The top Republican on the Senate Finance Committee drew a comparison this morning between the tanking investments of Harvard University’s endowment and the alleged fraud run by New York investor Bernie Madoff.
No, Harvard’s investment pool is not a Ponzi scheme, and its losses don't touch those of Madoff's victims.
But Sen. Chuck Grassley (R-Iowa) said both cases exemplify the risks facing the managers of foundation money. And both cases, he argued, demonstrate the need for greater regulation of not-for-profit corporations, including a possible expansion of what’s known as the excise tax on jeopardy investments.
The tax is designed to punish foundations and their management for failing to exercise sound judgment in their investment decisions. Since Madoff’s scheme came to light in December, some lawyers have suggested that those non-profits that lost money to the famously secretive investor could be on the hook.
Speaking at a forum on non-profit regulation at Buchanan Ingersoll & Rooney’s D.C. office, Grassley weighed in. He criticized Madoff’s non-profit investors who, he said, “looked the other way in return for the promise of high earnings.” He also took aim at Harvard University’s endowment for putting money in relatively illiquid investments such as hedge funds.
“Both of these examples, then, raise questions of why the jeopardy-investment excise tax should only apply to private foundations,” Grassley said.
In January, a Grassley aide told The Chronicle of Philanthropy that the tax might apply to foundation managers who authorized investment with Madoff.
Non-profits face different rules depending on whether they’re classified as private foundations — which have limited sources of funding and face stricter rules — or as public charities. Many of those rules date to 1969, before the proliferation of more exotic vehicles such as endowment funds, donor-advised funds, and venture philanthropy funds.
Grassley, whose role on the finance committee gives him significant influence over tax laws, has been pushing for expanded regulation of those kinds of funds. He frequently questions whether non-profits are justifying their tax-exempt status.
“In these 40 years, we have seen explosive growth in charities and charitable giving. What we haven’t seen, though, is the law and the enforcement of the law keep up with the growth,” he said. “Since some of these walk and talk like private foundations, it seems to me fair to ask why the private-foundation rules shouldn’t apply to them.”
Grassley also said he wants to revisit the rules for how much endowments must pay out each year and for non-profits that are owed money by states and localities.