New York State Attorney General Issues Guidance on the Conflict of Interest and Whistleblower Policy Provisions of the New York Nonprofit Revitalization Act of 2013
The New York State Attorney General’s Charities Bureau recently issued written guidance on certain provisions of the New York Non-Profit Revitalization Act of 2013 (the “Act”), including provisions on audit oversight (discussed in our prior client alert of April 22, 2015). Here, we discuss the attorney general’s guidance on the conflict of interest and whistleblower policy provisions of the Act, described in the attorney general publications entitled Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 and Whistleblower Policies Under the Nonprofit Revitalization Act of 2013. These publications summarize the relevant provisions of the Act1 and present the attorney general’s interpretation of those provisions and best practice recommendations. While these publications do not have the weight of law, they provide useful insight into how the attorney general interprets and may enforce the relevant provisions of the Act.
Previously Adopted Policies. Importantly, the whistleblower policy guidance notes that, under the Act, a corporation that has previously adopted and possesses a whistleblower policy pursuant to federal, state or local laws that is substantially consistent with the Act shall be deemed to be in compliance with the Act. The guidance states that such policy must have been “formally adopted” by the governing board or a committee of the board and the organization must act in compliance with the policy. The conflict of interest provisions in the Act include similar language deeming corporations with “substantially consistent” policies to be in compliance with the Act, although this provision is not highlighted in the attorney general’s conflict policy guidance. Accordingly, while all New York nonprofit organizations should become familiar with the attorney general’s guidance, organizations that have previously adopted policies following the passage of the Act that are designed to comply with the Act should not necessarily feel compelled to revise their policies based solely on the new guidance.
Conflict of Interest Policy Guidance
Definitions. Under the Act, all New York not-for-profit corporations2 and charitable trusts are required to adopt a conflict of interest policy that sets forth procedures for disclosing and resolving conflicts of interest and “related party transactions,” the latter of which are newly defined under the Act. An organization’s “key employees,” along with its directors and officers, are required to be subject to the conflict of interest policy.
The Act defines a “related party transaction” as any transaction, agreement or any 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.3
- In the guidance, the Charities Bureau notes that a related party’s financial interest may be either a “direct or indirect financial interest.” It further provides that a person has an “indirect financial interest” in an entity if a relative has an ownership interest in that entity or “if the person has ownership in an entity that has ownership in a partnership or professional corporation,” noting that this definition is consistent with the definition of “indirect ownership interest” in the instructions to Schedule L of the Form 990.
- The guidance also includes a detailed explanation of the term “key employee,” noting that the term merits explanation because the Act defines4 the term only by reference to the Internal Revenue Code and Federal Regulations. Relying on definitions and examples in the Code and Federal Regulations, the guidance notes that a key employee is a current employee who is in a position to exercise substantial influence over the affairs of the corporation, including a number of specific officers, such as president, chief executive officer, treasurer, chief financial officer, and chief operating officer, as well any employee with ultimate responsibility for certain tasks, such as implementing board decisions, supervising the management, administration or operation of the organization, or managing the finances of the organization.
- The guidance states, in addition, that a person also may be a key employee based upon the IRS Form 990 definition of that term. This definition broadens the scope of the term “key employee” to include a person (i) whose compensation is based primarily on revenues derived from the organization’s activities, or those of a specific department that he or she controls, (ii) who has or shares authority to control or determine a substantial portion of the organization’s capital expenditures, operating budget or compensation for employees, or (iii) who manages a discrete segment or activity of the organization if such segment or activity represents a substantial portion of the organization’s activities, assets, income or expenses.
