The National Conference of Commissioners on Uniform State Laws has approved and recommended for enactment in all states a new law to add oversight over charitable assets – the Model Protection of Charitable Assets Act (the Act). The Act clarifies, and in some instances increases, the state attorney general’s (or charity regulator’s) power to regulate and supervise charitable funds. It also imposes a number of new reporting requirements on charities. The Act’s purposes are to reduce abuse, fraud and other types of misbehavior in the use and management of charitable assets and to boost the public’s confidence in the charitable sector through increased transparency. One should note that “reporting” is not the same as “transparency” and that accountability is a result of having an active regulator willing to investigate and pursue the information reported (or not). The net benefit of this law – improved governmental protection of charitable assets – may come with a significant cost to both charities and the public alike, including the potential for increased state scrutiny of the internal operations of charities; higher costs for charities, which may affect resources available for mission (an issue in smaller charities that serve the community); increased enforcement expenses; and possible confrontation between church and state.
The Act’s purposes are to reduce abuse, fraud and other types of misbehavior in the use and management of charitable assets and to boost the public’s confidence in the charitable sector through increased transparency.
As states begin to consider and adopt their own versions of the Act, individuals and entities holding charitable assets must be ready to address issues raised by the Act. In that regard, this newsletter anticipates that debate and provides an overview of the powers the Act vests in the attorney general, who may be subject to the Act, the Act’s reporting requirements, and the major implications of the Act on the public and charitable organizations.1
The Authority of the Attorney General
The Act does not seek to limit an attorney general’s existing powers, but rather it clarifies existing powers. Many of the powers noted in the Act are historically within the state attorney general’s regulatory arsenal, but, depending on the law of a state where it is being considered for enactment, the Act may add to and expand them. Mainly, the Act grants the attorney general the power to prevent or remedy the misapplication of a charitable asset through reporting of certain events before they occur, investigation and legal action. The attorney general’s role as the protector of charitable assets does not give him the power to displace the governance of charitable assets or substitute his judgment for the business judgment of the charity. The Act also encourages attorneys general to cooperate with other state, federal or foreign public officials responsible for the protection of charitable assets in their respective jurisdictions. Thus, a matter that starts with a charities bureau in a state justice department could ultimately result in coordinated investigations and actions among other regulatory and law enforcement agencies.
Who Is Subject to the Act?
The breadth of the Act is confirmed in its expansive definitions of “charitable assets,” “charitable purpose,” and “persons” subject to the Act. Under the Act, a charitable asset is any property that is “given, received, or held for any charitable purpose,” which traditionally includes “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of governmental purpose, or any other purpose the achievement of which is beneficial to the public.” A “person” subject to the Act “means an individual, corporation, business trust, statutory trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government or governmental subdivision, agency or instrumentality, or any other legal or commercial entity.” These definitions are broadly and ambiguously written and could apply to a wide range of individuals and entities holding charitable assets even if an entity is not a charity per se. Individual states will have an opportunity to refine these definitions when they adopt their own versions of the Act, and given the centrality of these concepts, those who would be subject to the Act should pay careful attention to the precise definitions.
Almost all of the Act’s obligations flow from registration; once registered, the entity will also have to comply with its other requirements. The Act exempts a number of different groups from the registration requirements, such as governmental entities and entities holding charitable assets that belong to another (i.e., a financial institution or storage facility). Several draft versions of the Act alternatively included or exempted religious organizations. The possible inclusion of religious entities under the Act triggered discussion and commentary about its potentially unconstitutional sweep. The final version of the Act presents alternatives to expand or contract exemptions for religious groups. These alternatives range from broad exemptions of all religious organizations to no religious exemption at all. The level of religious exemption adopted also could incongruously result in requiring churches and other houses of worship to comply with reporting requirements of the Act even though they are specifically exempt from filing similar informational returns with the Internal Revenue Service. Given the range of various obligations placed on those regulated under the Act, the scope of inclusion or exemption of religious organizations will bear careful evaluation.
The Act’s Reporting Requirements
Requirement 1: Registration
Under Section 4 of the Act, a person is required to register with the attorney general within three months after the person has received charitable assets exceeding $50,000 and where the person has a significant connection to the state (i.e., the state is the location of the charity’s place of organization, principal place of business or charitable activities). When registering, the person must provide basic information to the attorney general, including:
- its name and address;
- the name and address of its statutory agent;
- the name and contact information for the individual responsible for the charity;
- the charity’s federal employer identification number; and
- information regarding the tax status of the charity.
States also may elect to require the person to provide other information or documents such as records that describe its charitable purpose and the terms of the use and management of its charitable assets. The Act suggests a registration fee of $15 and a late filing penalty of $100. The attorney general shall use the collected information to create a public registry of the charities.
