Fiduciary Responsibilities for Nonprofit Boards Pasco office: 5328

Fiduciary Responsibilities for Nonprofit Boards Pasco office: 5328 Trouble Creek Rd. New Port Richey, FL 34652 Phone: 727-848-8950 Pinellas office: 2323 Curlew Rd. Suite 6-D Dunedin, FL 34698 Phone: 727-772-9500

“The simultaneous occurrence of events which, taken individually, would be far less powerful than the result of their chance combination”

Job losses at highest level since 1945 The Labor Department says 524,000 jobs were lost in December, bringing the total for 2008 to 2.6 million. The 7.2% unemployment rate doesn't count many who are out of work. By Maura Reynolds and Peter Nicholas January 10, 2009 Reporting from Washington -- With jobs disappearing in numbers not seen since the end of World War II, pressure mounted on Congress and President-elect Barack Obama on Friday to overcome their differences and reach agreement on a massive recovery program to stave off economic catastrophe

“The future ain’t what it used to be.” Yogi Berra American

Who What Why

Who is a fiduciary? A person or persons having legal responsibility for managing someone else’s money, standing in a special relationship of trust, confidence and/or legal responsibility, including trustees and investment committee members of nonprofit boards.

Investment Steward Investment Manager Investment Advisor

No investments are “safe” How men of prudence, discretion & intelligence manage their own affairs No Liability if prudence standard was met

1935 1959 1972 1974 1992 1994 1997 1997 2000 2006 Restatement 1st of Trusts Restatement 2nd of Trusts Uniform Management of Institutional Funds Employee Retirement Security Act Restatement 3rd of Trusts Uniform Prudent Investor Act Uniform Mgmt of Public Employee Retirement Systems Act Uniform Principal and Income Act Uniform Trust Code Uniform Prudent Mgmt of Institutional Funds Act

Center for Fiduciary Studies Founded in 1999 Operates in association with the University of Pittsburgh, Center for Executive Education, Joseph M. Katz Graduate School of Business CEFEX is an independent global assessment and certification organization. It works closely with investment fiduciaries and industry experts to provide comprehensive assessment programs to improve risk management for institutional and retail investors. CEFEX certification helps determine trustworthiness of investment fiduciaries.

The Fiduciary Handbook Series

Fiduciary Quality Management System Organize Formalize Monitor Implemen t

What are the responsibilities? Fiduciary duty is highest known to law Failure has serious consequences Role must be documented and acknowledged Responsibility may be shared but not abdicated Presumption of knowledge

“How was I supposed to know?”

Role of the Finance Committee To define a prudent process to analyze, select and monitor: -investment advisors -investments -related expenses

Fiduciary Practices 101 Regularly held committee meetings Committee minutes Investment Policy Statement Conflict of Interest Policy and Procedures Committee By-Laws and Operating Procedures Fiduciary Acknowledgements Fiduciary Audit File Fiduciary Assessment Reports

Fiduciary Practices 101 Regularly held committee meetings Committee minutes Investment Policy Statement Conflict of Interest Policy and Procedures Committee By-Laws and Operating Procedures Fiduciary Acknowledgements Fiduciary Audit File Fiduciary Assessment Reports

Investment Policy Statement Clarifies organization’s investment related goals Provides a framework for evaluating investment performance Helps prevent short-term or arbitrary decision-making during turbulent times

Investment Policy Statement Provides evidence to donors that a clear process exists for good stewardship of funds Supports continuity in decision-making as committee members change

Investment Policy Statement Does not prevent losses Does not guarantee success Should raise the probability of success Should reduce the magnitude of losses

How could our finance committee minimize their liability exposure?

