Governor Cuomo Signs New York Non-Profit Revitalization Act of 2013

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1 Governor Cuomo Signs New York Non-Profit Revitalization Act of 2013 On Thursday, December 19, Governor Cuomo signed the New York Non-Profit Revitalization Act of 2013 which aims to reduce burdens on the nonprofit sector while strengthening governance and accountability. A summary of the changes to the laws and suggestions on how your organization can ensure compliance with the new requirements is provided below. The Act applies to nonprofit organizations incorporated in New York, New York charitable trusts, and organizations that solicit charitable contributions in New York, regardless of the state of incorporation. Most of the provisions become effective on July 1, Those with a later effective date are noted below. The Act requires many New York not-for-profit organizations and charitable trusts to adopt governance policies, including a conflict-of-interest and whistleblower policy. It also requires nonprofit organizations that solicit charitable contributions in New York (whether or not they are incorporated in New York) to adopt audit committee oversight procedures. While many organizations may already have these documents in place, we recommend a review of your current bylaws, governance policies, and procedures, and either a revision or replacement to ensure compliance when the Act comes into effect. PROVISIONS APPLICABLE TO ORGANIZATIONS REQUIRED TO REGISTER TO SOLICIT CHARITABLE CONTRIBUTIONS IN NEW YORK (REGARDLESS OF STATE OF INCORPORATION) 1. Audit Filing Requirement - Financial Threshold Changes The Act changes the fiscal year gross revenue thresholds for organizations to file an independent CPA review or audit with the Attorney General s office. The following chart outlines the threshold changes: Effective Date Unaudited Financial Report Independent CPA Review Independent CPA Audit Through June 30, 2013 < $100,000 $100,000 $250,000 July 1, 2014 < $250,000 $250,000 $500,000 July 1, 2017 < $250,000 $250,000 $750,000 July 1, 2021 < $250,000 $250,000 $1 million 1

2 2. Mandatory Audit Committee Oversight Requirements Every organization required to submit an independent CPA audit report must perform certain audit duties. The duties may be performed by the board, or a designated audit committee of the board. In either case, the duties must be performed entirely by independent directors. For all organizations required to submit an audit, the audit committee must: (1) oversee the accounting and financial reporting processes of the organization and the audit of its financial statements; (2) annually retain an independent auditor; and (3) review the results of the audit and any related management letter with the auditor. For organizations with revenues over $1 million, the audit committee must comply with the following additional requirements: (1) review the scope of audit with the auditor before the audit begins; (2) discuss material risks and weaknesses in internal controls identified by auditor; (3) annually consider the auditor s performance; and (4) report activities to board (unless performed by independent directors on the board). For organizations that are required to submit an audit, and had annual revenues of less than $10 million in the last fiscal year ending prior to January 1, 2014, the new audit oversight requirements are not applicable until January 1, Clarification to Fundraising Counsel Definition The Act clarifies that any individual engaged solely to draft grant applications for funding from a governmental agency or a 501(c)(3) tax-exempt organization is not considered a fund raising counsel for purposes of complying with New York s registration and reporting requirements. PROVISIONS APPLICABLE TO NEW YORK NOT-FOR-PROFIT CORPORATIONS AND CHARITABLE TRUSTS 1. New Governance Requirements and Related Procedures Many of the governance changes reflect policies and practices that are already considered best practices in the nonprofit sector. Nevertheless, all New York nonprofits should review their existing policies and practices to ensure they meet the new statutory requirements. 2

