Exempt Org. Resource Blog

6 Easy-to-Miss Points about New York’s Non-Profit Revitalization Act, Part I of II

July 1, 2014 - The New York Non-Profit Revitalization Act goes into effect today.  To mark the occasion, we offer up six easy-to-miss points about the Act.  Here are the first three. Three more will follow next week.  Click here for Patterson Belknap’s complete summary of the Act.

One:

The Act is generally applicable to not-for-profit corporations and wholly charitable trusts.  Those are broad categories, so let’s get more granular about it.

  • The Act has varied levels of applicability.  The requirement for a conflict of interest policy is applicable to all not-for-profit corporations and wholly charitable trusts.  However, the “related party transaction” rules apply only to those not-for-profit corporations classified as “charitable” (formerly known as “Type B” or “Type C” corporations) and to wholly charitable trusts.  The basic audit oversight provisions apply to charities, whether in corporate or trust form, but only those that are required to register to conduct charitable solicitations in New York and have annual revenue in excess of $500,000 (with additional oversight duties applicable if revenue exceeds $1,000,000).   The committee requirements apply to not-for-profit corporations but not  wholly charitable trusts.  These complex applicability thresholds are the reason we organized our summary as a matrix … the Act is a kind of matrix.
  • Statutory regulation of nonprofit governance in New York was previously limited to not-for-profit corporations.  But charitable trusts are now being pulled into the world of nonprofit governance best practices.  This is a new frontier in New York.  It will be interesting to see if and how the trend continues.
  • The Act never comes out and says how or whether it applies to organizations formed outside the State of New York.  We expect the New York Attorney General to take the position that the audit oversight provisions – the ones applicable to certain charities that must register to conduct charitable solicitations in New York – are applicable to all  such charities, not just those that happen to be formed in New York.  That may or may not be the right interpretation of the statute, but until the Attorney General says otherwise, we think out-of-state charities that raise money in New York and meet the stated revenue thresholds should comply with New York’s audit oversight requirements.  It is possible the Attorney General will go even further and attempt to apply all aspects of the Act (e.g., the conflict of interest and related party transaction rules and the committee requirements) to out-of-state organizations that are required to register or report in New York.  This interpretation might be a stretch and could be difficult to enforce.  Of course, the court system, not the Attorney General, is the final arbiter of the limits of the statute and of New York’s regulatory authority.
  • The Act defines “related party transactions” to include transactions not only by New York charities but also by their “affiliates.”  These definitions are so broad that they pick up transactions involving even for-profit corporations and entities that have no connection to New York other than their affiliation with a New York charity.  We will talk more about “related party transactions” and about “affiliates” in Part II of this series.

Stay tuned on these important issues.

Two:

If your organization’s board has delegated some aspect of its decision-making authority to a committee (e.g., the power to set the CEO’s compensation), you now need to make sure that the voting membership of that committee consists exclusively of current board members. The only exception appears to be for an investment committee, based on provisions of law that predate the Act.  Remember, some committees are merely advisory, and if that is the case, may include non-board members.  Organizations should check their committee rosters for compliance. If you’re not sure whether a committee is advisory or decision-making, it may be a good idea to update bylaws and committee charters (or to adopt a charter if none exists) to clarify committee duties and authority.  One other key point:  The Act cannot be read in isolation.  It has to be interpreted in light of the Not-for-Profit Corporation Law as a whole, and pre-existing provisions of the NPCL may affect the interpretation of the Act.

Three:

Even if your organization is not subject to the Act’s audit oversight requirements (as in the case of a New York charity that conducts no fundraising activities in New York), your board may still want to have an audit committee for fiduciary reasons. However, if that audit committee holds delegated decision-making authority from the board (such as the power to hire and fire the auditor), it needs to be made up exclusively of current board members.   This point is easy to overlook because non-fundraising organizations are not subject to the Act’s audit oversight provisions.   That is true as far as it goes, but the requirement about committee composition is generic - and is found in another part of the Act, not in the audit oversight provisions.