What You Ought To Know Of The Non-Profit Revitalization Act Of 2013
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What is the Non-Profit Revitalization Act of 2013?
On December 18, 2013, Governor Andrew M. Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the “Act”). The Act signifies the very first substantial overhaul from the laws and regulations regulating New York’s nonprofit sector in almost one half-century. The Act, that will work on This summer 1, 2014, amends numerous parts of the brand new You are able to Not-for-Profit Corporation Law and many parts of other New You are able to laws and regulations, including, although not restricted to, the manager Law, Education Law, Religious Companies Law and also the Estates, Forces and Trusts Law.[i] The objective of the Act is 2-fold: to lessen unnecessary and costly regulating burdens on nonprofits and also to strengthen nonprofit governance and accountability. The Act is dependant on recommendations posted towards the Attorney General (“AG”) through the Leadership Committee on Nonprofit Revitalization. The Leadership Committee, featuring its an assorted variety of nonprofit leaders and lawyers, was organised through the AG this year to promote a distinctive partnership between government and also the nonprofit sector and produce about significant reform.
Does the Act Apply to Your Organization?
Generally, the Act applies to New York not-for-profit corporations, other not-for-profit organizations to which the Not-for-Profit Corporation Law applies (e.g., education corporations, religious corporations) and organizations that operate or solicit charitable contributions in New York, including charitable trusts.[ii]
What Changes Are Effected by the Act?
The many changes effected by the Act fall into two general categories: 1) those which reduce regulatory burdens on nonprofits; and 2) those which enhance nonprofit governance and accountability. A summary of some of the major changes effected by the Act follows below.
Reforms Which Reduce Regulatory Burdens
- Thresholds for Financial Reporting Raised
Charitable organizations which solicit contributions from New Yorkers or receive government grants or loans must register using the AG and yearly file financial reviews. Presently, organizations that receive in almost any fiscal year $100,000 or fewer in gross revenue and support must file an unaudited financial report (on forms recommended through the AG). Organizations that receive in almost any fiscal year greater than $100,000 but only $250,000 in gross revenue and support must file a yearly financial report supported by a yearly financial plan including a completely independent CPA review report. Organizations that receive in almost any fiscal year greater than $250,000 in gross revenue and support must file using the AG a yearly written financial report supported by a yearly financial plan including a completely independent CPA audit report. The Act boosts the revenue thresholds for confirming as proven within the below chart. Additionally, the Act necessitates the payment of the $25 filing fee with every filing and authorizes the AG to produce rules for digitally filing such reviews. Presently, all filings should be posted in paper form.
|Effective Date||Unaudited Financial
|CPA Review Report[iii]||CPA Audit Report|
|July 1, 2014||$250,000 or less||More than $250,00 but not more than $500,000||More than $500,000|
|July 1, 2017||$250,000 or less||More than $250,000 but not more than $750,000||More than $750,000|
|July 1, 2021||$250,000 or less||More than $250,000 but not more than $1,000,000||More than $1,000,000|
- Barriers to Incorporation Eliminated
Abandonment from the “Type” System: The Act amends several cumbersome procedural needs which produced unnecessary and costly hurdles for nonprofits trying to incorporate and modify incorporation documents. First, it’s no longer essential to designate an organization like a Type A, B, C or D corporation before posting a suggested certificate of incorporation. The Act replaces the 4 kinds of not-for-profit companies with two simple groups: charitable companies and non-charitable companies. A charitable corporation is a created for charitable, educational, religious, scientific, literary, or cultural reasons or created to prevent cruelty to children or creatures. Any other kind of not-for-profit corporation is considered non-charitable. The Act provides that existing Type B and C companies will be considered charitable companies. All existing Type A companies will be considered non-charitable companies. All existing Type D companies with charitable reasons will be considered charitable, while different kind D companies is going to be considered non-charitable. Existing education companies and spiritual companies are specifically declared charitable companies through the Act. Because of this transformation, there’s no more an excuse for any not-for-profit corporation to file for a “certificate of type.”
