Basic Legal Principles

The New York Prudent Management of Institutional Funds Act (“NYPMIFA”), the New York version of UPMIFA, took effect on September 17, 2010.  That law made important changes to rules governing the spending of institutional funds and replaced key provisions of the prior statute known as the Uniform Management of Institutional Funds Act (“UMIFA”).  The new law was passed after the 2008-2009 financial crisis, a very difficult period for charities administering institutional funds, and gave nonprofit boards broader authority to spend donor-restricted institutional funds while establishing provisions to ensure that boards exercise their authority responsibly.  

Significantly, NYPMIFA made a few changes to the rules governing the modification or release of donor-imposed restrictions on institutional funds.  These changes are summarized in the guidance provided on the website of the Office of the New York Attorney General (the “Attorney General”), entitled A Practical Guide to The New York Prudent Management of Institutional Funds Act. In this article we focus on a new procedure created by NYPMIFA for lifting or modifying a donor-imposed restriction on the management, investment, or purpose of an institutional fund without donor or court approval when the institutional fund is less than $100,000 in value and has been in existence for more than 20 years. 

Below I outline the steps for releasing or modifying donor-restricted institutional funds that are under $100,000 and older than 20 years, as outlined in section 555(d) of the Not-for-Profit Corporation Law (N-PCL). In brief, if the institution determines that the restriction is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction, in whole or part, without court approval, after giving written notice to the Attorney General, unless the Attorney General objects to the release or modification within 90 days. It is the view of the Attorney General that such notice must also be given to the donor if available. The organization may proceed to release or modify the restriction if the Attorney General does not notify the institution within 90 days, or if the Attorney General provides its consent. 

Step 1. Identify Eligible “Small and Old Funds”

The institution should identify any donor-restricted institutional funds that are currently less than $100,000 in value and more than 20 years have elapsed since the fund was established. The institution should locate the original gift instrument and any other supporting document that indicates the fund’s age and value. 

Step 2. Determine Whether to Seek Modification/Release

Once the eligible small and old funds are identified, the institution should determine whether the restrictions on any or all of those funds are unlawful, impracticable, impossible to achieve, or wasteful, such as to warrant release or modification of the restrictions in whole or in part. This determination should be made in a careful and prudent manner by the institution’s board in the exercise of its reasonable business judgment, and documented in appropriate detail in the minutes of the board meeting where the decision was made. 

Step 3. Notify Donors 

Once the institution has determined which of the applicable small and old funds warrant release or modification, the institution must contact the original donor, if available, and try to obtain consent to the modification. A donor who is an individual is “available” if the donor is living and can be identified and located with reasonable efforts. There is no requirement to contact an executor or heir of the donor of the fund. If a donor’s current address is unknown, the institution should make reasonable efforts to locate the donor, including Internet searches and contacting known associates of the donor, such as an attorney who represented the donor when the gift was made. The institution should keep a record of its statutory notice to donors and should document the institution’s efforts to locate donors, even if those efforts are unsuccessful. If donor consent is received, the institution can proceed with its intentions without any further action. 

Step 4. Notify the New York Attorney General 

If the original donor cannot be reached or does not consent to the proposed modification, the institution must notify the New York Attorney General of the institution’s intent to modify or release the donor restrictions from the institutional funds. 

The notice to the Attorney General must contain the following. 

1. An explanation of the institution’s determination that the restriction is unlawful, impracticable, impossible to achieve, or wasteful.
2. An explanation of the proposed release or modification.
3. A copy of a record of the institution approving the release or modification.
4. A statement of the proposed use of the institutional fund after such release or modification.

The notice to the Attorney General must be submitted with the following supporting documents.

1. A copy of the gift instrument and other documentary evidence sufficient to show that the fund’s total value is less than $100,000 and that more than 20 years have elapsed since the fund was established.
2. If the donor is available, and particularly if the donor has withheld consent, a copy of any correspondence between the institution and the donor regarding the proposed release or modification.

