A church board appoints an investment committee consisting of five businesspersons in the congregation having financial expertise. The board relies on the recommendations of the committee in investing church funds. A board member asks if the board is still potentially liable for poor investments.

Start by completing the following exercise to test your knowledge. Then read on for a summary of this topic.

1. A church board invests church funds in a speculative investment. Such an investment may violate the church bylaws.
   True or False
   
   
2. Many nonprofit organizations use an investment committee to make recommendations regarding the investment of funds. While this is a good idea, the board remains personally responsible for poor investment decisions.
   True or False
   
   
3. One way for a church board to reduce its potential liability for breaching its fiduciary duty of due care in the investment of church funds is to diversify its investments rather than invest substantial amounts in one program.
   True or False
   
   
4. Churches generally should avoid investing funds in companies or programs with direct ties to a member of the church board.
   True or False
   
   

Investment scams have victimized many churches and church members, and no church is immune. This lesson is the fifth in a series that will explain the most common forms of securities fraud, provide several examples from real life, address the fiduciary duty of church leaders to invest church funds prudently, and provide practical steps that church leaders can take to minimize if not eliminate this risk. Investment fraud is a risk not only to churches, but also to church members. Church leaders who familiarize themselves with the information in these lessons not only will be protecting their church, but they also will be protecting members from scams.

How can church leaders responsibly discharge their fiduciary duties and protect the assets of the church and church members from fraudulent investments? Consider the following:

(1) check state law
If your church is incorporated under state law, be sure to check your state nonprofit corporation law for any provisions that address the duties of officers and directors. This information should be made available to all of the church's officers and directors.

(2) check the church's bylaws and minutes
Some church bylaws contain restrictions on investments. Such restrictions may also appear in the minutes of congregational or board meetings. It is essential for board members to be aware of these restrictions and to honor them.

(3) use an investment committee
Many nonprofit organizations use an investment committee to make recommendations regarding the investment of funds. This can be an excellent way to reduce the liability of board members for poor investment decisions. Rather than make decisions themselves, the board appoints an investment committee that includes individuals with proven investment or financial expertise. Committee members may include stock brokers, CPAs, attorneys, bankers, financial planners, and business leaders. Of course, the committee's recommendations ordinarily must be approved by the governing board, but by relying on the advice of experts the board is greatly reducing the risk of being liable for poor investment decisions. They were relying on the advice of experts.

(4) investment policy
A church congregation or board can create an investment policy to direct investment decisions. A policy can prohibit investments in specified instruments or programs.

(5) avoid speculative or risky investments
If a proposal sounds "too good to be true," it probably is. Any scheme that promises to "double your money" in a short period of time should be viewed with extreme skepticism. It is absolutely essential that such schemes not be pursued without the thorough evaluation and recommendation of persons with financial and investment expertise.

Key point. Do not rely on the "expert opinion" of persons representing the promoter of an investment scheme. Investment schemes must be reviewed by independent and objective persons having financial and investment expertise. Ideally, these persons will be members of your church, or persons within your community who have a reputation of unquestioned integrity.

Here are some examples of investments to avoid: uninsured bank accounts, high-risk bonds, gold or other precious metals, unsecured loans, and limited partnerships. It is also best to avoid investing all or a significant portion of available funds in the stock of one company, since the lack of "diversification" creates added risk. Investing in stock generally should be avoided unless investments are sufficiently diversified (for example, through conservative mutual funds) and recommended by a knowledgeable investment committee.

Key point. Church leaders should remember that they are investing donated funds. This is no time to be taking risks. Not only do officers and directors have a legal duty to exercise due care in the investment of church funds. Just as importantly, they have a moral duty to be prudent in their investment decisions. No officer or director wants to explain to church members at an annual business meeting how some of their contributions were lost due to poor investments. And this is so whether or not the duty of due care is met.

(6) avoid investing in companies or programs in which a board member has a personal interest
Avoid investing in companies or programs with direct ties to a member of your board. Such investments are not always inappropriate, but they demand a much higher degree of scrutiny.

Key point. Our recommendation--all of a church's investments should be reviewed at every board meeting. This ensures that all investments will be continuously monitored, and that necessary adjustments can be made.

(7) trustees have a higher duty
Sometimes church board members are designated as the trustees of a charitable trust. For example, a member dies leaving a large sum to the church for a specific purpose and designates the pastor or church board as trustees of the fund. Trustees are held to an even higher degree of care in the investment of trust funds than are officers or directors of a corporation. However, the Revised Model Nonprofit Corporation Act specifies, that "[a] director shall not be deemed to be a trustee with respect to the corporation or with respect to any property held or administered by the corporation, including without limit, property that may be subject to restrictions imposed by the donor or transferor of such property." In other words, a church officer or director is not automatically deemed to be a "trustee" of church funds. Officers and directors generally are held to the higher legal standard applicable to trustees only if they are designated as trustees in a legal instrument that creates a trust fund.

Quiz answers: 1) T  2) F  3) T  4) T 

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