February 16, 2012 – Attorney General Eric Schneiderman has announced a new reform plan to reduce the regulatory burden on New York not-for-profit organizations while strengthening their governance and accountability.
The Attorney General’s comprehensive plan distinguishes itself from recent proposals to cap not-for-profit executive compensation, emphasizing that improper compensation is not representative of the New York not-for-profit sector as a whole. Instead, the Attorney General seeks a practical approach to assisting not-for-profits in reducing financial strains while maintaining governance best practices.
The plan takes a three prong approach to reform: (1) The Nonprofit Revitalization Act, (2) the “New York on BOARD” initiative, and (3) the “Directors U” initiative.
Proskauer Rose LLP
Legislative and Administrative Reform
First, the Attorney General outlined his proposal for The Nonprofit Revitalization Act (the “Act”). The Act would include several key elements for:
- Streamlining bureaucratic processes to expedite formation of not-for-profits in New York and approval of key not-for-profit transactions;
- Modernizing outdated requirements, such as permitting the use of technology to facilitate more efficient operations and to reduce costs;
- Requiring that boards provide enhanced and independent oversight of executive compensation;
- Increasing board responsibilities to oversee financial audits;
- Enhancing the Attorney General’s tools to police self-dealing and other forms of corruption; and
- Requiring that not-for-profits adopt conflict-of-interest and whistleblower policies.
The Attorney General’s announcement came in conjunction with the issuance of the report (the “Report”) of the Leadership Committee for Nonprofit Revitalization (the “Committee”), composed of 32 representatives of the not-for-profit community, including not-for-profit executives and legal advisors. The Committee was created by the Attorney General in 2011 as a taskforce to survey the regulatory framework and compliance situation of New York not-for-profits and to propose meaningful solutions to existing governance issues. The Attorney General’s plan responds to and implements the recommendations made by the Committee. The Committee’s full Report is available on the Attorney General’s website.
In its Report, the Committee discusses its advice for legislative and administrative changes to improve regulation of the not-for-profit community in greater detail. The Report lists the following recommendations:
- Create an Office of Contracting Reform and Accountability. The Office would consolidate oversight of government contracting and ensure the implementation of contracting reforms to expedite and simplify the process for not-for-profits contracting with the State.
- Appoint a Nonprofit Liaison to the Governor. The Nonprofit Liaison would provide a single official with significant authority to review State agency contracting processes for inefficiency and to facilitate communication between the Governor’s office and the not-for-profit community.
- Capitalize a revolving loan fund for not-for-profits. The fund, already authorized under State law, would provide interest-free loans to not-for-profits whose government contracts were delayed. A similar loan program already operates in New York City as the Revolving Grant Fund.
- Create a State contracting website. The website would improve the transparency of government contracting by allowing not-for-profits to track the current status of Requests for Proposals, contract approvals, renewals, payments, and audits.
- Consolidate or eliminate not-for-profit corporation types. Elimination of Type C corporations would reduce the current confusion between not-for-profit corporation types with minimal impact, since Type C corporations are substantively treated in the same manner as Type B corporations.
- Expedite the not-for-profit incorporation process. The Committee recommends: (1) requiring only timely notification rather than agency pre-approval of not-for-profit incorporations when no compelling policy justification exists, (2) clarifying the corporate purposes content required for a not-for-profit’s incorporation application, and (3) granting the Department of State the authority to correct non-substantive errors in certificate of incorporation applications.
- Modernize not-for-profit communications. The Committee recommends: (1) allowing electronic board and membership communications, (2) eliminating the publication requirement for private foundations and trusts, and (3) allowing electronic filing with the Attorney General.
- Simplify the approval process for not-for-profit transactions. The Committee recommends: (1) creating an expedited process requiring only Attorney General approval of asset transfer and dissolution transactions but allowing for appeal to the courts, (2) creating a merger option giving educational and religious not-for-profits the same transactional freedoms as other not-for-profits, and (3) allowing board approval of small, routine real estate transactions by a lesser vote.
- Establish statutory requirements for board oversight. The Committee recommends creating a framework and specific criteria for board oversight of executive compensation, external financial audits, and self-dealing. The Committee realizes that federal tax law rules for determining presumptively reasonable compensation are in place and voluntarily used by many not-for-profits; the Committee suggests that this framework be mandated and expanded in State law. Executives and other compensated employees would be prohibited from serving as board chair, and limits would be placed on their participation in board deliberations and voting. In addition, not-for-profits would be required to adopt conflict-of-interest and whistleblower policies.
- Strengthen the Attorney General’s regulatory power. The Attorney General would be granted the power to bring judicial proceedings challenging interested-party transactions.
Recruiting and Educating Directors
In addition to the proposed Act, the Attorney General’s plan includes two new initiatives that will provide more immediate assistance to not-for-profits in recruiting and educating not-for-profit directors. New York on BOARD (“Building Oversight, Awareness, Resources and Depth”) will connect the business community with not-for-profit boards statewide. Administered by the Association for a Better New York (“ABNY”), New York on BOARD will ask businesses to pledge to be “on board” with the not-for-profit initiative. On board businesses would create programs encouraging their employees to serve as not-for-profit board members and matching them with a suitable organization. Incentives could include financial sponsorships of board service or recognizing board service in performance evaluations. A database will be created with profiles of prospective directors as well as descriptions of the needs of specific not-for-profit organizations. The goal of the initiative is to provide a stronger and more diverse recruiting pool for not-for-profit boards. It is intended to supplement, not replace existing recruitment efforts. Five companies will serve as initial members on the development steering committee: Bloomberg LP, Cushman & Wakefield, First Niagara Bank, Lazard, and Loews Hotels. After its initial implementation, New York on BOARD intends to expand recruitment to the academic and retiree communities.
Directors U is a second initiative designed to educate current and future not-for-profit board members about their legal and financial responsibilities. The initiative will provide online training materials and live educational sessions free or at minimal cost to not-for-profit directors statewide in an easily accessible manner. The goal of the initiative will be to promote knowledge of not-for-profit best practices. Individual participants will receive certificates to document completion of training courses, and organizations will be recognized based on the extent and frequency of their board participation. With the assistance of the Attorney General, the program will be administered by a consortium of academic institutions including Adelphi University, Baruch College, Binghamton University, Columbia University, Cornell University, The New School, New York University School of Law, University at Albany, and Yale University.
As the Attorney General’s plan is unveiled, not-for-profit organizations should carefully monitor the plan’s navigation through the State Legislature and any forthcoming implementation efforts. The Committee specifically recommended the establishment of future conferences between the Attorney General and the not-for-profit community to promote further discussion of productive reform. If any or all of the proposed changes are enacted, not-for-profits may face a significantly different regulatory playing field and should consider participating actively in shaping it.