Protection of Charitable Assets Act On Agenda For Uniform Law Group

More reporting requirements might be coming down the pike if the Protection of Charitable Assets Act (PCAA) gains approval this summer. State legislatures would still need to sign off on the model act, or simply pick and choose the parts they like, before any new regulations are enacted.

After years of meetings and drafts, the Uniform Law Commission (ULC) is poised to vote on the PCAA at its annual meeting July 7-13 in Vail, Colo. The act, should it be approved by states after gaining approval from the ULC, would require anyone who holds or administers more than $5,000 in charitable assets to register basic information about the charity and file an annual report with the state, as well as notify the state of any “life events,” such as a merger, dissolution or disposition of assets. The model act also formally defines the authority of the state charity official over the protection of charitable assets in that state, a provision critics say is too broad and vague.

The PCAA would replace the Uniform Supervision of Trustees Charitable Purposes Act, passed in 1954. Part of the purpose of the proposed model act is to confirm the authority of attorneys general to protect charitable interests, which the earlier act only assumed existed, according to Susan Gary, a professor at the University of Oregon School of Law, who served as a reporter for the ULC’s drafting committee. The new model act also modernizes some of the initial registration and reporting requirements of charities, she said.

“Some states that have adopted the old act probably made their own models, that actually have more strict, expensive reporting requirements. States are not likely to enact this act if they have more than it,” she said. And, the committee tried to create something that would be more widely useful and widely adopted, according to Gary.

The PCAA is only a model act, not a uniform act, which means states are not required to approve it. In 2006, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) was adopted as a uniform act and today, 47 states have enacted the measure, with Florida and Mississippi introducing legislation this year (Pennsylvania is the only state that did not). A committee of the ULC started meeting in 2008 regarding the PCAA.

“Some states already have really good laws in place, so they may or may not pass this,” or they might pick and choose what portions of it to enact, said Bob Carlson, assistant attorney general in the Missouri Attorney General’s Office and current president of the National Association of State Charity Officials (NASCO). The PCAA is a model act, which the ULC does not actively encourage states to pass, but should states draft a measure, they can follow the model, he said.

“It’s not redundant because states with registration requirements, no one’s going to register twice. That’s why it’s a model act and not uniform act,” Carlson said. “The point of the act is to confirm the AG’s role to protect assets. Some people who wish to avoid the AG’s ability to protect assets, who are up to no good or just don’t’ agree are using registration as a scapegoat to avoid the authority of the AG,” Carlson said. The act would allow states that might not have the resources of larger states to enact some form of charitable regulation, or states that might have charity-related statutes across several departments.

So many states have extensive regulation that the act is not likely to be uniform, but the hope was to provide a model law useful to states that want the legislation, according to Cynthia Rowland, a partner with Coblentz, Patch, Duffy & Bass in San Francisco. In states with no regulation, the act sets up registration and reporting structure for charities over certain size and relatively minimal reporting requirements, said Rowland, one of three American Bar Association (ABA) section advisors on the drafting committee. Most bigger states already have something like that, and are much more thorough in regulating charities, she said, adding that registration requirements help the sector because they create a basic standard.

“That’s the big benefit to the public and sector in general. Most charities – the big ones in particular — are registering and have the capability to meet these relatively minimal requirements. It’s not a huge burden,” said Rowland.

A former charity regulator in Pennsylvania, Tracy Boak fears the measure will create another duplicative burden for charities if states choose to enact it. Boak, now an attorney with the firm Perlman and Perlman in New York City, was involved in the ULC process during her time with NASCO as immediate past president before resigning this past January.

Boak said the measure will create more burdensome, duplicative requirements for charities if states pass the PCAA, especially in states such as Pennsylvania where charities register with the Department of State, attorney general, and the IRS.

“Here’s the reality of it: legislatures may pass this law because it looks like good uniform law but they may or may not take into consideration other laws regarding charity reporting,” Boak said. “Where will resources come from to enforce and implement this law? Will AGs get extra staff to process registrations?”

For states already involved in heavily regulating charities, Boak questioned whether the law will be adopted. “It won’t serve any useful purpose other than an extra burden to register and stretch resources even thinner,” she said. The requirement to notice the state with any “life event” by a charity — such as dissolution, merger or change in articles of incorporation — is a little overly intrusive, Boak said, though she was more concerned about who would review all these documents.

“If the legislature passes this, where are resources going to come from,” asked Boak. “I don’t think it will do anything more to protect charities against fraud… Anyone who wants to comply and be transparent, is already doing it,” she said.

Mark Weinberg, co-counsel for the Free Speech Coalition (FSC) in Vienna, Va., believes there are still too many unanswered questions about the feasibility or effectiveness of the proposed measure. States, he said, should provide some metrics to indicate the success of existing registration requirements before they extend regulations further.

“They don’t have to tell us how any crimes were prevented by this but they won’t even tell us how much crime was uncovered because of these reports, or what relationship that activity has to the amount of money that’s been laid out by charities — both filing fees, as well as undergoing investigations and maintaining audits that most states require,” said Weinberg. “At time when everything has to be justified, based upon cost and relevant benefit associated with it, these guys are just saying, ‘We’ve always done it this way, we should do more of it,’” he said.

“In most cases, having information won’t prevent them from stopping abuses. There’s already a wealth of information on [Form] 990s, and most of the information they’re talking about requiring is on the 990,” Weinberg said.

Other issues raised with the PCAA relate to the 4th Amendment and the right of attorneys general under existing common law. The act would give investigatory authority to AGs without requiring any recourse to get warrants for searches, Weinberg said, with no reference to reasonable cause or procedures.

“States that already do heavy solicitation regulation, probably won’t even try to get this passed, because this is nothing compared to what they are already getting for solicitation,” Weinberg said. “They can’t handle the information they already have and they’re asking for more,” he said. Most states now are “now gathering information from charities that is so extensive it’s impairing their ability to function,” Weinberg said.

Mark Fitzgibbons believes the act would create “a broad, sweeping new power to investigate and meddle with decisions of nonprofits if they think an organization has not been managing assets properly.”

Fitzgibbons, president of corporate and legal affairs for American Target Advertising in Manassas, Va., is a frequent critic of state regulators. He fears the act is written so broadly that it would give regulators too much discretion over when and why they could investigate, and what they could recommend, without having to go the courts.

Regulators would get “free reign to investigate without any real standards, other than so-called public interest,” Fitzgibbons said. “There’s no role for the court to place checks on abusive or mistaken charity regulators,” he said. NPT