3 A. Mandatory Conflict of Interest Policy and charitable trusts The Act requires the organization to adopt a conflict of interest policy that : (1) defines the circumstances that constitute a conflict of interest; (2) provides procedures for disclosing a conflict of interest to the board; (3) prohibits the person with the conflict of interest from being present at or participating in deliberations on the matter; (4) prohibits any attempt by the person with the conflict of interest to improperly influence deliberation or voting on the matter; (5) requires that the existence and resolution of the conflict be documented in corporate records; and (6) provides procedures for disclosing, addressing and documenting conflict of interest situations. The organization must require every director to submit an annual disclosure statement to the board, identifying any relationships or transactions which may give rise to, or constitute, a conflict of interest. B. Related Party Transactions and charitable trusts The organization is prohibited from entering into any related party transaction unless the transaction is determined by the board to be fair, reasonable and in the organization's best interest at the time of such determination. o A related party is any director, officer or key employee of the organization or any affiliate of the organization, any relative of any of the preceding, or an entity in which any of those individuals has a 35% or greater ownership interest. o A related party transaction is any transaction in which a related party has a financial interest and in which the organization or any affiliate of the organization is a participant. Any director, officer or key employee with an interest in a related party transaction must disclose in good faith to the board all the material facts concerning such interest. No related party may participate in deliberations or voting relating to the related party transaction, other than presenting information as requested by the board prior to deliberations and voting on the matter. The following additional requirements apply to all New York charitable corporations and charitable trusts (non-charitable corporations are exempt from this additional requirement) in which the related party has a substantial financial interest. Prior to approving a related party transaction, the organization s board or a committee thereof 3

4 must: (1) consider alternatives to the extent available; (2) approve the transaction by majority vote; and (3) contemporaneously document the basis for the approval, including consideration of alternatives. Comment: This section of the Act does not ban related party transactions, but rather, seeks to ensure that organizations only engage in such transactions when they are in the organization s best interests. If the financial interest is not substantial, or the organization is a non-charitable corporation, a board determination that the transaction is fair, reasonable, and in the corporation s best interest suffices to permit the transaction. If the financial interest is substantial, boards should follow the additional steps outlined above. Documentation of the approval process is particularly important because the Act gives the Attorney General power to void and rescind improper related party transactions and assess financial penalties. Related party transactions for which reasonable alternatives are not readily available should be carefully documented. C. Mandatory Whistleblower Policy and charitable trusts with 20+ employees and annual revenues over $1 million The organization must adopt a whistleblower policy and implement procedures that protect individuals who report suspected improper conduct. The policy must: (1) provide that no director, officer, employee or volunteer of the organization who in good faith reports any action or suspected action taken by or within the organization that is illegal, fraudulent or in violation of any adopted policy of the organization will suffer intimidation, harassment, discrimination or other retaliation or, in the case of employees, adverse employment consequence; (2) provide procedures for reporting violations or suspected violations and preserving confidentiality; (3) designate a person to administer and report on the policy to the board or appropriate committee; and (4) be distributed to directors, officers, employees and any volunteers that provide substantial services to the organization. D. Conducting Board and Member Activities Electronically The new law clarifies certain technical procedures that are required or permitted for conducting board and member meeting activities. Many of these procedures were not clearly addressed under the prior law. Member activities Notices of meetings of members, waivers of notices by members, and submissions of proxies or unanimous written consents may be given by fax or . 4

5 Large membership organizations with over 500 members may choose to give notice by newspaper publication (as already permitted under the prior law), but if they do so, they must now also post the notice prominently on the organization s website homepage continuously from the date of publication through the date of the meeting. Board member activities Waivers of notices of board meetings, and unanimous board or committee resolutions authorizing action may be submitted by or fax. Board members may participate in board or committee meetings via videoconference or other forms of video communication. E. Prohibition on Committees of the Corporation Binding the Board The Act specifies that committees of the corporation (which are defined as committees that include non-directors) shall not have authority to bind the board. Comment: This new provision is unique and may have unintended consequences. For example, some boards have previously delegated authority on decisions requiring specific expertise to special advisory committees that include non-board members. This will no longer be allowed. Committees of the corporation may be elected or appointed in the same manner as officers of the corporation, unless otherwise specified in the corporation s bylaws. 2. Streamlined Regulations Governing Corporate Transactions A. Simplified Merger Procedures Organizations seeking to merge are required to obtain approval from the Attorney General only, and are no longer required to obtain court approval as well. The Act permits educational and religious corporations to enter into mergers in addition to consolidations. A merger allows one of the two merging corporations to survive, whereas a consolidation requires the creation of a new, consolidated corporation. B. Simplified Real Estate Transaction and Asset Transfer Approval Procedures A nonprofit s board, or a committee of the board designated for that purpose, may approve non-substantial real estate transactions (purchases, sales, mortgages, and 5

