Investments/Stocks

One of the many reasons public libraries like to collaborate with “Friends” groups on fundraising is the added flexibility Friends groups (and other non-governmental groups) have when it comes to money. For example, Friends groups:

• Can buy goods and services without competitive bidding;
• Can make decisions about money whose records are not subject to the Freedom of Information Law; and
• Can invest money without following the restrictions of the General Municipal Law (GML).

It’s this last one that impacts the question. Municipal, school district, and special district public libraries have to follow the GML’s requirements for investment of public money, and that takes a lot of options off the table.

This prohibition is so complete, it even stops public libraries from keeping donated shares of stock that don’t meet the requirements. Any stock that is received as a gift has to be liquidated (sold) and replaced with either cold, hard cash or a compliant investment.

Except investments in a “true trust.”

What is a true trust? For purposes of this question, a true trust is a gift where the beneficiary getting the money has ZERO control or ownership of the asset generating a payment but gets the benefit of the gift.

Here is an example:

After a 70 years as a successful designer of board games and a shrewd investor, Ms. Superflua Affluence dies. In her large and complicated will, Ms. Affluence leaves her local public library roughly one million dollars in shares of stock. However, not trusting the library board to manage the money, Ms. Affluence decides not give the library the money outright. Instead, Ms. Affluence puts her lawyer, Estee T. Planning III, in charge of the stock shares as a trustee. Ms. Affluence (from beyond the grave) further specifies that the library will never, ever, ever actually own the stock outright, but will get the benefit of the stock for ten years. After ten years of the library getting whatever revenue is generated, the stock shares will go to the local cat shelter, Whisker Pops, who will own it outright.[1]

That is a “true trust.”

In a true trust, the assets are never under the control of the library, but the library gets the benefit of the legacy. This is allowed by the interaction of two laws: General Municipal Law Section 11 (which put the rules about investments in place) and Estates Powers & Trusts Law Section 11-2.2 (which creates the powers of trustees).

Where does this complicated lore come from? In 1995, the Office of the State Comptroller issued Opinion No. 95-30, which set all this in motion. The Comptroller did not use a cat analogy but set things out pretty plainly: public libraries must follow the GML’s restrictions on investments, but a “true trust” managed under Estates, Powers & Trusts Law (EPTL) Section 11-2.2 just has to follow the EPTL’s requirements.

The reason the Comptroller had to lay it all out was that the law had recently been changed (in 1992) to specify that public libraries were subject to GML Section 11. Several times prior to the change, the Comptroller had clearly stated that public libraries could keep donated investments. When the Comptroller laid out the new requirements in 1995, he stated, “other prior opinions are hereby superseded to the extent inconsistent with the above.”[2]

Since three decades is a pretty short time span in Libraryland, it is possible that some public libraries still have investments that don’t meet the requirements.

If a public library finds that this is the case, this is a good one to bring to a lawyer. Depending on how the stocks were acquired, they could be in a trust; if they need to be converted, it is more important that it be done properly than quickly. This is not one to handle without experienced advice and guidance.

Thank you for a great question on a complex but critical bit of law!

This "Ask the Lawyer" answer is being composed on December 28...that cold, snowy time between Christmas and New Year's, when the courts (even during non-COVID times) are slow, staff are on holiday, and lawyers sit around thinking about catching up on filing, or even (gasp) leaving the office early to shovel, or take their kids sledding.

This quiet, contemplative "winter lull" is the perfect time to consider questions about investments held by not-for-profits.  Why it that?  Because the answer must—no matter how carefully edited, designed, and written for clarity—be extensive, and therefore long.

But that's okay, because the deep mid-winter is the time for stories.  So, grab a mug of cocoa, snuggle into a blanket, and get ready to read:

Prudence: Tale of Library Investments

Chapter 1: Extra Money

It was a cold day, but then again, in New York, most winter days are.  The Library checked its old boiler system and found that, despite certain pangs, it was going to keep the heat running that day.  This was good, since even with the staff offering only services curbside, the Library's inhabitants would be happier if they didn't have to wear fingerless gloves while using the computers.

Assured that its occupants would be warm, the Library thought about an exciting new development: money.  Based on what it heard during the Zoom board meeting last night, due to some donations, the Library had some to spare.

This notion of "spare" money was new to the Library.  From its founding in 1885 through to the present, it couldn't recall having too much extra.  And even when the bank account got ahead, the Library found a way to spend it down: a new wing, a ramp, and one memorable year, a completely new roof.

The Library sat on its strong, stone foundation and recalled the discussion of the board.  "We can start an endowment!" said one.  "No, we can just set it aside," said another.  "We must invest it," said a third.  "Can we do that?" asked another. And finally: "We must research what to do," said the board chair, sounding prudent and wise and thoughtful. 

