Skip to main content
A Better Partnership


Jan 2009
January 20, 2009

CHIPs, DIPs and CRIPs:
Legal Considerations for Charitable Investment Pools Involved in the Madoff Scandal

In light of the recent investment scandal involving Bernard Madoff and his alleged ponzi scheme totaling upwards of $50 billion, a number of executives at nonprofit foundations and other charitable organizations find themselves dealing with an area of the law about which they know very little. This is especially true for a number of Jewish and other faith-based charities that have suffered serious losses due to direct or indirect investment exposure to Madoff’s alleged ponzi scheme. In some cases, these losses may be recognized within investment poolings by a group of charitable organizations. The nationwide scandal has highlighted important legal issues that charities and their attorneys, money managers, accountants and other advisers must take into consideration in this context.

Tim Horner, an attorney with national expertise in nonprofit organization securities offerings with Warner Norcross & Judd in Grand Rapids, Mich., has almost two decades of experience in the area of securities finance, lending and investment structuring for charitable organizations.

What follows is a question-and-answer session on the subject of investment poolings by charitable organizations.

Q: What is a CHIP?

A: A Charitable Investment Pool (CHIP) is formed by a group of charitable organizations that pool their funds together for common investment purposes. By investing in common, they achieve economies of scale and the benefits of professional money management that would not be available if they invested on their own.

Q: What is a DIP?

A: A Denominational Investment Pool (DIP) is a CHIP in which the participating organizations are all members of the same religious denomination. For example, a group of congregations, schools, camps, foundations, colleges and other charitable organizations of the same denomination may pool their monies for common investment purposes. Typically, a foundation or other charitable organization affiliated with a particular denominational group will serve as administrator for the DIP to retain professional money managers, to coordinate the investing activities and to provide general oversight for the DIP.

Q: What is a CRIP?

A: A Church Retirement Investment Pool (CRIP) is an unregistered, managed investment pool within a 403(b) plan or other retirement plan of a denominational group or church. CRIPs often function similar to mutual funds and may be available as an investment option for the church plan participants.

Q: Are CHIPs, DIPs and CRIPs required to register under the securities laws?

A: If properly structured, CHIPs DIPs and CRIPs qualify for exemptions from registration under the federal securities laws that generally regulate mutual funds and other investment poolings. They also may qualify for exemptions from registration under state securities laws, although this varies from state to state. Failure to properly structure a pool to qualify for these exemptions could result in a violation of federal securities laws as well as the laws of each state in which an investor participant is located.

Q: If a CHIP, DIP or CRIP qualifies for exemptions from securities registration is it exempt entirely from the securities laws?

A: No. There are no exemptions from state and federal securities laws that prohibit fraud and which mandate that each issuer of securities provide full and fair disclosure of all material information to the investors. As with hedge funds, private investment funds and other exempt poolings, each CHIP, DIP and CRIP must provide full disclosure to the investor participants in the pool. Failure to do so would be considered securities fraud.

Q: What about Pooled Income Funds?

A: A Pooled Income Fund (PIF) is subject to the same securities law requirements as other investment poolings, although in practice the form of disclosure may be somewhat different due to the donation-based character of PIFs. In some cases, a PIF also may be an investor participant in a CHIP or DIP.

Q: What about Charitable Gift Annuities?

A: Charitable Gift Annuities (CGAs) are general debt obligations of a charity that do not involve an investment pooling. Therefore, they are not subject to the same requirements as CHIPs, DIPs and CRIPs. As debt instruments, however, CGAs are subject to other exemption requirements under state securities laws, which vary from state to state. In addition, CGA-related assets may be invested in common as part of a CHIP or DIP if the applicable securities laws requirements are met. General disclosure requirements and anti-fraud principles of the securities laws also apply.

Q: Who is responsible to make sure the securities laws requirements are met?

A: Those who control the pool are generally responsible for ensuring compliance. One organization typically serves as the trustee or administrator of the pool and there also may be a board of trustees, board of pensions or other board control over the pool. However, it is common for investment authority and responsibility to be delegated to professional money managers, investment advisers and portfolio managers who exercise day-to-day control over the pool or over significant investment portfolios within the pool. "Control persons" may be held responsible under the securities laws if the pool fails to comply with the exemption requirements or fails to fulfill the securities laws disclosure requirements.

Q: What happens in the event of losses in the pool due to Madoff-related investments or for other reasons?

A: Generally, there is no promise of a particular rate of return to pool participants. If the pool suffers losses and the investment risks were fully disclosed, there should be no liability. The analysis changes, however, if the pool failed to comply with the applicable securities laws requirements.

Q: What happens in the event of noncompliance?

A: The SEC and state securities regulatory authorities have civil and criminal enforcement powers in the event of noncompliance. Investor participants may also have the right to rescind their investments and receive interest on the amount invested at a statutory rate. Rescission rates vary from state to state but generally range from about 6 percent to 11 percent. Investor participants also may sue for damages suffered as a result of noncompliance.

Q: How do we ensure compliance?

A: Securities laws are complex. The potentially available exemptions and the disclosure obligations are not well understood by many charitable organizations or their investment advisers and professional money managers. Make sure to speak with a securities law attorney with specialty expertise in working with charitable organizations that utilize investment pools.

For more information, contact Tim Horner by calling 616.752.2180 or by e-mail to

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.



+ -