2014 Corporate Compliance Summary

Transcription

1 Auxiliary Organizations Association 2014 Corporate Compliance Summary I. Corporate and Auxiliary Organization Law Changes There are presently 86 auxiliary organizations appearing on good standing list posted on the system s website. 1 That s an average of just over 3.5 per campus/chancellor s Office. The minimum is 2, and Fresno apparently still needs 6. From what I can determine, there is at least one new one in the works, one in limbo, and a recent dissolution. The active ones are chartered by the State of California as nonprofit public benefit corporations. As corporations, they are subject the provisions of the California Nonprofit Public Benefit Law (and as auxiliary organizations under the Education Code, the California Code of Regulations [Title 5], as well as Chancellor and campus policies). Each year at this time I paw through several of the Codes for any changes, particularly those that are significant in terms of creating, operating, restructuring or dissolving auxiliary organizations. [There is an associated students on one campus organized more as a club. It is neither a student body organization nor an auxiliary organization, and is not structured as an unincorporated association. I do review the California Corporations Code provisions dealing with unincorporated associations to spot any important changes from the last Legislative Session. In 2014 there were none. But, for the rest of you, there were five (5) bills amounting to some nine changes in the Nonprofit Public Benefit Corporation Law in Here they are: SB 1011: Risk-Pooling Arrangements. Amends Corps Code Section to establish a more detailed framework for corporations forming joint risk pool arrangements. AB 2755: Amends Corps Code Section 5047 to clarify that a board member by virtue of a specified position must have full voting rights. If non-voting, then such a person is not a board member despite any title to the contrary. For example, if a person holds a position named by the board as honorary or emeritus director without voting rights, then, notwithstanding such titles, in the eye of the law, that person is not a board member. 1 See: Do not rely on an outdated list at: 1

2 SB 1041: Amends Corps Code Sections 5120 and 5817 to require the Secretary of State to forward filed Articles of Incorporation or amendments thereto, to the Attorney General. [Note: this change relieves filers from providing a copy to the Secretary of State for forwarding on to the AG.] Also amends Corps Code Section 6211 to provide a more specific process through which an agent for service of process may resign or disclaims ever having been properly appointed. Also amends Corps Code Section 6611 clarifying the voluntary dissolution process as it relates to the required certificate of election. Also amends Corps Code Section 6810 narrowing application of the penalty for failure to file a biannual Statement of Information with the Secretary of State to include conversion to another type of business entity, or merged into another business entity. AB 2763: Amends Corps Code Section 5122 to make a technical change to the State agency required to approve any filed Articles attempting to use the words bank, trust, trustee, or related words in the corporate name. SB 1301: Amends Corps Code Section to add the social purpose corporation to those types of corporate status changes that public benefit corporations may use by amending the Articles of Incorporation. There were no changes to the Education Code relating generally to auxiliary organizations. However, the Trustees were given authority in Section 89300(b) to fix a voluntary membership in the statewide and campus student body organizations. II. Probate Law Changes At the first of the calendar year I always check my two favorite uniform trust laws for any changes that might impact the administration of trusts and endowments. Uniform Prudent Management of Institutional Funds Act. 2 No changes. Uniform Principal and Income Act. 3 Section 16350(c)(3) and (4), Allocation of Receipts to Income or Principal Determination at Liquidation, amended to provide exceptions to a trustee s allocation of receipts to principal. 4 2 Cal Probate Code Sections

3 III. Outdated Articles of Incorporation and Bylaws A. File Just the Amendment or a Restatement? Older auxiliary organizations seem to have fallen into an unfortunate habit of repeated amendments to their Articles of Incorporation by simply filing only the changes. So over time, the document becomes a potentially unwieldy mess to read comprehensively and interpret. The law permits a more effective alternative: file a restatement of the document with the amendments included. That accomplishes two important objectives. First, it maintains a unified document. And it should prompt a closer review of other provisions that may not be the subject of the immediate need to amend, but that will, when modified, keep the this important document up to date. That reminds me that the Chancellor s Office patiently awaits a response of a number of auxiliary organizations that have neglected to amend their Articles to include an up-to-date dissolution/succession provision (or, having completed the amendment process, forgotten to file a copy with the Chancellor s Office. The Chancellor s Office requires auxiliary organizations to promptly (within 30 days) file with the Chancellor s Office any amended Articles or Bylaws. 5 The filing must include not just the amended portion of such document. It must include the complete amended version (another reason to file restated amended Articles), together with the date the amendment was approved by the governing board/or members. So, how do you address these required filings? Presently it is: Verna Ale Paniani, Contracts Manager Contract Services & Procurement CSU Office of the Chancellor 401 Golden Shore Long Beach, CA Cal Probate Code Sections AB 296, effective September 30, See Compilation of Policies and Procedures For CSU Auxiliary Organizations, at Section 11.6, page 33. See: Also, California Code of Regulations, Title 5, Section 42600(a), requires an unincorporated auxiliary organization to adopt a constitution and file a copy with the Chancellor. 3

