Lessons for South Africa: The NonProfit Revitalisation Act Amendments in New York State

governance npos regulation
Wednesday, 14 August, 2013 - 12:17

This article focuses on the New York’s decision to pass the Nonprofit Revitalisation Act – which overhauled laws governing NPOs – and how South Africa could adopt a few lessons in order to improve the Nonprofit Organisations Act

On 20 June 2013, the New York State Senate passed the NonProfit Revitalisation Act, which overhauled the laws governing nonprofit organisations (NPOs) for the first time in 40 years. The last Act was passed in 1969.

New York State is heavily dependent on NPOs to offer community assistance, provide healthcare and respond in times of emergency. The law applies to five archival foundations, alumni associations, historical societies, agricultural societies, trade organisations, charities and NPOs. Many of these organisations are also regulated by other departments, including health and education departments and the Attorney General’s Office. Over 103 000 nonprofits are registered in the State. They employ over 1.25 million workers, one in every seven jobs in the state, and contribute billions of dollars in annual revenue.

The motivation for these amendments was that over the years, piecemeal changes created an antiquated and weakened regulatory environment, which was cumbersome, filled with fraud and financial abuse, slow economic recovery, as well as recent weather related disasters such as Cyclone Sandy. The aim was to cut the red tape, increase accountability and work for an enabling environment for these organisations.

Some of the key provisions of the Act provide for:

Reducing Unnecessary and Outdated Burdens

The Act has sought to make it easy to form and operate nonprofits in the state to deliver important social services to the people. The Act creates an enabling environment for nonprofits.

Eliminating Barriers to Forming Nonprofits

  • Eliminating corporate types of nonprofits: The Act eliminates the four historic 1970 categories and makes provision for two new categories - charitable corporations and non-charitable corporations;
  • Eliminating unnecessary pre-approvals: Historically, schools, colleges, universities, technikons, industrial schools and museums had to obtain pre-registration approval from the State’s Education Department. This amendment will now end the red tape and will ensure that public interest is protected; and
  • Reducing Red Tape: Previously, nonprofits registered their corporate purposes first and later stated the specific activities they intended to undertake. Now the law allows them to state their corporate purposes and be registered. The Act also allows nonprofits to correct / amend language errors without having to resubmit original applications. 

Eliminating barriers to operating nonprofits

  • Encouraging Electronic Communications: In keeping with international practice (including South Africa), the amendment allows for electronic communications and meetings;
  • Increasing Thresholds for Financial Reporting: Presently, nonprofits receiving over US$250 000 have to provide an auditor’s report. The amendment raises the threshold to US$250 000 for an independent Certified Public Accountant report, and progressively increases the threshold to US$1 million by 2021, for an auditor’s report;
  • Expediting Mergers and Property Transactions: This amended Act allows for nonprofits to obtain only the Attorney General’s approval, rather than the previous ‘two-steps’ approach, which required the Attorney General and the Courts’ approval. The Attorney General retains the right to ask for a judicial review if deemed appropriate;
  • Simplifying Dissolution: The process of dissolving nonprofits is also simplified, so that assets can be quickly redistributed to other charitable organisations; and
  • Facilitating e-Filing: Financial and other mandatory filings can now be completed in electronic form.

The NonProfit Revitalisation Act Amendments

Enhancing Governance and Oversight

The amendment provides oversight for external audits, executive compensation and related party transactions. It provides boards with a roadmap for oversight and accountability.

  • Audit Oversight: The amendments make provision for the board to retain auditors and review the findings of the external audit. For organisations with a revenue of over US$1 million, additional oversight measures have been put in place;
  • Related Party Transactions: The amendments require boards to actively assess and approve transactions between the nonprofit and its directors, officers and key employers, as well as their relatives and other entities to which they are affiliated:
    • Material disclosure is sought from the interested person.  The boards are required to make an affirmative determination that the transaction is fair, reasonable and in the best interest of the nonprofit. They should also be able to show that alternate transactions have been considered. The Auditor General will be able to bring an action to enjoin or rescind decisions and seek double damages in cases of wilful misconduct;
  • Conflict of Interest: The Act will require written conflict of interest policies where these policies do not exist. These policies should govern boards, officers and staff;
  • Whistle-blower Policies: While smaller organisations are exempt, larger nonprofits are required to adopt whistle-blower policies to create systems, in order  to report illegality and prohibit retaliation against persons who make such reports;
  • Board Leadership and Independence: The amendments also prevent the chief executive officer and other employees of a NPO from serving as a chair of its board;
  • Board Leadership and Independence: To promote integrity and curb self-dealing, the Auditor General is provided with powers to challenge and void interested party transaction, if the Auditor General has reason to believe they are unreasonable and not in the best interest of the nonprofit; and
  • Enhancing Board Capacity to correct wrongdoing: To identify and correct abuses, the Act now permits directors and managers to seek court approval to inspect a nonprofits books and records if they suspect wrongdoing. Previously, only creditors and members could petition court.

The lessons for South Africa are clear:

  • An on-going review of our legislation to keep up with local and international best practice is essential;
  • Measurement of the nonprofit sector’s contribution to the local, provincial and national economy must be undertaken as a priority by Statistics South Africa;
  • Allowing for easy registration, simplified reporting and fast-tracking mergers, dissolution and closures assisted by electronic processes will keep the registration data current and accessible;
  • Simplified financial reporting and auditing, based on total revenue, is a notion for which the time has come;
  • Similarly, board functioning has to be improved, and if legislated for in the NPOs Act will give immense comfort to those board members and staff who wish and desire to act ethically; and
  • South African civil society also needs introspection and a voice on conflicts of interest, whistle-blowing provisions and board capacity building. While provisions exist in other legislations, it may be of considerable value to entrench such provisions in the NPO Act to emphasise the centrality of these issues.

- Phiroshaw Camay is director at the Cooperative Research and Education.

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