This article was also published in EO Tax Journal on December 20, 2013, and in Association TRENDS on January 2, 2014.
The Nonprofit Revitalization Act, unanimously passed by New York's legislature last June, was signed into law by Governor Andrew M. Cuomo on December 18, 2013.
The Act is the first major revision to New York's nonprofit laws in over 40 years. Its provisions apply to nonprofits that are incorporated in New York, but one significant section – related to financial audits and financial reporting to the state – applies to all nonprofits that are registered in New York for charitable solicitation purposes. Most provisions of the new Act will take effect on July 1, 2014, and a couple of the provisions, including the prohibition on an employee serving as chair of the board and thresholds for financial reporting, will take effect in 2015, 2017, and 2021.
The Act modernizes aspects of the current laws, including the incorporation of new technology options for the board to hold meetings and new methods for the board and members to take action without a meeting. The law also imposes standards for enhanced governance processes, such as mandating that nonprofits of a certain size adopt conflict of interest and whistleblower policies, and it contains a new definition and approval process for related party transactions. In addition, the law imposes new limitations and prohibitions on certain governance structures and practices, which may create significant challenges for particular organizations. Many nonprofits will find that they need to amend their governance documents, policies, and procedures – and, in some cases, significantly overhaul their governance structure – to comply with some of the detailed requirements of the Act.
Below are some preliminary recommendations to help your organization respond to the changes. For more detailed information about the provisions of the Act, please see our prior article on this topic
For all nonprofits registered to solicit charitable contributions in New York:
For all nonprofits formed in New York:
- Be aware of new thresholds for financial reports and audits under Article 7-A of the Executive Law.
- If an audit is required, the Audit Committee members and the certified public accountant must be independent, as such term is defined by the Act. See below regarding new standards for independent directors. (Financial expertise is advisable but not required under the Act.)
- Determine whether you will need a new chair of the board in July 2015 to comply with the prohibition on having an employee serve as chair or comparable position.
- Develop a plan for having a steady group of "independent directors" who meet the specific standards for independence under the Act. Thresholds include: $10,000+ in compensation or $25,000+ in payments (or 2% of gross revenues) to or from the nonprofit by an entity in which a director is an employee, a relative is an officer, or either has a substantial financial interest. Notably, membership dues are counted but charitable contributions are not. Please refer to the detailed provisions of the Act for the full definition of independence.
- Review your Conflict of Interest Policy for compliance with the Act's standards for related party transactions, disclosure of conflicts, and resolution of conflicts by the full board or a committee of independent directors (the Audit Committee may fulfill this role). "Charitable" corporations are required to consider alternatives to related party transactions involving substantial financial interests to the extent available.
- For nonprofits with at least 20 employees and $1 million+ in annual revenues, put a Whistleblower Policy in place.
- Check your incorporation documents and bylaws to confirm that your organization can take advantage of new electronic communication and meeting options. Note that such types of communication and meeting options are permitted unless otherwise restricted by the organization's articles of incorporation or bylaws.
- If you plan to use email for communications with members and directors, solicit email addresses with the express stated purpose of using them for notices.
- In setting executive compensation, make sure the board or committee minutes document that the compensated employee was not present for the deliberation and vote.
- For real estate transactions, be aware of the changing statutory requirements for board and member approvals, in addition to any other specific bylaw requirements.
- For major corporate changes by a "charitable" corporation (change in purpose, transfer of all or substantially all assets, merger, or dissolution), consider the new option for Attorney General, rather than Court, approval. Under the Act, Type B and C entities, as well as Type D entities formed for a charitable purpose, are considered to be "charitable" corporations.
The New York Nonprofit Revitalization Act modernizes the laws applicable to nonprofits incorporated in New York and enhances nonprofit governance and oversight. Compliance with some of the new restrictions and requirements in the governance area may require challenging changes to your organization's governance structure.
- The New York Nonprofit Revitalization Act, as passed by the New York legislature, is available here.
- The New York Nonprofit Revitalization Group Report, on which much of the new law is based, is available here.
- The press release from the New York State Office of the Attorney General regarding the law being signed by Governor Cuomo is available here.
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For questions or more information, please contact Susan Golden at 212.370.6254 or sgolden@Venable.com; Lisa Hix at 202.344.4793 or lmhix@Venable.com; or Jeff Tenenbaum at 202.344.8138 or jstenenbaum@Venable.com.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.