More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
As charitable organizations face a new set of fiduciary requirements, Roland|Criss has been appointed registrar of a recently published fiduciary conduct guide for foundations and endowments. Roland|Criss, based in Arlington, Texas, is an advisor to fiduciaries and fiduciary service providers.
The new fiduciary requirements for charitable organizations are embodied in the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a template for state law to regulate investment decisions and endowment expenditures for the charitable organizations within its scope.
Drafted in 2006, UPMIFA has been enacted into law in all 50 states and the District of Columbia, Roland|Criss’s executive vice president Ronald Hagan said in a telephone interview with AdvisorOne.
“The states were prompted to act because of concerns over inconsistent behaviors among individuals who sit as trustees on funds donated by charitable persons and organizations,” Hagan said. Anecdotal evidence showed that the trustees needed to be brought into line, he said. “And the exclamation point on that is the impact of the Madoff scandal in the foundation community. It’s estimated $25 billion of the $30 billion Madoff made off with was taken from foundations.”
Developed in response to UPMIFA, the newly published Stewardship Excellence Guidelines for Endowments and Foundations(the standard) will serve as a conduct guide for foundations and endowments. The standard specifies objectives and steps that enable nonprofit charitable trusts to develop and implement a management system that conforms to the “prudent process” requirements defined by UPMIFA.
It takes into account ethical requirements to which endowments and foundations subscribe, and information about significant legal aspects of the nonprofit environment that enable an organization to meet or exceed industry best practices.
The standard was created and approved by a task force of the international standards organization Investment Fiduciary Leadership Council (IFLC). Hagan serves in a voluntary, unpaid capacity as chairman of the IFLC’s board, and he was a member of the task force.
Hagan said development of the standard began as a grassroots effort by directors and executives of “attentive foundations” who sensed something was about to change with respect to regulation in their industry. Up to the point states adopted UPMIFA, foundations had had a free ride, he said.
“When compared with the other major community of investment stewards—the U.S. corporate retirement industry, which is regulated by the Department of Labor, and major body of law [embodied in] ERISA—the foundation community has had no such comparable infrastructure of regulation: no law and no enforcement.”
During the development of the standard, Hagan said, “we on the task force were shocked to discover that there could not be found one case of a breach of fiduciary duty brought against a director or an executive of a misbehaving foundation or trust.”
In mid-May, the task force appointed Roland|Criss as registrar of the new standard. In this role, the firm will provide these things, according to Hagan:
- Training. Constituents who are planning to adopt the standard need training about it.
- Implementation assistance. When it comes to bringing in a new way of doing things, many organizations, already overloaded, need mentors and in some cases side-by-side assistance. “That’s even more true in the foundation world,” Hagan said. “Foundations by their very nonprofit nature are run very thinly in staffing.”
- Independent assessment. This will lead to in an attestation of a charitable organization’s conformance.
Hagan said the task force is thinking about using the attestation to create a rating system for foundations, perhaps one similar to the Standard & Poor’s rating system. The donor community, including philanthropists and their advisors, would welcome a benchmark to assist them in placing charitable dollars, he said.
As well, the regulatory community would benefit because attorneys general in many states are very thinly staffed, and a rating system would help them prioritize which ones need to be audited more immediately and which later.