Highlights of Non-Profit Revitalization Act of 2013

The Non-Profit Revitalization Act of 2013 (the "Act") was signed into law in December of 2013 by Governor Cuomo, with most provisions of the Act set to take effect on July 1, 2014. The Act will have a significant effect on New York's not-for-profit corporations and charitable trusts. This memorandum is intended to provide an overview of the Act's key provisions.

 

MANDATORY CONFLICT OF INTEREST POLICY

 

The Act requires that all not-for-profit corporations adopt a conflict of interest policy that includes the following:

 

• (i) a definition of the circumstances that constitute a conflict of interest;
• (ii) procedures for disclosing a conflict of interest to the audit committee or (if no audit committee exists) to the board of directors;
• (iii) a requirement that the person with the conflict of interest not be present at, or participate in, board or committee deliberations or voting on the matter giving rise to such conflict;
• (iv) a prohibition against any attempt by the person with the conflict to influence board deliberations or voting;
• (v) a requirement that the existence and resolution of the conflict be documented in the corporation's records;
• (vi) procedures for disclosing, addressing and documenting related party transactions; and
• (vii) a requirement that prior to the initial election of any director, and annually thereafter, directors must complete, sign and submit a written statement identifying (to the best of the director's knowledge) any potential conflicting interest or relationship.

MANDATORY WHISTLEBLOWER POLICY FOR CERTAIN ENTITIES

 

Not-for-profit corporations and wholly charitable trusts that have at least twenty employees and one million dollars in revenue for the prior year are required to adopt a whistleblower policy in order to protect individuals who report misconduct in good faith. The policy must include:

 

• (i) procedures for the reporting of suspected violations including procedures for preserving the confidentially of reported information;
• (ii) a requirement that an individual be designated to administer the whistleblower policy and report to the appropriate committee or (if no committee exists) the board of directors; and
• (iii) a requirement that the policy be distributed to all officers, directors, employees and volunteers (who provide substantial services to the corporation).

RESTRICTIONS REGARDING RELATED PARTY TRANSACTIONS

 

Not-for-profit corporations or wholly charitable trusts are prohibited from entering into related party transactions unless such transaction is deemed to be fair and reasonable and in the best interests of the corporation. Any director, officer or key employee who has an interest in the transaction must disclose in good faith to the board or an authorized committee thereof, the material facts concerning such interest. With respect to a related party transaction involving a charitable corporation, the board or authorized committee shall:

 

• (i) prior to entering into the transaction consider alternative transactions to the extent available;
• (ii) approve the transaction by a majority vote of the committee members present at the meeting; and
• (iii) document (i) and (ii) above, contemporaneously.

COMPENSATION APPROVAL

 

No person intended to receive compensation or distributions upon dissolution, according to a not-for-profit's compensation arrangement, may be present at or participate in any board or committee deliberation or vote relating to said person's compensation (the above referenced individuals may provide information or answer questions at the board's request prior to the aforementioned deliberations or vote).

 

PROHIBITIONS ON EMPLOYEES SERVING AS CHAIR

 

No employees of a not-for-profit corporation (including the CEO) may serve as Chair of the board or hold any title with similar responsibilities (this provision will become effective January 1, 2015).

 

MANDATORY AUDITING

 

Any charities required to register to solicit for charitable contributions in New York which have annual revenue in excess of $500,000 must have an audit committee comprised of independent directors. Alternatively the independent directors on its board may perform the duties of the audit committee. Duties of the audit committee include:

 

• (i) overseeing accounting and financial reporting processes and auditing financial statements;
• (ii) annually retaining an independent auditor;
• (iii) reviewing and discussing with the independent auditor the results of the audit, and
• (iv) overseeing the implementation of the conflict of interest and whistleblower policies.

*(Audit committees of charities with annual revenue in excess of $1 million have additional responsibilities).

 

MODERNIZATION OF COMMUNICATION

 

Notices and waivers of notice for meetings may be given by electronic communication such as email or facsimile, rather than mail or in person alone. The Act also requires not-for-profit corporations with more than 500 members to post notice of member meetings on their website (if they have an active website), in addition to publication by Newspaper. Not-for-profit corporations may use electronic mail to designate a proxy or to give unanimous written consent in lieu of a meeting. Additionally board member may participate in board meeting through videoconference, Skype and similar types of electronic communication, provided all members can hear each other at the same time.

 

ADMINISTRATIVE SIMPLIFICATION

 

The Act replaces the existing classification system (i.e. A, B, C, or D) with two classes of not-for-profit corporations: "charitable" and "non-charitable." "Charitable" corporations cover Type B and C corporations as well as Type D corporations formed for charitable purposes; all other Type D corporations and Type A corporations are considered "non-charitable." Existing organizations will not need to amend their governing documents to clarify their classification under this new system.

 

INCREASED THRESHOLDS FOR AUDITS AND REVIEWS

 

The Act raises the threshold of the annual gross revenue amounts that trigger auditing and reporting procedures under New York Executive Law in the following manner:

 

Annual Gross Revenue of Organization	Requirement
More than $500,000	File annual financial report on forms prescribed byAttorney General, accompanied by annual financial statement that includes an independent CPA's audit report containing an opinion that the financial statements are presented fairly in all material respects and in conformity with GAAP principles.(The threshold for this requirement will escalate to $750,000 in 2017 and to $1 million in 2021.)
$250,000-$500,000	File annual financial report in conformity with GAAP, along with annual financial statement that includes an independent CPA's review report in accordance with the "statements on standards for accounting and review services" issued by the American Institute of Certified Public Accountants.
Less than $250,000	File unaudited financial reports on forms prescribed by the Attorney General.

RELAXED APPROVAL POLICY FOR REAL ESTATE TRANSACTIONS

 

With regard to the sale or purchase of real estate where the property does not constitute all or substantially all of a non-profit's assets, only a majority of the board (or a specially appointed committee) is required. In the past, a two-thirds board vote was required. Where such real estate transactions constitutes all or substantially all of the charity's assets, a two-thirds board vote is required unless the board has fewer than 21 directors, in which case only a majority board vote is required.

 

SIMPLIFICATION OF PROCESS REGARDING MAJOR CORPORATE CHANGES

 

Major corporate changes in charitable corporations, such as: (i) the sale, lease or exchange of substantially all of a not-for-profit's assets; (ii) mergers; (iii) dissolutions, and (iv) changes to corporate purpose, are now subject to the Attorney General's approval as opposed to being subject to approval of the New York Supreme Court as well as notice to the Attorney General as was previously the case. (The Attorney General may still refer the case to the Supreme Court if appropriate and the charity may likewise seek the court's review.)

 

AUTOMATICALLY SUBJECT TO PERSONAL JURISDICTION IN NEW YORK

 

Upon becoming a director, officer, key employee or agent of a not-for-profit corporation, all individuals, including non-New York domiciles, are automatically subject to the personal jurisdiction of the Supreme Court of the state of New York.