The Texas Version of UPMIFA and A Peculiar Rule Governing Pooled Endowment Funds

I am writing an article on the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) and have decided to discuss a peculiar provision in the Texas version of the model act. The Texas Uniform Prudent Management of Institutional Funds Act (“TUPMIFA”), enacted in 2007, largely reflects the text of UPMIFA.  However, TUPMIFA contains a strange provision applicable to pooled endowment funds.  The Texas statute, see TEX. PROP. CODE § 163.005(g) (2010), states as follows:

If an institution pools the assets of individual endowment funds for collective investment, this section [i.e., the section governing the decision to spend or accumulate] applies to the pooled fund and does not apply to individual endowment funds, including individual endowment funds for which the nature of the underlying asset or donor restrictions preclude inclusion in a pool but which are managed by the institution in accordance with a collective investment policy.

The Texas rule plainly deviates from UPMIFA.  Although UPMIFA permits the pooling of endowment funds, such pooling is authorized only “for purposes of management and investment.” UNIF. PRUDENT MGMT. OF INSTITUTIONAL FUNDS ACT § 3(d).  Further, the official comments to UPMIFA state that the pooled funds will be considered individually for purposes of the rules relating to spending and modification of restrictions under the uniform act.  See id. § 3(d) cmt.
  
The TUPMIFA directive to apply its spending/accumulation section to “the pooled fund” and not to “the individual endowment funds” strikes me, and some others with whom I have spoken, as quite problematic.  As under UPMIFA, relevant factors under TUPMIFA that bear upon the decision to appropriate for expenditure, or instead accumulate, endowment funds include the “the duration and preservation of the endowment fund,” TEX. PROP. CODE § 163.005(a)(1), and “the purposes of the … endowment fund.”  Id. § 163.005(a)(2).  These particular factors are fund-specific.   It seems quite impossible to apply these factors to “the pooled fund” in any sensible manner.
 
I believe that a statutory amendment is necessary to conform the Texas rule to the approach of the model act.  As I have mentioned in a recent presentation (with MariBen Ramsey, the Interim President/CEO and General Counsel of the Austin Community Foundation) at the 28th Annual Nonprofit Organizations Institute, until the Texas provision is amended to remedy this defect, a plausible solution is to draft endowment fund investment policies so as to circumvent the statutory malady, and make certain that such policies are incorporated by reference in the terms of gift instruments.  Consistent with UPMIFA, the spending/accumulation rules of TUPMIFA are explicitly made “[s]ubject to the intent of a donor expressed in the gift instrument.”  Id.   Thus, the problem can be avoided if the gift instrument states that the pooling of funds will not render irrelevant “the purposes of the … endowment fund” and “the duration and preservation of the endowment fund” in considering whether to expend or accumulate.

I welcome any insight that others may have to offer on this deviation from UPMIFA enacted in Texas.

JRB