The Nonprofit Revitalization Act, NY A8072 (the
"Act"), a bill that makes comprehensive updates to the
New York Not-for-Profit Corporation Law, as well as several other
statutes related to nonprofits, recently passed both houses of New
York's legislature unanimously. The Act is awaiting
delivery to the Governor's office, at which time the Governor
would have 10 days to take action or the bill would automatically
become law, provided it is delivered before the end of the
legislative session on December 31, 2013. The Act would be
the first major revision to New York's nonprofit laws in over
40 years. Its provisions apply to nonprofits that are
incorporated in New York, but one significant section –
related to financial audits and financial reporting to the state
– applies to all nonprofits that are registered in
New York for charitable solicitation purposes.
If signed into law, most provisions of the new Act would be
effective on July 1, 2014 (a couple of the provisions noted below
would take effect in 2015, 2017, and 2021). The Act
modernizes aspects of the current laws, including the incorporation
of new technology options for holding meetings and taking
action. The law also imposes standards for executive
compensation and enhanced governance processes such as mandating
that nonprofits of a certain size adopt conflict of interest and
whistleblower policies, and it contains a new definition and
approval process for related-party transactions. In addition,
the law imposes new limitations and prohibitions on certain
governance structures and practices, which may create significant
challenges for particular organizations. Many nonprofits will
find that they need to amend their governance documents, policies,
and procedures – and, in some cases, significantly overhaul
their governance structure – to comply with some of the
detailed requirements of the Act.
The Act is based on recommendations from the Nonprofit
Revitalization Group, convened by New York Attorney General
Schneiderman, which recommended changes to cut red tape and
eliminate outdated procedures to make it easier and more efficient
for nonprofits incorporated in New York to operate. Some
heralded these changes as welcome updates to create greater
transparency in response to growing public mistrust of nonprofit
governance. However, some of these changes may create
practical challenges for many nonprofits that must now
significantly revise their governance and oversight procedures in
response.
Applicability
Generally, the Act only applies to nonprofits incorporated in New
York. One section of the Act, however – relating to
audit committees, related governance procedures, and financial
reporting to the Attorney General – also applies to
nonprofits which must register to conduct charitable solicitations
in New York, regardless of where they are incorporated.
The major provisions of the Act are summarized below.
Elimination of Letter Types
One of the most substantial changes in the Act is the elimination
of classification as Type A, Type B, Type C, and Type D.
Nonprofits will instead now be classified as either
"charitable" or "non-charitable."
Existing organizations do not have to amend their governing
documents to clarify whether the organization is
"charitable" or "non-charitable." The Act
provides that Type B and C entities, as well as Type D entities
formed for a charitable purpose, will be deemed to be
"charitable." Type A and all other Type D entities
will be regarded as non-charitable.
Modernization and Streamlining of Nonprofit Governance
Actions and Communication
- Electronic Mail for Meeting Notice / Waiver of Notice / Unanimous Consent
The Act makes changes to reflect use of modern technology in
governance. Prior to the Act, nonprofits were required to
provide notice of member and director meetings by mail or in
person. The Act now provides that notice, or waiver of
notice, can be given by electronic communication such as
e-mail. The Act also provides that electronic communication
can be used by members to designate a proxy, and by directors and
members to give unanimous written consent in lieu of an in-person
meeting.
- Video Conferencing for Board Meetings
Unless restricted by the corporation's certificate of
incorporation or bylaws, the Act also allows members of the board
to participate in a meeting of the board or any committee thereof
through electronic video screen communication such as Skype, so
long as all board members can hear each other at the same time and
each director can participate in all matters before the
board.
Enhanced Governance Procedures, Policies, and
Prohibitions
- Limitation on Employee Serving as Chair
In an effort to preserve the balance between the board and the
executive staff of nonprofits, the Act contains an express
prohibition on an employee serving as chair of the board or in an
officer position with similar responsibilities. However, it
should be noted that this prohibition would not extend to bona
fide independent contractors. The Act provides that the
board may appoint among its officers a chair or a president, or
both. The prohibition on an employee serving as chair would
presumably not apply to the president in an organization in which
different individuals serve as chair and president.
