| 
California’s Nonprofit Integrity Bill
Signed Into Law
By
Rachel
Glitz
[October 2004]
Governor Arnold Schwarzenegger signed the “Nonprofit
Integrity Bill” into law on Sept. 30, 2004. The new law,
which becomes effective Jan. 1, 2005, creates significant new
challenges for California nonprofit organizations. Sponsored
by California Attorney General Bill Lockyer, the legislation
is intended to increase donor confidence by enhancing the financial
accountability of charities and ensuring that a larger share
of the funds collected by professional fundraisers will go to
charity. Critics, on the other hand, maintain the new law will
merely increase expenses and administrative burdens on the organizations
that must comply with it.
The new law affects over 85,000 nonprofit charitable corporations
and charitable trusts currently registered with the Attorney
General’s Registry of Charitable Trusts and subject to
the Attorney General’s supervisory and enforcement powers.
It also extends those powers to unincorporated associations.
By amending the existing filing, registration and reporting
requirements for nonprofits, as well as the rules governing
charitable solicitations, the new law requires many California
nonprofit organizations to make fundamental changes to their
internal operations. Most notably, the new law requires all
charitable organizations that are required to register with
the Attorney General and that receive or accrue gross revenue
of $2 million or more in a fiscal year to obtain an independent
financial audit for that year. While this threshold is significantly
higher than the $500,000 minimum proposed in the original draft
of the bill, the audit requirement will nevertheless have a
significant impact on a large number of organizations.
The new law does not alter the existing exemption from registration,
filing and reporting with the Attorney General’s office
for religious corporations and other organizations that hold
property for religious purposes, and any charitable corporation
organized and operated primarily as a religious organization,
educational institution, hospital or Knox-Keene licensed health
care service plan. The new law helpfully extends the exemption
to cover unincorporated associations organized and operated
primarily for such purposes.
The new law makes the following significant changes for charitable
corporations, unincorporated associations and trustees:
- Applicability. Unincorporated associations
must now comply with registration, filing and periodic reporting
requirements, and are subject to the Attorney General’s
supervisory and enforcement powers. These rules previously applied
only to charitable corporations and trustees.
- Timing to File. The new law significantly
shortens the time period during which an organization must register
with the Attorney General after receiving any property for charitable
purposes from within six months of receipt to within 30 days of
receipt.
- Audit Requirement. Every charitable
corporation, unincorporated association and trustee not exempt
from the registration, filing and reporting requirements, that
receives or accrues $2 million in gross revenue in the fiscal
year must file annual, audited financial statements for the year
with the Attorney General and 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.
- Audit Committee. Charitable corporations
subject to the audit requirement must appoint an audit committee,
which must be separate from any finance committee and 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.
- Compensation Review. The compensation
of any president or chief executive officer and any treasurer
or chief financial officer of a charitable corporation, unincorporated
association or charitable trust 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.
For more information, please contact:
This TEO Advisory Bulletin is a
publication of the Tax-Exempt Organizations Practice Group of
Davis Wright Tremaine LLP, under the supervision of LaVerne
Woods and M. Steven Lipton, Editors. Our purpose in publishing
this Advisory is to inform our clients and friends of recent
developments in tax-exempt and nonprofit organizations law.
It is not intended, nor should it be used, as a substitute for
specific legal advice as legal counsel may be given only in
response to inquiries regarding particular situations.
Copyright © 2004, Davis Wright
Tremaine LLP.
return to Advisory
Bulletins main page
|
