Earlier this month, the New York State Society of CPAs' Not-for-Profit Organizations Committee hosted a presentation and webinar on The Charities Bureau and the New York Nonprofit Revitalization Act (the "Act") during which James G. Sheehan, Chief of the Charities Bureau, explained the reasons behind the Act, as well as best practices for implementation. The Charities Bureau, run out of Attorney General Eric Schneiderman's office, provides regulation, guidance and support to the over 80,000 registered nonprofit organizations throughout New York State.
According to Mr. Sheehan, most of the provisions of the Act are essentially to follow the core charity rule: Once assets are devoted to charitable purposes, they may not be diverted to private purposes unless there is a sale or transfer in which the charity receives fair market value and the assets received by the charity are held for similar charitable purposes.
Recently, several prominent New York nonprofits have been to court, resulting in large settlements or even jail time for not following this rule, including Quadriga Art ($24.6M settlement for profiteering and abuses of funds), Metropolitan Council on Jewish Poverty (former president presently serving time for helping to steal more than $9M), Pearson Charitable Foundation ($7.7M settlement for using charitable assets to benefit Pearson Inc.), and the National Arts Club (former president utilized endowment funds for personal gain will pay $950,000 in restitution).
The Act was created and passed by the New York Legislature in June 2013 and signed into law by Governor Cuomo in December 2013. Although most of the provisions of the Act became effective July 2014, there are still many actions nonprofits must do to ensure compliance and good governance.
In the past, if the Charities Bureau was concerned about misuse of funds, it had to show a breach of fiduciary responsibility and harm - a very hard standard to meet. As a result, one of the main changes to the Act is that a breach can now be proven by demonstrating noncompliance with certain new procedural rules, such as:
- Independent audit committee
- Related party transactions requirements
- Loans to officers
- Conflict of interest policy
- Whistleblower policy
- Compensation policy
One of the newly highlighted procedures requires that the Whistleblower policies now pertain to volunteers in addition to directors, officers and employees. Efforts must also be made to ensure that the volunteers are made aware of the policy change, possibly during the early stages of enrolling and performing ackground checks.
Chief Sheehan also explains that enforcement will include increased attention to laws and statutes that existed prior to the Act. For example, an increased stress will be placed on Management Letters issued by auditors and nonprofits' responses to those letters. Too often responses such as "management is aware of" and "currently working on these issues" appear year after year without follow-up or inquiries concerning resolutions.
Although the Act is officially in effect, the Charities Bureau acknowledged that many elements still need to be determined when putting the Act into practice. Questions and concerns are currently being gathered with the purpose of releasing additional answers and support as they become available.
New York Charities Bureau has many guidance documents regarding the Act on their website, which is updated on a regular basis.