On December 19, 2013, New York Governor Andrew Cuomo signed into law sweeping changes to the laws that govern nonprofits that do business in New York State. When they take effect in the coming months and years, these rules will be among the strongest nonprofit governance laws in the country. While religious organizations, colleges and universities have been exempted from some of these new requirements, the new law applies to virtually every nonprofit doing business in New York State, regardless of where they are based. As a result, while the Act affects many organizations across the country.

Enhanced Governance Policies

Many of the new provisions of the law are aimed at enhancing governance and oversight at the board level. The Act also gives the NY Attorney General broader powers to hold board members and others more accountable for the actions, or inaction, of the organization. The key provisions of the Act include:

Audit Committee Requirement

A designated audit committee will now be required. The audit committee must be comprised of “independent directors” and is responsible for retaining an independent auditor and reviewing the results of the audit. Audit committees of nonprofits subject to NYS charitable solicitation rules with greater than $1 million gross revenues have additional duties relating to the audit, as well. The Act also increases the threshold of gross revenue at which nonprofit organizations must have audited financial statements and are required to file annual reports with the Attorney General’s office.

Definition of “Independent Director”

The Act also clearly defines the criteria for an “independent director.” This definition includes limitations on current or former employees, vendors meeting a minimum compensation threshold, relatives of the organization’s current and former employees, beneficiaries of the organization, donors and board members past and present.

Mandatory Conflict of Interest Policy

Nonprofits are required to adopt a conflict of interest policy covering directors, officers and key employees. While many organizations have adopted a conflict of interest policy in recent years, the Act lays out specific elements of a sound conflict of interest policy, including defining what constitutes a conflict of interest, the process for disclosing a conflict and requirements surrounding participation in the organization by individuals who present a conflict of interest. Additionally, a written statement identifying potential conflicts must be signed before any director may join the board and must be signed by all board members annually thereafter.

Related-Party Transactions

The Act redefines what constitutes a “related party” and requires that transactions with a nonprofit be fair, reasonable and in the best interest of the nonprofit. Additional requirements of the Act will now include that the board consider alternative transactions to the extent available and approve any related party transaction by not less than a majority vote. The board must also document in the minutes why the related party transaction is the most favorable option available to the organization. The Act also grants the New York Attorney General authority to bring action related to any related-party transaction that violates any law.

Limitation on Employee Serving as Board Chair

Effective January 1, 2015, the Act will prohibit an employee from serving as chair of the board or in an officer position with similar responsibilities. This prohibition would not extend to bona fide independent contractors.

Compensation Approval

The Act gives the Attorney General several new enforcement tools to deal with actions that are deemed to provide an improper private inurement to the detriment of the nonprofit organization, particularly when it comes to compensation. The Act provides that compensation paid to directors, officers and key employees be “fair, reasonable and commensurate” with the services provided to the organization. The affected individuals may not participate in their own compensation deliberations. The new law allows the New York Attorney General to bring an action to void or rescind compensation decisions deemed to not be in the best interest of the nonprofit. Compensation decisions are a highly sensitive area and the utmost care must be taken to ensure compliance with not only the Act, but IRS regulations as well.

Mandatory Whistleblower Protection Policy

The Act mandates that nonprofits with 20 or more employees and annual revenue in the prior fiscal year in excess of $1 million implement a whistleblower protection policy. The policy must be distributed to all directors, officers, employees and volunteers, and must protect from retaliation any one of them who, in good faith, reports an action or suspected action that is potentially illegal, fraudulent or in violation of any adopted policy of the nonprofit. Additionally, the policy must include procedures for reporting violations, identification of person responsible for administering the policy and reporting to the audit committee or other committee of independent directors.

Other Provisions of the Act

Beyond the governance matters noted above, the Act also streamlines and updates certain outdated requirements in prior laws to now permit the use of electronic communications to conduct board meetings, updating the classification system used to categorize different types of nonprofit organizations, and modernize the rules surrounding mergers, acquisitions and real estate transactions.

Do you expect the Nonprofit Revitalization Act to significantly impact your operations?

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” blog (January 14, 2014). Copyright 2014 BDO USA, LLP. All rights reserved.