Minimum Statutory Requirements. The guidance provides that a conflict of interest policy must include the following elements:
- Definition of conflicts of interest. The guidance notes that the Act gives the Board the discretion to define the circumstances that constitute a conflict of interest and also what de minimis or ordinary course transactions are not covered by the policy (discussed further below); however, the policy must cover “related party transactions.” The Board also has the discretion to include in the policy specific procedures to be followed for specific types of conflicts (e.g., if there are ex-officio directors who serve on the board representing city government), as well as additional restrictions in connection with particular transactions unique to the organization (e.g., a no nepotism policy or a no gifts policy);
- Procedures for disclosing potential conflicts to the audit committee or board.5 The guidance notes that procedures for disclosing conflicts may include “expectations for each class of conflict reporters, forms, record-keeping, custodians; disclosure to other persons within the nonprofit or to third parties, timing and committee review and action”;
- Prohibition on participation or improper influence by disclosing party in deliberation or voting on the potential conflict. The disclosing party may, however, present background information or answer questions regarding the situation. The guidance states that the term “improperly influence” should have a meaning similar to the Securities and Exchange Commission definition, i.e., “coercing, manipulating, misleading, or fraudulently influencing…the decision-making”;
- Requirement that the existence and resolution of a conflict be properly documented. Conflicts and potential conflicts, including related party transactions, must be reflected in the minutes of any meeting at which they were discussed or voted upon;
- Procedures for disclosing, addressing and documenting related party transactions pursuant to N-PCL § 715. Under N-PCL § 715, an organization may not enter into a related party transaction unless the transaction is determined by the board (or an authorized committee of the board) to be fair, reasonable and in the organization’s best interest. The guidance clarifies that to meet this requirement, a director, officer or key employee must disclose his or her interest in a transaction, agreement or arrangement before the board authorizes the transaction; and
- Annual Disclosure Statements.
- The Act requires a director to complete, both prior to his or her initial election and then annually thereafter, a written statement disclosing certain relationships.
- The guidance notes that officers and key employees also must submit such annual disclosure statements to the organization.
- The guidance further provides that the disclosure statement must identify, to the best of the disclosing party’s knowledge, any entity of which he or she is an officer, director, trustee, member, owner, or employee and with which the organization has a relationship, and any transaction in which the organization is a participant and in which he or she might have a conflicting interest.
- The Act requires such disclosure statements to be submitted to the organization’s secretary.
- The guidance clarifies that the disclosure statements may be submitted to the secretary’s designee if set forth in the policy. The secretary (or his or her designee) must provide a copy of the completed disclosure statements to the chair of the audit committee or the board chair.
- The Act requires a director to complete, both prior to his or her initial election and then annually thereafter, a written statement disclosing certain relationships.
Exceptions to the Policy. The guidance identifies four types of transactions that typically do not require Board action or approval and, accordingly, may not need to be approved pursuant to the N-PCL-mandated procedure. They include:
- De minimis transactions. What constitutes a de minimis transaction depends on the size of the transaction relative to the size of the organization;
- Transactions undertaken in the ordinary course of business by the organization’s staff. The guidance notes that a transaction is in the ordinary course of business if it is consistent either with the organization’s consistently applied past practices for similar transactions or with common practices in the sector in which the organization operates. The guidance also includes several examples of ordinary course of business transactions (e.g., the selecting of a board member’s firm as outside counsel in accordance with the general counsel’s written and established policy for retention of counsel; the selecting of a board member’s fuel company by the facilities staff for fuel supply pursuant to a well-documented RFP process focusing on cost and service) as well as examples of the other categories of excepted transactions;
- Benefits provided to a charitable class. The guidance explains that such benefits must be provided -- in good faith and without unjustified favoritism -- to a related party solely as a member of a class that the organization intends to benefit through the accomplishment of its mission; and
- Compensating or Reimbursing Employees, Officers or Directors. The guidance provides that such compensation transactions are not considered related party transactions unless the recipient is a related party based on some other status, such as being a relative of another related party. Such transactions still must, of course, be analyzed for reasonableness, and the related party may not participate in any decision concerning the compensation.
According to the guidance, these types of transactions may not require the statutory mandates of N-PCL Section 715, but the parties involved still have a legal obligation to refrain from influencing any decisions made with regard to the transactions. Moreover, the guidance exhorts the decision-makers for these transactions “not [to] consider or be affected by” the related party’s involvement in “matters that may affect the decision-maker or those who review or influence the decision.”
Whistleblower Policy Guidance
The Act requires certain nonprofit corporations and charitable trusts6 to adopt a whistleblower policy to protect from retaliation persons who report suspected improper conduct.7 The Whistleblower Policy guidance provides the Charities Bureau’s view as to the meaning and scope of the Act’s requirements for such policies.
