What Do You Need to Know About the NY Nonprofit Revitalization Act?
For stewards of nonprofit organizations operating in New York and those who advise them, New York State has updated nonprofit regulations aimed at better governance, which will be effective July 1, 2014. If you think that your nonprofit is exempt because it’s incorporated outside of New York, keep reading – if an organization raises money in New York, it will likely be affected, even if incorporated or based elsewhere
The new law is the first major update of New York State law for not-for-profits since the 1960s. One of the drivers of the new statute was the number of nonprofits that were badly burned in the Madoff Ponzi scheme.
Much of what is contained in the statute is just good fiduciary governance. The goal: less red tape, better governance and oversight for nonprofits, with a focus on avoiding conflicts of interest and self-dealing.
The new law is the result of a unique collaboration the New York Attorney General’s office and stakeholders in the nonprofit world, according to Jason R. Lilien, Chair of the Nonprofit Organizations Practice at Zuckerman Spaeder LLP. Before joining the firm last October, Lilien was Bureau Chief of the New York State Attorney General’s Charities Bureau, overseeing more than 100,000 nonprofits. He led the efforts to draft the law.
The Bill is “balanced and implement-able but will require revision of nonprofit organizations’ governance policies and procedures,” Lilien said at a packed symposium hosted by Zimmerman Spaeder and EisnerAmper recently.
The scandals of the last several years really “impact the nonprofit sector,” Lilien noted. The revamped statute aims to “increase trust” in nonprofit governance. The Attorney General has “new powers, particularly in terms of self-dealing.”
Highlights of the new Law:
- Threshold for independent financial audits was lifted from $250,000 in revenue to $500,000, effective July 1, 2014; to $750,000 in 2017 and $1 million in 2021, removing the cost of that burden from smaller organizations. That’s not to say smaller organizations should not have an independent audit, just that they are not required to by law. However, for a nonprofit that falls below the new threshold, having a regular financial audit could set it apart from small nonprofits that do not.
- The new law strengthens the governance framework for independent Boards, related-party transactions, self-dealing and conflicts of interest. It also addresses independence for Board membership and leadership, and special tasks for and independence for the Audit Committee.
- Board Chair will have to be independent – not the CEO, executive director or employee of the nonprofit.
- Nonprofits must have a conflicts of interest policy covering definition of a conflict, procedures for disclosure to Board or Audit Committee, Recusal from deliberating and voting, and documentation of the existence and resolution of a conflict.
- The Conflict of Interest policy must also prohibit attempts to influence deliberation and voting on a conflict and procedures for disclosing, addressing and documenting related party transactions, according to the briefing.
- Board members must sign a Conflict of Interest disclosure statement prior to joining the Board and annually.
- Boards will oversee related-party transactions, and must determine that a related party transaction is fair, reasonable and in the best interest of the organization. The Board must consider alternative transactions, and document the deliberations and basis for approval in their minutes. Related transactions must be approved by majority vote.
Audit committees with have new, explicit responsibilities, according to EisnerAmper’s Julie Floch, Partner-in-Charge of the firm’s Not-For-Profit Service Group. The “Audit committee is responsible for oversight for whistleblower and conflict of interest policies, if not overseen by another independent committee.”
“The audit committee should be only independent Board members,” Floch advises.
“Financial expertise is not mandated, but it’s a good idea to recruit or train that expertise,” she notes. We are asked all the time for places to find out more about this, she says. Floch suggests checking with the AICPA, ( www.aicpa.org ) which has published an audit committee tool kit, specific to nonprofits.
Nonprofits with annual revenues of over $1 million, and more than 20 employees, must now have a Whistlebower policy, according to Zuckerman Spaeder Partner Mitra Hormozi. The “policy must include provisions for reporting violation of law and corporate policies, and protection and confidentiality, and be administered by person reporting directly to board.” Volunteers must also be aware of the policy, and, Hormozi notes, “the Employee Handbook may not be adequate for this.” She recommends that Boards consider an anonymous tipping capability. While the policy “must protect the whistleblower, frivolous reports can be disciplined,” she adds. Record all whistleblower reports or tips, document action and results.
Many of the governance procedures outlined above under the statute are part the framework of best fiduciary practices for Stewards, as outlined in the Handbook, “Fiduciary Practices for Investment Stewards,” from fi360 and the Centre for Fiduciary Excellence– www.CEFEX.org.
Nonprofit boards can save money and time by certifying that their decision-making framework embraces a fiduciary standard of excellence. This provides donors or grantors confidence that their support is well placed. FiduciaryPath can help, assessing the practices for certification or assisting Boards in developing best practices. –Kathleen M. McBride