4 Question: Does the 30 days filing deadline run from the date the Articles are approved by the governing board, when filed with the Secretary of State, or when the certified copy is received from the Secretary of State? B. Bylaws Out of Sync with Articles and the Law? This question arises primarily with student body organizations. A new student leadership regime will notoriously want to play government reform and attempt to make changes to the organization s bylaws. It frequently happens without regard to whether the changes are compatible with the Articles of Incorporation or the Nonprofit Public Benefit Corporation Law. The Bylaws are not a stand-alone constitution. An auxiliary organization, as a corporate entity, functions within a statutory framework with respect to its governance and operations, and with respect to its status as a tax-exempt organization. While I certainly encourage periodic reviews of corporate documents, such reviews particularly bylaws -- should include a reference back to the statutory and regulatory framework within which the organization functions. Recent examples: the Bylaws state a purpose not in sync with the Articles; nonvoting Board members; Executive Committees composed of non-board members; Bylaws that do not address default requirements in the law (and the organization is unaware of the consequences); noncompliance with the annual financial reporting requirements to members; misuse of the proxy requirements. A number of these required changes stem from a 2010 Bill, AB 1233, and I have posted a summary analysis of this Bill on the Conference website. IV. Supporting Organization Status? I continue to encounter auxiliary organizations that have not cleared up their status as a supporting organization under Internal Revenue Code Section 509. An incorrect classification can affect your organization s qualification for certain grants, claiming the student FICA exemption, CalPERS membership, or accepting certain private donations. Older auxiliary organizations may have IRS exempt-organization determination letters that do not cite the Section 509a classification. And, merely asserting your classification on the annual Form 990 (on Schedule A) does not constitute an IRS determination. I have encountered more than one auxiliary admitting that it did not even know why the Schedule A identified their classification. 4

5 So that s the bad news. The good news is that the IRS has simplified the reclassification request process: introducing IRS Form The form itself is a one-page cinch; it s the detailed supporting documentation that requires special attention. IRS staffing has been hammered by budget cuts, so getting a request in exactly the right form and content will help assure your 8940 has the promise of easy handling. Let me know if you need assistance. V. Transparency through Website Information There continues to be concern about the lack of essential information displayed on auxiliary organization websites. Working with the Chancellor s Office, AOA developed a Corporate Transparency Guidelines Matrix. The specific purpose of this document is to move member-organizations toward consistent disclosure practices when presenting website corporate information in a way that is both readily accessible and easy to comprehend. This is my opportunity to reinforce the use of this matrix as you develop the information to your websites. Access the guidelines via the AOA website: "Corporate Transparency Guidelines Matrix (pdf)." VII. Want to Join the CalPERS Retirement Program? Good hunting! Even though CSU auxiliary organizations and student body organizations are specifically spelled out in the California Public Employees Retirement Law (PERL) as public agencies eligible to join the retirement system, a pair of hurdles will certainly be encountered in the application process: U.S. Department of Labor Advisory Opinion. The PERL includes a requirement that: To qualify as a public agency any organization that qualifies under amendments to the definitions of public agency effective after January 1, 2002, shall also obtain a written advisory opinion from the United States Department of Labor stating that the organization is an agency or instrumentality of the state or a political subdivision thereof within the meaning of Section 1001 et seq. of Title 29 of the United States Code. 6 While the inclusion of auxiliary organizations and student body organizations in the PERL definition of public agency predates January 1, 2002, CalPERS staff does not seem to be that sensitive to the date-nuance in screening the applications of nonprofit organizations seeking membership. What seems to be driving this approach is the second hurdle. 6 Cal Gov t Code Section

6 Proposed IRS Regulations Defining a Governmental Plan. In November 2011 the IRS issued an advance notice of proposed rules notifying public pension plans that it is set to tighten its rules on which employers are appropriately included in a governmental pension plan. Fearing the implication for its system -- which happens to include entities that may not meet the proposed criteria -- CalPERS took unilateral action to attempt implementation of the IRS proposed new regulations even before they are formally effective. New organizations wanting to contract with CalPERS that fit the definition of a public agency as set out in the PERS statutes are now subject to closer scrutiny. The application denials raise concern about whether CalPERS is using a fair measure for determining which organizations are worthy to join, particularly since the proposed IRS rules do not express a black and white determination litmus test. And, for auxiliary organizations seeking to join the CalPERS retirement program, it becomes more critical that they be classified correctly under the Section 509a regimen. VIII. Does the Required Title 5 Successor at Dissolution Clause Eliminate the Role of the Governing Board? Back in May 2012 the Trustees amended the long-standing Title provision in Section 42600(b) requiring auxiliary organization Articles of Incorporation to include a statement that at dissolution the successor entity of net assets needs the approval of the campus president and the Chancellor (no longer the Board of Trustees). Does that provision mean that the governing board of the dissolving auxiliary organization is removed from the successor approval process? Hardly. I have encouraged auxiliary organizations to include the governing board in the amended language of their Articles for two sound reasons: First, the governing board serves a statutory role in the entire voluntary dissolution process, including the distribution of net assets. See Corporations Code Section 6610 and 6716(a); and Second, it avoids an interpretation of the dissolution Article that only the campus president and the Chancellor are involved in the successor approval process. 6

7 The Trustees cannot by regulation take away what the California Legislature requires. IX. Conflict of Interest Policy Statements I ve noticed that many of the auxiliary organization Conflict of Interest policy statements and annual certifications-by-board members still only cover the interests of board members in contracts or transactions that come to the their boards for action. 7 While these policy statements and certifications may pass the University Auditor review for compliance with the Education Code, auxiliary organizations should also be aware of and frame policies and procedures for the self-dealing transaction standards in the Nonprofit Public Benefit Law. 8 Note: these standards only deal with board members. Should not your policies and procedures be broad enough to include key employees, agents and other representatives of your organization? 7 See Cal Education Code Section See Cal Corporations Code Section