The notice must also be given to the original donor, if available. The Attorney General has 90 days to review the notification and object to the release or modification. If the Attorney General does not respond within 90 days, or if the Attorney General responds favorably, then the modification or release is deemed approved. 

Given the many specific requirements that must be met to obtain approval for the release or modification of small and old funds, institutions should consider consulting with legal counsel to ensure compliance with the required process. 

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Why do we need bylaws? 

Bylaws are important for many reasons, legal and practical. Each state has specific corporate laws that regulate the actions taken by nonprofit boards. Bylaws distill those laws into a series of clear procedures for the board to follow, providing an operational framework and helping to ensure that the actions taken are legally compliant. 

Who should draft our bylaws?

Ideally, drafting bylaws is a collaborative process between the board and an attorney with nonprofit expertise. Your organization’s governance practices will be dictated by the laws of the state in which your organization is incorporated, as well as federal tax laws applicable to exempt 501(c)(3) organizations. 

Nonprofit corporate laws vary from state to state, some with more specific requirements than others. There are areas of the law that provide the board with significant flexibility in deciding how it chooses to operate, so certain sections of the bylaws can be customized to reflect the board’s preferences on governance procedures. An experienced attorney will know the corporate laws of the state in which your nonprofit is formed and be able to advise your board on its legal requirements, optional provisions, and best practices. 

Copying another nonprofit’s bylaws or downloading a sample from the internet may seem like a good option, but it can be costly in the long run.  If your bylaws are not compliant with the laws of the state in which your nonprofit is formed or are not tailored to your board’s needs and preferences, you may face trouble down the road.  In a worst-case scenario, the actions of a board can be challenged by regulators or in court if the board has not been following its bylaws or its bylaws are not legally compliant. 

What should our bylaws cover?

Typical provisions in nonprofit bylaws include –

• Size of the board – minimum (and maximum, if any) number of directors 
• Procedures for the election, resignation, and removal of directors.
• Directors’ term lengths and term limits (if any). 
• Notice requirements for regular meetings and special meetings of the board. 
• Quorum requirements (the minimum number of directors that must be present at a meeting in order to take action). 
• Approval requirements for routine board actions and special approval requirements for major transactions. 
• Procedures by which the board can take action without meeting.
• Procedures for forming and authorizing committees. 
• Procedures for the election, resignation, and removal of officers.
• Officer titles and responsibilities. 
• Indemnification of directors and officers. 
• Procedures for amending the bylaws.
   

Can we change our bylaws? 

Yes! Bylaws can, and often should, be amended to better match the organization’s practices and goals. The bylaws that worked for your nonprofit in its start-up phase frequently need to change as your organization grows and develops.  Laws also change from time to time, so we recommend having an experienced attorney review your bylaws with your board every few years. 

There’s a lot more we can say about governance and bylaws, but we’ll save that for future articles.

The post Bylaws – Legal, Practical and Foundational appeared first on Perlman & Perlman.

On February 8^th, California Assemblywoman Jacqui Irwin introduced Assembly Bill 488, which would establish a new statutory framework for the ever-evolving world of online charitable fundraising platforms.¹

The proposed  bill for “charitable fundraising platforms” and “platform charities” would require:
(1) “charitable fundraising platforms” and “platform charities” to register and provide reports to the California Attorney General’s office;
(2) conspicuous disclosures to prevent a likelihood of deception, confusion, or misunderstanding;
(3) the platform or platform charity to obtain written consent of any recipient charitable organization before using its name in a solicitation unless specific requirements are met; and
(4) the funds raised to be held in a separate bank account, and donations and grants of recommended donations to be sent promptly to recipient charities, along with an accounting of any fees imposed for processing the funds.

Key Definitions
The bill defines “charitable fundraising platform” as “any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  Charitable fundraising platforms would likely include companies such as GoFundMe, Facebook, Amazon, Tiltify, Pledgeling, and the many other technology platforms that enable charitable giving.