Under the Act, the whistleblower policy must include the following provisions:
- A statement providing that no director, officer, employee or volunteer of the 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.
- Procedures for reporting violations or suspected violations of laws or corporate policies, including procedures for preserving the confidentiality of reported information.
- In the guidance, the Charities Bureau expresses its view that such procedures should address (i) the individuals or entities to whom violations should be reported; (ii) the possible means of reporting violations, including a provision allowing for anonymous reporting; (iii) the investigative steps the organization will take; (iv) the consequences for violating policies designed to protect from retaliation persons who report improper conduct; and (v) any other procedures the organization deems appropriate.
- A requirement that an employee, officer or director of the corporation be designated to administer the whistleblower policy and to report to the audit committee or other committee of independent directors or, if there are no such committees, to the board.
- The guidance states that such person or persons should have sufficient knowledge, resources and training to carry out this function. As an example, the guidance proposes that the organization could designate the audit committee chair as the person to receive complaints involving financial improprieties and the head of human resources as the person to receive complaints related to violations of the organization’s human resources policies. Such designated person must also (i) accept and implement responsibility for the policy; (ii) maintain records of whistleblower interactions; and (iii) identify and address needs for improving the policy.
- A requirement that a copy of the policy be distributed to all directors, officers, employees and to volunteers who provide substantial services to the corporation.8
Questions & Answers. The Charities Bureau notes that the guidance is also intended to respond to following key questions the Bureau received about the Act’s whistleblower policy requirements:
- Who is a volunteer? – According to the guidance, in determining who is a volunteer and whether the volunteer provides “substantial services” to the organization bringing them under the auspices of the whistleblower policy, an organization should look to its own circumstances and “the role of and relationship with people who assist the organization in carrying out its mission.” In addition, an organization can look to (i) the criteria it uses in determining the number of volunteers reported on its annual IRS Form 990 and (ii) its volunteer policy, if any.
- What constitutes “good faith”? – The guidance defines a “good faith report” as a report that the whistleblower “reasonably believes to be true” regarding conduct that he or she “reasonably believes to constitute illegal conduct, fraud or a violation of an organization’s policy.” In the Charities Bureau’s view, this requirement focuses on the existence of a violation or suspected violation and not necessarily on the whistleblower’s motives in reporting. Moreover, the guidance suggests that organizations may want to consider including language in the policy stating that a whistleblower may not necessarily receive immunity by virtue of the report for having participated in or being complicit in the violation that is the subject of the whistleblower report.
- What is an “adopted policy” of an organization? – A key interpretive question that the Act left unanswered was the required scope of the whistleblower policy, as the Act states that it must encompass good faith reporting on actions that are “in violation of any adopted policy of the corporation.” The guidance aims to clarify this question, defining “adopted policy” to include, without limitation, policies formally adopted by the organization’s governing body that are designed to prevent financial wrongdoing; policies prohibiting fraud, theft, embezzlement, bribery, kickbacks and abuse or misuse of corporate assets; conflict of interest policies; policies addressing unethical conduct; and harassment and discrimination policies.
- The inclusion of “harassment and discrimination policies” in the list of adopted policies is notable, as historically (e.g., under the Sarbanes-Oxley Act), whistleblower policies have not addressed themselves to these human resource-type policy violations. The guidance does provide, however, that one can designate separate individuals to receive and investigate different types of complaints or reports, permitting an organization to continue to allow violations of human resource-type policies to be reported through its human resources channels in accordance with its equal employment and anti-harassment policies. However, such separate channels should be addressed in the whistleblower policy and must meet the other whistleblower policy provisions of the Act, e.g., reporting to the person or body overseeing the policy.
- The guidance also provides one example of a policy violation not warranting whistleblower protection, noting that a complaint regarding a co-worker’s violation of a dress code set forth in the employment manual adopted by the Board would not warrant whistleblower protection.
