Recent Court Case Involves Marketing of Gift Annuities
Public Policy
Written by David Wheeler Newman   
Tuesday, June 23, 2009 08:00 PM

A recent ruling involving charitable gift annuities by the US Court of Appeals illustrates the old lawyers’ adage that bad facts make bad law. The case is further fallout from the melt-down of Mid-America Foundation, whose gift annuity program the Ninth Circuit characterized as a Ponzi scheme.

The Foundation paid commissions to investment advisors who arranged for the Foundation to issue over 400 annuities in exchange for about $55 million. The Foundation promoted the program aggressively with marketing materials stressing investment returns to annuitants, with language like “current average net-yield”, and comparing those returns to dividend yields on stocks and other investment alternatives.

The Foundation’s receiver sought to recover those commissions, in an effort to generate more funds to help make annuitants whole. Attorneys for the investment advisors took the position that the gift annuities were not “investments” and therefore not subject to the securities laws cited by the receiver, and that, even if the annuities are assumed to be investments that would otherwise be subject to securities laws, they are specifically exempted by the Philanthropy Protection Act.

The court disposes of the PPA defense by noting that the statutory protection is not available if a the person soliciting the funds for the charity is paid a commission. Language in the PPA specifically limits exemption from securities law to CGA programs that do not pay commissions.

The court also denied the claim that the CGAs were not “investments” subject to securities law. In addition to other points made by the court, the one most relevant to gift planners is that the court looked to the Foundation’s own marketing materials which emphasized the investment aspects of CGAs while mentioning charity only in vague terms.

The bad law resulting from the (extremely) bad facts of the Mid-America case is the court’s holding that charitable gift annuities, in that case, were investment contracts under federal securities law.

Two important points may be derived by charities and gift planners from this case. First, in case there was still any doubt in anyone’s mind, charities should not offer or pay commissions to anyone (employees or independent third parties like financial planners) for solicitation of gift annuities. Second, CGA marketing materials should emphasize the philanthropic, rather than the investment, objectives of this gift vehicle. Of course, it’s OK to talk about payments to the annuitant, and to express those payments a percentage of the amount transferred to the charity. But we should avoid referring to those percentages as “yields” or “returns”, or comparing CGAs to investments like stocks, bonds and certificates of deposit.

The court’s opinion is illuminating and may be found here: