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U.S. States: March 2004 Public Policy Update

Arizona

Senate Bill No. 1193 would amend current law in Arizona which now requires every charitable organization to file a registration statement with the secretary of state before soliciting its first contribution in Arizona, and then each September thereafter. Under this bill, the secretary of state would be required to notify charities at least 30 days before the deadline to file a renewal registration statement. The notice would state the deadline for filing the registration statement and the penalties for failure to comply with the registration requirements. This bill would also establish a 'charitable organization enforcement fund' in which penalties for late registration would be deposited. The required notice procedure contained in this bill would be a welcome addition to the law.

House Bill No. 1193 relates to charitable gift annuities. The bill would require a charitable organization entering into an agreement for a charitable gift annuity to have a minimum of $300,000 in unrestricted cash, cash equivalents or publicly traded securities exclusive of the assets funding the charitable gift annuity agreement. In addition, the charity must have been in continuous operation for at least 3 years or a successor or affiliate of a charitable organization that has been in continuous operation for at least 3 years. The bill also requires that the charity make detailed disclosures. If any agreement between a charity and a donor for a gift annuity is entered in violation of this section, the donor may bring an action in a court to recover the amount of the consideration paid for the charitable gift annuity, with interest, and may recover its costs and attorneys fees.

California

California Senate Bill 1262, the Nonprofit Integrity Act of 2004, would increase reporting and disclosure requirements for charities and charitable fundraisers. The bill, sponsored by California's attorney general, also incorporates certain sections of the federal Sarbanes-Oxley legislation regarding corporate accountability.

Some of the bill's provisions include:

  • Requiring annual audits of any charity that receives more than $500,000 in gross revenue annually. The audit would have to be performed by an independent auditing firm that changes every few years.
  • Mandating that all contracts between a charity and a fundraiser or fundraising counsel be in writing. A contract would have to include a clear statement of the fundraiser's fee, an estimate of what percentage the fee will constitute of the total contributions received and a requirement that all contributions be deposited in a bank account maintained solely by the charity within five days of receipt by the commercial fundraiser.
  • Creating new disclosure requirements concerning charitable solicitations. Every printed solicitation or written confirmation of a solicitation must include a statement that registration and financial information concerning the charity can be obtained from the attorney general's website.
  • Prohibiting misrepresentations concerning the donation of tickets purchased by donors. In some cases, a few solicitors have led donors to believe that if they don't use the tickets they bought, the tickets will be given to 'needy kids.' However, these events don't actually exist or the tickets are never given to anyone else--with the solicitor keeping the proceeds.
  • Requiring that all persons registering with the attorney general maintain records regarding their activities for 10 years.

AFP is concerned that the gross revenue floor for triggering an audit ($500,000) is too low and will affect charities that don't have the resources to perform an audit every year. Another area of concern is the requirement for fundraisers to estimate, if paid on a fixed fee, what percentage of their fee will constitute the total amount of contributions received. Under the bill, it is possible to prosecute fundraisers if the estimate is wrong, even if a reasonable estimate was made.

Finally, provisions in the bill allow for 10-day and 30-day cancellation of contracts by the charity without cause. This requirement could actually increase costs for charities as fundraisers might try to require more up-front costs if they know charities can cancel without cause in the first 30 days.

The bill has been referred to the Senate Judiciary Committee and may see action in the middle of the month starting on March 18. AFP will be working closely with its California chapters to amend the bill so it does not place onerous burdens upon fundraisers working in the state. For a copy of the legislation, please contact the AFP Public Affairs Department at paffairs@afpnet.org.

Connecticut

Senate Bill No. 396 would make substantial changes to the regulation of charitable solicitations and fundraising. For example, it would raise the registration application fee from $20 to $250. In addition to other information which is required to appear in the annual report, charities would be required to provide an itemized list of (A) all funds raised with the assistance of any fundraising counsel or paid solicitor and (B) the percentage of such funds that any such fundraising counsel or paid solicitor retained or was paid. The information contained in the report would be available to the public. Further, this bill would require charities to file a quarterly accounting not more than 30 days following the close of every quarter. This bill also has a requirement, which we believe may be contrary to Supreme Court cases in this area, the Attorney General's office will publish in the newspaper in the towns where charitable solicitation are to occur, an advertisement describing the terms of the contract between the fundraiser and the charity and the percentage of the funds raised to be paid to the fundraiser.