- What if a nonprofit already has a whistleblower policy? – As stated above, an organization that has adopted and possesses a whistleblower policy pursuant to federal, state or local laws that is substantially consistent with the Act’s requirements shall be deemed in compliance. (The guidance identifies whistleblower policies adopted in compliance with 18 NYCRR 521 for Medicaid provider compliance programs as an example of such a policy.) The Act also provides that whistleblower policies adopted by organizations that are state or local authorities under the New York Public Authorities Law and prohibited under that law from taking adverse actions against whistleblowers shall be deemed in compliance with the Act’s whistleblower policy requirements. The guidance notes that if an organization’s already adopted whistleblower policy does not meet either of these two exceptions, the organization must revise its policy or adopt a new one.
- What constitutes “retaliation” or “adverse employment consequences”? – The guidance construes these terms quite broadly, advising that retaliation and adverse employment consequences may include, in addition to intimidation, harassment and discrimination, which are specifically identified in the Act, failure to promote, adverse impact on compensation, termination, discharge, suspension, demotion, other changes in responsibilities, whether formal or informal, and “other negative consequences.”
- How does the policy need to be distributed? – The guidance provides that the distribution requirement may be satisfied by posting the policy on the organization’s publicly available website, with the proviso that a hard copy of the policy should be given to anyone who requests it. It further provides that “best practices” would include an initial distribution of the policy to each required distributee, whether as part of the new employee handbook or new director, employee or volunteer orientation, and a requirement that the recipient acknowledge that he or she has received and reviewed the policy. The guidance notes that an organization also should promote ongoing awareness of the policy as part of the organization’s normal compliance training and communication.
The guidance also advises organizations that, in addition to the whistleblower policy requirements under the Act, there may be other New York state laws providing protections to whistleblowers that an organization should be aware of and consider when drafting its whistleblower policy, e.g., False Claims Act, Labor laws and Civil Service laws.
1 The conflict of interest provisions of the Act are codified in §§ 715 and 715-a of the Not-for-Profit Corporation Law (the “N-PCL”) and, with respect to charitable trusts, §§ 8-1.9(c) and (d) of the Estates, Powers and Trusts Law (the “EPTL”); the whistleblower provision is codified in N-PCL § 715-b and, with respect to charitable trusts, § 8-1.9(e) of the EPTL. The publications discussed herein are available on the Charities Bureau website at www.charitiesnys.com/pdfs/Charities_Conflict_of_Interest.pdf and www.charitiesnys.com/pdfs/Charities_Whistleblower_Guidance.pdf. Our prior alert discussing the audit oversight provisions of the Act can be found at https://www.dwt.com/New-York-State-Attorney-General-Issues-Guidance-on-the-Audit-Oversight-Provisions-of-the-New-York-Non-Profit-Revitalization-Act-of-2013-04-22-2015/.
2 This provision of the Act also applies to New York education corporations governed by the N-PCL pursuant to Education Law § 216-a and to New York religious corporations governed by the N-PCL pursuant to Religious Corporations Law § 2-b.
3 N-PCL § 102(a)(24).
4 N-PCL § 102(a)(25); EPTL § 8-1.9(a)(3).
5 Under the Act, a board committee comprised solely of independent directors, as defined in the Act, may oversee the adoption and implementation of, and compliance with, the conflict of interest policy. If no such committee is designated, either the board or the audit committee must provide such oversight. N-PCL § 712-a(c); EPTL § 8-1.9(b)(3).
6 The whistleblower policy provisions of the Act apply to nonprofit corporations and charitable trusts that have 20 or more employees and that had annual revenue in excess of $ 1 million in the prior fiscal year. The provisions also apply to New York education corporations governed by the N-PCL pursuant to Education Law § 216-a and to New York religious corporations governed by the N-PCL pursuant to Religious Corporations Law § 2-b.
7 In the Whistleblower Policy guidance, the Charities Bureau expresses its view that smaller organizations not meeting the criteria mandating the adoption of a whistleblower policy still should consider adopting whistleblower policies because, among other things, whistleblower policies are generally recognized as part of an effective compliance program and adopting such a policy will help promote compliance with federal and state laws that provide protections to whistleblowers.
8 A charitable trust must distribute a copy of its whistleblower policy to all of its volunteers, not only those providing substantial services to the trust. EPTL § 8-1.9(e)(2)(C).