“Platform charity” is defined as a trustee or charitable corporation that facilitates acts of solicitation on a charitable fundraising platform.  Platform charities would likely include well-known organizations like PayPal Giving Fund and Network for Good, as well as the many other charities that serve as the intermediary and legal recipient of all donations raised through fundraising platforms.

Disclosure Requirements
If passed, the new law will require charitable fundraising platforms and platform charities to provide all of the following key disclosures to potential donors.

• A statement about who will receive the donations (e.g., that the recipient is the charitable fundraising platform, the platform charity, the recipient charitable organization, or the person engaging in peer-to-peer charitable fundraising).
• If applicable, a statement that a recipient charitable organization may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charitable organization may not receive the funds. (Note: This disclosure relates to the “variance power” that is well-recognized in other contexts, such as donor-advised funds and fiscal sponsorships)
• The maximum length of time it takes to send the donation or a grant of the recommended donation to a recipient charitable organization with an explanation as to the length of time.
• The fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation that are charged or retained by the charitable fundraising platform, platform charity, or any other partnering vendor, other than digital payment processing fees.²
• Whether the donation is tax-deductible or not.

Written Consent
While current California law requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charitable organization before using its name in a solicitation, the proposed law would provide that such written consent is not required if all of the following circumstances are met:

• The charitable fundraising platform or platform charity only references the recipient charitable organization’s name, address, telephone number, internet website (including through a hyperlink), employer identification number (EIN), corporation or organization number, or registration number with the Attorney General’s Registry of Charitable Trusts, classification in the National Taxonomy of Exempt Entities (NTEE) system, or other information set forth in rules or regulations established under Section 12599.10, if any. (Note that, as drafted, a recipient charity’s mission statement taken from its Form 990 cannot be included, unless written consent is obtained from that charity or the AG adopts rules to permit it. The inability to include a mission statement could potentially lead to unintended confusion by donors who are intending to support one charity and inadvertently designate their gift to benefit a different charity with a similar name but different mission)
• The charitable fundraising platform or platform charity conspicuously discloses before persons can complete a donation (or select or change a recipient charitable organization) that the recipient charitable organization has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by persons engaging in peer-to-peer charitable fundraising, when applicable. (Possible concerns remain about how this disclosure must be worded, and whether it could hamper giving by appearing to be like a “warning label”, notwithstanding the consent that may exist between a platform and a platform charity)
• The charitable fundraising platform or platform charity promptly removes any recipient charitable organization from its list or any solicitation regarding the recipient charitable organization upon written request by the recipient charitable organization.
• The charitable fundraising platform or platform charity does not require that a recipient charitable organization consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

Good Standing
Pursuant to the bill, a charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service, or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General.

Intersection with Other Fundraiser Registration Requirements
Over the last two decades, charitable fundraising platforms have been in a regulatory gray area, as the charitable solicitation laws were established decades before the Internet was around.  The existing regulatory framework in California and other states covers professional fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial co-venturers (e.g., retail businesses advertising that sales or use of their goods or services will benefit a charitable organization).  Many states require contracts between a regulated fundraiser and a charity to be submitted or at least disclosed, and separate campaign reports to be filed per contract (some forms even require two original notarized charity signatures!).

Most fundraisers that fall into the existing regulated categories do not support the fundraising efforts of hundreds or thousands of charities simultaneously, so compliance, while somewhat burdensome, is generally manageable.  Most new fundraising platforms, however, aim to assist hundreds or thousands of charities in broadening their fundraising reach through new innovative methods of giving.  If a platform provider is required to file hundreds or thousands of contracts and campaign reports, these reporting burdens would most likely hamper innovation and, ultimately, severely limit donations to thousands of charities, large and small.

