2014 EXEMPT ORGANIZATIONS
CONFERENCE
The Charities Bureau, the Nonprofit
Revitalization Act and Compliance
Issues for New York’s Not‐For‐Profits
Laura A. Sprague, Assistant Attorney General
Charities Bureau, Enforcement Section
Office of Attorney General Eric Schneiderman
A little about us . . .
• Charities Bureau for NY Attorney General Eric Schneiderman
• Regulation and Support of New York’s Non‐Profit sector‐1.2 million
employees, 80,000 registered organizations
“
OUR JOB AS A REGULATOR ISN’T
JUST TO GO OUT AND CATCH BAD
GUYS, IT’S ALSO TO HELP THE
GOOD GUYS CONDUCT THEIR
BUSINESS EFFICIENTLY AND
EFFECTIVELY.”
New York State Attorney General
CORE CHARITY RULES‐CONFLICTS OF
INTEREST
• Charities Bureau‐"any situation in which a director or officer’s personal
interests or loyalties could, or could be seen to, prevent them from making
a decision only in the best interests of the charity". (not just financial)
• IRS 990 – are conflicts of interest requirements reported in Part VI?
Consistently enforced? Described in Schedule O?
• Study by the Urban Institute’s Center on Nonprofits and Philanthropy of
more than 5,100 nonprofits from across the nation found that more than
twenty percent of nonprofits surveyed acknowledged engaging in financial
transactions with board members in the preceding two years. The bigger
the charity, the more likely it is that the charity engaged in such self‐
dealing transactions.
FRANCINE OSTROWER, NONPROFIT GOVERNANCE IN THE UNITED STATES:
FINDINGS ON PERFORMANCE AND ACCOUNTABILITY FROM THE FIRST
NATIONAL REPRESENTATIVE STUDY (2007) 8‐9. (cited in Reconciling Nonprofit
Self‐Dealing Rules, unpublished 2013 paper by Prof. Ellen Aprill)
CONCERNS ABOUT BOARDS
•
Do Board members know what their legal
responsibilities are?
•
If you explain their responsibilities so they
understand, will they quit?
•
Does the Board as a whole have the skill set
necessary to oversee the organization?
•
If they exercise their responsibilities, will the
Executive Director tell them to stop?
CONCERNS ABOUT VOLUNTEERS
•
Background and credential checks
•
Oversight and supervision
•
Freelance fundraising (and keeping)
•
Whistleblower notice and information
Risk Assessment and Amelioration
•
Risk assessments/bad outcomes‐sector data
–
Quality of data: untimely filing of 990s, poor reporting
to regulatory authority
–
Data analysis by:
• Sector (public charter schools, private residential colleges,
hospitals, historic house museums)
• bond ratings
• Finances‐ratios, reserves, insurance, fiscal plan
• Internal controls, compliance weaknesses‐management
letters
• Board issues‐meetings, records, turnovers
• CFO, compliance officer, auditor changes
• High percentage of income to fundraisers
NY CHARITIES BUREAU POWERS
• Section 112(a) of the Not‐for‐Profit Corporation Law:
(7)“to enforce any right given under this Chapter to
members, a director, or an officer of a charitable
corporation. The Attorney General shall have the same status
as such members, director, or officer.
(10)“to enjoin, void, or rescind any related party
transaction, or seek additional damages or remedies”
• Section 112(b):
(6) “take proof and issue subpoenas”
NY CHARITIES BUREAU POWERS
•
Section 175(2) of Executive Law:
…the Attorney General may bring an action or special
proceeding in the supreme court, in the name and in behalf of the
people of the state of New York, against a charitable
organization and any other persons acting for it or in its behalf to
enjoin such organization and/or persons from continuing the
solicitation or collection of funds or property or engaging therein
or doing any acts in furtherance thereof, and to cancel any
registration statement previously filed with the attorney general
pursuant to this article and for an order awarding restitution and
damages, penalties and costs; and removing any director or other
person responsible for the violation of this article; dissolving a
corporation and other relief . . .
EVERY NONPROFIT PROVIDER MUST
COMPLY WITH NOT‐FOR‐PROFIT
CORPORATION LAW AND NPRA
•
1) Corporation filed with the Secretary of State (DOS‐
form 511‐f has been changed for NPRA) ‐ no new filing
required if previously filed
•
2) Corporation registered with the AG Charities Bureau
(CHAR 410) (no new filing required unless registration
cancelled or suspended)
http://www.charitiesnys.com/pdfs/char410.pdf
•
3) Corporation timely files annual financial statements
and IRS 990s with the Charities Bureau (CHAR 500)
http://www.charitiesnys.com/pdfs/CHAR500‐13‐
fillable.pdf
OBLIGATIONS OF DIRECTORS UNDER
NPRA
•
Disclosure of Conflicts of Interest to the organization prior to election (and
thereafter)
• Any director with an interest in a “related party transaction” must disclose
in good faith the material facts of the interest to the board or authorized
committee;
• No director with an interest in a related‐party transaction (including
compensation) may be present at or participate in deliberation or voting
on it. (The board or committee may request that the person provide
information or answer questions prior to the deliberations or voting).
