Current Trends and Issues in Charitable Regulation

Regulators
Conference panels presented by various state regulators covered ongoing trends and issues. Public trust of the charitable sector was a topic of general concern, based on surveys indicating a decrease in the trust in the nonprofit sector.  The regulators noted that they play an important role in enhancing trust by providing meaningful oversight of the sector.

Noteworthy topics included the importance of Board governance and oversight, particularly in monitoring the organization’s finances. The panelists noted a rise in for-profit entities soliciting in-kind disaster relief, particularly those that do not have a nonprofit partner. This trend has been largely observed in connection with the rise of natural disasters and the war in Ukraine.   Regulators are also troubled by the balloon and bust of opioid-crisis relief organizations. This is threatening given the importance these organizations play in their local communities. Such failures have been attributed to their overly rapid growth.

Several state regulators noted an increase in mergers and acquisitions filings of hospitals. Approval of these transactions generally turns on the question of whether the transaction is in the best interest of the community. As for charity care, regulators noted that nonprofit hospitals have a duty to provide subsidized care to patients in need, something they say they have seen too little of.

A notable increase of fraud, committed in the name of charities or directed at charities, is also of concern. It is reported that there has been a rise of bad actors using the name and information of known and respected charities to commit fraud.  One typical scheme is the impersonation of regulators claiming that registration fees are past due. Charities that receive such calls are admonished to use best efforts to confirm the identity of caller.

NASCO puts out an annual report detailing trends on state regulation and enforcement.

Nonprofit Sector and Practitioner Panelists
In the afternoon, other stakeholders in the charitable sector spoke on the trends they have observed during the past year. Jan Masaoka, CEO of the California Association of Nonprofits, discussed the Association’s concerns with donor-advised funds (DAFs) arising from the delay in time between donor benefit (i.e., the donor’s tax-deduction) and the donation reaching its target community. Erin Bradrick, Principal of NEO Law Group, spoke on the growth of fiscal sponsorships and the lack of sector education and oversight that exists. She observed that Decentralized Autonomous Organizations (DAOs) have the theoretical ability to seek 501(c)(3) status without having a governing body (the core distinguishing characteristic of DAOs).  Ms. Bradrick also noted an upward trend in the politicization of issues directly tied to key nonprofit areas, which have created a tension between state and federal law., naming the recent cannabis and abortion access laws as prime examples.

NFT and Cryptocurrency
Sara Hall, Chief Legal Officer and General Counsel of ALSAC, Andrea Kramer, Partner of McDermott, Will & Emory, Ruth Madrigal, Principal of the Exempt Organizations Group at KPMG, and Beth Short, Director of Outreach and Education, Charitable Law Section of the Ohio Attorney General’s Office, discussed cryptocurrencies, NFTs, and other emerging forms of donation.  The panel noted that these forms are not suitable for all organizations, as there is significant risk and several complex issues to consider in accepting donations of cryptocurrency.

It was noted that organizations that decide to accept NFT or cryptocurrency donations should ensure they have a detailed donation acceptance policy and procedure in place.  The policy should include how the organization will protect the security of the crypto wallets through which they accept the donation, how to appraise the cryptocurrency or NFT, and whether to use an intermediary service like a Donor Advised Fund (DAF). Including the development department on any decision on acceptance of these donations is critical.

Now and Next in Charitable Giving
In her keynote address, Dr. Una Osili, Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy, made a deep dive into the data to identify donor trends. Among those Dr. Osili highlighted are that giving is at an all-time high, that individuals remain the largest group of donors, and that fewer households are donating. She also pointed to a downturn in religious donations, historically the largest generator of donations, and an upturn in donations to racial identity and environmental groups. Donors are moving from a trend of making passive donations to getting more involved in the causes they support through active engagement and education.

Dr. Osili ended by sharing some of her key findings, notably that giving is the great equalizer. Adjusted for gross income, charitable giving is the same across all groups. Technology, specifically crowdfunding websites and social media, has become one of the strongest vehicles for attracting donations, making up 40% of all giving. Finally, charities should start thinking of the value of donating one’s testimonial and network of connection, not just time and gifts. For more information, visit the Indiana University website at Generosity for Life.

Establishing a Healthy Board
Dr. Gerri King, President of Human Dynamics Associates, taught board mediation and communication techniques. Her talk centered on the five states of group development: Forming, Storming, Norming, Performing and Adjourning. Dr. King explained that at each stage, there are unique challenges affecting Board dynamics, and that any change to the make-up of the Board can be a setback.

