Nonprofit Law Overhaul Changes the Landscape for N.Y. Charities
In late June 2013, the New York state legislature passed the Nonprofit Revitalization Act of 2013 (NRA), which marks the first overhaul of New York's charities laws in more than 40 years. The legislation grew out of the Feb. 16, 2012 report to Attorney General Eric Schneiderman by the Leadership Committee for Nonprofit Revitalization, a blue-ribbon panel appointed by the attorney general. The Revitalization Act encompasses many of the committee's recommended improvements to update statutory provisions applicable to nonprofits and charitable trusts.
Attorneys who advise either officers and directors of charities or those who serve on boards of nonprofits should take note of this important piece of legislation. The changes will affect virtually every nonprofit corporation and wholly charitable trust in New York state that are governed under Not-for-Profit Corporation Law (NFPCL) and the Estates, Powers and Trusts Law (EPTL). The bill is awaiting action by Gov. Andrew M. Cuomo and, if enacted, would take effect on July 1, 2014.
This article examines the key provisions of the NRA that address governance issues; namely, audit oversight, related-party transactions, conflict of interest policy, whistleblower policy, authorizations of real property transactions and approvals of substantial transactions.
The bill was introduced in the Senate by Sen. Michael Ranzenhofer and in the Assembly by Assemblyman James F. Brennan, at the request of the Department of Law. As stated in the Sponsor's Memorandum in Support of the legislation, the purpose of the bill is "to reduce unnecessary and outdated burdens on nonprofits and to enhance nonprofit governance and oversight to prevent fraud and improve public trust." In its Justification Section, the Sponsor's Memorandum explains:
[T]he success of the nonprofit sector depends on maintaining the public's trust. This requires that boards provide effective oversight over the charitable funds entrusted to them, and that the Attorney General have the necessary tools to protect charities and donors from fraud and abuse. This bill strengthens New York law to enhance governance and accountability by setting forth clearer expectations of board duties in key areas, such as providing financial oversight. It also includes new provisions to limit and, when necessary, remedy self-dealing.
Among other things, the legislation eliminates the current statutory classification of nonprofits into four types: A, B, C and D and replaces them with two categories, charitable corporations and non-charitable corporations. In addition, the legislation would raise the dollar thresholds for obtaining independently certified financial statements and submitting annual charitable reports to the attorney general. In several places the legislation includes references to a "key employee." The term is defined in proposed subdivision 25 of NFPCL §102 as having the same meaning as in Internal Revenue Code §4958 regarding intermediate sanctions.
Every charitable corporation and charitable trust with revenue exceeding $500,000 registered to solicit charitable contributions in New York must file an independent certified public accountant audit report with the attorney general. The NRA requires those institutions to designate an audit committee of the board, consisting of at least three independent directors, for the purposes of overseeing the accountant and financial reporting processes of the corporation and the independent certified public accountant's audit of the corporation's financial statements. The corporation's entire board may constitute the audit committee, provided that only independent directors are present at and participate in deliberations and voting relating to audit committee matters. The committee must adopt a charter.
The audit committee must, at a minimum, perform the following:
• Retain and evaluate the independent auditor who shall report directly to the audit committee
• Review with the independent auditor the scope and planning of the audit
• Review and discuss with the independent auditor the results of any audit
• Oversee adoption, implementation of and compliance with any conflict of interest policy or whistleblower policy adopted pursuant to the act, if the function is not otherwise performed by another committee of the board comprising solely independent directors.