Fundraising Day in New York 6/7/2013. Transparency: WHO S WATCHING YOU? HISTORY OF FUNDRAISING REGULATION THRESHOLD QUESTIONS

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1 WHO S WATCHING YOU? Best Practices for Todays Nonprofits Legislature IRS Other Federal Agencies Seth Perlman Senior Partner, Perlman and Perlman LLP Art Taylor President & CEO, BBB Wise Giving Alliance Erika Kloehn Vice President, Direct Response, USO Watchdog Organizations States News Media Donors THRESHOLD QUESTIONS Why is fundraising regulated? What role do the states play? What role does the federal government play? What about watchdogs and the media? How extensive is fraudulent fundraising in the charitable sector? Does registration and reporting help prevent fraud? How has technology changed the landscape? How will it change in the future? HISTORY OF FUNDRAISING REGULATION In 1955, New York established the Office of Charitable Registration to administer new fund raising regulations. Eventually over 40 other states established charity offices modeled after New York, in response to: Growth of mass marketing technology Proliferation of charities Increased competition Increased presence and use of commercial fundraisers PROLIFERATION OF CHARITIES 501(c)(3) Entities Registered with IRS 1940: 12, : 320, : 654, : 1,135,626 As of 12/2012, 1,072,746 (973, 961 public charities and 98,785 private foundations) WHAT ACTIVITY IS REGULATED? SOLICITATION In short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization. GOVERNANCE Historically, governance was within the purview of the states; starting in 2008, the new Form 990 put the IRS in the position of regulating the governance of nonprofits. 1

2 STATE REGULATION 45 states have some sort of statutory scheme to regulate charitable solicitations and the use of nonprofit assets within their borders. Registration and reporting requirements are imposed on charities, professional fundraising counsel, professional solicitors, and commercial co-venturers. Each group is required to file annual registrations and/or contracts and/or financial reports and/or the IRS Form 990. CHARITABLE ORGANIZATIONS Primarily Section 501(c)(3) and (c)(4) organizations Also may include other nonprofit organizations as defined by state law tax exemption and deductibility is a function of federal tax law while the nonprofit status is a creature of state law May even include for profit organizations key issue is asking for money using a charitable appeal 40 States plus DC require registration prior to commencement of solicitations PROFESSIONAL SOLICITORS (a/k/a Professional Fundraisers or Commercial Fundraisers) Directly solicit the general public on behalf of a charitable organization for a fee May have custody/control of the contributions received Many states also require a pre-solicitation disclosure of professional status prior to making the request for a gift Required to register in 44 states, post a surety bond and file contracts with their nonprofit clients PROFESSIONAL FUNDRAISING COUNSELS (a/k/a Fundraising Consultants) Help plan, manage, advise on, consult or produce and design solicitations to the general public for a fee Do not make the solicitations Generally, may not have custody or control of contributions Required to register in 32 states and post bonds in a few COMMERCIAL CO- VENTURERS An entity that, as part of a sales promotion, uses the charity s name to sell its products or services (at its usual retail price) and makes a charitable donation based on the sales Registration and/or filing of contract required in: Alabama, Hawaii, Maine, Massachusetts, Mississippi and South Carolina (+ maybe California) 17 other states regulate the activity but do not require registration Require written contract and, in some cases, charity to file copy Require specific disclosure of the amount of the donation to potential buyers (either as a dollar amount of percentage of sales) REGISTRATION EXEMPTIONS Vary from state to state, but most common include: Churches and in most states - Religious Organizations Organizations raising less than a specified dollar amount (most common is $25,000) Educational Institutions Organizations for which solicitations limited to membership Volunteers soliciting for the benefit of a named individual Political organizations Hospitals 2

3 CONSTITUTIONAL FRAMEWORK CONSTITUTIONAL FRAMEWORK First Amendment - General Principles: The states have the power to compel charitable solicitors to identify themselves to the public before they solicit However, the First Amendment otherwise protects this activity and narrow tailoring of the laws is essential Solicitation of charitable contributions is fully protected, even by professional fundraisers with profit motives The Trilogy: Schaumburg, Munson and Riley Supreme Court struck down state and local regulations limiting the percentage of fees that charities could pay to raise funds Pre-solicitation disclosures of fundraising percentages held unconstitutional The Court questioned the states attempts to connect high fundraising costs to fraud IRS REGULATION OF GOVERNANCE OTHER GOVERNMENT REGULATORY AGENGIES The IRS has a clear, unambiguous role to play in governance [w]here an organization has adopted good governance practices, we can reasonably expect that it poses less risk that it will misuse its tax-exempt status or its charitable assets. -Sarah Hall Ingram, Commissioner, Tax Exempt Division, 2009 Postal Service Federal Trade Commission United States Treasury (Anti-Terrorism) U.S. Senate Finance Committee U.S. House Ways and Means Committee U.S. House Committee on Oversight and Government Reform State Trade Commissions County and Municipal Registration Offices WATCHDOG ORGANIZATIONS AND THE MEDIA List of Watchdog Groups 2013 BBB Wise Giving Alliance Charity Navigator CharityWatch (f/k/a The American Institute of Philanthropy) Guidestar - Philanthropedia News Media Print, Television, Internet And some with a religious focus: (part of Wall Watchers) And of course:

