New York’s Nonprofit Revitalization Act was hailed as a landmark overhaul when it was passed in 2013. Three years later, Empire State lawmakers revised certain aspects of the law regarding independent directors, related party transactions and audit committees.
“One-size-fits-all rules make it very difficult to put in place in a practical way,” said Sean Delany, executive director of the Manhattan-based Lawyers Alliance for New York, which endorsed the legislation signed by Gov. Andrew Cuomo in November. He described the amendments as “fine-tuning,” with practical changes meant to recognize the diversity of the nonprofit sector. Upstate, rural nonprofits have different challenges than urban ones and larger organizations have different challenges than smaller organizations, he said.
As with any complete statutory overhaul, once the new regulations took effect there were aspects found to be “operationally impractical” or challenges that did not necessarily serve the purposes of the law, according to Delany. The amendments will eliminate minor issues of noncompliance that he described as “foot-fault problems.”
Amendments “definitely relax standards that previously had been imposed on organizations,” said Mike West, senior attorney for the New York Council of Nonprofits (NYCON), which opposed the legislation. Rules around related party transactions previously had been a pretty rigid mandate, he added.
Laura Abel, senior policy counsel with the Lawyers Alliance for New York, said the law adopts guidance by the Attorney General’s Charities Bureau that allows staff members rather than the board to approve a transaction with a director, officer, or related party if the transaction is “of limited value.” Staff also can approve a transaction if it would not usually be reviewed by the board during the ordinary course of business and is available to others on the same or similar terms.
There was a lot of pressure from upstate groups to make changes to the statutes that would take into account the reality that it is much more difficult to secure board members for organizations in less populated areas, according to Seth Perlman, a partner with the Manhattan law firm Perlman + Perlman. Requirements relating to independence and non-compensation of board chairs were “problematic for smaller communities with more unavoidable, intertwining relationships,” he said.
Previously, people employed by a company that does business with a nonprofit could not be independent directors, according to Delany, which could be a problem for smaller organizations in more rural areas.
It was difficult to recruit board members, particularly those with financial expertise, Delaney said. For instance, the CFO of a local utility company or bank with which a nonprofit does business would not be able to sit on an audit committee – “even though they have expertise that would helpful,” he said.
Essentially it makes transactions with much larger organizations a finding of non-independence triggered at a much higher level.
The threshold for who could be considered an “independent director” was revised, creating a sliding scale. Now, a director could still be independent if their employer has a financial interest or was paid in the last three years at least $10,000 or 2 percent of consolidated gross revenues, for companies reporting less than $500,000. The amount of payments to the company can’t exceed $25,000 for those with gross revenues of $500,000 and $10 million, and $100,000 for those with $10 million or more.
Most changes will go into effect May 27, 2017 – 180 days after the measure was signed into law. One provision, related to board chairs, takes effect Jan. 1. An organization’s board chair can now be a paid employee, which the original legislation banned. Statewide, there was little difficulty complying with what was enacted but downstate organizations found the legislation to be unduly burdensome, according to one observer, who didn’t find it necessary for the revisions though the modifications are nuanced tweaks.
Under the revitalization act, only a majority of board members could vote to create a committee or appoint committee members. A minimum quorum requirement for boards in New York is one-third and even less for larger boards. For larger boards, it can be difficult to get a majority of board members if the quorum is set at one-third, Delany said. Revisions now make it a simple majority of a quorum for the creation of committees or appointments of committee members, except for the executive committee.