Requirement 2: Annual Reports
Under Section 5 of the Act, persons subject to registration and that hold or receive charitable assets exceeding a certain amount during the reporting period must file an annual report with the attorney general, unless the attorney general has waived the requirement. Each state may set a different threshold asset amount; however, the Act suggests the amount be set at $50,000 (which is the same amount as the baseline for registration). At a minimum, the annual report must contain:
- the name and address of the person;
- the name and address of the statutory agent of the person; and
- the name of and contact information for the responsible individual during the period.
States also may elect to require the person to provide or verify information ranging from the person’s total revenue for the period to “reportable events” occurring during the period (see Requirement 3 below). In addition, persons required to file an annual report under the Act and a federal information return with the Internal Revenue Service must attach a copy of the federal return to their annual report to the attorney general.
Requirement 3: Notice of Reportable Events
Following registration, persons holding charitable assets must file a notice with the attorney general of certain “reportable events.” Charities subject to the registration requirements of the Act must file notice within 20 days before or after certain life events such as dissolution, merger and disposition of substantial charitable assets. Persons subject to these reporting requirements must seek consent from the attorney general to transfer charitable assets within a certain time period following the delivery of the notice to the attorney general.
The Act also imposes reporting requirements regardless of whether the charity is subject to the registration requirement. For example, a party seeking relief in certain actions or proceedings involving charitable assets and filed in the state must give notice of the action or proceeding, including the initial pleading, to the attorney general. The Act does not state when the notice must be filed. The attorney general, however, will not be bound by an order, decree or judgment rendered in an action or proceeding if notice was not given.
Major Implications of the Act
Greater access to information about the use and disposition of charitable assets will advance the efforts of state attorneys general to be proactive in overseeing the charitable sector. In many states these powers will expand the reach of the regulators. While the Act has the laudable goal of preventing diversion and inurement of charitable assets, this comes with increased state scrutiny, higher costs and religious entanglement. Much of the impact will be determined by the legislatures’ intentions on passage and the courts’ interpretations of the Act in specific cases.
The Act increases state and public scrutiny of the use and management of all charitable assets. Through annual reports and notices of reportable events, the attorney general will have more information about a charity and can intervene to prevent or remedy an alleged abuse of a charitable asset. Although the Act disclaims allowing the state to govern charitable entities, experience teaches that the line between guiding and managing is a fine one. In addition, the registrations and annual reports are public records. Increased transparency may lead the opponents of a mission-driven charity to use this as an opportunity for mischief among regulators, donors or even the public served. Thus, while transparency and accountability are public goods, in specific cases, increased scrutiny may interfere with a charity’s ability to a carry out its charitable purpose in the way it sees most fit. For example, the Act may dissuade a charity from taking an entirely lawful step to organize its assets if, in doing so, it might be subject to public criticism regarding the purpose of the action. The Act does not provide an obvious mechanism for such instances to be sorted out between charities and regulators.
In addition, both charities and the public will incur significant costs as a result of the requirements of the Act. Charities will incur costs from paying filing fees to employing attorneys and financial professionals to ensure compliance with the Act’s new registration and reporting requirements. While these may seem like small additions to what charities already expend, any new set of requirements, especially ones that are broad, ambiguous and backed by powerful state enforcement arms, triggers careful attention to every detail. Likewise, the states will need to direct significant resources to their offices of attorney general to ensure compliance and enforcement of the Act. These increased costs incurred by charities and states may create financial burdens difficult to overcome, especially in light of the country’s present economy.
The Act also creates the potential for religious entanglement in violation of the First Amendment in cases where the Act is applied to religious organizations. As discussed above, the draft Act presumes that some set of religious entities will (and should) likely be subject to its provisions. Except where states exempt all religious organizations, some religious organizations will be required to register with the attorney general, provide reports annually and give notice of certain life events. This forced disclosure may run afoul of the First Amendment in a regulatory state already prone to provoke, rather than avoid, entanglement.
In sum, the Act will have a significant impact on the individuals and entities to which it applies. Because the contents of the Act will vary as it is adopted across the country, the information and issues highlighted in this newsletter provide a strong foundation for entities holding charitable assets to begin preparing for the consideration of the Act in their respective states.
1 A detailed exposition of all of the Act’s features and implications is beyond the scope of this newsletter. The full text of the Act and information about its passage is available at The National Conference of Commissioners on Uniform State Laws’ website: http://www.nccusl.org. In addition, an author of this newsletter, Mark Chopko (firstname.lastname@example.org), served as an observer for the drafting committee and offered critiques that outlined unintended consequences for religion and for government if religious entities were broadly included.
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