6 leases) by majority vote, rather than a two-thirds vote of the entire board as was previously required. If a committee approves a real estate transaction, it must promptly notify the board. However, transactions involving property that constitutes all or substantially all of a nonprofit's assets still require approval by two-thirds vote of the entire board. Nonprofits seeking to sell, lease, exchange, or dispose of all or substantially all of their assets must obtain approval from the Attorney General only, and are no longer required to obtain court approval as well. C. Simplified Dissolution Procedures Applies to: All New York not-for-profit charitable corporations Organizations are required to obtain approval from the Attorney General to dissolve. Under the prior law, organizations with more than $25,000 in remaining assets or more than $10,000 in liabilities were required to obtain both Attorney General and court approval. Organizations have the option to appeal to the courts for approval, and the Attorney General can refer petitions for dissolution to the courts if it is determined, in his or her discretion, that judicial review is more appropriate. 3. Changes to Incorporation Procedures A. Simplified Categorization of Not-for-Profit Corporations Not-for-profit corporations are now categorized simply as either charitable or noncharitable instead of as Type A, B, C, or D, based on the organization s purpose. Charitable corporations are formed for one or more charitable purposes, which is defined as purposes that are charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals. Non-charitable corporations include any not-for-profit corporations that do not have charitable purposes, such as social or fraternal organizations or trade or business associations. Existing organizations will automatically be classified as either charitable or noncharitable. All Type B or Type C not-for-profit corporations, and Type D not-forprofit corporations formed for charitable purposes, will be deemed charitable. All Type A not-for-profit corporations, and all other Type D not-for-profit corporations, will be deemed non-charitable. Existing organizations do not need to file new paperwork or amend any contracts or other documents that refer to the old classification system. 6

7 B. Streamlined Process for Filing Certificates of Incorporation Not-for-profit corporations no longer need to describe in their Certificate of Incorporation the specific activities they plan to undertake in addition to their corporate purpose. The Certificate of Incorporation can now simply specify their corporate purpose. The Department of State is empowered to correct non-material typographical errors in certificates of incorporation and other instruments upon written authorization from the incorporator, which will streamline the process for incorporating in New York. C. Simplified Administrative Agency Consent Requirements Applies to: All not-for-profit corporations incorporating in New York The Act eliminates the pre-approval of the Commissioner of Education for many notfor-profit corporations whose purposes include educational activities. The Act still requires all not-for-profit corporations whose purposes include the operation of a school; a college; a university or other entity providing post-secondary education; a library; or a museum or historical society to obtain pre-approval of the Commissioner of Education, or in the case of a college or university, the written authorization of the Regents. Any other corporation whose Certificate of Incorporation includes a purpose for which the corporation might be chartered by the Board of Regents must notify the Commissioner of Education by submitting a certified copy of the Certificate of Incorporation within 30 days after it is filed with the Department of State (but does not need to obtain the Commissioner of Education s pre-approval). Any organization whose purposes do not include those triggering registration with a New York administrative agency may satisfy the approval and notice requirement by simply stating in its certificate of incorporation that its purposes and powers do not include any of those described in Section 404(a)-(v) of the Not-for-Profit Corporation Law. 4. Enhanced Attorney General Enforcement Powers The Act grants the Attorney General a variety of new enforcement powers, with a specific focus on preventing related party transactions that result in an improper private benefit at the organization s expense. The Act empowers the Attorney General to enjoin, void, or rescind improper related party transactions, as well as seek monetary relief, such as damages and restitution. The Attorney General may also remove the directors or officers who approved the improper transaction, and may seek double damages in the case of willful or intentional conduct leading to the approval of the improper transaction. As such, it is very important that organizations carefully evaluate and 7

8 document any proposed transaction in which a related party has a substantial financial interest. If you have any questions about this client alert, please contact any of the attorneys at the firm, or call To sign up to receive our client alerts and other firm-related news, please info@perlmanandperlman.com or sign up at To read the New York Attorney General s press release on the Act and a link to the full text of the bill, click here. This summary was last updated on January 10, The information provided in this document does not constitute legal advice, and is not intended to substitute for legal counsel. This publication may constitute attorney advertising in some jurisdictions. 8