The provision prohibiting employees serving as a chair has an
effective date of January 1, 2015, one year later than the other
provisions of the Act.
- Compensation Approval
The Act provides that no person who may benefit from a
compensation decision may be present at or otherwise participate in
any board or committee deliberation or vote concerning that
person's compensation, except that the board or committee may
request that the person present information as background or answer
questions at a board or committee meeting prior to the commencement
of deliberations or voting thereon.
- New Definition of "Independent Director"
The Act defines an "independent director" as an
individual who meets all of the following criteria:
- has not been an employee of, or does not have a relative that was a key employee of, the corporation or an affiliate of the corporation in past three years;
- has not received, or does not have a relative that has received, $10,000 or more in direct compensation from the corporation or an affiliate in the last three years (other than expense reimbursement or reasonable compensation as a director);
- is not a current employee of or does not have substantial financial interest in an entity that made or received payments from the corporation or an affiliate of more than $25,000 or 2% of the corporation's gross revenue for property or services (whichever is less) in the last three years; and
- does not have a relative who is a current officer of or has a substantial interest in an entity making or receiving payments of a similar amount to the organization in the past three years.
The Act exempts payments of charitable contributions from the
definition of payments, but does not contain an exemption for
membership dues, which could trigger the "$25,000 or 2%"
definition of independence and should be noted by an organization
whose board consists of employees of member entities (which is
common in trade associations as well as in other types of
nonprofits).
This definition of independence particularly impacts audit
oversight and administration of the organization's
whistleblower and conflict of interest policies, as discussed
below.
- Mandatory Conflict of Interest Policy
The Act requires all nonprofits to adopt a conflict of interest
policy covering directors, officers, and key employees. Some
nonprofits may need to adopt a new conflict of interest policy, or
update their current policy, to meet the new requirements. At
a minimum, this policy must include (1) a definition of
circumstances that constitute a conflict of interest, (2)
procedures for disclosing a conflict to the audit committee or the
board, (3) a requirement that the person with a conflict of
interest not be present at or participate in board or committee
deliberations or voting on the matter giving rise to such conflict,
(4) a prohibition on any attempt by a conflicted person to
influence board deliberations, (5) documentation procedures for
detailing the existence and resolution of the conflict, and (6)
procedures for disclosing and addressing related-party
transactions. The Act provides that, prior to the initial
election of any director, and annually thereafter, directors must
complete, sign, and submit a written statement identifying any
potential conflict, as defined in the Act. The board or
designated audit committee of the board must oversee the adoption,
implementation of, and compliance with any conflict of interest
policy if this function is not otherwise performed by another
committee of the board consisting solely of independent
directors.
- Related-Party Transaction Approval Process
In conjunction with the new conflict of interest policy
requirement, the Act updates the definition of what constitutes a
"related party," defined as (1) any director, officer, or
key employee of the corporation or any affiliate of the
corporation; (2) any relative of any director, officer, or key
employee of the corporation or any affiliate of the corporation; or
(3) any entity in which any individual described in (1) or (2) has
a 35 percent or greater ownership or beneficial interest or, in the
case of a partnership or professional corporation, a direct or
indirect ownership interest in excess of five percent. A
"related-party transaction" is defined 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.
The Act prohibits all corporations from entering into any
related-party transaction unless the transaction is fair,
reasonable, and in the corporation's best
interests. The Act contains additional requirements for
charitable organizations (as opposed to non-charitable
organizations, as defined by the Act) considering such
transactions, including a requirement that the board consider
alternative transactions to the extent available and approve the
transaction by not less than a majority vote of the directors or
committee members present at the meeting.
With regard to enforcement, the Act adds a provision allowing the
New York Attorney General to bring an action to enjoin, void, or
rescind any related-party transaction that is not reasonable
and in the best interests of the corporation at the time such
transaction was approved.
