Major Overhaul for New York State Not-for-Profits

Governor Andrew Cuomo has signed the New York Nonprofit Revitalization Act of 2013 (“Act”) which is the first major sweeping change for New York’s not-for-profit entities in four decades. The intent of the new Act is to allow for an easier formation process, improve governance and operations, modernize not- for-profit corporate laws and reduce the reporting burden for smaller nonprofit organizations.

The Act applies to nonprofits incorporated in New York, however, the significant area of the Act relating to financial reporting and regulatory compliance applies to all nonprofits registered in New York for charitable solicitation purposes.

Nonprofit organizations have until July 14, 2014 to implement the new provisions. A summary of the most significant changes include:

Governance:

• Nonprofits are now required to adopt a Conflict of Interest Policy and every corporation with annual revenue in excess of $1 million with twenty or more employees must adopt a Whistleblower Policy as well. The policy must include procedures for reporting violations and it must be disseminated to employees, volunteers, officers and directors annually.
• The Act prohibits nonprofits from entering into a transaction with a related party unless the nonprofit board determines the transaction is fair, reasonable and in the nonprofits best interest. The Act creates the definition and procedures for “related party transactions” and what must be considered when these types of transactions arise, such as exploring an alternative approach to the extent available, obtaining board approval by majority vote, prohibiting the participation of the interested party from deliberations and documenting the approval and alternative considerations. Furthermore, the Attorney General is given the power to enforce actions against unlawful transactions or transactions deemed unreasonable and not in the best interest of the nonprofit.
• Reasonable compensation is still permitted within the Act, however, no individual can participate or vote in the committee or board meetings if their compensation is affected.  
• No employee of the nonprofit may serve as Board Chair. This provision has an extended effective date of January 1, 2015 to allow more time to identify and appoint a new chair.

Financial Oversight and Compliance:

• All organizations registered for charitable solicitation that are subject to the mandatory audit requirements with the Attorney General must have a designated audit committee of the board comprised of independent directors (newly defined in the statute) responsible for retaining an independent auditor and reviewing the results of the audit. The audit committee is also responsible for overseeing the adoption, implementation and compliance of the Conflicts of Interest and Whistleblower Policies.
• The annual gross revenue threshold for triggering a mandatory independent audit is increased from $250,000 to $500,000 as of July 1, 2014. This threshold will be increased again as of July 1, 2017 to $750,000 and a further increase to $1 million as of July 1, 2021.
• The annual gross revenue threshold triggering a review report by an independent auditor is raised from $100,000 to $250,000 as of July 1, 2014. However, the Attorney General has retained the right to request an audit after reviewing the report.

Communication:

• Nonprofits will be permitted to send board and membership meeting notices by fax or email. The use of videoconferencing is also now permitted for board members participation in meetings unless restricted by the corporation’s certificate of incorporation or bylaws.
• Electronic communication may be used for waiver of notice, proxy designations and for members and directors to give unanimous written consent in lieu of an in-person meeting.

Corporate Law:

• The Act eliminates the Type A, B, C and D classifications to either “charitable” or “non charitable” entities. Those nonprofits previously formed as Type A, B, C or D are not required to submit any filings for this new classification. Types “B and C” and some Type “D” which were formed for charitable purposes will automatically get the classification of “charitable”. Type “A” and all other Type “D” entities will be considered “non- charitable”.
• The new law streamlines certain corporate actions such as amending the certificate of incorporation, mergers, sales of significant assets, and dissolution by allowing the Attorney General to approve such transaction in lieu of obtaining court approval.
• The Act changes the requirement for certain organizations with an educational purpose whereby they no longer have to file with the New York State commissioner of education unless they are a nonprofit operating school, library, museum or historical society. This would not apply to colleges and universities. 

Nonprofits affected by the Act should review their internal control policies and governance practices to update based on the new requirements going into effect for 2014. Let Marcum’s nonprofit team assist in developing an understanding of the statutory changes so that your organization is informed and compliant.