Trends & Developments - October 2014 - Not-for-Profit Update: New York’s New Law for Not-for-Profit Entities
October 24, 2014
In an effort to reduce many of the outdated regulatory burdens on New York not-for-profit entities (NPOs), as well as to enhance corporate governance, accountability and oversight of NPOs, in December 2013, Governor Andrew Cuomo signed into law the New York Non-Profit Revitalization Act of 2013 (the Act). The law’s provisions, which require a variety of actions by NPOs – many of which had previously been considered simply to be optional “best practices” – went into effect on July 1, 2014.
The Act has many far-reaching elements, including significant amendments to the New York Not-for-Profit Corporation Law, as well as applications to the New York Estate Powers and Trust Law (which brings charitable trusts under the Act’s jurisdiction as well). The law’s many operational provisions are expected to be beneficial to NPOs and include such modernizations as (i) meetings and communications of the governing board and committees may now take place through e-mails and telefaxes; (ii) meetings of the board and committees may now be conducted through videoconferencing; and (iii) the distinction between an NPO’s standing committees and special committees has been eliminated.
Because of the significance of the Act’s various changes, many NPOs may wish to consult legal counsel to be certain that their governance structures, by-laws, and various policies and procedures are in accordance with the new law. As a starting point, some of the more important “do’s and don’t’s” that an NPO’s governing board and management should consider about the Act are that it:
- eliminates a governing-board approval requirement for ordinary leasing transactions;
- permits a majority-of-committee approval (rather than that of the full governing board) for non-substantial property transactions;
- prohibits an employee from serving as chair of the governing board (delayed until January 1, 2016);
- mandates a requirement for conflict-of-interests policies (to be affirmed annually);1
- requires a determination by the governing board that related-party transactions are reasonable (with enhanced procedures and documentation required in certain circumstances), and likewise prohibits a related party from being present during governing-board deliberations regarding potential transactions with that party;2
- requires that parties for whom compensation is being discussed not be present during the deliberations for such compensation arrangements; and
- mandates a whistleblower policy3 for entities with 20 or more employees and annual revenue in excess of $1,000,000 (though the applicability of this provision to all entities has been open to some differences in interpretation among knowledgeable parties).
With regard to the Act’s extensive requirements for mandatory audit oversight, for those not-for-profit entities (or “charities,” as described in the law) that are required to register to conduct charitable solicitations from the public – and submit annual reports and financial statements with the New York Attorney General – there are the following obligations:
- entities must have an audit of financial statements if annual revenues exceed $500,000 (with a phase-in to $1,000,000 by 2021);
- an audit committee has to be established, the voting members of which must consist solely of “independent” governing-board members (or the independent directors/trustees of the full governing board may instead function as the audit committee), with the following responsibilities:
- overseeing the audit process,
- communicating with the independent auditors,
- determining the retention of the independent auditors, and
- implementing and overseeing governance policies; and
- for organizations with greater than $1,000,000 in annual revenue, the audit committee is also responsible for:
- reviewing the scope and planning of the audit with the independent auditors,
- discussing the audit findings, including internal-control matters, with the independent auditors, and
- on an annual basis, assessing the performance and independence of the auditors.
However, it is important to note that those entities that are not required to register under Section 7-A of the New York Executive Law, which governs the solicitation and collection of funds for charitable purposes, are also exempted from the above audit-related requirements of the Act. This category of exempt organizations includes, among others, (i) most types of religious organizations, (ii) educational institutions that confine their contribution-solicitations to their student bodies and their families, alumni, faculty and trustees; and (iii) various membership organizations that confine their requests for funds to only their members.
As with any new legislation, there are varying interpretations of certain parts of the Act, which are expected to be clarified as the Act’s requirements are implemented and assessed.
1 Akin to the related-party provision described below, the Act requires that all NPOs adopt a conflict-of-interests policy. For those NPOs that already had such policies, their versions will be acceptable as long as they are substantially consistent with the Act’s requirements, which include: (i) a definition of a conflict-of-interests; (ii) procedures to disclose conflicts to the audit committee or governing board; (iii) a requirement that the conflicted party not participate in, or otherwise influence, the NPO’s deliberations regarding the interested-party’s action or transactions; and (iv) a requirement that the conflict be documented in the NPO’s records.
Moreover, the policy must be created (or affirmed) by the audit committee or by the governing board, and each trustee/director and officer of the NPO must disclose, on an annual basis, his or her status with regard to conflicts.
2 A “related party” to the NPO may be defined as (i) any of the NPO’s trustees/directors, officers, or key employees (e.g., those employees who exercise “substantial influence” over the NPO’s affairs, regardless of professional title or job description); (ii) relatives of such individuals; (iii) any corporation in which that person has a 35% or more ownership, or (iv) any partnership or professional corporation in which that person has a 5% or greater interest. Such related party must (i) disclose in good faith to the NPO his or her material interest in any interested action or transaction with the NPO that provides benefit to the related party, and (ii) be ineligible to participate in the NPO’s deliberations regarding the interested action or transaction.
Likewise, the governing board of the NPO, when considering the action or transaction, must (i) consider alternative transactions, (ii) approve the action or transaction with a majority vote of those present at the board meeting, and (iii) document the basis for its approval of the related-party action or transaction.
3 NPOs that meet the Act’s size criteria are required to maintain or adopt a whistleblower policy, thus protecting from retaliation any officer or employee who reports an action with the NPO that he or she, in good faith, believes to be illegal, fraudulent, or in conflict with any NPO policy. The audit committee or the governing board must adopt and implement the policy, which must include the following elements: (i) a mechanism for reporting violations while maintaining employee confidentiality; (ii) the appointment of an individual to investigate the allegation; and (iii) a requirement that the policy be distributed to all of the NPO’s trustees/directors, officers, employees, and volunteers.
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