Dr. King emphasized the importance of creating a no blame, no gossip environment among the team and the organization, noting that although it sounds simple, it can be intensely difficult to achieve. The benefits, as she noted, are indispensable., creating higher accountability, cohesion, trust and efficiency.

Update on the California Charitable Fundraising Platform Law
Brian Armstrong, Deputy Attorney General of the California Attorney General’s Office, discussed Assembly Bill 488, which is set to take effect on January 1, 2023. This is the first law in the U.S. specifically designed to regulate online charitable fundraising platforms, including through a new registration and reporting requirement, specific required public disclosures, and other provisions designed to safeguard charitable donations received through these platforms.

The proposed regulation is currently in the “review of public comments” stage. Armstrong indicated that a second, 15-day period for public comments will open up again once the review is complete, but did not specify when that would be.  During the follow-up Q&A, our team learned that the registration portion of the law is not likely to go into effect on January 1, 2023. Still pending would be final regulations and the development of the new registration forms. However, the AG’s office intends to begin enforcement of those portions of the law which are not dependent upon the passage of final regulations (e.g., the disclosure requirements).

Charitable fundraising platforms and platform charities should take time to carefully review their current platform disclosures (including disclosures made throughout the user/donor flow, as well as the platform Terms of Use) and ensure they are in compliance with these new requirements.  For more details on the legislation, please read California Enacts New Law to Regulate Charitable Fundraising Platforms by firm partner Karen Wu.

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Impact of COVID-19
The impact the COVID-19 pandemic has had on the charitable sector was a focus of the conference. Yael Fuchs, NASCO President and Co-Section Chief for the Charities Bureau of the New York Attorney’s General Office, pointed to many state regulatory changes in areas such as virtual meeting guidance, registration deadline extensions, changes to signature requirements, and modified filing requirements. Some of these changes can be found in the NASCO chart of state registrations laws. While many of the pandemic related modifications are set to, or have already, expired, NASCO is looking for feedback as to what virtual components and guidance modifications should stay. For further information on virtual member meetings, please read Virtual Nonprofit Board and Member Meetings in the Time of COVID by my colleague Jeremy Coffey.

Ms. Fuchs described the effects the pandemic has had on filings requiring regulatory approval. While the trends are anecdotal, it was a shared observation that charity regulators are seeing an increase in divestment of real property, deaccessioning of art, mergers, and amendments to certificates of incorporation. She further noted that charity regulators have not yet seen an increase in endowment modifications and dissolutions, but based on historic trends, they expect these types of transactions may be forthcoming in the near future.

Federal Trade Commission (FTC)
Tracy Thorleifson, Attorney and FTC’s leading expert on charitable solicitation fraud, highlighted some of the key work the FTC has been doing in the charitable sphere, and explained the role the FTC plays in charitable regulation. Specifically, the FTC has regulatory authority under the FTC Act to prosecute sham charities engaged in fraudulent and deceptive fundraising activities. The FTC also has oversight over robocalls when made by fundraisers hired by charities (i.e., professional fundraisers) on the federal level. The FTC encourages everyone to report any suspected or known charitable fraud activity to www.reportfraud.ftc.gov.

Policy Updates and Trends
Courtney M. Aladro, Assistant Attorney General and the Chief of the Non-Profit Organizations/Public Charities Division at the Massachusetts Attorney’s General Office, NASCO Board Member, and Chair of the Policy Committee, presented a handful of legislation and policy changes from the past year.

State Legislation
The first focus was on two state legislative changes. The Washington Nonprofit Corporation Act (Chapter 24.03 RCW) makes changes to the existing regulatory regime. First, it updates the rules governing electronic communications and member meetings. Second, it enhances the Attorney General oversight of charitable assets held by nonprofit corporations. Finally, it allows for “domestication” and for-profit to nonprofit conversion. This new act will go into effect January 1^st, 2022.

The other state legislation highlighted was the California Bill on oversight of charitable giving on online platforms (AB 488), which was signed into law on October 7^th, 2021. The bill requires online platforms facilitating charitable fundraising to register with the Attorney General’s office. It also requires certain disclosures and prompt distribution of donations. Finally, it prohibits solicitations for charities that are not “in good standing” with the Attorney’s General Registry of Charitable Trusts, the Franchise Tax Board, or the IRS. NASCO has a crowdfunding working group that is continuing to monitor online fundraising activities. For a deeper understating of this bill, please read California Enacts New Law to Regulate Charitable Fundraising Platforms by my colleague Karen Wu.