• No director may be involved in related party transaction in which the
director has an interest (not just Board actions)
•
Compare with IRS 990: Did the organization have a written conflict of
interest policy? (Section B, Page 6)
• Compare with IRS 990: Did the organization regularly and consistently
monitor and enforce compliance with the policy? If “Yes,” describe in
OBLIGATIONS OF DIRECTORS UNDER
NPRA (conflicts of interest)
• each director must submit to the secretary at time of election, and
annually thereafter a signed written statement identifying, to the
best of the director’s knowledge,
1) any entity of which the director is an officer, director,
trustee, member, owner or employee, with which the
organization has a relationship and
(2) any transaction in which the organization is a participant
and in which the director might have a conflicting interest.
• The secretary must provide copies of all such statements to the
chair of the Audit Committee or, if none, to the chair of the Board.
• The bylaws should reflect this policy, and Schedule O of the IRS 990
should reflect the policy and the bylaw
OBLIGATIONS OF DIRECTORS: Failure to
Exercise Oversight on Violations of Law
• the facts support a reasonable assumption that there was a
"sustained and systematic failure of the board to exercise
oversight," in this case intentional in that the directors knew of the
violations of law, took no steps in an effort to prevent or remedy
the situation, and that failure to take any action for such an
inordinate amount of time resulted in substantial corporate losses,
• In re ABBOTT LABORATORIES DERIVATIVE SHAREHOLDERS
LITIGATION 325 F.3d 795 (2003)
• IRS 990‐Has the organization provided a complete copy of this Form
990 to all members of its governing body before filing the
form?(Part B, Page 6)
• IRS 990‐Describe in Schedule O the process, if any, used by the
organization to review this Form 990.(Part B, Page 6)
• Watch out for SALY (same as last year)
Obligations of officers and “key
employees” under NPRA
• No employee may serve as Chair or hold any other office with
similar responsibilities
• No employee may serve on Audit Committee
• “Key employees” must disclose conflicts and interests in “related
party transactions”
• Any officer or key employee with an interest in a related party
transaction must disclose in good faith the material facts of the
interest to the board or authorized committee;
• No officer or employee with an interest in a related‐party
transaction may be present at or participate in deliberation or
voting on it. (The board or committee may request that the person
provide information or answer questions prior to the deliberations
or voting).
• No officer or key employee may be present or participate in board
deliberation or voting on their compensation.
STRUCTURE OF BOARDS UNDER NPRA
•
Formal conflict of interest policy in bylaws consistent with
statutory requirements
•
Formal whistleblower policy consistent with requirements
(see also element 8 of the OMIG regulation at 18 NYCRR
521) IRS 990‐”Did the organization have a written
whistleblower policy?”
•
Independent Audit Committee (no member is employee of
organization)
•
Independent Chair
•
Conflicts of interest or whistleblower deliberations and
determinations must be made by a committee (such as an
audit committee) or the board, consisting only of
“independent directors”
9) AUDIT COMMITTEE DUTIES(if
revenue meets test)
•
Review with the auditor the scope and planning of the
audit prior to its commencement;
•
Upon completion of the audit, discuss with the auditor
any identified material risks and weaknesses in internal
controls, any restrictions on the scope of the auditor’s
activities or access to information, any significant
disagreements between the auditor and management,
and the adequacy of the corporation’s accounting and
financial reporting processes;
•
Annually consider the performance and independence
of the auditor; and
•
Report to the board
DUTIES OF BOARD (CONFLICTS
TRANSACTIONS)
• In any transaction involving a New York charitable nonprofit
corporation and in which a “related party” has a “substantial
financial interest” the board or an authorized committee of the
board must:
• Prior to entering into the transaction, consider alternative
transactions to the extent available;
• Approve the transaction by not less than a majority vote of the
directors or committee members present at the meeting; and
•
Contemporaneously document in writing the basis for the board
or authorized committee’s approval, including its consideration of
any alternative transactions.
•
If the organization engages in a transaction in violation of these
requirements, the Attorney General is empowered to unwind the
transaction.
