February 23, Background

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1 STROOCK & STROOCK & LAVAN LLP Governor Cuomo Approves Amendments to 2013 New York Non-Profit Revitalization Act to Refine Numerous Provisions, Including Those Relating to Conflicts of Interest, Related-Party Transactions and Board Committee Composition February 23, 2017 Background On November 28, 2016, Governor Andrew Cuomo signed legislation that makes major needed revisions to the Non-Profit Revitalization Act of 2013 (NPRA) for New York-formed nonprofits. 1 These changes address some of the irksome problems created by the NPRA, especially the provisions dealing with related party transactions, conflicts of interest and board committee composition, making nonprofit operations more manageable. 1 A10365-B, available at /amendment/B. Note that the NPRA provisions do not apply to nonprofits formed outside of New York, even if they are qualified to conduct activity in New York or solicit contributions in New York. The newly-approved bill will bring the law into conformity with guidance previously issued by the Attorney General regarding related party transactions. The 2016 changes follow modest tweaks to the NPRA enacted in These 2 S5868-A, available at 68/amendment/A; S5870, available at 70, and A7641, available at The 2015 changes extended the effective date of a requirement that an employee could not be a chair of the board or hold any other office with similar authority, tweaked the definitions of independent director, related party and key employee (among other terms), and rectified certain problems regarding board member compensation, board quorums and board committees. These changes, where still relevant, are discussed in this Stroock Special Bulletin, to alert nonprofits that did not reflect them STROOCK & STROOCK & LAVAN LLP NEW YORK LOS ANGELES MIAMI WASHINGTON, DC 180 MAIDEN LANE, NEW YORK, NY TEL FAX

2 changes should be applauded by all members of the New York nonprofit community. Most of the 2016 changes become effective May 27, As a result of these reforms, New Yorkformed nonprofits will need to review and revise their by-laws, conflict policies and any required whistleblower policies to reflect the 2015 and 2016 changes. This is also a good opportunity for New Yorkformed nonprofits to generally review their governance documents to make sure they conform to other provisions of the Not-for-Profit Corporation Law (N-PCL), including requirements in the NPRA that were not affected by the 2015 or 2016 changes. The NPRA, 3 which became effective July 1, 2014, amended the N-PCL, Estates, Powers and Trusts Law (EPTL) and Executive Law, among other laws. While it made many changes aimed at making these laws more manageable, especially in the area of formation of nonprofit corporations, the NPRA imposed significant and often onerous burdens on nonprofits with respect to certain governance matters, especially related-party transactions and other conflicts, whistleblower procedures and related matters. The 2013 law also created certain unintended complications, as is often the case with new legislation, including matters related to how board committees are formed and function. The New York nonprofit bar, including the New York State Bar Association, the New York 3 in new by-laws that had been previously changed to reflect the adoption of the NPRA. A8072, available at City Bar Association, the New York Law Revision Commission (LRC), the Lawyers Alliance of New York (LANY) and the Nonprofit Coordinating Committee (NPCC), among other groups, generally supported the 2013 changes but pushed for refinement of certain provisions. Certain minor technical corrections and a few refinements were enacted in 2015 and, after extensive coordination with the New York Attorney General s office, major corrections were enacted late in The 2013 law and the 2015 and 2016 changes represent the culmination of a process to revise New York s N-PCL, which had not been substantially changed since it was adopted in This process was started by the State Bar when it proposed a top-to-bottom rewrite of the N-PCL and further promoted by the City Bar in commenting on the State Bar s proposal and suggesting that it might be easier to address specific problematic provisions of the N-PCL instead of rewriting the entire law. The Charities Bureau of the New York Attorney General s office commissioned a blue ribbon panel to study possible reforms to the N-PCL and other nonprofit practices, circulated a study bill in 2012 and then proposed the bill which became the NPRA in Under the leadership of LANY, the LRC and NPCC assumed significant roles, along with the New York State and New York City bar associations, in generally supporting the Attorney General s bill and promoting the 2015 and 2016 modifications. These reforms do not obviate all of the problems with the N-PCL, but they eliminate many of the ambiguities and unintended 2