Federal legislation
Ms. Aladro highlighted two federal bills applicable to charitable organizations. The first bill was the Fraud and Scam Reduction Act (HR 1215). This act was supported by NAAG/NASCO in an open letter sent on behalf of 47 states. The bill passed the House on April 15, 2021 and is currently awaiting Senate approval. The bill, if passed, would establish a Senior Scams Prevention Advisory Group to support training and education efforts to identify and prevent scams targeting the elderly. The bill would also establish the Office for the Prevention of Fraud Targeting Seniors in the Bureau of Consumer Protection of the FTC.

The other federal bill discussed was the Accelerating Charitable Efforts Act (S 1981, known as the “ACE Act”). This bill, which was introduced on June 9th, would create new rules for private foundations and donor-advised funds (DAF). The legislation takes aim at regulating DAF funds specific to deduction eligibility and payout requirements and timelines.

Supreme Court Decision
Americans for Prosperity Foundation v. Bonta was discussed. In this case California enacted a rule requiring all charities that fundraise in the state to disclose their confidential IRS Form 990 Schedule B, if they filed one, with the California Registry of Charitable Trust. The Supreme Court found this rule unconstitutional and struck it down. In doing so, it did acknowledge that states can obtain Schedule B information through subpoenas and audits, but only if there is an underlying reason. In response to this case, California, Hawaii, New Jersey, and New York have altered their Schedule B collection rules and/or practices. For more information on this case leading into the Supreme Court’s opinion, please read Schedule B Disclosure Cases Head to the Supreme Court – Is Donor Privacy Threatened? by my colleague Seth Perlman.

Alternative Nonprofit Fundraising
Brian Yacker, Adjunct Professor at the University of California Irvine, discussed issues surrounding alternative fundraising. Alternative fundraising can include many things (for example auctions or “virtual” bake sales), special event fundraisers such as games (raffles, bingo, etc.), virtual events (gala, run/walk, etc.), or crowdfunding. Some of these activities may generate unrelated business income tax (“UBIT”). If the amount of unrelated business activities become too substantial, it could jeopardize an organization’s tax-exempt status. It is therefore important that nonprofit boards keep a vigilant eye on the type of fundraising activities that generate UBIT to ensure that it does not become too substantial. It is also important that these activities are properly reported to the IRS on the Form 990. Failing to report properly could lead to tax liabilities, penalties, and an uncertain tax position.

Charities Working with Non-Charities
A panel of regulators discussed the various considerations an organization must take into account when deciding to partner with a non-charity. On the federal level, such considerations include the 501(c)(3)’s purpose, unrelated business taxable income, private benefit, jeopardizing investments, and self-dealing. On the state level, the considerations become much broader. An organization must consider, among other things, the various duties (loyalty, obedience, care, and accounting), the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”, enacted in all states except PA), registration and reporting requirements, charitable solicitation laws, donor expectations, and charitable purpose. One of the panelists, Assistant Attorney General for Washington Joshua Studor, pointed to the 2019 American Law Institute’s Restatement of Charitable Nonprofit Organizations Law as a great resource for many of these state considerations.

Fundraising Events – Virtual, In-Person, and Hybrid
Sara Hall, Chief Legal Officer for St. Jude’s Children Research Hospital, spoke on the uncertainty of fundraising events. She noted an increasing expectation for returning to in-person events. As a lesson learned, Sara addressed the hybrid event. Ms. Hall noted the heightened challenges of hybrid events (both virtual and in-person). The logistical issues with both types are compounded when thrown together.

Ms. Hall also noted that, in the area of event contracting, force majeure clauses have become less reliable. Vendors are specifically excluding COVID and no longer excusing non-performance. It is important to negotiate at time of booking with catering that cancellation penalties will be credited towards future bookings and that you have a date to confirm your numbers before food is purchased.

Cryptocurrencies, NFTs, and Beyond
Ms. Hall also spoke to the burgeoning areas of cryptocurrency and NFT donations. Currently, cryptocurrencies are considered property for tax purposes. If a charitable organization wishes to accept cryptocurrencies, it is important that they set clear policies and controls for doing so. These include: establishing gift acceptance policies and safeguards that are consistent with the organization’s finance and audit procedures, custodian agreements for individuals with account access, and monthly reporting and auditing of their crypto wallet. It is also important that charities work with vendors and exchanges that are regulated by the Financial Crimes Enforcement Network (“FinCEN”) or the New York Department of Financial Services (“NYDFS”) if you are a New York entity. For more information on how charities should handle cryptocurrencies, please see What Nonprofits Should Be Asking About Virtual Currency Regulation and Fundraising by my colleague Jeremy Coffey.

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