New York Law Puts Spotlight Back on Nonprofit Governance

New York recently enacted the Nonprofit Revitalization Act, which affects not only New York nonprofits, but nonprofits formed in other states, including Colorado, which fundraise in New York. In the wake of Sarbanes-Oxley (SOX), which became law in 2002, there was much discussion about whether the governance principles of SOX, which apply mostly to public companies, should also apply to nonprofit organizations. This started a movement in which many states considered adopting “mini-Sarbanes” legislation to beef up the governance practices of nonprofits operating within their boundaries. The most notable, and far-reaching, was the Nonprofit Integrity Act, adopted in California in 2004. Since then, other states substantially scaled back similar efforts or tabled them entirely … until now. Nonprofits that fundraise in New York will want to become familiar with the new law as it pertains to them. For those that don’t, pay attention … other states may follow the leads of New York and California.

There are two main aspects to the New York law: (1) stepping up (though in some cases, becoming more practicable about) the regulatory requirements around financials, conflicts and other governance; and (2) simplifying and updating some of the process requirements. Importantly, the section relating to audits and financial reporting applies not only to nonprofits incorporated in New York, but also to any nonprofit required to register in New York for charitable solicitation or fundraising.

Increased Regulation and Oversight

Requirements triggered by charitable solicitation. Probably the most significant changes, from the perspective of a non-New York entity, are the requirements related to audits and financial reporting, which apply to both New York nonprofits and nonprofits required to register in New York for charitable solicitations purposes.
All organizations subject to charitable solicitations registration in New York with gross revenues over $500,000 must now have a designated audit committee comprised of independent directors responsible for retaining an independent auditor and reviewing the results of the audit (alternatively, independent board members can serve this role in lieu of a designated audit committee).

However, the existing thresholds that trigger different levels of financial reporting to the state have been increased, meaning potentially fewer organizations will be subject to the higher-levels of reporting. Smaller organizations (under $250,000) may file unaudited financial statements signed by an officer under penalty of perjury. Organizations with gross revenues between $250,000 and $500,000 must file financial reports accompanied by a CPA’s review report. And organizations with gross revenues over $500,000 must file financial statements along with a CPA audit report, with an opinion that the financial statement and balance sheet fairly present the financial operations of the organization. These thresholds will increase in 2017 and again in 2021, as will the gross revenue amount that triggers the audit committee requirement discussed above.

Again, while this aspect of reporting is not new (apart from raising the thresholds), the law also now allows the AG (if unsatisfied with a review report) to require a full audit.

Requirements for New York organizations only. In addition to the requirements discussed above, the legislation also includes a number of regulatory requirements that apply only to New York nonprofit corporations and wholly charitable trusts:

  • Whistleblower policies are now mandatory for every New York nonprofit with 20 or more employees and annual revenue over $1 million.
  • Conflict of interest policies are now mandatory for all New York nonprofits. The policy must cover directors, trustees, officers and key employees, and must include (1) a definition of a conflict; (2) procedures for disclosure of a conflict to the audit committee or, if no audit committee exists, to the board; (3) a requirement that conflicted persons not be present or participate in any meeting on the matter giving rise to the conflict; (4) a prohibition against any attempt by a conflicted person to  influence the deliberation or voting on the conflict matter; (5) a requirement that the existence and resolution of the conflict be documented (including meeting minutes); and (6) procedures for addressing and disclosing related party transactions. In addition, directors and trustees need to complete and sign an annual disclosure form. We have highlighted in bold the requirements that, in our experience, we often find missing in conflict of interest policies.
  • Restrictions on related party transactions are tightened. Such transactions are generally prohibited unless the board or trustees determine it is fair, reasonable and in the organization’s best interest. For charitable organizations contemplating a related party transaction, the board (or trustees or authorized committee, as applicable) must (1) consider an alternative transaction (this is something we find is often missing from the approval process); (2) approve the transaction by no less than a majority vote of all the directors present at the meeting; and (3) contemporaneously document the basis for its approval. Any director with an interest in a related party transaction must disclose the facts in good faith, and refrain from participating in deliberations or voting related to conflict matters (though they may be present at the meeting). In addition, the law adds a provision allowing the AG to bring an action to enjoin, void or rescind a related-party transaction that is not reasonable and in the best interests of the nonprofit at the time of approval.
  • An employee serving in a dual role as chair of the board, or in an officer position with similar responsibilities, is now prohibited. This is a major statement by New York about these types of conflicts.

Simplification and Updates

  • Fax and email is expressly allowed for notice of board and member meetings, waivers of notice, entering into unanimous written consents (though not for other voting purposes), and for member proxy designations. Also, directors can participate in meetings by video conference, Skype or other forms of video communication.
  • Letter types of nonprofits have been eliminated. This was an unusual type of law unique to New York, that assigned nonprofits to A, B, C or D status. Now, there will just be charitable (essentially, the definition now mimics that of 501(c(3) and non-charitable nonprofits (the latter is mainly membership organizations formed for particular purposes such as political or fraternal).
  • A one-step process is now in place for significant corporate events like mergers. Before it had to be approved by AG and court; now it just needs AG approval (though nonprofits would have the right to seek court approval).
  • Two-thirds approval is no longer required for non-substantial real estate transactions by smaller nonprofits; instead, majority approval is allowed.
  • The requirement to provide residential addresses of board members has been removed.

It remains to be seen whether the New York law will trigger another wave of state developments around nonprofit governance. With fundraising scandals continuing to make headlines, it is possible that other states already have changes in the works—Florida, for example, is considering an overhaul to increase transparency and oversight. It is certainly worth keeping an eye on for all nonprofits.

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