NYS Regulatory Alert

Craig, Fitzsimmons & Michaels, LLP would like to inform you of some recent developments in the legislation for non-profit organizations.  New York State has successfully passed The New York Non-Profit Revitalization Act of 2013.  This non-profit law becomes effective July 1, 2014 and will likely affect every charitable organization in New York State.  In essence this Act is intended to increase efficiency of administrative tasks, update New York non-profit law, and establish stronger and more extensive corporate governance requirements. As a result many of NY’s not-for-profit organizations will have to make a number of changes in order to comply with the newly mandated statutory requirements. Please read the following regulatory alert for more in-depth details on the Act and as always feel free to contact Craig, Fitzsimmons & Michaels, LLP should you have any questions relating to this alert.

REGULATORY ALERT:
NYS Passes Sweeping Changes to its Non-Profit Law and Regulation

In June of 2013 the New York State legislature passed The New York Non-Profit Revitalization Act of 2013 (the “Act”). On December 20, 2013 the Act was signed and made law by Governor Andrew Cuomo. The Act is the most comprehensive reform to the New York Not-For-Profit Corporation Law (the “NPCL”) since the 1960’s.  This new law and the regulations that accompany it become effective on July 1, 2014.

Changes to the non-profit law have been suggested since Governor Cuomo was the state’s attorney general.  However, momentum for these changes to the New York not-for-profit law really began to gain traction under the initiative of Attorney General Eric Schneiderman.  Back in 2011, AG Schneiderman convened a Leadership Committee for Non-Profit Revitalization.  The group was comprised of the leaders of the non-profit sector from across New York State. The Committee was charged with presenting a series of recommendations to the Attorney General to reduce the regulatory burdens and administrative costs of the state’s non-profits as well as strengthening transparency and accountability. The suggestions of this task force provided the framework for the Act.

The Act has three general objectives: (1) to reduce or eliminate unnecessary administrative and procedural burdens, (2) to modernize the New York non-profit law, and (3) to strengthen corporate governance. Several of these changes may require non-profits to make significant governance and oversight changes to properly align with the new law. Highlights of the changes under the Act are summarized below.

  • The Act provides for a more common-sense corporate governance, such as permitting notices and consents of covered entities to be sent via e-mail and fax. The Act allows for the modernization of board procedure and meetings allowing participation by directors who are unable to attend meetings in person. For example, under the Act, non-profits may now use electronic mail to transmit board and membership meeting notices and waivers of notice, and to enter into unanimous written consents. Board members will also be able to participate in meetings by video conference; FaceTime, Skype, or other forms of video communication.
  • New York not-for-profit corporations will no longer be identified as Type A, B, C, or D.  Non-profits will now simply be known as being either “charitable” or “non-charitable.” Non-charitable entities are those membership organizations formed for a specific list of purposes including but not limited to, civic, political, social, fraternal, athletic, professional, and trade or service associations. Charitable organizations are now defined as those entities that provide for charitable, educational, religious, scientific, literary, cultural, and for the prevention of cruelty to children or animals.
  • New York Executive Law requires the submission of reviewed or audited financial statements to the Attorney General for every charitable organization registered or required to be registered to solicit charitable contributions in New York. Prior to 2014, independent accountants were required to attest to financial reports for these non-profits once revenue reached $75,000. The newly adopted Act now raises the gross revenue thresholds for independent review or audit over time. Beginning on July 1, 2014, entities with $250,000 to $500,000 in revenue will be required to obtain an independent accountant’s review report.  Certified audits will only be required for those entities with revenue and support in excess of $500,000. The audit threshold will be raised to $750,000 as of July 1, 2017 and $1 million on July 1, 2021.
  • The Act also adds certain requirements related to the board’s oversight of its independent auditor. The board or audit committee of the board must be comprised of independent directors, who are required to oversee the internal accounting and financial reporting processes. Additionally, the audit committee of a non-profit that has annual gross revenue and support in excess of $1 million will be required to review with its independent auditor the scope of the annual audit prior to its commencement and, upon its completion, discuss any material risks and weaknesses in internal controls identified by the auditor. The purpose of this provision is to ensure that boards are aware of, and respond to, issues and risks identified by its auditors.
  • The new law hopes to improve corporate accountability by addressing abuses and tightening non-profit related-party transaction rules. The Act now requires that the board, or its designated audit committee, oversee the adoption, implementation of, and compliance with a conflict of interest policy. Furthermore, the Act requires that any related party transaction entered into by a not-for-profit: be fair, reasonable and in the non-profit’s best interest and that directors and officers who have a direct or indirect interest in a related-party transaction disclose such interest to the board. Good faith disclosures are required to be made by “key employees.” The Act defines a key employee as any person who is in a position to exercise substantial influence over the affairs of the non-profit and aligns with the “disqualified person” provisions of the excess benefit transactions applicable to public charities and social welfare organizations under Internal Revenue Code section 4958. Under the Act, the board of a charitable organization must consider alternatives to any related-party transactions, approve the transaction upon the vote of at least a majority of the directors and document contemporaneously the basis of the board’s approval. The Act authorizes the attorney general to bring an action, by his or her discretion, to enjoin, void, or rescind any related-party transaction or proposed related-party transaction that is not reasonable or in the best interest of the non-profit at the time the transaction was approved. Alternatively, the attorney general may seek restitution and removal of directors or officers.