3 procedural problems. 4 The 2015 and 2016 revisions were intended solely to rectify problems arising under the 2013 legislation; there are other provisions of the N-PCL that are also ripe for reform It remains to be seen whether these changes are sufficient to encourage new nonprofits to form in New York, or whether new nonprofits will instead look to Delaware and other states to avoid complications stemming from the New York law that can be avoided by incorporating in other states. That question is something that will continue to be monitored by the New York nonprofit bar. It appears likely that smaller New York nonprofits, which might want to avoid dealing with the inconveniences of out-of-state incorporation however minor that might be as well as other nonprofits that rely on New York State or New York City funding, will incorporate in New York state. However, many larger or more sophisticated nonprofits will continue to incorporate in other states with more welcoming statutory and regulatory environments. These include oft-ignored requirements that (a) nonprofit members (or, if there are no members, the directors) receive at the annual meeting a written annual report that includes certain financial information that is no older than six months, notwithstanding the fact that the annual meeting may be held later than six months after year-end (note: distribution of the Form 990 does not technically satisfy this requirement), (b) notification be given to members regarding obtaining directors and officers insurance policies and any claims under such policies, (c) changes to the size of the board of directors must be approved by action of a majority of the entire board if the by-laws state that the size of the board shall be fixed by the board, (d) provisions regarding classification of the board (e.g., having three classes of directors with one-third of the directors elected each year) must appear in the certificate of corporation instead of the by-laws unless the corporation has members who have approved this provision in the by-laws, and (e) newly elected directors must submit a conflicts questionnaire prior to election instead of promptly after election (the Attorney General recommends that the by-laws state that such newly- This Stroock Special Bulletin reviews the 2015 and 2016 changes. For information about the 2013 changes, see the memorandum The Nonprofit Revitalization Act of 2013 Will Require Many Changes for Existing New York-Formed Nonprofit Corporations dated January 30, 2014 (updated March 14, 2014), available at Overview of 2015 and 2016 Amendments Among other things, the 2015 and 2016 amendments (in the order of the sections of the N- PCL which were revised): 6 Revise the definition of independent director to enable more directors affiliated with businesses that have commercial dealings with the nonprofit to be deemed independent. See N-PCL Section 102, subparagraph 21 of paragraph (a). 6 elected director cannot take office until such questionnaire has been submitted). Under the definition prior to the 2016 changes, an independent director was a person who (a) is not (and has not at any time in the prior three years been) an employee or key employee of the nonprofit or an affiliate and does not have a relative who has occupied such a position in the past three years and (b) has not received more than $10,000 in direct compensation from the nonprofit in any year, (c) is not an employee of or does not have a substantial financial interest in (nor have a relative who is a current officer of or has a substantial financial interest in) any entity with which the nonprofit had commercial dealings in any of the last three years in excess of the lesser of $25,000 or 2% of such other entity s consolidated gross revenue and, reflecting a change made in 2015, and (d) is not (and does not have a relative who is) an owner, director, officer or employee of the corporation s outside auditor and who has not worked on the audit at any time in the past three years. (Clause (d) was added in 2015.) 3

4 A similar change was made regarding independent trustees in the EPTL. See Section 8-1.9, paragraph (a), subparagraph (7). The 2016 changes addressed a problem faced by nonprofits that wish to include employees of vendors, such as public utilities, on their boards. Prior to the changes, whether a director was or was not independent was relevant for conflict and whistleblower issues. Following these changes, that is no longer the case, though a board member must still be This definition caused people who were employees or owners of institutions that generated payments in excess of the $25,000, such as the phone company or power company, to not be deemed independent (which might discourage some from serving on the board), when, in fact, many employees of such major companies (especially those at higher levels of management) have the exact profile of people that nonprofits want to have serve on their boards because they bring valuable professional expertise and can be especially helpful in fundraising. Furthermore, for a large company or institution, even if their business with the nonprofit exceeds $25,000 per year, that volume of business would not affect their independence. The new definition uses a sliding scale in clause (c), ranging from $10,000 (or 2% of consolidated gross revenue) if the entity s consolidated gross revenue is less than $500,000, to $100,000 if the entity s consolidated gross revenue is $10,000,000 or more. The new definition also