Nonprofit Revitalization Act

“It has been said that Democracy is the worst of form of government except all the others that have been tried.” —          Winston Churchill

Well, I did it. I took one for my team of nonprofit colleagues and board members. That is, I read every word of the 67 pages that constitutes the Nonprofit Revitalization Act of 2013. It was recently passed by the New York State Senate and Assembly and has been sent to Gov. Cuomo for his likely signature.

For those of you who have never had the pleasure of reading a legislative bill, it is a mind-numbing experience. The proposed changes are intended to both revitalize and reform the nonprofit sector in the state and have actually been considered for the last five to seven years. The origin of many of these reform initiatives dates back to Eliot Spitzer when he was attorney general, prior to his ill-fated tenure as New York Governor.

The reform initiatives were reintroduced in early 2012 by our current Attorney General Eric Schneiderman.

This bill, when signed by Gov. Cuomo, continues the government regulators’ focus on the following areas of nonprofit management and operations:

 

§ Effective board governance and oversight

§ Conflict-of-interest disclosures and due process

§ Related party transactions conducted at fair market value

§ Accountability and transparency by adopting a whistleblower policy

§ Mergers and asset transfers

 

In many cases, you will find the requirements of the act to have already been adopted by your nonprofit organization. However, since the requirements of the act are very specific, every nonprofit should conduct a “gap analysis” to identify what policy and procedure changes need to occur within your organization in order to comply with these new requirements.

The following represents my latest top 10 list of actions / requirements that should be considered by your organization. Keep in mind that there may be other requirements in the legislation’s 67 pages that you should evaluate since they may affect your specific organization. However, the following list addresses those requirements that affect virtually all tax-exempt organizations.

1.  Effective date — Assuming signature by Gov. Cuomo, the effective date of the act’s requirements is July 1, 2014. However, many of the requirements described below can and should be implemented prior to that date.

2.  Corporate type of organization — In an effort to both simplify and clarify New York State Nonprofit Corporation Law (NPCL), the act eliminates the segregation of nonprofits as Type A, B, C, or D corporations. All nonprofit corporations will now fall under statutory definitions of either a “Charitable Corporation” or a “Non-charitable Corporation.” Each organization should verify that its corporate type under previous NPCL translates appropriately to these new definitions. Generally speaking, Type A corporations are Non-charitable. Type B or C corporations are Charitable. Type D corporations can be either classification based on the organization’s original purpose. Fortunately, no additional filings with New York State are required in this area since existing nonprofits will be grandfathered.

3. Whistleblower policy — If you are a health- and human-services provider, you should already have a whistleblower policy. The act requires all nonprofit corporations with more than 20 employees and annual revenue in excess of $1 million to adopt a whistleblower policy. Organizations with existing policies will most likely not have to make changes. However, all nonprofits should adopt a whistleblower policy well in advance of the act’s effective date. Jan. 1, 2014, would be a reasonable target.

4. Audit oversight / board governance — From my perspective, this section of the act adopts requirements for independent auditors and the nonprofit boards that are long overdue. In a nutshell, the act requires the nonprofit board or its designated audit committee (comprised of independent directors) to do the following:

 

§ Review directly with the independent auditor the audit scope and planning prior to the commencement of the audit.

§ At audit completion, meet with the independent auditor to review all required audit reports, including internal control recommendations, required communications, and the audited financial statements.

§ An annual requirement to consider the performance and independence of the independent auditor.

 

If the requirements above are completed by the audit committee, periodic reports of the audit committee must be made to the full board.

 

5. Merger approvals by the Attorney General — The act significantly expands the role of the New York State attorney general regarding:

 

§ Approvals for mergers of nonprofit organizations.

§ Approvals to sell, lease, or otherwise dispose of all, or substantially all, of a corporation’s assets.

§ Specific reporting requirements are detailed in the act. The attorney general may refer the final approval in certain circumstances to the Supreme Court of the applicable judicial district.

 

6. New definition of “entire board” — In order to address the issue of significant decisions being made by a small group of eligible voting board members, the act provides a definition for the “entire board.” The “entire board” is defined as the total number of directors entitled to a vote if the organization had no board vacancies. The bylaws control this number if a fixed number of directors is specified. In the event of a bylaw range for directors, the “entire board” is the number of directors elected at the most recently held election of directors.

This particular provision relates directly to significant transactions involving the purchase or sale of significant assets of the organization. Specifically, in these applicable situations, an affirmative vote of two-thirds of the entire board is required.

 

7. Conflicts of interest — The act requires every nonprofit corporation to adopt a Conflict of Interest policy that is intended to ensure that its directors, officers, and key employees act in the corporation’s best interest. As stated previously, many nonprofits have an existing policy in this area. If you need a template for either conflict of interest or whistleblower policies, please email me at garchibald@bonadio.com.

 

8. Electronic technology updates — The act recognizes that a significant amount of corporate business activity is completed electronically. However, existing regulations are outdated in this area. The act provides the following guidance:

 

§ A continued prohibition on board voting by email or fax transmission.

§ Proxies may now be submitted by board members via email, which authorizes another board member in attendance to vote on his/her behalf.

§ Notice provisions for membership meetings can be provided by either fax or email.

 

9. New York Supreme Court Personal Jurisdiction Provision — All directors, officers, key employees, or agents of the nonprofit organization will be subject to the personal jurisdiction of the Supreme Court of New York related to attorney general proceedings. This particular provision appears to be directed at addressing issues regarding directors, officers, or employees who are not New York State residents. However, depending upon interpretation of this provision, recruitment of volunteer board members may be more difficult.

 

10. Related-Party transactions and independent directors — The act defines a related-party transaction as any transaction, agreement, or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant.

 

[“Independent Director” is defined as an individual who has not, within the last three years, been an employee of the corporation or an affiliate, and does not have a relative who was a key employee within the last three years. Additional details regarding the independent director definition are specified in the act.

Every organization should identify whether individual directors are independent or not under the definition provided in the Act. In addition, all related party transactions should be thoroughly documented at fair-market value, with no involvement of the related party in the decision-making process.

The act has a number of additional references regarding requirements and roles that must be fulfilled by independent directors. For example, the audit committee must consist of only independent directors.]

 

In my view, the requirements of this act should be viewed by nonprofit organizations as “best practices” that should be adopted and implemented as soon as possible. While signature by Gov. Cuomo is expected, your organization must recognize that these requirements originated with the New York State attorney general. Therefore, whether legally adopted or not, the requirements clearly set the standard of expectation for all New York nonprofit organizations.

 

Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at (585) 381-1000, or via email at garchibald@bonadio.com