United States: Public Day Review: Highlights Of The State Charity Regulator 2015 NAAG/NASCO Annual Conference

Last Updated: October 16 2015
Article by Atitaya C. Rok, Carrie Garber Siegrist and Jeffrey S. Tenenbaum

This week in Washington, D.C., the National Association of Attorneys General (NAAG) and the National Association of State Charity Officials (NASCO) convened for their 2015 Annual Conference. The Public Day of the Conference, held this past Monday, provided an opportunity for nonprofit leaders, professional counselors and advisers, and academics to participate in discussions with charity regulators from across the United States about the latest trends and enforcement priorities of state-level charities regulators. The rest of the Conference is only for regulators, but the Public Day provided attendees with the important opportunity to learn from regulators about their recent enforcement efforts and future operations that impact the nation's charities. State regulators are eagerly and actively picking up where the Internal Revenue Service has taken a less active role in the monitoring and regulation of the nation's nonprofits. For nonprofit organizations, it is always important to understand how state laws govern their structure and operations and how the state regulators are enforcing those laws.

The sessions on Monday included informative panel discussions featuring many members of state charity regulators' offices, who explained how their offices function with respect to promoting compliance, educating nonprofit organizations, and the enforcement of regulations; common and uncommon state regulatory issues for nonprofits; growing trends in nonprofit corporate governance; proposed new standards for nonprofit financial statements; the use of audit processes to improve oversight; a report on the updated independent standards available to nonprofit organizations; emerging trends and the use of mobile devices in disaster fundraising; achieving effective collaboration between regulators and nonprofits; the development of a single portal for required charitable registrations; and a lively conversation about the impact and effectiveness of the Charleston Principles (relating to online charitable fundraising and whether and when it triggers state charitable solicitation registration requirements).

Below are some highlights of the NAAG/NASCO Conference Public Day.

Columbia Charities Research Project

The Public Day commenced with a comprehensive explanation of innovative research by the Columbia Law School Attorneys General Charities Law Project and the Urban Institute, to be published shortly. The study explored three areas: 1) the structure and nature of state charity regulators' offices; 2) the jurisdiction and types of charities overseen by regulators; and 3) tools for regulators' execution of oversight. Cindy Lott, who is the Senior Counsel with the Project, and Karin Kunstler-Goldman, who is the Assistant Attorney General in New York, provided an overview of the Project's research methodology and findings.

To conduct the research, the Project analyzed all of the state laws pertaining to the charitable sector in 56 jurisdictions (all 50 states, the District of Columbia, and U.S. territories), an anonymized survey completed by every state attorney general office and other state charity regulators, and telephone interviews with regulators. Data collected for activity since 2008 included office size and structure; staffing; outreach, press, and transparency; funding; data and tracking; and types of enforcement.

The research revealed interesting information that is relevant to nonprofits as they seek to understand how to interact with state charity regulators and the laws that provide the regulators with their jurisdiction. Over one-half of all states house the registry of charities and fundraising professionals in an agency other than the attorney general's office. Calling them "bifurcated jurisdictions," the Project noted the following potential agencies with enforcement power over charities: attorney general, secretary of state, department of agriculture, department of consumer affairs/protection, and department of financial regulation. Identifying states with bifurcated jurisdiction is important for nonprofit organizations to ensure that they are in contact with, and complying with laws that are enforced by, the disparate agencies within the same state.

Since 2008, despite the growth in the number of charities, the staff size in state regulators' offices has remained relatively stable. The regulators exercise authority in a broad variety of areas, including charitable solicitations, corporate registration, registration compliance, conservation easements, transaction review, wills and trusts, board governance, and criminal, among others. In some situations, the attorney general is the only enforcement authority, while in others, only a regulating agency exercises power, or there may be a combination of offices engaged in enforcement. Only 44% of jurisdictions require audited financial statements from charities. The most common areas of enforcement are in fundraising and professional fundraisers, but, in the growing area of social media fundraising, only 70% of the states regulate social media fundraising. The draft research study report is near completion and will be issued later this fall.

Common State Regulatory Issues

With the explosive growth of the number of nonprofit organizations, due in part to the IRS Form 1023-EZ and the availability of online fundraising platforms, state charity regulators are working hard to ensure that organizations are complying with their state legal obligations. Regulators on a panel convened to discuss common issues in their offices noted the lack of proper governance due to absentee boards or role reversal between the board and executive staff; lack of proper internal controls, which often leads to fraud or embezzlement; charitable organizations soliciting contributions without being properly registered; conflict-of-interest transactions between board members and charitable organizations; and incomplete or inaccurate financial reports by charitable organizations.

The regulators urged nonprofits to take advantage of the resources available from state nonprofit associations and the guidance available on the state regulators' websites. They also suggested that representatives of nonprofits contact them with questions to ensure that the organizations are aware of and can achieve compliance with all of the legal and regulatory obligations applicable to them. Increased information sharing helps regulators and nonprofits partner to identify and stop fraudulent activity. Some organizations have been prone to fraud and embezzlement recently, partly because of their desire to stay quiet about the improper activity.

One state, Hawaii, has developed an app through which donors and others may learn on-demand information about charitable organizations that are registered. Hugh Jones, the Supervising Deputy Attorney General of Hawaii, explained that the use of technology has improved Hawaii's ability to effectively regulate the charities operating in the state.

Updated Industry Standards

For many nonprofit organizations, understanding the legal obligations and industry recommended practices is difficult and burdensome when they are focusing their primary efforts on pursuing their nonprofit missions. To lighten the burden, nonprofit associations and independent organizations have developed and shared principles and practices to help guide nonprofits in their operations, maximize their mission-related impact, and minimize their risk of noncompliance. Three such sets of principles were discussed and summarized on a panel titled, "Report on Updated Industries Standards: 2015 Principles of Good Governance; Standards for Excellences; Council on Foundations National Standards."

The Independent Sector's Principles for Good Governance and Ethical Practice, which outline 33 principles of sound practice for charitable organizations and foundations in the areas of legal compliance and public disclosure, effective governance, strong financial oversight, and responsible fundraising, was developed in 2007 and updated in 2015 to reflect changes in the law as well as new circumstances in which charitable organizations and foundations function.

The National Standards for U.S. Community Foundations (National Standards) is an accreditation program that promotes operational effectiveness to foster excellence in community philanthropy. It is administered by the Community Foundation National Standards Board, a Type I supporting organization of the Council on Foundations. The most recent updates, which took effect in January 2015, morphed the former 41 standards into 26 clear and streamlined standards, promoting accountability and setting consistent expectations among community foundations. The resulting accreditation, the National Standards Seal, serves as evidence of credibility and trustworthiness among donors, as well as distinction from entities that provide similar community foundation services.

The Standards for Excellence Institute promotes high standards of ethics and accountability in nonprofit governance, management, and operations. It offers an accreditation program for nonprofit organizations demonstrating that they recognize and abide by the Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector (the Code). The Code, which was recently updated in 2014, consists of 6 Guiding Principles across 27 different topic areas, with specific performance benchmarks that characterize effective, ethical, and accountable organizations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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