exempts from the term compensation reimbursed expenses and reasonable director compensation as allowed by Section 202 of the N-PCL and payments made at fixed or nonnegotiable prices for services received if such services are generally available to the public on the same terms and such services are not available elsewhere (e.g., utility charges). Other tweaks include expanding the types of commercial dealings covered to include providing property or services (in addition to providing payments). A 2015 change exempted from the term payment any dues or fees paid to the nonprofit for services which the corporation pays as part of its nonprofit purposes provided that such services are available to individual members of the public on the same terms; this change primarily affected trade associations. 7 8 independent to serve on the audit committee. Revise the definitions of certain terms, including (a) affiliate (to delete references to nonprofits under common control with the subject corporation this change means that the only affiliates of a nonprofit are its parents or subsidiaries), 7 (b) relative (to better reflect spouses and domestic partners), and (c) related party (to include persons who exercise the authority of officers, directors or key employees these changes were first made in 2015 and the definition of related party was later revised in 2016 to reference key persons ). See N-PCL Section 102, paragraph (a), subparagraphs (19), (22) and (23) and EPTL Section 8-1.9, paragraph (a), subparagraphs (4), (5) and (6). Recognize that directors can approve otherwise-n-pcl-compliant compensation arrangements for service on the board if such compensation is to be made available to all directors on the same or substantially similar terms. See N-PCL Section 515, paragraph (b). Prior to this addition, made in 2015, the award of such compensation might be considered a relatedparty transaction (and thus invalid since all directors would need to abstain from any vote to approve it). 8 This change was made because it was felt that many nonprofits might not even know if other nonprofits are under common control with them. Whether a nonprofit has affiliates is most relevant in the context of related-party transactions since such a transaction includes a transaction between a related party and the affiliates of the nonprofit. The new language clearly covers annual and permeeting fees but there is some ambiguity as to whether it covers fees for committee meeting attendance or being the chair of a committee; it would be best if such compensation for committee service was uniform for all committees and chairmanships (if higher compensation is to be awarded for service on, or chairmanship of, any 4

5 9 Eliminate the concept of key employee (and its problematic definition) and adopt instead the concept of key person. See N-PCL Section 102, subparagraph 25 of paragraph (a) and EPTL Section 8-1.9, paragraph (a), subparagraph (3). Key persons (and, previously, key employees) are considered related parties and thus subject to the complex related-party transaction rules. The prior term created great confusion because, as defined by cross references to inappropriate Internal Revenue Code sections and IRS regulations, the term included people other than employees it even included major donors to the organization. The new definition (i.e., a person who is not an officer or director who has responsibilities akin to those of officers or directors or who manages the corporation or a segment which represents a substantial portion of the activities, assets, income or expenses of the corporation) recognizes that the persons intended to be covered are not limited to employees. The new definition essentially tracks the IRS definition of key employee used with the annual Form 990 report and treats those people who are powers behind the throne as if they were officers of the corporation. 9 By changing the term to specific committee, that might need to be approved as a related-party transaction, with proper abstentions). There may also be some ambiguity as to whether the board can approve an expense reimbursement policy; although the amount by which each director would be reimbursed would not be the same, the concept of reimbursement is the same for all directors. There had been scandals during the period when NPRA was under consideration where certain politicians controlled nonprofits without holding an official position and claimed that they were not responsible for the bad acts of the nonprofit since they were not officers or directors. The inclusion of powers behind the throne language is probably now covered under both the concept of key persons and related party (which has included, person rather than employee, the scope of the term is more obvious. The confusing Internal Revenue Code and IRS regulations references were dropped. Clarify that a quorum would not be lost if the number of directors needed for a quorum were not present as a result of conflicted directors having to leave the meeting during action on a matter. See N-PCL Section 708, paragraph (d). Section 708 says that a quorum has to exist in the room at the time of the vote in order for action taken to be valid. The 2015 change