Listing of Activities in Certificate of Formation No More Needed: A not-for-profit corporation may, but is not needed to, list in the certificate of incorporation those activities so it expects to handle in furtherance of their reasons.
Notice to, rather than Approval of, Commissioner of your practice Now Needed for several Recently Created Not-for-Profit Companies: Underneath the Act, the last approval from the Commissioner of your practice is not needed for that incorporation of not-for-profit companies with educational reasons that aren’t schools, schools, colleges, libraries, museums or historic communities. Rather, this type of corporation must simply file a licensed copy of their certificate of incorporation using the Commissioner of your practice following formation. Prior approval from the Commissioner of your practice continues to be needed for schools, libraries, museums and historic communities. Schools and colleges must have the prior written authorization from the Board of Regents.
Department of Condition Can Correct Minor Errors in Submissions Just before Filing: The Act authorizes the Department of Condition to fix typographical along with other minor errors in certificates along with other documents posted towards the Department of Condition for filing before the filing of these documents upon the written or digitally posted request of the baby that has posted the documents for filing.
Attorney General May Now Approve an adjustment from the Reasons Incorporated inside a Corporation’s Certificate of Incorporation: The Act enables an organization to find your application from the AG to some certificate of amendment which adds, changes or eliminates a mentioned reason for the business within the organization’s certificate of incorporation, instead of Top Court approval. Some companies may benefit out of this change, the Act leaves open the choice of seeking court approval of these amendments, despite a rejection of these an amendment through the AG.
- Procedural Hurdles for Nonprofit Transactions Reduced
Education Companies and spiritual Companies Are Now Able To Merge additionally to Consolidate: Current law enables education companies and spiritual companies to “consolidate” along with other education companies and spiritual companies, correspondingly, but doesn’t allow such organizations to “merge” to ensure that one corporation continues to be the making it through entity. The Act authorizes such mergers.
Attorney General Approval of Mergers, Dissolutions and Substantial Resource Sales Now Sufficient: The Act provides charitable organizations with a choice of seeking only AG approval of great transactions that presently require court approval and see towards the AG. Such significant transactions include mergers, consolidations, dissolutions[iv]and also the purchase, lease, exchange or any other disposition of or substantially all a corporation’s assets. Underneath the Act, a not-for-profit corporation which objects towards the AG’s determination can always seek Top Court review.
- Board Procedures and Voting Requirements Modernized
Routine Transactions Might Be Approved by Majority Election of Board or Committee: The Act enables not-for-profit companies to initiate routine property transactions (i.e., to buy, sell, mortgage, lease, exchange or else get rid of property) when approved by most the corporation’s company directors or most a committee approved through the board. Presently, such transactions should be approved by two-thirds of the corporation’s entire board or, for any board with 21 or even more company directors, a big part election from the entire board. The Act maintains this tighter voting requirement just for transactions concerning any substantially all a corporation’s assets.
Electronic Transmission of Notices, Waivers and Votes and Meeting Participation through Video Conference Acceptable: The Act sanctions the electronic transmission of notices of member conferences, waivers of notice of conferences of people and company directors, votes needing the unanimous consent of people and company directors and member proxy authorizations. Additionally, the Act provides that company directors and committee people may take part in conferences via video conference.
Committee Groups Simplified: The Act eliminates the excellence between standing and special committees and, rather, provides two simple committee groups: committees from the board, composed of just company directors, and committees from the corporation, composed of company directors and non-company directors. The Act clarifies that committees from the corporation cannot bind the board and, unless of course the by-laws and regulations of the corporation provide otherwise, is going to be chosen very much the same as officials.
