"The act is a blessing and a devil in disguise," said Andrew Grumet, a counsel with Schiff Hardin LLP of New York. "A lot of it will apply to the individuals who are responsible for running the endowment. These individuals are going to have to understand fiscal discipline."
Expanding the definition of "prudence" may not be enough, he said.
"The 'prudent behavior' definition is not a safeguard," Mr. Grumet said. "It comes down to an issue of educating the board members with respect to what it means to be prudent and what their responsibilities are to those funds. That's something that is not easily legislated."
Responding to concerns about removing numerical barriers, the National Conference of Commissioners on Uniform State Laws included an optional provision under which spending more than 7% of a fund's assets is considered imprudent unless an organization can justify doing so.
Six states have included that provision in their law.
An increase in donations of individual stocks in recent years has put many endowments at the mercy of the stock market. In 2003, for example, 54% of educational endowments and 48% of community foundations had funds that were underwater, according to Commonfund.
David Bahlmann, president and chief executive of the Ball State University Foundation in Muncie, Ind., said: "It caused a significant amount of confusion and angst in the field as to how to deal with these funds."
Giving managers more flexibility could be timely given the recent market downturn.
"We're in one of those periods now," said Jeffrey Mechanick, a not-for-profit staff specialist and project manager at the FASB. "And this period may end up being like what we experienced in 2001 and 2002. The act allows them some way to manage during periods of short-term difficulty."
Some advisers see the law as a meaningful update.
"It will provide more investment and distribution flexibility," said Randy Fox, a founding principal of InKnow Vision, a Chicago-based consulting firm that advises clients with net worth of $10 million or more in estate planning and wealth management.
"Times change," he said. "This act still mandates prudence. It just expands what that means in today's economic environment. I don't think the door is open for abuse."
E-mail Sue Asci at firstname.lastname@example.org.