added a sentence stating that the directors who had to leave the meeting due to conflicts or relatedparty transactions shall be determined to be present at the time of the vote. Require that if the compensation of officers is not set in or pursuant to the by-laws, it must be fixed by action of a majority of the entire board. See N-PCL Section 715, paragraph (e). Such approval was previously required only with respect to an officer s salary, but much of an employee s remuneration can be in forms other than salary. The IRS, in determining if compensation is reasonable, looks to the totality of the compensation package, not just the salary component. (Although it is appropriate that officer compensation be fixed by board action, the requirement that it be done by action of a majority of the entire board can be problematic. Because most nonprofits do not bother to seek approval by such a high vote (or even bother to have compensation board-approved), it may be appropriate to include in the by-laws a provision that compensation should be approved by routine board action (i.e., by approval of a majority of the directors at a meeting at which a quorum is present), so as since 2015, persons who exercise the authority of officers, directors or key employees/key persons). 5

6 to avoid the N-PCL default provision requiring the higher vote. 10 Exempt from the definition of relatedparty transaction, transactions that are de minimis (and transactions in which a related party has a de minimis interest) and transactions which would not normally rise to the level of needing board approval in the ordinary course of business. See N-PCL Section 102, subparagraph 24 of paragraph (a) and EPTL Section 8-1.9, paragraph (a), subparagraph (8). This provision now substantially tracks the AG s prior guidance on related-party transactions, the legal effectiveness of which was questionable under the prior statutory language. Accordingly, transactions that would not normally percolate up to the board can be handled at an administrative level, rather than burdening the board. 11 The law does not provide any further guidance as to whether transactions are routine or whether transactions or interests are de minimis that might be an area for further guidance from the Attorney General or maybe definition by each company. In addition, the revised definition of related-party transaction exempts transactions which provide a benefit to a member of class 10 Note that the term officer is not defined in the N- PCL and questions may arise as to who is an officer, in addition to the classic positions of president, vice president, secretary, treasurer, etc. For instance, is an executive director an officer for purposes of N- PCL Section 715(e)? Such person would be considered an officer for IRS Form 990 reporting purposes and would definitely be a key person under the N-PCL and it would be appropriate to consider such person an officer for this purpose (and for officer liability indemnification and insurance). 11 Although the statute does not require administrative staff to treat such minor transactions with the same degree of scrutiny that the board must follow with covered transactions, staff should be mindful of the need to act in a proper fashion regarding such transactions so as to avoid any potential controversy. of beneficiaries that the corporation intends to benefit as part of its mission which benefit is available to all similarly situated members of the same class on the same terms (e.g., benefits provided to members of trade associations). Allow board committees to be formed and operated in a more practical manner (see N-PCL Section 712, paragraph (a)): o Under the new provisions, most committees can be formed and their members can be named by routine action of the board, i.e., by the action of a majority of the directors present at a meeting where a quorum exists. Previously, all board committees could only be formed by action of a majority of the entire board (unless such committees were formed by the by-law) and all of the members had to be named by action of a majority of the entire board which was rarely done, especially with larger boards, which often have quorums of one third of the members, or less. Now, only members of the executive committee have to be so named and there are also provisions allowing such executive committee members to be named by a lesser level for boards of 30 or more members. 12 o Furthermore, under the new procedures, by-laws can state that certain office holders who are directors will automatically be on specified board committees without the need for formal board action. These changes reflect what many nonprofits were doing in practice, although contrary to the prior N- PCL requirements that all board committee members had to be named by the board. 12 In those cases, committee members could be named by action of at least three-quarters of the directors present at a meeting at which a quorum exists. 6

