SB 1262, effective Jan. 1, 2005, has been analogized to using nuclear weapons to kill gnats. While nonprofit hospitals are exempt from its requirements, nonprofit organizations affiliated with hospitals, such as development foundations, will begin feeling its impact this year. Most significantly, affected organizations will be required to obtain and disclose audited financial statements and to maintain an audit committee.

Who Must Comply? A nonprofit organization that is organized for charitable purposes and doing business or holding property in California for such purposes must comply (whether or not it is organized under the laws of California) unless it is exempt from the Attorney General’s filing, registration and disclosure requirements. Hospitals and Knox-Keene-licensed health care service plans are exempt (as are certain other types of nonprofit organizations specifically exempted from the Attorney General’s supervision).¹ However, unless a nonprofit qualifies under an exempt category, it is subject to the Attorney General’s supervision and the new requirements.

What Requirements Does the New Law Impose?

• Audited Financial Statements. All charitable organizations that are required to register with the Attorney General and that receive or accrue $2 million or more in gross revenue in the fiscal year (beginning with fiscal years ending after June 30, 2005) must obtain an annual independent financial audit for that year, must file annual, audited financial statements for the year with the Attorney General and must make them available to the public. Even if the entity takes in less than $2 million, disclosure to the Attorney General and the general public is required if the entity chooses to have its financial statements audited.

  The Act provides that if a nonprofit organization subject to the Act is "under the control of another organization, the controlling organization may prepare a consolidated financial statement." This would allow a foundation with financial statements consolidated with a controlling parent entity to file and make available the parent's financial statements in satisfaction of the Act. However, because the Act does not specify the meaning of "control," it is unclear whether and when consolidated statements are a permissible substitute for a nonprofit entity's separate financial statements.
  
  

• Audit Committee. Charitable corporations subject to the audit requirement must appoint an audit committee, which is responsible for recommending to the board of directors an independent, certified public accountant to perform the audit, reviewing the accountant’s findings and determining whether to accept the audit.

• Audit Committee Members. No audit committee member may have a material financial interest in any entity doing business with the nonprofit. However, the new law does not require a minimum size for the audit committee, which may be as small as just one member. In addition, members of the committee need not be members of the board of directors (provided they do not serve on the organization’s staff or as its president or CEO, treasurer or CFO) And, although the audit committee must be separate from any finance committee, finance committee members may serve on the audit committee, provided they constitute less than half of the committee and provided they do not serve as its chair.
  
  
• Audit Committee Compensation. Although audit committee members may be compensated, they cannot receive compensation that is greater than the amount paid (if any) to the board of directors for their service on the board.


• Timing of Registration. The new law shortens the time period for registering with the Attorney General from within six months after receiving any property for charitable purposes to within 30 days of receipt.
  
  
• Compensation Review. The compensation of the charitable organization’s president or chief executive officer and any treasurer or chief financial officer must be reviewed and approved by the organization’s board of directors, or an authorized committee of the board, to ensure that it is just and reasonable.
  
  
• Fundraising Contracts. A charitable organization must enter into a written contract for each fundraising campaign or event for which it hires a professional fundraiser. The contract must contain provisions that are specifically required by the Attorney General, according to the category the professional falls within. For example, if the contract is with a commercial fundraiser, for a fixed fee, it must identify not only the amount of the fundraiser’s fee, but also a good faith estimate of the percentage of contributions that the fee represents and the assumptions upon which that estimate is based.

  All contracts with professional fundraisers must provide for the charitable organization’s right to cancel, without penalty, for 10 days following execution. The charitable organization is also required to notify the Attorney General of any such cancellation. All contracts must further provide for the charitable organization’s right to terminate for cause, at any time, or without cause, with 30 days’ written notice. A charitable organization may also void its contract for a fundraiser’s failure to satisfy registration requirements with the Attorney General before soliciting any funds.

• Solicitations. The new law prohibits any misrepresentation of a charitable organization’s purpose, its nature or its beneficiaries. Certain conduct is specifically prohibited in connection with a solicitation or charitable promotion. For example, falsely characterizing goods or services as having the endorsement or sponsorship of a particular person, without his or her written consent, or using the mere fact of registration with the Registry of Charitable Trusts to imply an endorsement of or approval by the Attorney General, is prohibited.

FOOTNOTES

1 Also exempted are: the United States, any state, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any of their agencies or governmental subdivisions; any religious corporation sole or other religious corporation or organization that holds property for religious purposes, or to any officer, director, or trustee thereof who holds property for like purposes; a cemetery corporation; certain political action committees, charitable corporations or unincorporated associations organized and operated primarily as a religious organizations and educational institutions. See CAL. GOV’T CODE §12583.

For more information, please contact:

Author: Rachel Glitz San Francisco, California (415) 276-6537 RachelGlitz@dwt.com

Author: Gerry Hinkley San Francisco, California (415) 276-6530 GerryHinkley@dwt.com

Thomas E. Jeffry, Los Angeles, (213) 633-6882, TomJeffry@dwt.com

This Advisory is a publication of the Health Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in health law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2005, Davis Wright Tremaine LLP.