House Bill No. 5312 would require paid solicitors, who are presently required to file certain annual reports, to file quarterly financial reports with the Attorney General's office for each solicitation campaign conducted for a charitable organization. The financial report must include the name, address, method of payment and telephone number of each contributor.

Hawaii

Senate Bill No. 2839 would require professional solicitors to file with the attorney general a financial report within ninety days after any solicitation campaign or event has been completed and on the anniversary of the commencement of the solicitation, including gross revenue and an itemization of all expenses incurred. The report would have to be signed and sworn to by the authorized contracting agent for the professional solicitor and two authorized officials of the charity. Also, a professional solicitor would be required to maintain a long list of records during each solicitation campaign and for not less than 3 years after the completion of the campaign. This bill is very detailed and if passed it will add a great deal to the current law in Hawaii.

Massachusetts

The Massachusetts Attorney General's office is drafting a proposal (no bill number as there is no official legislation introduced yet) that would seek to improve charity accountability and transparency. The proposal incorporates elements of the federal Sarbanes-Oxley corporate accountability law, as well as aspects of the Internal Revenue Service's rules on intermediate sanctions, involving insider transactions and conflict of interest.

The proposal includes the following provisions:

  • Raise the annual revenue threshold that triggers the requirement to submit audited financials from $250,000 to $750,000.
  • Require managing officers of smaller charities (annual revenues of less than $750,000) to expressly certify to the accuracy of the financial statements submitted to the state attorney general. Officers of larger charities (more than $750,000 in annual revenue) also would have to certify that they have established disclosure and internal financial reporting controls.
  • Mandate that larger charities (more than $750,000 in annual revenue) establish an audit committee comprised of independent members of the board. This committee would oversee the charity's independent certified public accountant and establish procedures to accept complaints from anonymous sources within the charity. The proposal also prohibits charities from retaliating against any employee, officer, director or trustee who submits such a complaint. Complaints also would have to be forwarded to the state attorney general.
  • Allow for transactions for 'related parties' (officer, director, senior manager or family member of any such person) only if the board approved such a transaction by a 2/3 vote; all material facts were disclosed in good faith; the board used legitimate and appropriate comparability data; and the board documents the basis for its approval. For example, if a charity board were to have the charity enter into a contract with a firm led by a trustee, all of the above criteria must be met, including obtaining data to ensure that the contract was reasonable and competitive with other firms.
  • Require compensation of officers, directors and trustees to be established through at least a majority vote and that all such compensation be fair and reasonable.

AFP is reviewing a copy of the draft proposal and will be working with its Massachusetts chapters to develop comments for the Attorney General's office. If members would like a copy of the legislation, please contact the Public Affairs Department at paffairs@afpnet.org.

New Jersey

Senate Bill No. 970 would make it a crime for a person who is, or was, a member of a charitable organization to solicit donations while making an explicit claim that the organization has the authority of the government or a law enforcement agency. Also, if an organization limits its membership to persons who are law enforcement officers, that organization must keep all funds solicited from the public in an account that annually provides a financial statement concerning the organization's fund raising account to the Attorney General and to the employer of the members of that law enforcement charitable organization.

Vermont

House Bill No. 642 would add a provision that under Vermont law, charities may be liable for misrepresenting, directly or indirectly, facts relating to a fundraising solicitation. The bill would authorize the Attorney General to adopt rules to require that notices of solicitation, fundraising contracts, financial reports, and bonds must be filed electronically. This bill would give donors a private right to commence a lawsuit with respect to the acts and practices of charitable organizations. However, a charitable organization would not be liable for punitive damages unless it acts with malice, willfulness, or wanton disregard of the donor's rights.

Virginia

House Bill No. 1365 would expand the definition of a charitable organization to mean any nonprofit organization submitting grant proposals to specifically targeted corporations or foundations, and not to the general public, for funding for study or research on medical, scientific or scholarly issues collected by such organization.

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