New York Overhauls Its Nonprofit Laws
Kelley Drye Client Advisory
On December 18, 2013, in the wake of a string of alleged nonprofit scams, New York Governor Andrew Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the “Act”), which, for the first time in more than 40 years, provides major changes to the New York Not-For-Profit Corporation law. The Act is scheduled to take effect on July 1, 2014, and provides new governance rules, more streamlined administrative and procedural filing requirements and expanded state oversight power. This Advisory highlights the most significant provisions of the Act.
Approval Required for Related Party TransactionsUnder the Act, a not-for-profit organization’s governing board is prohibited from entering into a “related party” transaction unless it has determined that the transaction is fair, reasonable and in the organization’s best interests. A “related party” is defined as any director, officer or key employee of the organization or its affiliate, any relative of such individual, and any entity in which such individual has a 35% or greater ownership interest or, in the case of a partnership or professional corporation, a greater than 5% direct or indirect ownership interest. The Act also dictates a review and approval process that a board must undertake before entering into a related party transaction, and specifically empowers the Attorney General to challenge a related party transaction. In the case of willful and intentional misconduct, the Attorney General may impose a penalty on the nonprofit or its directors of twice the improperly obtained benefit, in addition to other statutory remedies.
Executive Compensation Approval ProcessThe Act imposes specific procedural requirements on boards of not-for-profit organizations in their review of executive compensation packages. In particular, the Act restricts persons who may benefit from compensation paid by the not-for-profit organization from participating in any board or committee deliberation or vote concerning the compensation, except to the extent the board or committee requests that they present information or answer questions. Directors who vote for, or concur in, a compensation arrangement without following these procedural requirements may be jointly and severally liable to the organization under existing statutory provisions.
Whistleblower and Conflict of Interest Policy RequirementsUnder the Act, a not-for-profit organization with over $1 million in annual revenues and 20 or more employees must adopt a whistleblower policy to protect from retaliation persons who report suspected improper conduct. The Act also requires every not-for-profit organization to adopt a conflict of interest policy that requires directors, officers and key employees to act in the organization’s best interests. The Act specifies minimum required components of the policy, but acknowledges that a not-for-profit organization may have already adopted a conflict of interest policy under federal, state or local law that may satisfy these requirements. In addition, each director must submit a statement regarding potential conflicts of interest prior to his or her election to the Board and annually thereafter.
Attorney General May Approve Certain Corporate Transactions Without Court InvolvementThe Act allows a not-for-profit organization seeking approval of a merger, a plan of consolidation, or changes in corporate purposes and asset dispositions to go through a one-step process of applying for an approval from the Attorney General, rather than a former more cumbersome two-step process of State Supreme Court approval following Attorney General review. If the Attorney General disapproves the application or concludes that court review is appropriate, then the organization may seek judicial review of the transaction.
Financial Reporting Threshold ChangesThe Act clarifies and increases the revenue thresholds for not-for-profit organizations that must make annual financial reports to the Attorney General:
- If a not-for-profit organization has less than $250,000 in annual gross revenue, it must file unaudited financial statements.
- If a not-for-profit organization has between $250,000 and $500,000 in annual gross revenue, it must file audited financial reports and an independent certified public accountant’s audit report.
- If a not-for-profit organization has greater than $500,000 in annual gross revenue, it must file annual financial statements along with an independent certified public accountant’s audit report and an opinion letter.
Beginning on July 1, 2017, the annual gross revenue threshold for filing audited financial reports along with an independent certified public accountant’s audit report and opinion letter will increase to $750,000. The threshold will increase again to $1,000,000 beginning on July 1, 2021.
Audit Oversight Requirement ImposedIn the case of a not-for-profit organization which is required to file an independent certified public accountant’s audit report with the Attorney General, the “independent directors” or a designated audit committee composed of the “independent directors” must oversee the organization’s accounting and financial reporting and the audit of its financial statements. The Act defines an “independent director” as someone who is not (or whose relative is not) an employee of the organization for the past three years and does not have another type of financial relationship with the organization, as specifically defined in the Act.
Simplification of Corporate “Types”Under the Act, the existing classification of not-for-profit corporations by type (A, B, C, and D) is eliminated and replaced with two classes of not-for-profit corporations — “charitable” corporations and “non-charitable” corporations. Not-for-profit corporations that have already formed as a particular type will be “grandfathered” so that they will not have to file new paperwork or amend contracts.
Other ChangesUnder the Act, the Not-for-Profit Corporation Law is amended to allow not-for-profit organizations to conduct board votes and other actions via e-mail, conduct board meetings via videoconference, Skype, and other forms of video communication, and delegate the approval of small transactions to committees.
* * * *In light of the Act’s enactment, you may want to reassess your organization’s specific corporate policies and processes, including your organization’s existing conflict of interest and whistleblower policies, and approval process for compensation arrangements and related party transactions. We encourage you to contact us to discuss the Act’s new requirements as they relate to your organization.