Amendment of By-Laws and regulations Not Needed to repair Quantity of Company directors: The Act authorizes a not-for-profit corporation without people to repair the amount of company directors by action from the board within specific provision from the by-laws and regulations or having a range established within the by-laws and regulations. Under current law, this type of corporation is needed to amend its by-laws and regulations to be able to change the amount of company directors.
Reforms Which Enhance Governance and Accountability
- Independent Board Oversight over Compensation Required: The Act prohibits any director, member or officer of a not-for-profit corporation whose compensation is being deliberated or voted on by the corporation’s board or committee from participating in such board or committee deliberation or vote. However, the Act provides that, upon the board’s or committee’s request, such an individual may provide relevant information to the board or committee or answer relevant questions posed by the board or committee prior to such deliberation or vote.
- Independent Board Leadership Required: The Act prohibits any employee of a not-for-profit corporation from serving as chair of the corporation’s board or holding any other title with similar responsibilities.
- Board Oversight of the Corporation’s Financial Processes and Audit Required: Currently, charitable corporations meeting certain revenue thresholds (discussed above) must annually file independent CPA audit reports with the AG. However, the law does not provide requirements for board oversight of the corporation’s audit or other financial processes. The Act clarifies and requires, for the first time, such oversight. Specifically, with respect to each corporation required to file a CPA audit report, all independent directors[v] on the board or a designated audit committee comprised of independent directors must: 1) oversee the accounting and financial reporting processes of the corporation and the audit of the corporation’s financial statements; 2) annually retain an independent auditor; and 3) review the results of the audit and any related management letter with the independent auditor. For a charitable corporation that is required to file a CPA audit report with the AG and which had in the prior fiscal year, or reasonably expects to have in the current fiscal year, annual revenue in excess of $1,000,000, the independent directors on the board or the designated audit committee must also: 1) review with the auditor the scope and planning of the audit prior to the audit’s commencement; 2) upon completion of the audit, review and discuss with the auditor any material risks and weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditor’s activities or access to requested information, any significant disagreements between the auditor and management, and the adequacy of the corporation’s accounting and financial reporting processes; 3) annually consider the performance and independence of the auditor; and 4) if such duties are performed by an audit committee, report to the board regarding the committee’s activities. The independent directors on the board or the designated audit committee must also oversee the adoption of, implementation of, and compliance with the corporation’s conflict of interest policy and/or whistleblower policy if such functions are not otherwise performed by another committee of the board comprised of independent directors. For corporations that had less than $10,000,000 in annual revenue in the last fiscal year ending prior to January 1, 2014, these new audit oversight rules will not become effective until January 1, 2015.
- Board Oversight of Related Party Transactions Required: Although most corporations currently have in place some form of conflict of interest policy and state law currently requires parties interested in a corporate transaction to disclose the material terms of such transaction to the board, the Act, for the first time, requires significant board oversight of related party transactions. Specifically, the Act prohibits any not-for-profit corporation from entering into a related party transaction[vi] unless such transaction is determined by the board to be fair, reasonable and in the corporation’s best interest. In addition, any director, officer or key employee of a not-for-profit corporation who has an interest in a related party transaction must disclose in good faith to the board (or an authorized committee) the material facts of such interest and any related party is prohibited from participating in deliberations or voting concerning the transaction. Further, when a related party transaction involves a charitable corporation and a related party with substantial financial interest, the board or authorized committee must: 1) prior to entering into the transaction, consider alternatives to the extent available; 2) approve the transaction by not less than a majority vote of all directors or committee members present at the meeting; and 3) contemporaneously document in writing the basis for board or committee approval, including the consideration of alternatives.
