Obama eases impact investment rules for foundations to catalyse market

The Obama Administration has announced the completion of regulations that will make it easier for private foundations to do impact investment, in a move it hopes will catalyse the market.

It follows similar action in the UK, which has created a new statutory power of social investment for charities, enabling them to invest for lower financial return or higher risk where this advances the purpose of the charity.

The US’s Program-Related Investments (PRIs) rules, first proposed in 2012, seek to clarify that foundations can use PRIs to advance their charitable purpose without obtaining legal advice, even if the investment offers a lower rate of return, higher risk, or lower liquidity than alternative investments that do not further charitable purposes.

The new rule also clarifies that foundations can pursue PRIs, which received tax-favoured treatment, without specific approval from the US tax authority, the Internal Revenue Service (IRS).

PRIs are investments made primarily to accomplish a foundation’s charitable mission, not to generate financial return. It is typically used in place of a grant, to fund social projects seeking to harness market forces or private money to further its aims.

The Bill & Melinda Gates Foundation is a big fan of PRIs, using them as what it describes as a “high impact tool to stimulate private-sector driven innovation” in areas such as health and vaccines development.However, many foundations were worried that expensive processes, such as specific IRS approvals or legal opinions, were necessary.

So last week, the US Treasury Department and the IRS finalized regulations clarifying the use of PRIs, with the White House announcing the news on its website.

In a statement, David Wilkinson, Director of the White House Office of Social Innovation and Civic Participation, said through the new regulations, the Obama Administration sends a clear message that private foundations can deploy a wide array of financial tools to achieve their charitable goals.

He said: “These two actions by Treasury should remove confusion and signal to the field that a foundation can use its financial assets in a variety of ways to accomplish its mission. With increased comfort about using a variety of prudent financial tools, private foundations can continue to help create safe communities, strengthen schools, and achieve other charitable goals that make our country a place where everyone has the opportunity to succeed.”

The Office of Social Innovation and Civic Participation (SICP) was created in early 2009 by President Obama to harness innovative solutions to social problems.

Part of this has been impact investment and pay for success initiatives, including social impact bonds. Prior to leading the SICP team, Wilkinson spent seven years as Executive Director of City First Enterprises, a non-profit bank and incubator of social finance solutions.