Michael J. Kline writes:
Part II of this blog entry uses disclosures required for board members of charities to demonstrate the unrelated and unanticipated negative ripple effect that may flow from what may appear to be relatively unimportant consent decrees or admissions of wrongdoing discussed in Part I. (Capitalized terms not otherwise defined in this Part II shall have the meanings assigned to them in Part I.)
Effect of Consent Settlements and Admissions of Wrongdoing on Charitable Disclosures
What does the discussion in Part I have to do with disclosures by charities and their board members? It has little relevance to the “Part VI, Governance, Management and Disclosure” section of the Form 990 Annual Return that most charities are required to file annually with the Internal Revenue Service (“IRS”). Since 2008, charities have become highly attentive to meeting Part VI disclosure requirements under Form 990 because it is a formal IRS filing and becomes universally available on the Internet on Web sites such as GuideStar.
The Form 990 concentrates in Part VI on conflicts of interest; family or business relationships among board members, officers, and others; governance of the charity; whether the charity has a whistleblower policy; whether the charity has a document retention and destruction policy; and compensation of board members, officers and others. Most charities distribute annual questionnaires to their board members and officers to be able to respond to the Form 990 questions on conflicts of interest and family relationships. The existence of a consent order and/or an admission of wrongdoing by a board member in an unrelated judicial or administrative proceeding, however, would not ordinarily come to light in responses to the Form 990 questions.
It is, however, a different case for reports to be filed annually with most states under charitable registration statutes (“State Reports”) by organizations that do public fundraising. Many of these State Reports require filing of a copy of the latest Form 990 and require specific disclosures and explanations about individual board members, officers and other specified persons (collectively, “Individuals”) regarding unrelated events like the SEC or Department of Labor administrative actions discussed in Part I. This can be enormously embarrassing to the charity and the Individual, as such State Reports are matters of public record and readily available from the states upon request. As a matter of fact, the Form 990 requires disclosure in Part VI, Section C of those states where a copy of the Form 990 is required to be filed by the charity.
In contrast to the Form 990, the Unified Registration Statement (the “URS”) for charitable organizations, which has become acceptable as an alternative permitted form for State Report filings in approximately 37 of the states that require State Reports, includes the following question 7D, among others:
7. Has [the] organization or any of its officers, directors, employees or fund raisers: . . .
D. Entered into a voluntary agreement of compliance with any government agency or in a case before a court or administrative agency?
Yes ___ No ___
If “yes” to 7A, B, C, D, E, attach explanation
As an additional example of the type of questions that may appear in State Report forms other than the URS, the State Report form for New Jersey (the “NJ Form”), which asks more than the usual number of questions relating to unlawful and/or criminal activities regarding Individuals, contains the following question, among others:
22. Has the organization or any of its officers, directors, trustees or principal salaried executive staff employees been adjudged liable in any administrative or civil action involving theft, fraud, or deceptive business practices? For purposes of this question a judgment of liability in an administrative or civil action shall include, but is not limited to, any finding or admission that the individual engaged in an unlawful practice in relation to the solicitation of contributions or the administration of charitable assets. Yes ____ No ____
If “Yes,” identify the individual(s) below and attach to this registration a copy of any order, judgment or other documents indicating the final disposition of the matter.
If the accountants who entered into consent decrees and the theoretical ERISA Defendant discussed in Part I were on a charitable board, it is likely that the charity could not answer “Yes” to the questions quoted above from the URS and the NJ Form. The charity would likely have to answer “Yes,” with an explanation, in a public document that can be readily acquired by potential donors, foundations and planned giving prospects, as well as employees and the media. In the case of the ERISA Defendant, further review would be necessary to determine if his/her role with the charitable organization could be deemed to make the ERISA Defendant a fiduciary of the charity’s ERISA-governed plans, thereby resulting in an unintended violation of his/her consent order were such status to continue.
(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm’s Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)
[To be concluded in Part III]