And everyone had nodded or put their thumb up in agreement, as people in Zoom meetings are wont to do, before putting up their thumbs again to adjourn.

Chapter 2: Research

The Library was still recalling the ins-and-outs of the meeting (no new carpet this year; but a slight raise for the Director, who had been "a rock," according to the chair of the board), when it recalled what the board had committed to do about the "spare" money: research. 

Hey, the Library thought, I can do that.  And, firing up the internet on a computer in the corner,[1] it accessed Lexis-Nexis to see what it could do.

When the Senior Clerk showed up for work the next day, she found this, sitting on the printer:

To the Board:

I am so pleased the library has acquired some spare money at a time when I do not need repairs, new shelving, or capital improvements!

While you might want to think about having the boiler replaced, I have taken the liberty to research some options for investing this windfall.

First, it appears that a not-for-profit corporation like this library should have an "investment committee."  Information on that is here: https://www.charitiesnys.com/pdfs/sympguidance.pdf

Second, it seems that if the library is to have any endowment or investments, it should have a policy about the "prudent" management of them.  The New York Attorney General's guidance on that is found here: https://www.charitiesnys.com/pdfs/mifa-funds.pdf

Third, I can confirm that while an association library like me doesn't have to follow the "rules" (which are actually laws) regarding investments that public libraries do, those rules are regarded as a nice model to follow.  The Comptroller's guidance on those rules is here: https://www.osc.state.ny.us/files/local-government/publications/pdf/investingpublicfunds.pdf

Fourth, since the Comptroller's restrictions on certain investments don't apply to us, if we are "prudent," adopt a solid investment policy, and follow it, we can invest in local initiatives, publicly held companies, and even "socially responsible investing."  Some good commentary on that is here: http://www.nysl.nysed.gov/libdev/trustees/handbook/chapter11.htm

Fifth, if a contemplated investment is local, we must take particular care to document that all decisions regarding it comply with our "Conflict of Interest" policy (you know how things are in a small town).

Finally, we have to consider how this looks on our annual fiscal reporting, since we are a recognized charity under the Internal Revenue Code (what we refer to as our "501(c)(3)" status), and must file a form "990" disclosing how much we have in our investments.  What that boils down to is: if people look us up at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search, will we look like responsible investors?

And that's it.  I was happy to help with the research.  In return, it would be great if you would consider creating an ad hoc committee to investigate some preventative maintenance on my boiler.  Oh, and when you re-point my masonry, be sure you use a contractor who will select the right mortar.[2]

Thanks and good wishes,

Your Library (Building)

Chapter 3: Finding a New Senior Clerk

They've dealt with Safety Plans.  They've risen to the occasion with curbside.  They've found a way to do readings and workshops and community events online.  But they might draw the line at working in a sentient (some would say haunted) building that does its own not-for-profit management research.

THE END

Thank you for indulging my taste for a little end-of-2020 fiction!  Hopefully, the Library's research guides you to the right places for legal compliance when making investment decisions. 

My final guidance on this?  To be safe,[3] turn off the computers at night.  Then, to move forward with creating an endowment[4] or making an investment like the one described in the question:

• amend your library's bylaws to create an investment committee;
• have the investment committee use the linked guidance (along with a lawyer) to develop an investment policy;
• confirm the details of the policy and method of accounting for investment revenue with your library's accountant;
• if your library places a high priority on “socially responsible investment,”[5] make sure those parameters are in the policy;
• apply the standards in the policy to make a decision;
• when an investment is local, pay close attention to the parameters for investing and your library's policy for managing conflicts of interest; and
• Record every step in the board minutes.

And that is how your association library can invest in a "bank, or a stock, share of a public company."

I wish you many happy returns on your investments! 

[1] Yes, in addition to being a boring, prudent and thorough discussion of how an association library must manage funds dedicated to endowment and/or investment, this IS a story of a sentient library encased within a historic sandstone structure.  2020 has been a long year!  It's time to be fanciful!

[2] This is just me channeling my worst fears about old buildings into the story; if you undertake to "re-point" (fix the mortar between stones or bricks) make sure your contractor picks the right mortar.  If they use something like Portland Cement, the mortar won't move with the stones/bricks, and it can cause horrific damage. 

[3] And to be green.

[4] "Endowment fund" is often used as a catch-all term for a stockpile of money held by a charity, but in New York’s Not-for-Profit Corporation Law, it is defined as “an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis..." [emphasis added].  Meaning: the use is limited to the income generated by the core amount (over-reliance on endowment income, by the way, is why 2008 was such a nightmare for many well-endowed not-for-profits, when investments tanked and interest was next to nothing).

[5] For example: seeking out funds that limit use of fossil fuels, and avoiding investment in companies with a record of abusive labor practices.  For libraries, taking care the fund does not support regimes that suppress academic freedom/media, or otherwise limit access to information, might also be a key criterion.