- Attorney General’s Power to Police Self-Dealing Enhanced: The Act strengthens the AG’s power to bring judicial proceedings challenging related party transactions. Specifically, the Not-for-Profit Corporation Law will specifically authorize the AG to: 1) bring an action to enjoin, void or rescind any related party transaction or proposed related party transaction that violates any provision of the Not-for-Profit Corporation Law or was otherwise not reasonable or in the best interest of the corporation; 2) seek restitution and the removal of directors or officers; or 3) require any person or entity to: i) account for any profit made from such transaction and pay such profit to the corporation; ii) pay the corporation the value of the use of any of its property or other assets used in the transaction; iii) return or replace any property or other assets lost to the corporation as a result of the transaction (together with any income or appreciation lost to the corporation by reason or such transaction) or account for any proceeds of sale of such property and pay the proceeds to the corporation (together with interest at the legal rate); and iv) pay, in the case of willful and intentional conduct, an amount up to double the amount of any benefit temporarily obtained.
- Conflict of Interest Policy Required: Although, as mentioned, most organizations have adopted a conflict of interest policy as a best practice or to ensure compliance with federal laws, New York state law currently does not require that a not-for-profit corporation implement such a policy. The Act indeed requires that every not-for-profit corporation adopt a conflict of interest policy that ensures that its directors, officers and key employees act in the corporation’s best interest and comply with applicable legal requirements, including the new rules for related party transactions contained in the Act. Specifically, the Act provides that a conflict of interest policy must include, at a minimum: 1) a definition of the circumstances that constitute a conflict of interest; 2) procedures for disclosing a conflict of interest to the audit committee or, if there is no audit committee, to the board; 3) a requirement that the person with the conflict of interest not be present at or participate in board or committee deliberations or votes on the matter giving rise to the conflict; 4) a prohibition against any attempt by the person with the conflict to improperly influence the deliberation or voting on the matter giving rise to the conflict; 5) a requirement that the existence and resolution of the conflict be documented in the corporation’s records, including the minutes of any meeting at which the conflict was discussed or voted upon; and 6) procedures for disclosing, addressing and documenting related party transactions in accordance with the rules for related party transactions in the Act. In addition, the policy must require that prior to the initial election of any director, and annually thereafter, such director shall complete, sign and submit to the secretary of the corporation a written statement identifying any entity of which such director is an officer, director, trustee, member, owner or employee and with which the corporation has a relationship, and any transaction in which the corporation is a participant and in which the director might have a conflicting interest. The secretary must provide a copy of all completed statements to the chair of the audit committee or, if there is no audit committee, to the chair of the board.
- Whistleblower Policy Required: The Act requires that in addition to a conflict of interest policy, a not-for-profit corporation with 20 or more employees and annual revenue of $1,000,000 or more must adopt a whistleblower policy to protect from retaliation persons who report suspected improper conduct. Like conflict of interest policies, whistleblower policies have been adopted by many nonprofits as a best practice or to ensure compliance with federal laws, but are not currently required by state law. Pursuant to the Act, a whistleblower policy must provide that no director, officer, employee or volunteer of a corporation who, in good faith, reports any action or suspected action taken by or within the corporation that is illegal, fraudulent or in violation of any adopted policy of the corporation shall suffer intimidation, harassment, discrimination or other retaliation or, in the case of employees, adverse employment consequence. In addition, the policy must include: 1) procedures for the reporting of violations or suspected violations of laws or corporation policies, including procedures for preserving the confidentiality of reported information; 2) a requirement that an employee, officer or director of the corporation be designated to administer the policy and to report to the audit committee or other committee of independent directors or, if no such committee exists, to the board; and 3) a requirement that a copy of the policy be distributed to all directors, officers, employees and volunteers who provide substantial services to the corporation.
What Should Your Organization Do Now?
Thinking about the Act doesn’t become effective until This summer 1, 2014, your business should now take a moment to examine and digest the appropriate provisions from the Act and see how its by-laws and regulations, committee charters, guidelines and methods should be modified to conform using the Act and really should be modified to benefit from the lower burdens on and streamlined methods for nonprofits.
Particularly, your business should review its financial confirming obligations and whether or not this will take advantage of the elevated revenue thresholds for confirming towards the AG.