- Mandatory Whistleblower Protection Policy
The Act also mandates that nonprofits with 20 or more employees
and annual revenue in the prior fiscal year in excess of $1,000,000
institute a whistleblower protection policy. The
whistleblower policy must protect from retaliation any director,
officer, employee, or volunteer who in good faith reports an action
or suspected action that is potentially illegal, fraudulent, or in
violation of any adopted policy of the corporation. The
policy must include procedures for reporting violations; a
designated employee, officer, or director tasked with administering
the policy and reporting to the audit committee or other committee
of independent directors or, if there are no such committees, to
the board; and a requirement that the policy is distributed to all
directors, officers, employees, and volunteers.
Required Audit Procedures and Financial
Reporting
- Audit Committee and New Audit Procedures
One of the more significant changes in the Act relates to
financial audits, including audit committees, governance
procedures, and financial reporting to the Attorney General.
The audit provisions apply not just to nonprofits incorporated in
New York, but also to nonprofit organizations incorporated anywhere
that are required to register under New York Executive Law Section
172 – the charitable solicitation registration statute
– due to their charitable solicitation activities in New
York.
The Act requires all organizations subject to registration for
charitable solicitation in New York that are required to file an
independent auditor's report with the Attorney General,
pursuant to Section 172-b of the New York Executive Law (triggered
by receipt of gross revenues above $500,000 in 2014; $750,000 in
2017; and $1,000,000 in 2021, as further explained below), to have
a designated audit committee of the board comprised of independent
directors responsible for retaining an independent auditor and
reviewing the results of the audit. Alternatively, the
delineated tasks must be performed by the independent directors on
the board.
The audit committee of an organization with annual revenues
(presumably meaning gross revenues) in excess of $1,000,000 that is
required to file an independent certified public accountant's
audit report with the Attorney General, pursuant to Section 172-b
of the New York Executive Law, is subject to more extensive duties
relating to the audit, including reviewing the scope and planning
of the audit with the auditor prior to commencement of the audit,
discussing any significant disagreements between the auditor and
management after the audit, and annually considering the
performance and independence of the independent auditor.
The audit committee also is charged with overseeing adoption,
implementation, and compliance with the mandatory conflict of
interest and whistleblower policies.
- Raised Thresholds for Financial Reports
The Act raises the thresholds of revenues for which
organizations conducting charitable solicitations in New York are
required to file certain financial reports with the Attorney
General. These threshold levels will become progressively
higher on July 1, 2014; July 1, 2017; and July 1, 2021,
respectively. Starting on July 1, 2014, organizations with
gross revenues under $250,000 (previously $100,000) may file
unaudited financial statements signed by the chief financial
officer and president, or other authorized officer, under penalties
of perjury. Organizations with gross revenues greater than
$250,000 (previously $100,000) but less than $500,000 (previously
$250,000) must file audited financial reports accompanied by an
independent certified accountant's review report.
Organizations with gross revenues greater than $500,000 (previously
$250,000) must file annual financial statements accompanied by an
independent certified public accountant's audit report with an
opinion that the financial statement and balance sheet fairly
present the financial operations and position of the
organization.
In 2017, these threshold levels are raised so that organizations
with gross revenues under $250,000 will still file unaudited
financial statements, but organizations with gross revenues between
$250,000 and $750,000 must file audited financial statements with
review reports, and organizations with gross revenues over $750,000
must filed certified audit reports. In 2021, the threshold is
increased to allow organizations with gross revenues between
$250,000 and $1,000,000 to file audited financial statements with
review reports and organizations with gross revenues over
$1,000,000 to file certified audit reports.
The requirement to file different types of financial reports is not
new, and the three-step increase in revenue thresholds should
relieve the burdens of filing audited financial statements or
certified audit reports for some smaller nonprofits. However,
the mandatory audit procedures and designated audit committee
functions go well beyond what was previously required under New
York law and are detailed in a nature that goes well beyond that of
other states' requirements in the charitable solicitation
area.
