New York State Attorney General Eric Schneiderman and the chairmen of some key legislative committees have proposed a major overhaul of state laws governing the nonprofit sector in the first major reforms in 40 years, including improved oversight of audits by the charity's board and the hiring of independent auditors.

Schneiderman joined Senators Michael Ranzenhofer and Carl Marcellino and Assembly Members Jim Brennan, Helene Weinstein and Steve Englebright in proposing the bipartisan legislation on Tuesday. The product of more than a year of legislative deliberation and negotiation, the Nonprofit Revitalization Act and the Executive Compensation Reform Act  aim to make New York a model for nonprofit governance in the country, while cutting unnecessary red tape to better enable nonprofits to perform.

“Nonprofit organizations provide critical services to New Yorkers across the state and represent a powerful engine for economic growth and stability,” Schneiderman said in a statement. “We must work together with the nonprofit community to cut red tape while strengthening governance and oversight, and that’s exactly what this legislation does. Our goal is to revitalize New York’s charitable organizations and, at the same time, put a stop to the financial abuses that have come to light.”

The bill aims to enhance nonprofit governance and oversight to prevent fraud and improve public trust; and reduce unnecessary and outdated burdens on nonprofits. To ensure sound financial management, the bill would require that charities’ boards perform active oversight over financial audits. Boards would be responsible for retaining independent auditors and reviewing results of the audit. At larger charities with over $1 million in annual revenue, the board or audit committee would be required to follow additional oversight procedures.

The bill also aims to prevent conflicts of interest by requiring that transactions between a nonprofit and insiders who stand to benefit be fully disclosed and that nonprofit boards determine they are fair, reasonable and in the organizations’ best interests. When a charity engages in a substantial transaction with an insider, the board would have to consider alternatives and document its basis for choosing the insider transaction.

The bill would also strengthen the Attorney General’s power to police fraud and abuse by granting clear power to bring judicial proceedings to unwind interested-party transactions. In addition, it would provide board independence by prohibiting any employee of a nonprofit from also serving as chair of its board. The bill would also promote good governance by requiring all nonprofits to adopt conflict of interest policies and those with over $1 million in annual revenue and 20 or more employees to adopt whistleblower policies.

The Nonprofit Revitalization Act would modernize New York law to remove unnecessary burdens by streamlining procedures for nonprofit mergers, property sales and corporate dissolutions, so that funds needed for ongoing charitable programs would not be wasted on unnecessary red tape. It would also modernize laws to allow nonprofits to conduct their affairs more efficiently, such as permitting nonprofits to use email and video technology for meetings and allowing boards to delegate the approval of small transactions to committees. The bill also would aim to eliminate unnecessary and costly requirements for nonprofits forming in New York to save nonprofits money and time and allowing them to commence charitable programs more quickly.

A related piece of legislation, the Executive Compensation Reform Act, would rein in excessive compensation by requiring that boards of nonprofits review compensation and determine it is fair, reasonable and justified. All organizations would have to review and approve CEO compensation.

The same bill would also require additional oversight at large organizations. Charities with annual revenue of over $2 million would have to review the compensation of the top five highest paid officers or key employees and compare it to the compensation paid at similar organizations.

Marylou Borowiak, president and CEO of the Food Bank of Western New York, praised the two bills. “The Food Bank of Western New York is in strong favor of nonprofit laws that promote good governance practices and improve oversight,” she said. We applaud Attorney General Schneiderman's leadership on this issue and Senator Michael Ranzenhofer’s sponsorship of this important legislation.”

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