This FAQ is the second advisory of a series that we will be bringing to you over the next few weeks. Please feel free to reach out to me with any legal questions you may have.
Board Members, staff members, donors, church/synagogue/mosque members are all a part of Not-for-Profit Organizations. Because of the pandemic, not-for-profits are struggling with various areas simultaneously-headcount reductions, work-from-home challenges, donor relations, and long-term strategic initiatives. What is the best way to process the new reality and move forward?
Here are the answers to some of the most frequently asked questions we’ve recently received from our nonprofit and religious organization clients.
1. Our investments have taken a hit in the current market. What should our Board do about it?
Every organization that invests assets, including marketable securities, as well as other types of assets (i.e., real estate), should have an investment policy that outlines a prudent investment protocol. Also, if your organization does not have an Investment Committee, we recommend that you appoint one and delegating it with the responsibility of consulting with the organization’s professional investment advisors. It is crucial you collectively come up with a plan for handling investments as values fluctuate in this unstable economic environment.
Under the Uniform Prudent Management of Institutional Funds Act, directors/trustees have a fiduciary duty to manage investments in good faith, and with the care, an ordinary person in a like position would exercise under similar circumstances (UPMIFA has been adopted in some form in every state except Pennsylvania, but Pennsylvania nevertheless imposes a similar fiduciary duty on trustees and directors dealing with investments).
There is no single correct answer about what to do in these unprecedented times of volatility. The key is for directors to pay attention, consider the factors outlined in UPMIFA, and decide what they want to do if anything. It may be appropriate to re-balance investments in different asset classes, to change investments, to reposition the portfolio, or to decide which specific investments to sell to provide needed operating funds. It may be appropriate just to hold tight. This is the time to get professional advice and document what is decided and, to the extent possible, why.
To avoid liability, having a reasonable process, and following internal investment policies is evidence of good faith and the exercise of ordinary care. Even if the Board has delegated full discretion to a professional manager, this is the time to be sure that the manager is operating within the investment policy, and perhaps whether that policy should be updated. A court will not judge whether decisions were ultimately good ones, but whether they were considered and made in good faith. Failure to discuss the issues in these times could be viewed as a failure to act in good faith.
2. Can we use PPP loans to pay salaries of staff who are now being paid through a budget line for wages in a contract with a governmental agency?
The SBA has not provided any guidance on this question, and therefore I don’t think anyone can give you a firm answer to that question today. Consequently, I would not use a PPP loan today to pay the salaries of people whose positions are already funded by a governmental contract. You will ultimately have to assure the governmental agency that you spent its money on the salaries you included in the budget. You will also have to show the SBA that you spent the money you received from the loan for compensation of the same employees. It will be hard to certify to both agencies that you used the money from each for the same purpose. They probably wouldn’t like your double-dipping.