To benefit from the Act’s modernized board methods and voting needs, your business should review its by-laws and regulations and, if required, amend its current committee designations and existing methods and needs for supplying notice of member conferences, waivers of notice of conferences by people and company directors and member proxy authorizations, member and director voting by unanimous consent, taking part in conferences of company directors and committees, voting on routine real estate transactions, and fixing the amount of company directors.
To conform using the Act’s new audit oversight needs, your business should review and, if required, amend its audit committee charter or, if no audit committee presently is available, see whether compliance with audit oversight needs is going to be carried out by an audit committee or through the full board (minus interested company directors). A brand new audit committee will need a charter that matches the Act.
Compliance using the Act’s new needs for oversight of related party transactions along with other conflicts of great interest will need your business to examine its current conflict of great interest policy and, if no current policy is available, produce a comprehensive conflict of great interest policy that matches all relevant legal needs. Additionally, your business must evaluate the charter from the committee accountable for oversight of related party transactions along with other conflicts of great interest (audit committee or any other committee) to find out whether or not this matches the brand new needs underneath the Act. In case your organization doesn’t presently make use of a committee for this function, it ought to see whether using a committee is going to be advantageous and, if that’s the case, amend the charter of the presently existing committee to incorporate such responsibilities or produce a new committee and committee charter.
Your business also needs to review whether it’s needed through the Act to consider a whistleblower policy. If it’s, as well as your organization presently includes a whistleblower policy in position, the insurance policy ought to be reviewed and amended if required to make sure compliance using the Act. In case your organization doesn’t presently possess a whistleblower policy but is needed through the Act to consider one, a brand new whistleblower policy ought to be drafted and adopted in compliance using the needs from the Act. Additionally, your business must review and amend, if required, the charter from the committee accountable for implementation from the whistleblower policy (audit committee or any other committee) to find out whether or not this matches the brand new needs underneath the Act. In case your organization doesn’t presently make use of a committee for this function, it ought to see whether using a committee is going to be advantageous and, if that’s the case, amend the charter of the presently existing committee to incorporate such responsibilities or produce a new committee and committee charter.
This advisory is intended to provide a comprehensive overview of the major changes effected by the Non-Profit Revitalization Act of 2013, but does not address every component of the Act and should not be construed as specific legal advice.
[i] This advisory focuses on the amendments to the Not-for-Profit Corporation Law, Education Law and Religious Corporations Law.
[ii] This advisory focuses on the effect of the Act on not-for-profit corporations, education corporations and religious corporations. The Act’s effect on charitable trusts is not specifically addressed.
[iii] The Act allows the AG to require an organization to file a CPA audit report in the event the AG determines that that such filing is necessary following its review of the organization’s CPA review report.
[iv] The AG may also approve plans of dissolution for non-charitable not-for-profit corporations holding assets legally required to be used for a particular purpose.
[v] An independent director is defined in the Act as a director who: 1) has not been an employee of the corporation or an affiliate of the corporation in the last 3 years and has no relative who has been an employee of the corporation or an affiliate of the corporation in the last 3 years; 2) has not received (and has no relatives who have received) in the last 3 years more than $10,000 in compensation from the corporation or an affiliate of the corporation (other than reimbursable expenses or reasonable compensation for director services); and 3) is not a current employee of or does not have a substantial financial interest in (and does not have a relative who is a current employee of or has a substantial financial interest in) any entity that has made payments (not including charitable contributions) to or received payments (not including charitable contributions) from the corporation or an affiliation of the corporation for property or services in an amount which, in any of the last 3 fiscal years, exceeds the lesser of $25,000 or 2% of such entity’s consolidated gross revenues.
[vi] The Act defines “related party transaction” as any transaction, agreement or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant. “Related party” is defined as 1) any director, officer or key employee of the corporation or any affiliate of the corporation; 2) any relative of any such person; or 3) any entity in which any such person has a 35% or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%.