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Rules governing endowments set to change

An act signed into law earlier this month by Gov. David A. Paterson will change the ways in which universities, charities and other nonprofits manage their endowments.

Sue Stewart, vice president and general counsel for the University of Rochester, believes the changes contained in the new Uniform Prudent Management of Institutional Funds Act are helpful — but not critical — to institutions such as hers.

“All in all, this is favorable,” she said.

Nixon Peabody’s Michael Cooney, who represents the Al Sigl Community of Agencies, said he has serious reservations, however, when it comes to a requirement mandating notification to original donors to older funds when making certain changes in their use.

“If you have 900 different funds, you have to send out 900 different notices and wait 90 days for them to get back to you,” he said.

Worse, although the Legislature intended the notification requirement to apply only to the new provisions included in the law, the actual language may mean it applies to quite a bit more, Cooney said, and could significantly complicate the management of nonprofits.

“There are substantial complications that have to be overcome in order to use certain parts of the statute,” Cooney said.

Other changes are good, he said.

Among other things, the new law allows nonprofits to draw upon funds when they are underwater, or worth less than when they were established. Previously, such actions were forbidden — something that often could hamstring institutions looking to fund projects through tough economic times, proponents said.

Fund managers now must take economic conditions, inflation and deflation, the institution’s investment policies, expected total return, and a few other factors into consideration when spending an endowment. Today it is considered imprudent to spend more than 7 percent of a fund’s fair market value per year.

Another major change would give nonprofits the ability to update or change the purpose of smaller, older, out-of-date funds, Stewart said. As it previously stood, institutions such as the University of Rochester could not repurpose smaller funds dedicated to out-of-date issues such as polio to more modern medical concerns without costly legal work that often ate up much of the fund’s value. The new law allows institutions can change the use of a fund older than 20 years and worth less than $250,000 without court action, provided the original lenders and the New York State Attorney General’s Office are notified. If there is no objection after 90 days, the change can be made, Stewart said.

Cooney said that the Attorney General’s Office has pledged to release guidelines that may eliminate some of the confusion, but, given the current language, a complete fix seems unlikely.

The Uniform Prudent Management of Institutional Funds Act already has been adopted by 44 states and several U.S. territories. It was introduced previously in the New York State Legislature and Senate in 2009, but was sidelined due to the ongoing battles over control of the state Senate.

Andrea Holland, spokesperson for the United Way of Rochester, said her organization is still reviewing the new law to find out how it affects their organization’s member agencies.


Eric Walter is a Rochester-based freelance writer.