The proposed regulations for charitable fundraising platforms provide a streamlined approach that is more appropriately suited to the way in which charitable fundraising platforms work.  The bill recognizes the potential overlap between the new “charitable fundraising platform” category and the three existing fundraiser categories, and explicitly carves out “charitable fundraising platforms” from the definition of commercial fundraiser, fundraising counsel and commercial co-venturer “when the acts of solicitation for charitable purposes occur solely through an internet service, website, or other platform provided by the charitable fundraising platform.”

While many charitable fundraising platforms will not need to comply with inconsistent or duplicative requirements applicable to the other regulated fundraiser categories, the limited scope of the carveout could still cause many fundraising platforms to remain subject to the additional regulatory requirements of other fundraiser categories.  For example, what if a platform sends an email about a specific campaign conducted on the platform to individuals who have signed up to receive communications?  What about a social media post?  Exactly how these definitional carveouts are finalized and implemented will significantly affect the amount of the compliance obligations applicable to charitable fundraising platforms.³

The passage of Assembly Bill 488 will not resolve the ambiguity in other states’ charitable solicitation laws and their applicability to charitable fundraising platforms. However, given the various states’ interest in providing oversight to these new technology-driven fundraising platforms, there is a good chance that other states may follow suit in adopting similar legislation.

Stakeholder Engagement
Assemblywoman Irwin and the California Attorney General’s office have been actively engaging with various stakeholders in the community in the development of this legislation (which has included associations of nonprofits and fundraisers, including The Nonprofit Alliance and the California Association of Nonprofits, as well as various fundraising platforms and platform charities) to ensure that innovation in charitable giving is encouraged within a framework of oversight and transparency.

In Conclusion…
The new bill is, in many respects, a much-needed update to the existing fundraising regulatory framework that more appropriately reflects the nature of charitable fundraising and giving in the age of the Internet.  However, the final codification of the legislation could have significant regulatory implications on the charitable fundraising community, so our firm is paying close attention to the bill as it makes its way through the legislative process.

1 Since 2018, Assemblywoman Irwin has introduced several bills that would govern charitable fundraising platforms, including Assembly Bills 2556 (2018), 1539 (2019), and 2208 (2020). Among the comments submitted as part of the legislative process for Assembly Bill 2208, the National Association of State Charity Officials submitted a statement of support: “The National Association of State Charities Officials (NASCO) is an association of state offices (attorneys general, secretaries of state and other offices) charged with the regulation and oversight of charitable organizations and charitable solicitation in the United States. As state regulators, we have witnessed the impact of the internet on charitable fundraising over the past 20 years. Charitable fundraising is no longer limited to solicitations through telephone, direct mail, or even a charity’s own website. Fundraising through third party websites, social media apps, and live video streaming have become the norm. The sheer volume of charitable solicitations made through online fundraising has exploded; most recently, for solicitations concerning the COVID-19 and the civil rights crises. This issue is so important that NASCO has formed a working group to look at the breadth of charitable giving through the internet, the regulatory and enforcement challenges this presents, and the need for states to address it [… ]  NASCO believes that these issues require a legislative solution to protect charities and the public, and to provide the platforms with a regulatory scheme that fit their business model. Assembly Bill 2208 represents a thoughtful and comprehensive approach to address these problems.”

