San Diego Grantmakers Hosts
California Attorney General Bill Lockyer

The discussions and luncheon, sponsored by the McCarthy Family Foundation, Sempra Energy and Washington Mutual, were intended to gain the Attorney General's insight into the ramifications and goals of SB 1262, as well as give leaders in the local nonprofit sector a chance to air any concerns or questions.

While an excellent summary of the Nonprofit Integrity Act is available from the California Association of Nonprofits, most of the discussion at the October event and elsewhere centers on a few key requirements included in the act. For nonprofits with gross revenues over $2 million, these requirements focus on:

• Financial audits
• Public disclosure of financial statements
• The make-up of an organization's financial committee and audit committee
• The compensation of an organizations CEO and CFO

For all nonprofits registered with the Attorney General, requirements of the act include:

• Public disclosure of financial statements
• A shortened timeframe (30 days instead of 6 months) for registration after acquiring assets
• Contracts for commercial fundraisers
  

The main question on everyone's mind seems to be: how many San Diego organizations will feel a major impact? According to Leslie Hine-Rabichow, executive director of the San Diego Association of Nonprofits who spoke after Lockyer at the luncheon, the regulations requiring an audit and defining the makeup of committees for finance and audit apply to less than 2.5% of San Diego 501(c)3s, which together represent less than 20% of total revenues generated in the San Diego nonprofit sector. As for the fundraising regulations, Hine-Rabichow estimated that those provisions would apply to about 94% of the nonprofits in San Diego, which together represent less than 28% of total nonprofit revenues.

The general discussion about SB 1262 revolves around an important equilibrium sought by nonprofits: how to be accountable while maintaining efficiency of service delivery. In line with his history of focusing on consumer protection, the Attorney General views the act as protecting those who operate in the nonprofit sector as well as those who benefit from nonprofit services. However, those in the nonprofit sector fear that the requirements of SB 1262 will infringe on the already-limited time and resources that nonprofits have, detracting from their ability to provide much-needed services in our communities.

Most agree that the audit requirement will not impose an unreasonable burden on most nonprofits, because those who meet the $2 million threshold for the most part already do an annual audit. However, the requirements governing the makeup of the financial and audit committees raised some alarm due to the fact that human capital within the nonprofit sector is already stretched thin. Nonprofits already depend on many volunteers with financial expertise, and this new layer of complication may make it all the more difficult for nonprofits to recruit enough volunteers to satisfy the regulation.

In addition, the registration and commercial fundraiser requirements also seem to be unnecessary to some nonprofit leaders. By legislating contract requirements for commercial fundraisers, the Nonprofit Integrity Act opens up the possibility that this requirement may cause a business chill among commercial fundraisers, which would in turn negatively impact the ability of nonprofits to raise funds. However, the Attorney General seemed to think that these requirements are necessary to protect nonprofits from unscrupulous fundraisers.

During his presentation, Lockyer highlighted what he felt were the important points of the Nonprofit Integrity Act:

• The act is intended to be "just good sense rules for managing assets," designed to empower the board of directors to carry out effective oversight, and give them mechanisms to protect themselves.
• Ninety-six percent of all nonprofits are actually exempted from the audit requirement, and most large organizations already do an audit.
• The section covering requirements for contracting with outside fundraisers is intended to help nonprofits avoid fraudulent fundraisers.
• Several sections address misrepresentation, specifically as it applies to telephone fundraising.

The impetus for the Nonprofit Integrity Act apparently arose from an amalgam of securities fraud in the private sector and waning consumer confidence in nonprofit organizations. Lockyer cited the Sarbanes-Oxley Act (Public Company Accounting Reform and Investor Protection Act) of 2002 in the private sector and the prevalence of securities fraud scandals, and mentioned there was some spillover of these concerns into the nonprofit sector. Additionally, he asserted that SB 1262 is intended to maintain or restore confidence in those who may consider giving to a charitable organization, as well as to protect nonprofits.

Lockyer also referred to his personal experience with crimes against nonprofits, repeatedly giving the example of a slick con artist taking advantage of a charitable organization by not turning over funds raised in the charity's name. He painted the picture of a larger-than-life con artist feeding his ego by getting lots of celebrity participation in events, and using the charity's funds to provide expensive gifts to celebrities.

At one point, Lockyer told the story of Aaron Tonken, a contract fundraiser in Los Angeles, who handled several high-profile charitable events with celebrity participants. (In 2003, the Attorney General filed a lawsuit against Aaron Tonken and several associates, alleging fraudulent solicitation of donations, and diversion of donations to non-charitable purposes.) Lockyer asserted that a 'charismatic con artist' is frequently at the center of fraudulent schemes to divert charitable donations, and SB 1262 is designed to give nonprofits mechanisms to protect themselves from such predatory con artists.

While no one disputes that such con men may operate in the fundraising industry, discussion in the nonprofit sector centers on whether or not the benefits of SB 1262 outweigh the burdens imposed on nonprofits by the legislation. Lockyer's main focus seemed to be on the threat of con artists and the need to protect nonprofits, yet there is little evidence that the measures outlined in SB 1262, which affect a broad spectrum of nonprofits, will be effective against the relatively small threat posed by con artists.

During her portion of the presentation, Hine-Rabichow elaborated on suggested standards for good public policy in the nonprofit sector, which included the requirement that it should be 'based on sound evidence that what we have in place now is not effectively addressing the problem.' This seems to be a major doubt about SB 1262: for all of the requirements and burdens it may impose on nonprofits, there is very little sound evidence that it will effectively combat the types of fraud outlined by Lockyer. Regardless of current concerns about SB 1262, the act takes effect on January 1st and it remains to be seen how these regulations will truly impact nonprofits. The nonprofit sector must prepare for the upcoming changes.