7 These changes should help promote the valid use of board committees as a way to more fully involve directors in board governance. Add additional limitations on the authority of board committees. See N- PCL Section 712, paragraph (a). Such limitations were already implied by other provisions of the N-PCL. 13 Eliminate the requirement that members of committees of the corporation (i.e., committees other than board committees) may be elected or appointed in the same manner as officers. Additionally, the 2016 changes removed language from Section 712 subjecting members of such committees to fiduciary duties as if they were officers. See N-PCL Section 712, paragraph (e). The first change was made in Now, by-laws can give the right to name members of such committee to a board chair or the chair of each such committee or as otherwise authorized by the board when the committee is established, which is consistent with the practice of most nonprofits. And, with the removal of the language subjecting members of committees of the corporation to fiduciary duties, such persons no longer need to be referenced in the directors and officers liability provisions of the by-laws. Allow, in various situations, a director or trustee who must leave a meeting for conflict or audit reasons to make statements and answer questions before leaving the meeting, without such action 13 The new provisions are: elect or remove directors or officers, approve mergers or dissolutions, authorize transfers of substantially all the assets and authorize amendments of the certificate of incorporation. The N-PCL has long had language elsewhere requiring or implying that such actions could only be taken by the board; this provision adds them to the specific list set forth in the committee section of the N-PCL as actions that require full board involvement. being deemed unauthorized participation in the meeting. See N-PCL Section 712-a, paragraph (e) and Section 715-a, paragraph (b) and EPTL Section 8-1.9, paragraph (d), subparagraph (2), clause (C) and paragraph (e), subparagraph (2), clause (C). Similar provisions appeared in certain other sections of the initial version of the NPRA but were not in all applicable sections. This change was made in Allow an employee of the corporation to serve as the chair of the board (or any other title with similar responsibilities, such as president if there is no chair), subject to approval of any such appointment by a two-thirds vote of the entire board with the basis for such board approval being contemporaneously documented. See N- PCL Section 713, paragraph (f). Prior to the 2016 change, an employee would have been precluded from holding such office after December 31, 2016 accordingly, this provision of the new amendments became effective January 1, The requirements of the new provision help ensure that such decisions are properly made, fully supported by the board and documented. Note that this provision might also apply to the president if such title is viewed to hold similar responsibilities. Allow related-party transactions to be approved by any authorized board committees. See N-PCL Section 715, paragraph (a) and EPTL Section 8-1.9, paragraph (c), subparagraph (1). Previously, due to noweliminated language in the audit oversight provision (Section 715-a, paragraph (e)), the implication of the law was that all relatedparty transactions had to be approved by the entire board (with all directors who were not independent although independence has no relevance for conflict decisions being excluded) or by the audit committee or another committee composed solely of 7

8 independent directors. This change clarifies that independence is irrelevant to conflict issues and allows a board to properly delegate related-party and other conflict administration to appropriate committees. Allow in an action brought by anyone other than the Attorney General, claiming a violation of the related-party transaction rules, a defense that a related-party transaction was fair, reasonable and in the corporation s best interest, even if the statutory relatedparty transaction procedures were not followed. See N-PCL Section 715, paragraph (i) and EPTL Section 8-1.9, paragraph (c), subparagraph (7). This will minimize the risk of law suits for foot faults if the transaction meets the NPRA criteria. Allow under certain circumstances a defense to an action by the Attorney General regarding a transaction that was fair, reasonable and in the corporation s best interest, even if the transaction was entered into without compliance with the required related-party transaction approval procedures, if the corporation ratified the transaction prior to AG action. See N-PCL Section 715, paragraph (j) and EPTL Section 8-1.9, paragraph (c), subparagraph (8). This will encourage boards to review prior transactions which might have been taken without formal compliance to ascertain if board approval was needed to bring them into compliance. It might be wise for boards (or an audit or governance committee) to request an annual report from management as to all non-routine actions, at which time the board could determine if board approval in accordance with the NPRA should have been done and then take appropriate action if warranted. Revise language requiring that a conflicts policy set forth procedures for disclosure of conflicts, or possible conflicts, to the directors or trustees (or a committee of the directors or trustees) and procedures for the board or committee