New York State Not for Profit Reform Law

January 2, 2014 | Health Services

On December 18, 2013, New York Governor Andrew Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the “Act”), the full text of which is available here.  The Act, which takes effect on July 1, 2014, represents the first extensive overhaul of New York’s nonprofit laws in over four decades.  The Act is intended to decrease the administrative burdens on the nonprofit sector while simultaneously strengthening governance and accountability requirements for nonprofit entities.  Below are brief summaries of the major components of the Act. 

Replacement of Letter Types with “Charitable” and “Non-Charitable” Designations

The Act replaces the current categorizations of nonprofit corporations as Type A, B, C or D with two simplified designations – charitable and non-charitable.  The Act defines a “charitable corporation” as any corporation formed for charitable purposes.  “Charitable purposes” is defined as purposes contained in the certificate of incorporation that are charitable, educational, religious, scientific, literary, cultural, or for the prevention of cruelty to children or animals; all other nonprofit corporations are non-charitable. The Act states that all corporations formed under the New York Not-for-Profit Corporation Law prior to July 1, 2014 as Type A nonprofit corporations shall be deemed as of that date to be non-charitable corporations, and all Type B or C nonprofit corporations shall be deemed as of that date to be charitable corporations. Type D nonprofit corporations formed for charitable purposes shall be deemed to be charitable corporations as of July 1, 2014, and all other Type D nonprofit corporations shall be deemed to be non-charitable corporations as of such date. 

Mandatory Whistleblower Policies.

The Act states that nonprofits with twenty or more employees and annual revenue in excess of $1,000,000 in the prior fiscal year must adopt a whistleblower policy.  Such policy must provide that no director, trustee, officer, employee or volunteer who in good faith reports any action or suspected action taken by or within the nonprofit that is illegal, fraudulent or in violation of any adopted policy of the nonprofit shall suffer retaliation.  The policy must include (a) procedures for the reporting of violations or suspected violations that incorporate procedures for preserving the confidentiality of reported information, (b) a requirement that an employee, officer, director or trustee be designated to administer the policy and to report to the audit committee or other committee of independent directors or trustees or, if there are no such committees, to the board or trustees,  and (c) a requirement that a copy of the policy be distributed to all directors, trustees, officers and employees and to volunteers (who, in the case of a nonprofit corporation, provide substantial services to the corporation).

Mandatory Conflict of Interest Policy.

The Act requires every nonprofit to adopt a conflict of interest policy to ensure that its directors, trustees, officers and key employees act in the nonprofit’s best interest and comply with applicable legal requirements.  The policy must include, at a minimum, (a) a definition of the circumstances that constitute a conflict of interest, (b) procedures for disclosing a conflict of interest to the audit committee, board or trustees, (c) a requirement that the conflicted party not be present at or participate in board, trustee or committee deliberations or vote on the matter giving rise to the conflict, (d) a prohibition against any attempt by the conflicted party to influence improperly the deliberation or voting on the matter giving arise to the conflict, (e) a requirement that the existence and resolution of the conflict be documented in the entity’s records, including the minutes of any meetings where the conflict was discussed or voted upon and (f) procedures for disclosing, addressing and documenting related party transactions.

The conflict of interest policy must require that prior to the initial appointment of a director or trustee and annually thereafter, such director or trustee shall complete, sign and file with the records of the nonprofit a written statement identifying any entity of which he or she is an officer, director, trustee, member, owner or employee and with which the nonprofit has a relationship, and any transaction in which the nonprofit is a participant and in which such director or trustee might have a conflicting interest.

Related Party Transactions.

The Act requires that related party transactions be fair, reasonable and in the nonprofit’s best interest.  It extends the disclosure requirements to include “key employees” in addition to officers, directors and trustees, with “key employee” defined to mean any person who is in a position to exercise substantial influence over the corporation.  The Act also states that with respect to any related party transaction, the board, the trustees or an authorized committee must, prior to entering into the transaction, consider alternative transactions to the extent available.  The transaction must be approved by not less than a majority vote of the directors, trustees or committee members present at the meeting, and the board, trustees or committee must document in writing the basis for the approval, including its consideration of any alternative transactions.  No related party may participate in deliberations or voting relating to related party transactions.

Independent Directors.