4 EVOLUTION OF FUNDRAISING THE INTERNET Jurisdictional questions affecting nonprofit online activities: Whether a state court has the power to adjudicate claims against an organization for its conduct on the internet The extent of statutory authority of state or federal regulatory agencies Charleston Principles Federal Tax Issues BBB Wise Giving Alliance: Overview Why? Because donors and businesses asked for it Standards-based reports Goals - Encourage informed giving - Strengthen charities 20 It s been going on for quite a while 1920s BBB s began national & local charity reporting 2001 BBB national program merged with another charity watchdog (NCIB) and was renamed as BBB Wise Giving Alliance 21 What is involved? BBB Standards: 20 Standards for Charity Accountability BBB Reports: on publicly soliciting charities - about 11,000 across BBB system (1,300 national charity reports) 22 What is the benefit? Donors: BBB Reports - free, quick way to check if charities meet high standards BBB Seal -widely recognized, valued charity trust mark What is the benefit? Charities: Standards key practices BBB Accreditation no cost. Charity that meets all 20 Standards is Accredited. BBB Seal Optional licensing program, only for BBB Accredited Charities

5 BBB Standards for Charity Accountability Governance & Oversight Reporting on Effectiveness Finances Solicitations & Informational Materials Guiding Concepts for BBB Charity Standards Standards for key practices, not ratings Audited financial statement is preferred reference. IRS Form 990 is not sufficient alone. Generally Accepted Accounting Principles (GAAP) Accuracy of expense reporting Accountability is more than financials Top BBB Charity Findings What are the top 5 BBB Wise Giving Alliance report findings? Annual Reports: not fancy Mission Program Summary Board & Officers List Financial Summary - Total income, prior FY - Expenses: program, FR, admin - Ending net assets Top BBB Charity Findings Governance Meetings 3 or more evenly spaced full board meetings/year Majority in attendance Face-to-face - One conference call may serve as one of the 3 meetings 29 Top BBB Charity Findings Effectiveness Policy Enacted by board Policy commits to conduct performance assessments at least every 2 years How well org is addressing its mission (e.g., strategic plan) 30 5

6 Top BBB Charity Findings Effectiveness Report Written report on org s performance provided to board for approval Progress, future goals ChartingImpact.org (project of GuideStar USA, Independent Sector & BBB WGA) 31 Top BBB Charity Findings Website Disclosures, If Soliciting Annual report basics Mailing address of charity Access to in PDF or - link to GuideStar 990, description Privacy policy - notice, access, choice, security 32 Expense Ratios! What issue gets the most public attention but is not among the top 5 BBB charity report findings? Spend at Least 65% of Total Expenses on Programs Spend No More Than 35% of Contributions on Fundraising Expenses Fewer than 7% of national charities do not meet either of these standards BBB conducts in-depth financial review: Expense ratio calculation using GAAP financial information. Will question expense allocation, if potential concerns identified. Joint Cost Allocation Activity that combines fundraising with education/advocacy Cover story of Wise Giving Guide Example: Appeal asks for donations but also asks recipient to: - sign a petition - see doctor if have following symptoms - take these actions to clean environment

7 Joint Cost Allocation Appeal Accuracy Key GAAP issues: Intent charity planned dual purpose appeal Audience selected for need for information Content must include a call-to-action other than sending a donation Should not exaggerate program allocation More info: AICPA Statement of Position 98-2 (ASC ) Have solicitations and informational materials, distributed by any means, that are accurate, truthful and not misleading, both in whole and in part. Examples of appeal accuracy issues: 100% of your donation Zero Fundraising Expenses Incomplete or inaccurate representations about the financial state of organization Cause-Related Marketing Want More Information? Disclose at point of solicitation: Amount or % per unit sold to go to specified charity If applicable, duration (i.e., during October 2013) If applicable, the maximum or minimum total donation Nationally Soliciting Charities: Give.org ataylor@council.bbb.org Metro New York charities: NY.give.org llewis@newyork.bbb.org Motivating the donor Rational Practical Emotional Donor Skepticism Charitable confidence hit bottom in 2003 One in three: nonprofits have pretty seriously gotten off in the wrong direction 70% thought charities waste a great deal or a fair amount of money Only 25% said charitable organizations did very good helping people Source: 2008 Brookings Institute study 7

8 Employee Skepticism 50%+ had observed at least one act of ethical misconduct One third had a well-implemented ethics and compliance program Media Skepticism Source: 2007 National Nonprofit Ethics Survey Stop. Nonprofits benefit from public subsidies Nonprofits ask for unrestricted funds Nonprofits fulfill obligations to those they serve yet many lack a multi-year strategic plan, an ability to chart their impact, or employee performance Highlights: DMANF Guidelines Calls for most revenue going toward the program Establish a balanced view of organization's financials Communicate a strategic plan Chart your impact Understand and manage your business Follow GAAP and reasonable JCA What do donors want? Have you asked them? Are you appealing to both the rational and emotion sides? Typically, you re receiving money from a donor who trusts that you will spend the money in the manner in which you say. There is no way for them to measure how well you are actually achieving those goals or helping the communities that you serve. Andre Alexander Winning donor trust Strengthen the brand entitles you to have the conversation in the first place Test adding or removing certain language Show success now and then Monitor donor response and reaction Connect and engage donors with the mission 8

9 Strengthen the brand Brand promise delivery Consistency around experience Publish your mission, vision and values Strong brand = trust Test! Remove pie chart Long-term impact infographics Describing how money will be used Emotional v rational content Show success now and then (Video of) success followed by an ask Utilize non-ask touch points to share a positive story Leverage relationships for an authentic third party view What are your only statements? Monitor donor attitudes Identify your key attributes or indicators to measure Collect as structured or unstructured data Maintain an ongoing tabulation of attitudes Connect and engage Stakeholder conference calls Live stream from remote locations Pre-produced video Stories Events Be transparent! In summary Adopt the DMANF ethics guidelines Build credibility, be trustworthy Pay attention to your brand Inspire donors Fortify their relationship 9

10 Thank you! Seth Perlman Art Taylor Erika Fry Kloehn 10