to determine whether a conflict exists. See N-PCL Section 715-a, paragraph (b). Prior to this 2016 change, such matters had to be reported to the audit committee, if such a committee existed, or to the full board if there was no committee and there was no language regarding disclosure of possible conflicts. In 2015 the N-PCL was changed to allow required initial and annual statements regarding the conflict policy to be given to a designed compliance officer; prior to this 2015 change, such statements had to be submitted to the corporate secretary. Clarify that it is the board (by routine action) that shall adopt and oversee implementation of and compliance with conflict policies and any required whistleblower policy. See N-PCL Sections 715-a and 715-b. Similar provisions regarding trusts appears at EPTL Section 8-1.9, paragraph (d), subparagraph (1) and Section 8-1.9, paragraph (e), subparagraph (1). Prior language (buried in the audit oversight section of the N-PCL, Section 712-a, and thus easily overlooked by nonprofits that are not required to obtain an audit) required this to be done by a board committee composed solely of independent directors, such as the audit committee, or the board acting only through its independent directors. The new version properly recognizes that independence is a standard appropriate for audit issues, not conflicts issues. The new version also makes it clear that the initial adoption of any conflict policy and approval of any changes to such policy are so important that they must be done by the board. 14 It is now generally understood that 14 Although existing language in the N-PCL allowing board decisions to be delegated to board committees, unless barred by the N-PCL, might allow a board committee to act, it is best if these policies, and any 8

9 oversee does not require that the board make individual conflict decisions, but the board does need to exercise supervisory authority over any committee making conflicts decisions, as it does with all board committees. Bar any directors who are employees or trustees from participating in deliberations or voting related to administration of any required whistleblower policy. See N-PCL Section 715-b, paragraph (b) and EPTL Section 8-1.9, paragraph (e), subparagraph (2), clause (B). Allow any required whistle-blower policy to be posted on a corporate website or at a conspicuous site at the office accessible to employees and volunteers as a way of satisfying the requirement that the policy must be distributed. See N-PCL Section 715-b, paragraph (b) and EPTL Section 8-1.9, paragraph (e), subparagraph (2), clause (D)). This change was made in In addition, in 2015 a provision of the Religious Corporations Law (RCL) governing real estate transactions, requiring consent to be obtained for the sale, mortgage or lease for a term exceeding five years of any real property, was amended to allow such consent to be granted by the Attorney General, in addition to the Supreme Court. See RCL Section 12, subdivision (1). This change conformed the RCL to the N-PCL changes made in amendments, are reviewed and adopted by the full board so the board members are better aware of what they are agreeing to be bound by. 15 Note that the RCL provision still differs from the N- PCL provision regarding real estate transactions: under the N-PCL consent is required only if the property is all or substantially all of the assets of the corporation and no consent is required for a Changes NY Nonprofits Will Need to Make to Their By-Laws All nonprofits should review their by-laws for conformity with the N-PCL (including pre- NPRA provisions that may not have been properly reflected in their by-laws). Many nonprofits will need to make changes in their by-laws to reflect: Revised definitions of independent directors, affiliate, relative and related party and adoption of the term key person in place of key employee. It may be best if the by-laws cross refer to the N-PCL for the meaning of such terms, rather than defining them in the text of the by-laws (a footnote, noted as not being part of the by-laws, indicating the definition as applicable at the time of the last legislative definition would be helpful so as to avoid the need for the reader to consult the statute; if the statutory definition is later changed, the by-laws would not need to be amended instead, the footnote could be updated without formal board action). 16 That persons who must leave a meeting due to conflicts are deemed to be present for purposes of approving action, which requires that the vote be at least a majority of the directors present at the time of the vote, provided a quorum is present at the time of the vote. mortgage; under the RCL such consent is required for all sales, all mortgages (subject to certain exclusions, such as purchase money mortgages) and many leases. 16 Nonprofits which have audits, whether or not required pursuant to the Executive Law, can set forth audit provisions in an audit committee charter in lieu of setting them out in the by-laws. In that case the policy may need to be revised to reflect the new definition of independent director. 9

