NPL 273 Introduction to Nonprofit Leadership

Prudent Investment Practices

The American Institute of Certified Public Accountants has issued a set of principles for “prudent investment practices” for investment fiduciaries.

They begin with the seven uniform fiduciary standards of care:

Know standards, laws, trust provisions
Diversify assets to specific risk/return profile of client
Prepare investment policy statement
Use “prudent experts” (money managers) and document due diligence
Control and account for investment expenses
Monitor the activities of “prudent experts”
Avoid conflicts of interest and prohibited transactions

In addition, the consider the five steps of the investment management process:

1. Analyze current position

2. Diversify—allocate portfolio

3. Formalize investment policy

4. Implement policy

5. Monitor & supervise (and rebalance)

Combining these two sets of principles into a matrix, they arrive at the following set of practices:

1. Analyzing Current Position

1.1. Investments are managed in accordance with applicable laws, trust documents, and written investment policy statements

1.2. Fiduciaries are aware of their duties and responsibilities

1.3. Fiduciaries and parties in interest are not involved in self-dealing

1.4. Service agreements and contracts are in writing, and do not contain provisions that conflict with fiduciary standards of care

1.5. There is documentation to show timing and distribution of cash flows, and the payment of liabilities

1.6. Assets are within the jurisdiction of US courts, and are protected from theft and embezzlement

2. Diversification & Allocation of Portfolio

2.1. Risk level has been identified

2.2. An expected, modeled return to meet investment objectives has been identified

2.3. An investment time horizon has been identified

2.4. Selected asset classes are consistent with the identified risk, return, and time horizon

2.5. The number of asset classes is consistent with portfolio size

3. Formalize Investment Policy

3.1. There is detail to implement a specific investment strategy

3.2. The investment policy statement defines the duties and responsibilities of all parties involved

3.3. The investment policy statement defines diversification and rebalancing guidelines

3.4. The investment policy statement defines due diligence criteria for selecting investment options

3.5. The investment policy statement defines monitoring criteria for investment options and service vendors

3.6. The investment policy statements defines procedures for controlling and accounting for investment expenses

3.7. The investment policy statement defines appropriately structured, socially responsible investment strategies (when applicable)

4. Implement Policy

4.1. The investment strategy is implemented in compliance with the required level of prudence

4.2. The fiduciary is following applicable “safe harbor” provisions (when elected)

4.3. Investment vehicles are appropriate for the portfolio size

4.4. A due diligence process is followed in selecting service providers, including the custodian

5. Monitor & Supervise (and Rebalance)

5.1. Periodic reports compare investment performance against appropriate index, peer group, and IPS objectives

5.2. Periodic reviews are made of qualitative and/or organizational changes in investment decision-makers

5.3. Control procedures are in place to periodically review policies for best execution, soft dollars, and proxy voting

5.4. Fees for investment management are consistent with agreements and with the law

5.5. “Finders fees,” 12b-1 fees, or other forms of compensation that have been paid for asset placement are appropriately applied, utilized, and documented.

MSU