2 While transparency around fees assessed is critically important in promoting trust in fundraising and avoiding deceptive solicitation violations, there may be constitutional implications depending on exactly how this disclosure requirement is ultimately codified. In a series of four cases from 1980 (Schaumburg) to 2003 (Madigan), the U.S. Supreme Court consistently held that regulation based upon fees paid to fundraisers violate First Amendment rights.  In particular, Riley v. National Federation of the Blind of North Carolina, 487 U.S. 781 (1988), invalidated a requirement that fundraisers disclose at the point of solicitation the percentage of funds they raised in the past year which went to the charity.  The Court found such “compelled speech” to improperly burden protected speech (i.e., a fundraising solicitation). 487 U.S. at 798. This mandatory financial disclosure requirement was found to be overbroad and not justified by the state’s interests in informing donors or prohibiting fraud. The Court determined that “the compelled disclosure will almost certainly hamper the legitimate efforts of professional fundraisers to raise money for the charities they represent.” 487 U.S. at 799. Since then, most state charitable solicitation laws require fundraisers to disclose their fees upon request of any donor. Given the online nature of charitable fundraising platforms, a balance may need to be struck between the constitutional concerns of compelled speech and the need for transparency in an online context. One option is to permit such fees to be disclosed within a conspicuous hyperlink.  The bill, as introduced, permits certain of the required disclosures to be included in a conspicuous hyperlink, but this fee disclosure is currently not among them.

3 Consider that a professional fundraiser that registers in 40 states and has national contracts with 100 charities would have to file up to 8,000 separate filings each year! (That number is based on one contract/solicitation notice and one campaign report per contract per state x 40 states per year) While the exact reporting that will be required under Assembly Bill 488 and related regulations to be established by the California Attorney General’s office is still to be determined, I anticipate it will be a much more streamlined reporting process that will not require separate per-charity filings. The bill does not require each charity contract to be filed either, as is required of other types of fundraisers, although contracts must be available for inspection by the Attorney General. To minimize the compliance burdens of the current regulatory framework, one solution that has been adopted is for a fundraising platform that registers as a professional fundraiser to partner with a single platform charity so that there is only one professional fundraiser relationship – the relationship between the fundraising platform and the platform charity.

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Colleges/Universities
State regulators discussed issues faced by colleges and universities in 2020. Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau, stated that financial hardship faced especially by small liberal arts colleges outside metro areas has led to an increase interest in mergers as a possible solution. He mentioned that his office has witnessed situations where a merger is the only way to save the mission of a financially distressed nonprofit college or university and, in this and similar circumstances where a merger is lawful, his office is generally supportive of this activity.

In addition, regulators are reviewing how colleges or universities forced to close due to the financial strain caused by COVID-19 might implement a teach-out plan for current students (a teach-out plan is an arrangement whereby a college or university provides current students with the opportunity to complete their course of study when the institution closes). Other common issues faced by colleges/universities in 2020 of interest to state regulators include (1) determining the circumstances when it may be appropriate to utilize a larger percentage of a college or university’s endowment fund; (2) whether a financially distressed college or university should borrow from a third party or liquidate otherwise illiquid assets; and (3) under what circumstances a college or university can remove donor-imposed restrictions on charitable contributions.

The NY Charities Bureau plans to issue guidance on the use of endowment funds for institutions facing financial challenges during COVID-19. Massachusetts has already released similar guidance.

Tanya Ibanez, Senior Assistant Attorney General in the California Attorney General’s Office of Charitable Trusts, mentioned that the California Attorney General is looking closely at for-profit schools converting to non-profit organizations.

Crowdfunding
State regulators are still considering carefully how to regulate crowdfunding platforms. Ms. Ibanez briefly discussed the California Attorney General’s support of California Assembly Bill 2208, which recently died in committee. Generally, the bill required charitable fundraising platforms to register and file annual reports with the California Attorney General’s Registry of Charitable Trusts before soliciting, permitting, or enabling solicitations in California. Ms. Ibanez said that she anticipates that a similar bill will be introduced in the California legislature’s next legislative session.

In the context of discussing regulation of crowdfunding, Leslie Friedlander, Assistant Attorney General in the Texas Attorney General’s Office, reminded listeners of the recent PayPal Giving Fund settlement entered into between PayPal Giving Fund and twenty-two (22) state attorneys general. A summary of that settlement and its implications, PayPal Giving Fund Enters Multi-State Settlement, was written by my colleague Karen Wu.  Ms. Friedlander also teased upcoming donor-facing guidance on crowdfunding to be released by NAAG/NASCO in the near future. The FTC has released guidance for donors on giving through an online giving portal.

