A Brief Overview of the New York Nonprofit Revitalization Act

The New York State Legislature, recently passed the New York Nonprofit Revitalization Act (the “Act”).  The passage of the Act represents the first major revision to New York State’s nonprofit law in more than forty years.  The purpose of this document is to provide a brief overview of the changes brought about by the Act.  Nonprofit organizations must review the Act and evaluate its impact on governance policies and financial statements audits.

Applicability

In general, the Act applies only to nonprofit organizations incorporated in the State of New York.  However, certain provisions of the Act also apply to out-of-state nonprofit organizations that must register to conduct charitable solicitations in the State of New York.

Effective Date

A majority of the provisions of the Act went into effect on July 1, 2014.  Some provisions will not be effective until January 1 or July 1, 2015.

Matters of Governance

Chairperson of the Board and Compensation Decisions

One of the goals of the Act is to separate the responsibilities of the chairperson of the board from the employees of the nonprofit organization.  The Act accomplishes this by prohibiting an employee of the nonprofit from serving as chairperson of the board or officer with similar responsibilities.  The effective date of this provision is January 1, 2015.

Compensation

Regarding compensation decisions reached at board meetings, the Act does not allow a person who may benefit from compensation decisions to be present, or otherwise participate in, any board or committee discussions or voting concerning that individual’s compensation.  However, the individual may be present at the board’s request for inquiry prior to the board’s deliberations.

Modernizing and Streamlining Governance Actions and Communications

In recognition of the capabilities of today’s technology, the Act allows board members, unless restricted by the nonprofit’s bylaws, to participate in board meetings via electronic video conferencing, such as Skype, so long as all board members can effectively communicate and each director can participate fully.

The Act also facilitates the use of electronic communication to provide notice of member and director meetings, waiver of notice and unanimous consent.  Prior to the Act, a nonprofit organization was required to provide such notice by mail or in person.

Conflict of Interest Policy

Under the Act, all nonprofit organizations are mandated to adopt a conflict of interest policy covering its directors, officers and key employees.  The Act specifies the following new minimum requirements for structuring a conflict of interest policy:

  • A definition of circumstances that constitute a conflict of interest
  • Procedures for disclosing a conflict of interest to the audit committee or the board
  • A requirement that the party with a conflict of interest not be present at, or participate in, board or committee deliberations, or voting on the matter giving rise to such conflict
  • A prohibition of any attempt by a conflicted party to influence board deliberations
  • Documentation procedures for detailing the existence and resolution of the conflict
  • Procedures for disclosing and addressing related party transactions

Nonprofit organizations are required to adopt this policy by July 1, 2014.

Related Party Transactions

The Act updates the definition of a related party to include:

(a)  Any director, officer, or key employee of the corporation or any affiliate of the corporation;

(b)  Any relative of any director, officer, or key employee of the corporation or any affiliate of the corporation; or

(c)  Any entity in which any individual described in (a) or (b) has a 35% or greater ownership or beneficial interest, or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%.

The definition of a related party is of importance, as the Act prohibits related party transactions unless the transaction is fair, reasonable, and in the nonprofit organization’s best interest. In the case of charitable nonprofit organizations, the Act requires that in considering a proposed related party transaction, the board is required to consider alternative transactions to the extent available.  Approval of a related party transaction requires a majority vote of the board.

From a legal perspective, the Act provides the New York Attorney General with the authority to bring a legal action to enjoin, void, or rescind, any related party transaction that is not reasonable and in the best interest of the nonprofit organization, at the time the transaction was approved.

Whistleblower Policy

Another provision of the Act requires nonprofits with twenty or more employees and annual revenue in the prior fiscal year in excess of $1 million to adopt a whistleblower policy.  The whistleblower policy must protect, from retaliation, any director, officer employee or volunteer, who in good faith, reports an action or suspected action that is potentially illegal, fraudulent, or in violation of any of the nonprofit organization’s policies.