Simplification of Approval Process for Certain
Transactions
- Ability to Seek Consent of Attorney General as Opposed to New York Supreme Court for Certain Corporate Transactions
The Not-for-Profit Corporation Law previously required Type B,
C, and D organizations to engage in a two-step process of 1)
seeking approval of the New York Supreme Court, and 2) providing
notice to the New York Attorney General, prior to engaging in
certain fundamental transactions. The Act now provides a
simplified process for "charitable" entities, whereby the
organization can seek the approval of the Attorney General instead
of initiating a court proceeding for transactions such as
dissolution (sale, lease, exchange, or other disposition of
substantially all assets); merger or consolidation; and change of
purposes. The Attorney General has discretion whether to
grant such action or to require the action to be submitted for the
approval of the New York Supreme Court, and the nonprofit can
appeal a denial by the Attorney General to the New York Supreme
Court. The process for approval of non-charitable entities
remains the same as under current law.
- Notification Instead of Consent to New York Commissioner of Education
The Act also modifies a prior requirement for certain
organizations with an educational purpose as defined by the New
York Education Law (i.e., "colleges, universities, or
other entities providing post-secondary education; nursery,
elementary, secondary or charter schools; libraries, archives, or
museums or historical societies with collections; and public
television and radio shows") to seek the approval of the New
York Commissioner of Education prior to incorporation. Under
the new Act, out of the types of entities listed above, those that
do not have as one of their purposes the operation of a
"school, university, library, museum, or historical
society" no longer have to receive prior approval.
- Lowered Approval Requirements for Real Property Transactions
Previously, the New York Not-for-Profit Corporation Law required
that two-thirds of the entire board approve any purchase of real
property, for organizations with fewer than 21 directors. The
Act lowers this threshold by requiring that only a simple majority
of the board needs to authorize the purchase, sale, lease,
exchange, or other disposition of real property, provided that the
property to be acquired or disposed of does not constitute all, or
substantially all, of the assets of the corporation. If the
property does constitute all, or substantially all, of the
corporation's assets, the approval of two-thirds of the entire
board will continue to be required (unless there are 21 or more
board members, in which case simple majority approval is
sufficient). The Act also allows for the final determination
as to the purchase, sale, lease, exchange, or other disposition of
real property to be delegated to a committee authorized by the
board, provided that the committee report any actions taken to the
board by the next regularly scheduled board meeting.
Other
- New Definition of "Entire Board"
The Act includes a new definition for the term "entire
board" that clears up an ambiguity in the previous definition
regarding the number of directors that must be counted for purposes
of a quorum and board action when board size is provided as a range
in the bylaws. Under the Act's new definition, if the
board size is provided as a range between a minimum and maximum
number, any reference to the "entire board" shall refer
to the number of directors elected as of the most recent
election. Meeting the "entire board" voting
thresholds could be difficult for a board with vacant seats if
there is a set number of directors provided for in the
bylaws.
- Removal of Requirement to Provide Residential Addresses of Board Members
The Act eliminates a provision in the section on membership
access to records that required the corporation to provide the
residential address of board members and officers to members upon
request. Under the Act, a corporation may lawfully comply
with a member request by providing a list of board members and
officers without addresses.
Conclusion
The New York Nonprofit Revitalization Act will modernize the laws
applicable to nonprofits incorporated in New York and enhance
nonprofit governance and oversight. It also will establish
new restrictions and requirements in the governance area that will
require certain nonprofits to make significant – and, in some
cases, challenging – changes to their governance
structure. Notably, the financial audit provisions apply to
all nonprofits required to register to solicit New York residents
for charitable contributions, regardless of their state of
incorporation. Presuming the Act is signed into law –
which most expect it will be – many New York nonprofit
corporations will need to adopt additional policies and procedures,
and should carefully review their governance documents for
compliance with the new law.
- The New York Nonprofit Revitalization Act, as passed by the New York legislature, is available here.
- The New York Nonprofit Revitalization Group Report, on which much of the new law is based, is available here.
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