AHLA. Non-Profits and the Attorney General. Thomas K. Hyatt Dentons US LLP Washington, DC

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1 AHLA Non-Profits and the Attorney General Thomas K. Hyatt Dentons US LLP Washington, DC Gary W. Hawes Assistant Attorney General Office of the Attorney General Hartford, CT Bill McCollum Dentons Former Florida Attorney General Washington, DC James G. Sheehan Chief, Charities Bureau New York Attorney General s Office New York, NY Tax Issues for Health Care Organizations October 19-21, 2014

2 AHLA: Tax Issues for Health Care Organizations 2014: Looking at Attorneys General and State Charities Enforcement James G. Sheehan Chief, New York Charities Bureau Office of Attorney General Eric Schneiderman The Promise in the Agenda actions taken and guidance given by state attorneys general in areas relevant to nonprofit health systems and health plans including executive compensation, board composition, conflicts of interest, CEO oversight, endowment management, charitable giving, and charitable solicitation. 1

3 A little about us... Charities Bureau for NY Attorney General Eric Schneiderman Regulation and Support of New York s Non Profit sector 1.2 million employees, 80,000 registered organizations, 1/6 of private employment OUR JOB AS A REGULATOR ISN T JUST TO GO OUT AND CATCH BAD GUYS, IT S ALSO TO HELP THE GOOD GUYS CONDUCT THEIR BUSINESS EFFICIENTLY AND New York State Attorney General Eric T. Schneiderman EFFECTIVELY. CHARITY HEALTHCARE ISSUES STRESS TESTS what organizations are likely to be at risk in changing health care environment? Hospitals Specialized providers dealing with Medicaid managed care for first time home care, nursing homes, developmentally disabled, substance abuse, mental health Providers affiliated with higher education institutions Nonprofit managed care organizations facing forprofit competition 2

4 HOW DO ORGANIZATIONS REACT TO STRESS? Denial? (no bad news) Double down? Minimize risks? Tapping restricted funds Cost cutting and the essential but non urgent Lobbyists and electeds Don t tell our stakeholders or our regulators Rare reaction in not for profits(or government agencies) we need an exit strategy METROPOLITAN COUNCIL Home Care and Medicaid provider cost reimbursed Fraud by President William Rapfogel over 20 yearsinflating insurance payments and receiving kickbackssome kept, some given to electeds December 2013 Charities Bureau Agreement to permit Metropolitan Council to continue to receive public payments 5 year term Appointed Monitor reporting to state agencies new general counsel new compliance officer Over $1 million in repayments to state and City 3

5 WILLIAM RAPFOGEL METROPOLITAN COUNCIL PRESIDENT AND GUEST OF NEW YORK STATE William Rapfogel over a 20 year period of time, he conspired with others to steal over $9 million and personally stole $3 million from the people that needed it most to benefit himself and his lifestyle. Gary Fishman, Assistant Attorney General speaking at sentencing 7/14 Mr. Rapfogel has shown a lack of contrition, has continued to "minimize to others the full extent of his complicity in the criminal scheme" and had "attempted to mislead the Office of the Attorney General from the very beginning of our investigation. AAG Fishman sentenced in 2014 to 3 1/3 years in prison for stealing $3 million from the Metropolitan Council 4

6 THE NONPROFIT REVITALIZATION ACT(NPRA) 2012 Report to New York Attorney General ship%20committee%20report%20( ).pdf Act passed by New York Legislature June 2013 Act signed by New York Governor December 2013 ACT effective date July 1, 2014 Text of NPRA New York Charities Bureau Guidance on NPRA nce.jsp NEW YORK NONPROFIT REVITALIZATION ACT 7/1/2014 Key concept moving from general fiduciary duty and harm defined by common law to system of clear statutory rules and risks relating to independence and conflicts of interest. Rules enforced by parties Title insurance companies D & O and fidelity bond insurors Lenders, bond counsel, in house counsel Board members Accountant audits and management letters 5

7 NPRA FROM DUTY TO RULE AG Need not show breach of fiduciary responsibility AG Need not show actual loss Positive process obligations with consequences Independent audit committee Related party transactions requirements Loans to officers Conflict of interest reporting Whistleblower protection Compensation approvals How are Charitable Not For Profit Organizations Accountable to AG? Section 715 unwinding related party transactions Section 511/512 transactions reviews sales, mergers, financing Use of restricted funds Obamacare reporting/ data analysis Section 720 of NPCL actions against officers, directors, key employees Membership fiduciary duties Private inurement Unapproved compensation 6

8 OBLIGATIONS OF DIRECTORS UNDER NPRA Disclosure of Conflicts of Interest to the organization prior to election (and thereafter) Any director with an interest in a related party transaction must disclose in good faith the material facts of the interest to the board or authorized committee; No director with an interest in a related party transaction (including compensation) may be present at or participate in deliberation or voting on it. (The board or committee may request that the person provide information or answer questions prior to the deliberations or voting). No director may be involved in related party transaction in which the director has an interest (not just Board actions) Compare with IRS 990: Did the organization have a written conflict of interest policy? (Section B, Page 6) Compare with IRS 990: Did the organization regularly and consistently monitor and enforce compliance with the policy? If Yes, describe in Schedule O how this was done (Section B, Page 6) STRUCTURE OF BOARDS UNDER NPRA Formal written conflict of interest policy consistent with statutory requirements Formal written whistleblower policy consistent with requirements (see also element 8 of the OMIG regulation at 18 NYCRR 521) IRS 990 Did the organization have a written whistleblower policy? Independent Audit Committee (no member is employee of organization) Independent Chair (as of 1/1/2016) Conflicts of interest or whistleblower deliberations and determinations must be made by a committee (such as an audit committee) or the board, consisting only of independent directors 7

9 Duties of Board (Conflicts Transactions) In any transaction involving a New York charitable nonprofit corporation and in which a related party has a substantial financial interest the board or an authorized committee of the board must: Prior to entering into the transaction, consider alternative transactions to the extent available; Approve the transaction by not less than a majority vote of the directors or committee members present at the meeting; and Contemporaneously document in writing the basis for the board or authorized committee s approval, including its consideration of any alternative transactions. If the organization engages in a transaction in violation of these requirements, the Attorney General is empowered to unwind the transaction. DUTIES OF BOARD (COMPENSATION TRANSACTIONS) Person who will benefit from compensation decision may not be present at or otherwise participate in board or committee deliberation or vote Exception: board or committee may request information, background or response to questions prior to beginning deliberations or voting Covers compensation to directors, officers, employees IRS 990 Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision? 8

10 SIGNIFICANT EVENTS IN OTHER STATES Massachusetts Attorney General Martha Coakley issued a December 2013 report on executive compensation at Massachusetts 25 largest nonprofits, which include health plans, hospitals, and universities. Report does aggregate comparisons for health plans and hospitals, and reports compensation and benefits by name of recipient. LOOK TO OUR WEBSITE FOR INFORMATION ON THE NPRA Thank you for your attention and the work you do. James G. Sheehan Chief, New York Charities Bureau james.sheehan@ag.ny.gov 9