New York Nonprofit Reform Law: what are the major changes and how will this affect your organization?

New York Nonprofit Reform Law

The Non-Profit Revitalization Act of 2013 goes into effect this July: what changes do you have to make?

Non-profits throughout New York should already be aware of the upcoming reform of the Not-for-Profit Corporation Law (N-PCL), but it’s hard to be sure of what these changes mean with the legalese.  The N-PCL sets the parameters for how non-profits are formed and incorporated and regulates how they are governed and maintained.

The Revitalization Act of 2013 updates this law to reflect modernized processes and new standards for transparency and accountability. Many organizations and groups outside New York may also be wondering if this is a bellwether for changes in other states, and how this affects nation-wide groups with chapters or branches in New York State.

Disclaimer: Understanding the provisions of the law and their effect on you require discussion with your organization’s attorney or legal adviser.

To help you get started, though, here’s a break-down of three major reforms:

Mandatory Whistleblower Policy

If your organization has 20+ employees and more than $1,000,000 in revenue from the prior fiscal year, you must adopt a whistleblower policy, which ensures that any director, trustee, officer, employee or volunteer who (in good faith) reports any illegal or fraudulent activity or policy violations within the organization will not suffer retaliation.  The policy must include reporting procedures, means to preserve the confidentiality of reporting, and designation of someone to administer the policy and report to an audit committee.  A copy of the policy must be distributed to all directors, trustees, officers and employees and any volunteers who render significant service.

Mandatory Conflict of Interest Policy

The meat of the Act, this mandate requires every nonprofit to adopt a conflict of interest policy to ensure that everyone acts in the nonprofit’s best interest and complies with legal requirements.  This policy must include, at the very least, a definition of Conflict of Interest, disclosure procedures, exclusion of conflicted parties from meetings determining or voting on matters of conflict, mandated documentation of the existence and resolution of this conflict within the organization’s records (including minutes from discussions and vote meetings), and the procedures for said reporting, documenting and disclosing.  This policy must require any director or trustee to complete, sign and file a statement identifying any other entities with which they have a role, that may give rise to a conflict of interest.

Related Party Transactions

If any services or needs can be transacted with unrelated providers, all the better.  But there are times when there must be related party transactions.  This section of the Act requires that related party transactions be fair, reasonable and in the nonprofit’s best interest.  This includes disclosure, the inclusion of key employees (any person who is in a position to exercise substantial influence over the corporation) and the due consideration of alternatives.  Any related party transactions must be approved by a majority vote, which must document in writing their basis for approval, including their deliberations on alternatives.  Related parties cannot participate in any way in these deliberations.

So what is this Act all about?

Firstly, it’s been more than 40 years since the Not-for-Profit Corporation Law had a work-up. This is more than a nip-tuck job, though: the Act was designed to streamline the administrative responsibilities for the non-profit sector through more accountability and better governance. Sounds counter-intuitive, but take a moment to contemplate it. When there is better oversight and clearer protocols, there are fewer headaches in paperwork and reporting later on if accountability does come into question.

Secondly, it is a reflection of the growing changes in legislation and administration of non-profits in the United States.  More transparency has been demanded in the wake of revelations about executive compensation, kickbacks and money re-routing. New York is home to the headquarters of many significant nation-wide organizations, so these changes will affect many subsidiary organizations and local chapters as well.

Who is affected?

All organizations incorporated under the N-PCL are subject to the reform act, though to what extent the articles directly affect your organization depends on your governance structure and services.

It’s important for your organization and your legal team to review the Act and, if you are in New York State, to make the policy adjustments as required.

Organizations outside NY should take this as an opportunity to review your current policies and see if these alterations could potentially make your agency more transparent, more accountable and more trustworthy.

Take the time now to gather your leadership, assess your current policies, create new ones before July and get your legal protocols in order. Meet with your attorney or legal advisers for a more accurate and applicable assessment of the law and its provisions.

Get Your Act Together

The New York State Non-profit Revitalization Act lays out measures to prevent misuse and misappropriation of funds solicited for charitable purposes, such as through conflict of interest, Board Chairs who are also employees, or the lack of whistleblowers.

Most elements of reform have to do with ensuring the independence of third-parties in auditing and in service provision and preventing any retaliation against employees or affiliates who blow the whistle from within the organization.*

Other significant changes include:

• Completely restructured categorization for defining non-profit types
• Modernizing of Board Meetings
• Board Chairs
• Independent Directors
• Compensation Deliberations
• Revised Annual Financial Reporting and Audit Requirements
• Disposition, Mergers, Consolidations and Dissolution
• Real Estate Transactions

The full Act can be found here, with updates and changes helpfully highlighted.

*It is essential that you consult your attorney or legal advisers about the law’s effects on your organization. Use this summary as a starting point only.