The Act contains new definitions of “independent director” and “independent trustee” which provide that such director or trustee is one who (a) is not, and has not been within the last three years, an employee of the nonprofit or an affiliate of the nonprofit, and does not have a relative who is, or has been within the last three years, a key employee of the nonprofit or an affiliate of the nonprofit, (b) has not received, and does not have a relative who has received, in any of the last three fiscal years, more than $10,000 in direct compensation from the nonprofit or an affiliate thereof (other than reimbursement for expenses reasonably incurred as a director or trustee or reasonable compensation or trustee commissions as permitted by law), and (c) is not a current employee of or does not have a substantial financial interest in, and does not have a relative who is a current officer of or has a substantial financial interest in, any entity that has made payments to, or received payments from, the nonprofit or an affiliate of the nonprofit for property or services in an amount which, in any of the last three fiscal years, exceeds the lesser of $25,000 or two percent of such entity’s consolidated gross revenues.  For purposes of this provision, “payment” does not include charitable contributions.

Modernization of Board Meetings.

The Act revises existing law to allow participation in meetings of a nonprofit corporation via video screen communication unless otherwise restricted by the certificate of incorporation or the by-laws, provided that all persons participating in the meeting can hear each other at the same time and each director can participate in all matters before the board.  The Act also updates notification requirements to permit e-mail or facsimile communications for notices of meetings, waivers of notice and consents to decisions made without a board meeting, among other items.

Chair of the Board of Directors.

Effective July 1, 2015, employees will no longer be permitted to serve as the chair of the board of directors of a nonprofit corporation or in any other position with similar responsibilities.

Compensation

The Act prohibits a member, director or officer of a nonprofit corporation from being present for or otherwise participating in the decision-making process concerning his or her own compensation.

Service of Process.

The Not-for-Profit Corporation Law, as amended by the Act, now provides that a non-domiciliary of New York who becomes a director, officer, key employee or agent of a New York not-for-profit corporation is subject to the personal jurisdiction of the Supreme Court of the State of New York, and process may be served on such person in an action or proceeding by the Attorney General under the Not-for-Profit Corporation Law.

Revised Annual Financial Reporting and Audit Requirements.

The Act revises the financial reporting requirements for charitable organizations required to be registered with the New York Attorney General in order to solicit charitable contributions in New York.  The revisions increase the reporting thresholds between now and July 1, 2021 as follows: 

Effective Date

Unaudited Financial Reports on Forms Prescribed by the NY Attorney General

Annual Financial Report with Independent CPA Review Report

Annual Financial Report with Independent CPA Audit Report

July 1, 2014

Required for gross revenue and support = $250,000

Required for gross revenue and support = $250,000 but = $500,000

Required for gross revenue and support > $500,000

July 1, 2017

Required for gross revenue and support = $250,000

Required for gross revenue and support = $250,000 but = $750,000

Required for gross revenue and support > $750,000

July 1, 2021

Required for gross revenue and support = $250,000

Required for gross revenue and support = $250,000 but = $1,000,000

Required for gross revenue and support > $1,000,000

 

The Act also states that for a nonprofit with revenue in excess of $1,000,000 per year, the board, trustees or audit committee must review with the independent auditor the scope and planning of the audit before its commencement and, upon the audit’s completion, review and discuss with the independent auditor any material risks or weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditor’s activities or access to requested information, any significant disagreements between the auditor and management, and the adequacy of the organization’s accounting and financial reporting process.

Significant Corporate Events.

The following significant corporate events of nonprofit corporations no longer require the approval of the New York Supreme Court:

  • Disposition of all or substantially all of the corporation’s assets
  • Mergers and consolidations
  • Dissolution

The Act provides that such actions instead be approved by the New York Attorney General.  However, the approval of the New York Supreme Court would still be required for the disposition of all or substantially all of the corporation’s asset if (a) the corporation is insolvent or would become insolvent as a result of the transaction, (b) the Attorney General concludes that a court should review the petition or (c) the corporation chooses to seek court approval upon notice to the Attorney General (which approval may be sought regardless of whether the Attorney General has rejected the disposition request). 

With respect to mergers and consolidations and dissolutions, the Supreme Court may approve rather than the Attorney General if (a) the Attorney General determines that a court should review the application or (b) a corporation seeks court approval upon notice to the Attorney General (which approval may be sought regardless of whether the Attorney General approved the application). 

Real Estate Transactions.

The Act changes the required vote of directors for real property transactions of a nonprofit corporation from two-thirds of the entire board to a majority of the entire board, unless the transaction relates to all or substantially all of the nonprofit’s assets, in which case a two-thirds vote is still required unless the nonprofit has twenty-one or more directors, in which case a majority will be sufficient.

While the above summary touches upon many of the significant components of the Act, every New York nonprofit should conduct a thorough review of the Act and its own current internal policies, procedures and governing documents to ensure that it will be in compliance with the requirements of the Act by the July 1, 2014 effective date. 

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