10 Revised provisions applicable to board committees to incorporate the liberalized provisions in the statute regarding the naming of members of such committees. The new provisions generally eliminate the need for the members of each such committee to be named by a majority of the entire board (that requirement, or an alternative provision, now being applicable only to executive committees), and bless frequently-found provisions in by-laws naming the holders of specific positions in the corporation to specified board committees. Any separate audit committee charter may also need to be changed to reflect committee appointment procedures. Actions that the N-PCL precludes committees of the board from undertaking. If the by-laws restate the provisions of Section 712 of the N-PCL regarding matters which cannot be done by board committees, such list will need to be expanded to reflect four other actions (which other provisions of the N-PCL already required be done by the full board). New language on committees of the corporation to delete any language about the previous provision of the N-PCL subjecting members of such committees to fiduciary duties as if they were officers. (It is rare that this language appears in the by-laws because this was a provision that few people were aware of.) The ability of an employee to hold the position of chair of the board, provided that the requirements of the statute on voting and documentation are satisfied. These requirements will need to be added to any discussion of the position of chair of the board in the by-laws;. If there is no chair, this provision might need to be discussed with regard to the position of president if the president would be viewed as having similar responsibilities to those of a board chair. Approval of the compensation of officers. The by-laws should either include the N-PCL provision regarding approval by a majority of the entire board or an alternative approval in order to avoid the N-PCL default language. Other changes to conform the by-laws to longexisting or new N-PCL provisions may also be necessary. In drafting by-laws, consideration needs to be given as to whether the by-laws should include required provisions of law set forth in the N-PCL or just address issues not otherwise dealt with under the statute. Including the requirements set forth in the N-PCL allows the officers and directors to consult the by-laws without the need to simultaneously consult the statute but requires that the nonprofit update the by-laws when the law is changed. Changes NY Nonprofits Will Need to Make to Their Conflict of Interest Policy All nonprofits should review their conflict policies for conformity with the N-PCL. Nonprofits may need to make changes in such policies to reflect: The new term key person (which replaces key employee ). The deletion of any references to, and definitions of, independent director as no longer being relevant. The changed definition of related-party transaction to reflect the exemption for certain routine and de minimis transactions (if the term is only defined by cross reference to the N-PCL, an amendment to the policy may not be needed). Depending on how the policy is written, it may also be appropriate to 10

11 refine any definition of conflict of interest to similarly exempt, or otherwise reflect applicable procedure for, such de minimis transactions from the general conflict rules. It may also be appropriate to add language requiring the nonprofit s management to determine that any transaction with a related party which is exempt from the board-review requirements due to the de minimis financial interest or the routine nature of the transaction is fair, reasonable and in the best interest of the nonprofit. Provisions allowing required relatedparty transaction review to be done by an authorized board committee if the nonprofit wishes such matters to be done at the committee level. Language in the statute confirming that the policy needs to be adopted by the board and that the board must also oversee the implementation of, and compliance with, the policy. The provision allowing initial and annual statements required under the conflict policy to be given to compliance officers in addition to, or in lieu of, reporting to the corporate secretary. Changes NY Nonprofits Will Need to Make to Their Whistleblower Policies All nonprofits required by the N-PCL to have whistleblower policies 17 should review such policies for conformity with the N-PCL. Nonprofits may need to make changes in such policies to reflect: Language in the statute confirming that each whistleblower policy must be adopted by the board and that the board must also oversee the implementation of, and compliance with, the policy. Language in the statute that bars any directors who are employees from participating in board or committee deliberations or voting related to administration of any required whistleblower policy. By David W. Lowden, special counsel in the Corporate and Not for Profit Organizations and Charitable Giving practice groups of Stroock & Stroock & Lavan LLP. For More Information David W. Lowden dlowden@stroock.com 17 Nonprofits with 20 or more employees which had, in the prior fiscal year, annual revenue in excess of $1 million. 11

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