The whistleblower policy must include the following:

  • Procedures for reporting violations
  • The designation of an employee, officer, or director, tasked with administering the policy and reporting to the audit committee, or other committee of independent directors, or, if there are no such committees, to the board
  • A requirement that copies of the policy be distributed to all directors, officers, employees, and volunteers

Nonprofit organizations must adopt this policy by July 1, 2014.

Audit Committee

The audit provisions of the Act apply not only to nonprofits incorporated in New York State, but also to nonprofits incorporated elsewhere that solicit contributions in New York State. Such out of state nonprofits are required to register under the State Executive Law’s charitable solicitation statute.

The Act stipulates that nonprofits meeting the requirement to file an independent certified public accountant’s audit report (see Financial Reporting Requirements below) with the Attorney General, must appoint an audit committee consisting of independent board members that oversee the retention of an independent auditor, and a review of audit results.

The audit committee of a nonprofit organization  with annual revenues in excess of $1 million dollars is subject to additional responsibilities relating to the audit.  Such additional responsibilities include:

  • Reviewing the scope and planning of the audit prior to the start of the audit
  • Discussing any significant disagreements between the auditor and management after the audit
  • Considering, on an annual basis, the performance and independence of the independent auditor

A nonprofit organization that had gross revenue of less than $10,000,000 for its last fiscal year  ending before January 1, 2014, has until January 1, 2015 to meet this requirement.  A nonprofit organization that received more than $10,000,000 of gross revenue in that year, must comply by July 1, 2014.

The audit committee (unless a separate committee undertakes this responsibility) is also responsible for reviewing and recommending amendments, and for adopting and implementing, conflict of interest and whistleblower policies.

Definition of Independent Director

The Act defines an “independent director” as an individual who meets all of the following criteria:

  • Is not, and within the past three years has not been, an employee of, and does not have a relative who is, nor within the past three years has been, a key employee of the corporation or an affiliate of the corporation
  • Has not received, and does not have a relative who has received, more than $10,000 in direct compensation in any of the last three years from the corporation, or an affiliate of the corporation (other than expense reimbursement or reasonable compensation as a director)
  • 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 who has a substantial financial interest in, any entity that made payments to, or received payments from, the corporation or an affiliate of the corporation, for property or services in an amount that, in any of the last three fiscal years, exceeds the lesser of (a) $25,000, or (b) 2% of such entity’s consolidated gross revenues

Financial Reporting Requirements

The Act increases the revenue threshold that triggers the requirement to file an independent certified public accountants audit report (by nonprofit organizations that solicit charitable contributions in New York State) over the period 2014 through 2021 from the current level of “more than $250,000” to “more than $1,000,000” in 2021.  The revenue threshold that triggers a review report by independent certified public accountants also increases from the current level of “more than $100,000” to “more than $250,000.

These changes will go into effect for a nonprofit organization’s first return due after the effective date of the Act.  The following table summarizes these changes:

 

Gross Revenues Simple Financial Report on Form CHAR 500 Review Report by Independent Certified Public Accountant Audit Report by Independent Certified Public Accountant
Current Rules $100,000 or less More than $100,000 but not more than $250,000 More than $250,000
Effective July 1, 2014 $250,000 or less More than $250,000 but not more than $500,000 More than $500,000
Effective July 1, 2017 $250,000 or less More than $250,000 but not more than $750,000 More than $750,000
Effective July 1, 2021 $250,000 or less More than $250,000 but not more than $1,000,000 More than $1,000,000

 

Action Item

Nonprofit organizations that are subject to the New York Nonprofit Revitalization Act should take a close look at its current governance documents, as well as its other policies and procedures, to determine whether significant changes need to be made to remain in compliance.

It is highly recommended, with respect to the enactment of any significant legislation such as this Act, that a nonprofit organization consult with a legal advisor to fully gauge the law’s impact, and to ensure the nonprofit is compliant.

For more information regarding the content of this document, please contact a Buchbinder professional.

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