We are, as I write this, on the cusp of RRSP season, and as usual at this time of year, many people are turning their minds to plans for their future financial security. Early January, however, brought for some investors unfortunate news of the troubled state of the $95 million Church Extension Fund (CEF) run by the Lutheran Church in B.C. and Alberta. Similar funds are run by other branches of the Lutheran Church in Canada and the United States. The funds are a vehicle available for individuals, congregations, organizations and businesses to invest in religious and social projects that advance the church’s ministry.
The immediate problem the Alberta and B.C. CEF faces is an anticipated shortage of liquid assets to meet redemptions in the next few months, but the long term viability of the fund has also been called into question. The fragile state of the fund seems to stem from some questionable investment decisions.
The CEF concept is perhaps one of the first instances of what we now call social investment. It was initially developed in the early part of the 20th century so Lutheran congregations could fund facilities for a new parish in a neighbouring community. Whether from this or other modest origins, interest in investing for purposes other than (or in addition to) monetary return has grown exponentially in recent years and now extends well beyond faith-based organizations. Property and civil rights matters, under the Canadian Constitution, generally are within the jurisdiction of the provinces. Determining what constitutes appropriate investment of charitable assets is a provincial issue. But, other than in Ontario, provinces do not take an active interest in investment decisions of charities. That said, what the Alberta and B.C. CEF is currently experiencing may hold some wider lessons for social investment.
As is commonly the case in the world of Canadian charity law and regulation, in this area you can’t go very far without stubbing your toe on jurisdiction.
In revisions to its Community Economic Development Guidance in 2012, the Canada Revenue Agency Charities Directorate provided registered charities with greater scope to use their assets for investments or loans to further social ends. That was a welcome development given widespread desire to consider non-monetary factors in how monies not directly used in charitable work were invested or otherwise allocated by registered charities. But this increased flexibility was subject to the caveat that any activity in this regard had to comply with applicable provincial regulation.
Property and civil rights matters, under the Canadian Constitution, generally are within the jurisdiction of the provinces. Determining what constitutes appropriate investment of charitable assets is a provincial issue. But, other than in Ontario, provinces do not take an active interest in investment decisions of charities. In Ontario there is legislation establishing the Office of the Ontario Public Guardian and Trustee and giving it authority to investigate and go to court for a variety of remedies where there may be misuse of charitable property.
Elsewhere, it is generally left to the courts alone to deal with claims made by interested parties seeking remedies for misuse of charitable assets through poor investment. Where this happens, charity stakeholders may be able to bring an action against the organization’s board or trustees to hold them accountable for breach of fiduciary duty.
At common law and, in many jurisdictions, under statute, trustees have an obligation to invest charitable assets prudently. It is not yet settled law whether this duty extends to the directors of corporations that hold charitable assets. The legal question is: are they trustees?
In practice, even in Ontario, poor organizational decisions on the use of assets are dealt with – if at all – only after the fact.
Moreover, provincial securities legislation intended to protect individual investors often features an exemption for charities and/or non-profit organizations from issuing a prospectus and the other requirements that would otherwise apply to promoting investment opportunities. Discussion is currently underway in some jurisdictions about possible new exemptions with respect to crowdfunding initiatives, which may be put on by voluntary sector groups.
Although this approach has the obvious merit of relieving charities and non-profit organizations from complying with red tape – a burden lifted – doing so deprives investors of the protections (protections particularly important for unsophisticated investors) provided by these requirements. Unfortunately, the appeal of being able to invest in projects that are socially beneficial, as well as earning a monetary return, may make these individuals even more vulnerable to problematic investment decisions than they might otherwise be.
In the face of cyclical and frequently project-based, as opposed to core, government funding, together with the often unpredictable philanthropic funding, self-financing mechanisms have huge appeal. There are also sound public policy reason for encouraging innovative practices and new approaches to addressing social issues.
But with incidents like Alberta and B.C. CEF, there is also a compelling rationale for a robust regulatory regime that will ensure full transparency for individuals choosing this type of investment vehicle and adequate measures to safeguard assets being put to a social end. Whether that should be a return to command and control style government regulation, developing metrics around performance and disclosure or other measures appropriate for this type of initiative remains a matter for debate, but the current passive approach seems unlikely to be the best long-term solution.
Admittedly, one does not have to look back too far in history to realize that even in a regulated environment – think Bernie Madoff or the 2008 crash – things can go wrong. While that may be so, as the Muttart Foundation’s Talking About Charities survey regularly affirms, charities enjoy among the highest levels of trust of any group in contemporary society. That trust isn’t likely to last very much longer if social investment debacles become front-page news too often.