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AFP to Congress: Prohibit Percentage-Based Compensation

(July 26, 2004) One of the most important steps Congress can take in increasing public confidence in charities is to outlaw percentage-based compensation, AFP President and CEO Paulette V. Maehara, CFRE, CAE, told U.S. Senate Finance Chairman Charles Grassley (R-Iowa) and key committee staff members at a July 22 roundtable on charity regulation.

The roundtable was set up by Finance Committee staff to hear feedback and comments regarding a discussion paper released by the committee in June. AFP was one of nearly 20 speakers at the roundtable, which was attended by more than 100 representatives from charities and regulatory agencies, including the Internal Revenue Service (IRS), Federal Trade Commission and state charity offices.

While the discussion paper contained numerous proposals on how to better regulate the charitable sector, AFP noted in its written comments that the critical issue was sufficient funding for the IRS and other agencies. "In almost all cases, the current laws are sufficient; the problems lie in enforcement. And if additional laws are needed, they should be fashioned to target wrongdoers without burdening legitimate charities."

However, AFP did support some of the proposals in the discussion paper, such as a closer examination of donor advised funds and contribution valuation, as well as reform of the Form 990.

But most of AFP's oral presentation during the roundtable focused on the abuses of percentage-based compensation for fundraisers. Maehara noted that percentage-based compensation is flawed for several reasons, including:

  • Charitable mission often becomes secondary to self-gain.
  • Donor trust can be unalterably damaged.
  • There is incentive for self-dealing to prevail over a donor's best interests.
  • Percentage-based compensation can produce reward without merit.

Maehara called on the committee to prohibit percentage-based compensation. "Few new initiatives could do as much to limit future fundraising abuses as outlawing percentage or commission-based fundraising," she said to the roundtable participants. She also urged Congress to pass S. 476, the Charity Aid, Recovery and Empowerment (CARE) Act.

More Regulations in the Near Future?

In comments made to the participants, Chairman Grassley that he understood the importance of the charitable sector and its impact on Americans. Nevertheless, he indicated that legislation incorporating some of the discussion paper proposals could be introduced later this year.

During the roundtable, the committee heard comments on several overall areas related to charity regulation and accountability, including:

  • Tax-exempt status reforms, including a proposal for the IRS to review a charity's tax-exempt status every five years;
  • Additional limitations on insider and "disqualified" persons, including applying private foundation self-dealing rules to public charities and increasing penalties for self-dealings;
  • Reforms related to foundation grants and expenses;
  • Increased coordination of regulation between federal and state agencies;
  • Changes to the Form 990;
  • Board governance, including restrictions on board size and composition and disclosure of new documents. AFP was strongly opposed to many of these proposals.

AFP's written and oral comments are available under the "Attachments" section below. AFP also submitted its position paper on percentage-based compensation.


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