Among other things, the Act requires that a conflict of interest policy include the following:

  1. Definition of what constitutes a conflict of interest;
  2. Procedures for disclosing a conflict of interest to the audit committee or board;
  3. Prohibition against any attempt by the person with the conflict of interest to influence    improperly the deliberation or voting on the matter giving rise to such conflict; and
  4. A requirement that the existence and resolution of the conflict be documented in the non-profit’s records, including the minutes of any meeting at which the conflict was discussed or  voted upon.
  5. Before the initial election of any director, and then every year of service thereafter, directors must complete, sign and submit a written disclosure of potential conflicts.
  • Related to this push for greater board oversight, accountability, and transparency, every non-profit with 20 or more employees and annual revenue in excess of $1 million are required to adopt a whistleblower policy. The whistleblower policy must protect directors, officers, employees, and volunteers who report suspected improper conduct from retaliation. Among other things, the whistleblower policy must set forth a requirement that the policy is properly administered and that there are procedures in place for reporting suspected violations, including the preservation of the confidentiality of reported information.
  • To help ease administrative burdens and streamline the effort required when a NPO takes major corporate actions, such as changing its certificate of incorporation, undergoing a corporate merger, the sale of all or substantially all its assets, or dissolution may now be approved by the Attorney General, in lieu of obtaining a Supreme Court order.
  • The new statues provide specific guidance for small (under 21) and large boards when considering real-property transactions.  Specifically, the Act clarifies when real-property transactions (sales, leases, exchanges) must be approved by a majority of the board, and those transactions that only require the approval of a committee thereof.   In short, when a real property transaction constitutes all, or substantially all, of the assets of the corporation, greater board oversight and approval is required.
  • Any person, by becoming a director, officer, key employee, or agent of a not-for-profit corporation is subject to personal jurisdiction of the New York Supreme Court.
  • No employee of a not-for-profit corporation, including its CEO, may serve as the chair of the corporation’s board or hold any other title with similar responsibilities.
  • The Act allows non-profits to reasonably compensate their executives. However, no person whose compensation is being determined during a meeting may be present at or otherwise participate in any deliberation or vote on that person’s compensation.
  • The Act provides a definition of an “independent director” as a director who has not been an employee of, or does not have a relative who was a key employee of, the non-profit or an affiliate of the non-profit in the past three years; has not received, or does not have a relative who has received, $10,000 or more in direct compensation from the non-profit or an affiliate in the past three years (other than expense reimbursement or reasonable compensation as a director); and is not a current employee of, or does not have a substantial financial interest in, any entity that has made payments to, or received payments from, the non-profit or an affiliate of the non-profit for property or services in an amount that exceeds the lesser of $25,000 or 2 percent of such entity’s consolidated gross income in the past three years.

The recent changes to New York’s non-profit law should serve to reduce unnecessary and costly burdens on the non-profit sector. The adoption of this Act signals a shift in New York’s not-for-profit regulatory environment and shows a commitment to reducing redundancies throughout the system that waste non-profit resources. These regulatory changes indicate a strong desire to make New York more welcoming for non-profits that incorporate or transact business in New York by setting forth clearer expectations and more appropriately articulate the responsibilities of non-profit boards to effectively and properly govern not-for-profit organizations.   This means that many non-profits will be required to adopt additional policies and procedures to appropriately implement the new statutory requirements of the Non-Profit Revitalization Act of 2013.

We suggest that you consult with your legal counsel and ask that they evaluate how this applies to your organization.  A copy of the complete text of the law can be found at the NYS legislative website:

http://public.leginfo.state.ny.us/menugetf.cgi

At the main menu enter:

Bill No. A8072
Year 2013
Check: [TEXT]

Should you wish to discuss this Regulatory Alert and its impact on your organization, please feel free to contact Robert Craig at 631.360.1400 Extension 303 or via email rcraig@cfmllp.com.