Governor Andrew M. Cuomo has signed into law the Nonprofit Revitalization Act of 2013, the most comprehensive reform of New York’s nonprofit laws in decades. The legislation, passed unanimously by the New York State Legislature in June, is aimed at strengthening board oversight and accountability and reducing burdens and costs on nonprofit organizations. Virtually all New York nonprofits will be impacted by the changes, whether as a result of new mandated governance requirements, modernized corporate law procedures, or enhanced attorney general enforcement powers.
The new requirements, most of which take effect July 1, 2014, will require nonprofits and their boards to evaluate their current policies and procedures to assess compliance and determine whether changes are necessary.
New Governance Requirements
The Nonprofit Revitalization Act imposes new governance requirements on nonprofits, including:
- New Financial Audit Oversight Responsibilities. The Nonprofit Revitalization Act imposes new board oversight responsibilities on charities that must obtain an independent financial audit under Article 7-A of New York’s Executive Law (generally charities are required to obtain audits if they raise funds from the public and meet specified revenue thresholds, as discussed further below). Under the new law, the board or a designated audit committee of the board will be required to retain the outside auditor and review the audit’s findings with the auditor upon completion. Organizations with annual revenue of more than $1 million will be subject to additional oversight responsibilities. Only independent directors (as defined in the statute) will be permitted to serve on the audit committee; if the board itself performs the oversight function, only independent directors can participate in the discussions or voting. These provisions take effect on January 1, 2015 for organizations that had revenue of less than $10 million during the last fiscal year ending prior to January 1, 2014; they apply to other organizations beginning July 1, 2014.
- New Requirements Concerning Related Party Transactions. The Nonprofit Revitalization Act creates a new statutory framework for reviewing and approving related party transactions (transactions involving the nonprofit that financially benefit its directors, officers, or key employees). Certain provisions apply to all not-for-profit corporations and wholly charitable trusts—such as requiring that the board affirmatively determine that the transaction is fair, reasonable, and in the best interest of the organization—while additional provisions apply only to charitable organizations—such as requiring that the board or a board committee evaluate alternative transactions and document the basis for its decisions.
- Mandatory Conflict of Interest Policy. The new law requires that all not-for-profit corporations and wholly charitable trusts have a written conflict of interest policy, and sets forth the minimum provisions that the policy must contain.
- Mandatory Whistleblower Policy. Not-for-profit corporations and wholly charitable trusts with 20 or more employees and annual revenue in excess of $1 million will be required to adopt a whistleblower policy and implement procedures for directors, trustees, officers, employees, and volunteers to report potential illegality and protect them from retaliation.
- Independent Board Leadership. The new law will prohibit the chief executive officer, executive director, or any other employee of a not-for-profit corporation from also serving as board chair. This provision has an extended effective date of January 1, 2015, allowing more time for impacted organizations to identify and appoint a new chair.
Corporate Law Changes
To reduce burdens on nonprofits, the Nonprofit Revitalization Act also streamlines the Not-For-Profit Corporation Law in a number of key areas, including:
- New Procedures for Mergers, Asset Sales, Dissolutions, and Certificate of Incorporation Changes. To expedite government approval time and reduce transaction costs, organizations seeking to merge or sell significant assets will have the option of obtaining approval from the attorney general in lieu of court approval (currently, court approval is required). The new law similarly streamlines the process for dissolving a corporation or amending its certificate of incorporation.
- Increased Financial Thresholds for Independent Financial Audits.The new law provides relief to charitable organizations required to obtain an annual financial audit by a certified public accountant. Effective July 1, 2014, the revenue threshold for an audit will be raised from $250,000 to $500,000, and will be further raised to $750,000 in 2017 and $1 million in 2021. The revenue threshold for an independent financial review by a certified public accountant will also be raised to $250,000 (up from $100,000).
- Streamlined Incorporation Procedures. The new law makes numerous changes to streamline New York’s cumbersome incorporation process in an effort to reduce costs and burdens to nonprofits and expedite government approval. Among other things, the new law eliminates New York’s confusing corporate “type” system, replacing it with two simpler categories—“charitable corporation” and “non-charitable corporation”. It also modifies the provision that requires that many nonprofits obtain pre-approval from the New York State Department of Education prior to incorporation.
- Permitting Electronic Notices and Voting and Use of Videoconferencing. Bringing the law into the 21st century, nonprofits will be permitted to use email to send board and membership meeting notices, and to conduct voting by unanimous written consent. They will also be able to hold meetings by videoconference, Skype, and other forms of video communication.
- Real Property Transactions. Providing greater flexibility to boards and clearing time on board meeting agendas, the new law permits boards to delegate to a committee the responsibility for reviewing and approving most real property transactions (current law requires that the entire board approve such transactions by either a two-thirds or majority vote).
Enhanced Attorney General Enforcement Powers
The attorney general will have enhanced enforcement powers to remedy financial abuses that result from improper related party transactions. The attorney general will be authorized to bring actions to enjoin, void, or rescind a transaction that violates law or was not otherwise reasonable or in the best interest of the organization. Additionally, the attorney general’s authority to seek financial restitution, the recovery or replacement of transferred assets and the removal of directors or officers is enhanced. In cases of willful and intentional misconduct, the attorney general can also seek double damages.