updated UMIFA in four key areas: investment conduct, expenditure of funds, delegation of management, and release or modification of restrictions.
To perform their fiduciary duty, charities are expected to manage the costs of their portfolio management prudently, consider the total portfolio when making individual investment decisions, and are specifically required to diversify and balance their portfolio in consideration of their risk tolerance.
UPMIFA also provides the following seven specific guidelines for amounts a charity or endowment can spend and on what they can spend the funds:
1. Duration and preservation of the endowment fund
2. The purposes of the institution and the endowment fund
3. General economic conditions
4. Effect of inflation or deflation
5. The expected total return from income and the appreciation of investments
6. Other resources of the institution
7. The investment policy of the institution
UMIFA updated the legal constraint that trusts can spend only income, subject to a floor defined by the historical dollar value. The historical dollar value is the sum of the original gift plus any additions required by the donor or by law. UPMIFA eliminated this rule and instead states that institutions “may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines to be prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.”
For individual state governments that prefer more specific guidelines, they can amend the act to allow an initial assumption of imprudence if an organization spends more than 7 percent of the fund's fair market value over a three-year period using an averaging formula.
UPMIFA also clarifies the procedures for releasing or modifying restrictions on charitable funds. If notice is given to the state's attorney general and the changes are still consistent with the donor's intent, a court can allow modifications if it determines the funds are either unlawful or not practical to retain or the fund's purpose is impossible to achieve or is wasteful.
Additionally, if the amount of the donation in question is less than $25,000 and more than 20 years old, the charity may modify the fund's restrictions without going to court. Again, the state's attorney general must be notified, but if the charity receives no objections after 60 days, restrictions can be changed as long as the result is consistent with the original intent of the gift.
Federal Regulatory Agencies
The two core agencies for federal regulation in investment management are the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Agency (FINRA).
SEC
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g., the stock exchanges), state securities regulators, and various private sector organizations.
The Securities Exchange Act of 1934 created the SEC to interpret securities law, to provide rules regarding the disclosure of information by public companies, and to enforce those rules. Market participants, including securities exchanges, brokers and dealers, self-regulatory organizations, clearing agencies, and others are required to register with the SEC. These entities are required to disclose information regarding their financial condition and business practices, including the registration of new securities, annual shareholder reports, and mergers and acquisitions. The SEC requires also that investments such as mutual funds, exchanged-traded funds, and others disclose information useful to investors so that they can make informed investment decisions.
To determine standards for what information should be disclosed by these various organizations and public companies and how that information should be presented, the SEC works closely with self-regulatory organizations such as the Financial Accounting Standards Board. The SEC also oversees securities exchanges, self-regulatory organizations, and credit rating agencies.
In a single statement, the SEC exists to provide investors with rules for the fair execution of trades and to enforce those rules. To that end, several major violations of fair trading are prohibited by the SEC. The SEC prohibits the use of insider or nonpublic information to place trades. For example, wash sales can be used either to create artificial tax losses or, when used by very large shareholders, to mislead investors by manipulating the share price. Wash sales occur when investors sell shares only to almost immediately buy back those same or similar shares, usually within 30 days. Churning, whereby an advisor creates multiple transactions, typically over a short period of time, that generates commissions or other income and increases the costs to a client's invested assets without a clear benefit to the client, is also prohibited.
In order to provide investment professionals with the information they need to follow these rules and maintain the integrity of the securities industry, the SEC administers the examination and inspection programs for all registered self-regulatory agencies, investment companies, broker–dealers, and advisors, among others in the securities business.
The SEC also has jurisdiction over the private, nonprofit Securities Investor Protection Corporation (SIPC) that insures customer accounts at member brokerage firms against the failure of those same firms. Unlike Federal Deposit Insurance Corporation (FDIC) coverage, SIPC insurance does not insure accounts against loss due to market movements.
Financial Industry Regulatory Authority (FINRA)
FINRA is the largest independent, nonprofit self-regulatory organization (SRO) registered under the SEC for all securities firms doing business in the United States. It writes and enforces rules related to federal securities law to protect and educate investors. FINRA examines firms and can punish individuals and firms through fines, suspensions, and up to and including expulsion from the securities industry.
All brokers must be licensed and registered by FINRA, pass qualification exams, and satisfy continuing-education requirements. For the public's protection, FINRA also discloses any disciplinary action it takes against registered advisors.
Most advertisements and marketing material used by members must be filed with FINRA before an advisor or firm can distribute them to the public. Further, FINRA requires not only that the sales material be truthful, but that the security sold is suitable to the individual investor and that the investor receives complete disclosure about an investment before purchase. When problems arise, FINRA also administers the arbitration typically required as the starting point to begin to resolve disputes among investors and its members.
FINRA replaced the National Association of Securities Dealers (NASD) when its rulemaking and enforcement activities were consolidated with those of the enforcement division of the New York Stock Exchange in 2007.
Thus, FINRA also monitors securities exchanges for suspicious activities and provides educational materials freely available to the public.
State Agencies
Each state has its own state security administrator responsible for regulating the securities industry in that state. The state security administrator also can register securities offered or sold in their state and oversee the firms and individuals selling securities or providing investment advice to their citizens.
Although similar in scope to the SEC, investment advisors managing less than $100 million must register and file Form ADV with the state securities agency in their principal location.
The National Securities Markets Improvement Act of 1996 amended the Securities Act of 1933 to exempt securities traded nationwide and registered with the SEC from registering with a state individually. Each state's securities law or “blue sky laws,” a name taken from a fraudulent rainmaking scheme against drought-stricken farmers, still provide the state with the authority to prosecute over securities fraud.
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