Minimizing Liability Hire prudent expert, selected through a defined due-diligence process, willing and legally capable to serve as co-fiduciary Have the prudent expert acknowledge their co-fiduciary status in writing Grant discretionary power to the expert Monitor the prudent expert’s activities in a consistent and well-defined manner

Investment Steward Investment Manager Investment Advisor

Registered Representative Registered Investment Advisor Suitability Fiduciary Required disclosure of all conflicts of interest No Yes Full fee transparency No Yes Broker/Dealer Client Standard of Care Fiduciary duty to

Investment Advisor Named Fiduciary Appointed Fiduciary Functional Fiduciary

Managing Committee Liability Apply a process to periodically review the effectiveness of the organization in meeting its fiduciary responsibilities

Checking Account Budget and Financial Statements

Checking Account Budget and Financial Statements Investment Account Fiduciary Practices

Checking Account Budget and Financial Statements Audit and Oversight Investment Accounts Fiduciary Practices Audit and Oversight

The Application of the Practices: Case Studies

Due Diligence Monitor the activities of “prudent experts” Avoid conflicts of interest and prohibited transactions

Nonprofit: Kannahelp University Person: Chairman of the Investment Committee His background: Very well respected investment advisor in town Situation: He suggests an investment for consideration. As a part of full disclosure, he indicates that he will receive an annual fee from the investment company. The Board waives their conflict of interest rule and moves forward with the investment.

Minimizing Liability Hired prudent expert Selected through a defined due-diligence process

Minimizing Liability Hired prudent expert Selected through a defined due-diligence process

Nonprofit: Yeshiva University Person: Ezra Merkin, Chairman of the Investment Committee His background: Formerly the head of GMAC Financial Svcs. Situation: Merkin received 1.5% per year or 225,000 on the 15 million they invested with him. He placed the funds with his friend, Bernie Madhoff, who later served as the Treasurer of Yeshiva University.

Investment Fees Control and account for investment expenses Monitor the activities of “prudent experts”

Financial Institution Fund (XXXXX) Morningstar rated 485 million fund Inception date: December 10, 1996 Manager in place since day one Front load: 4.50% Gross expense ratio: 1.68%

Benchmarking Comparison Year (XXXXX) S&P 500 Difference 2009 Year-to-date -5.86% -6.37% 0.51% 2008 -33.19% -37.0% 3.81% 2007 6.45% 5.50% 0.95% 2006 14.63% 15.80% -1.17% 2005 6.75% 4.90% 1.85% 2004 11.72% 10.90% 0.82% 2003 28.10% 28.70% -0.60% 2002 -18.69% -22.10% 3.41% 2001 -9.02% -11.90% 2.88% 2000 0.58% -9.10% 8.52% 1999 15.73% 21.0% -5.27%

Financial Institution Fund (XXXXX)

SPDRs – S&P 500 (SPY)

Performance Comparison Overlay

Expense Comparison 750,000 invested Financial Institution Fund Expense ratio: 1.68% 12,600 SPDRs (SPY) Exchange Traded Fund Expense ratio: 0.08% 600

The CIO Process for Nonprofits The Fiduciary Forum The Strategy Shield The Governance Guide The Portfolio Director The RFP Manager The Manager Monitor

The CIO Process for Nonprofits The Fiduciary Forum The Strategy Shield The Governance Guide The RFP Manager

The CIO Process for Nonprofits The Fiduciary Forum The Strategy Shield The Governance Guide The Portfolio Director The RFP Manager

The Portfolio Director Nonprofit Finance Committee Fiduciary Advisor Portfolio

The CIO Process for Nonprofits The Fiduciary Forum The Strategy Shield The Governance Guide The Portfolio Director The RFP Manager

The CIO Process for Nonprofits The Fiduciary Forum The Strategy Shield The Governance Guide The Portfolio Director The RFP Manager The Manager Monitor

The Manager Monitor Investment Manager A Nonprofit Finance Committee Investment Manager B Fiduciary Advisor Investment Manager C Investment Manager D

Conclusion

Fiduciary Code of Conduct If you’re going to do itDo it right. As you manage investment decisions: Document the process; Hire competent professionals; Monitor the results; And always remember you have been entrusted with someone else’s money. Never invest in anything you don’t understand or is difficult to value. Know what you are paying for – Don’t hire the fox to count the chickens. Understand that, when everyone else is talking about making a killing – The market is already dead. Cautiously approach investments that promise superior returns. Believe in the statement – The past is not necessarily indicative of future performance. Relish the opportunity to be a steward of sound investment practices for, in the end, It’s procedural prudence, not performance, that counts.

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