke ting o r re c o mme nding to a no the r pa rty a ny tra nsa c tio n o r ma tte r a ddre sse d in this c o mmunic a tio n. 17