New York Governor Andrew Cuomo recently signed into law the Non-profit Revitalization Act of 2013.  The provisions of the Act are generally effective on July 1, 2014.  A copy of the Act can be found at http://open.nysenate.gov/legislation/bill/A8072-2013.

The Act will require nonprofit corporations governed by the New York Not-for-Profit Corporation Law and wholly charitable trusts subject to the New York Estates, Powers and Trusts Law (“New York Charities and Non-Profits”) to adopt many of the “best practices” for charitable organizations previously encouraged by Baker Hostetler.  Highlights of the Act include:

Mandatory Conflict of Interest Policy. The Act will require New York Charities and Non-Profits to adopt a conflict of interest policy to ensure that directors, trustees, officers and key employees act in the nonprofit’s best interest.  Such policies must include various provisions defining what constitutes a conflict of interest, procedures for disclosing and handling conflicts of interest and the proper documentation of these requirements.  In addition, before the initial election of any director or trustee and annually thereafter, directors and trustees will be required to complete, sign and submit a written disclosure of potential conflicts.

Mandatory Whistleblower Policy. The Act will require New York Charities and Non-Profits with 20 or more employees and which have revenue in excess of $1 million in the prior fiscal year to adopt a whistleblower policy.  The policy must, among other things, protect those who report suspected improper conduct from retaliation and must include a person designated to administer the policy, the procedures for reporting suspected violations, including procedures for preserving the confidentiality of reported information, and be distributed to directors, trustees, officers, employees and volunteers with instructions on how to comply with the policy and its procedures.

Related-party Transactions.  Related-party transactions between a New York Charity or Non-Profit and a related-party must be fair, reasonable and in the organization’s best interest.  Directors, trustees, officers and key employees who have a direct or indirect interest in a related-party transaction must disclose such an interest.  The Act will mandate that directors, trustees or an authorized committee of directors or trustees consider alternatives to any related-party transaction, approve the transaction by a majority vote of disinterested directors, trustees or committee members and contemporaneously document the basis of such approval, including the consideration of any alternative transactions.

Audit Requirements.  Certain charitable organizations (even if not a New York Charity or Non-Profit) registered or required to be registered to solicit for charitable contributions in New York are required to file a certified public accountant’s audit report with the Attorney General.  The Act modifies certain requirements related to such audits.  The audit process and the review of financial reports must be under the oversight of independent directors, trustees or a designated audit committee of independent directors or trustees.  Additionally, the directors, trustees or audit committee of such a charitable organization that has annual gross revenue and support in excess of $1 million will be required to review with its independent auditor the scope of the audit before the audit is started and, upon its completion, discuss any material risks and weaknesses in internal controls identified by the auditor, any restrictions on the scope the auditor’s activities or access to requested information, any significant disagreements between the auditor and management and the adequacy of accounting and financial reporting processes.  In addition, such directors, trustees or committee must annually consider the performance and independence of the auditor.

Lessons.  The Act is a reminder for directors, trustees, officers and all who advise charitable organizations, large or modest in size, that is always advisable to review the organization’s policies, procedures and guidelines to make sure the organization has adopted and follows each of the best practices required by applicable state law as well as those highly recommended by the Internal Revenue Service.