Form 990 Reporting
State charity regulators are taking advantage of the increased availability and searchability of data about charitable organizations, particularly data filed with the IRS on Form 990, to find organizations that may warrant closer is scrutiny.

Mr. Sheehan explained that organizations which disclose governance weaknesses on Form 990, Part VI, are more likely to have other governance problems such as weak internal controls that can lead to serious problems of interest to regulators. He recommended that, in addition to Part VI, tax practitioners should pay particular attention to Form 990 Schedules J (Compensation Information), L (Transactions with Interested Persons) and O (Supplemental Information). Organizations should ensure information on these schedules is complete, correct, and that an organization does not simply copy and paste information on these schedules from year to year.

Ms. Ibanez added that two additional areas of interest to regulators are the percentage of total contributions received as gifts-in-kind and joint cost allocations. She mentioned that if, for example, an organization receives 70%-80% of total contributions as gifts-in-kind then that organization is likely on the California Attorney General’s radar for a potential audit to determine whether those gifts are being properly valued.

Donor-Advised Funds
Speakers also discussed issues that regulators are grappling with when it comes to contributions made to and from donor advised funds.

Carol Washington, Manager of the Minnesota Attorney General Charities Division, shared how her office recently engaged with the Minnesota Council of Nonprofits to discuss areas of mutual public policy focus with respect to donor advised funds. The Minnesota Council of Nonprofits prepared an extensive white paper on the operation of donor advised funds, including policy recommendations on how the state might regulate donor advised funds to improve transparency and ensure that the original donor’s intent is respected.

Board Engagement During COVID-19
In answer to a question about the need for increased board engagement during COVID-19, Eunice Nakamura, General Counsel, Susan G. Komen, emphasized the importance of the board meeting early and often and encouraging board members to be proactive in discussing strategies that can be implemented and actions that can be taken now that will help the organization to weather this crisis now and into the future. Courtney Aladro, Chief of the Non-Profit Organizations Division of the Massachusetts Attorney General’s Office, mentioned that another way boards have increased engagement during COVID-19 is to create specific committees focused on issues raised by the pandemic.

Incentive-Based Executive Compensation
Ms. Aladro was asked for her thoughts on organizations that approve incentive-based compensation in order to reward nonprofit executives for staying with the organization through the difficult circumstances presented by the COVID-19 pandemic. She explained that, even assuming the compensation was reasonable, a regulator might still raise questions about such an arrangement if, for example, the organization has offered such incentive-based compensation but at the same time has made the decision to lay-off lower paid workers in order to keep the organization afloat.

Virtual/Online Events
Sara Hall, Chief Legal Officer at St. Jude Children’s Research Hospital, discussed some very practical lessons her team has learned switching from in-person to virtual fundraising events. These include: (1) obtaining all trademark clearances (for event names, hashtags, etc.) and music licenses for the event; (2) vetting and engaging a vendor with experience facilitating multi-channel, multi-platform content; (3) projecting attendance (Ms. Hall mentioned that this is particularly difficult with virtual events since there is generally no translation from in-person events); and (4) being aware of that spammers and fake websites may pop-up prior and during the event. It is important to be ready to address these issues during the event in real time.

With respect to digital engagement, Ms. Hall reminded listeners not to forget about required disclosures when engaging an influencer as part of a virtual fundraising event. For more on that subject read Influencer Philanthropy and Social Media – What are the Rules, What are Best Practices? by my colleague Jeremy Coffey.

Online Fundraising – Charleston Principles
Brian Armstrong, Deputy Attorney General at the California Department of Justice, discussed regulation of online fundraising. He pointed listeners to the Charleston Principles (which he said is generally consistent with personal jurisdiction case law) to determine when registration may be required due to online activity. For more on this topic, please see Karen Wu’s excellent article recently published in The Nonprofit Quarterly.

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