Summary of The "The Nonprofit Integrity Act" (SB 1262)

For more information, contact Ken Larsen, Public Policy Director, California Association of Nonprofits, 916.402.1335, klarsen@canonprofits.org

Who is impacted by SB 1262?

All charitable corporations, charitable trusts and unincorporated associations that are required to register with and annually report to the Attorney General’s Registry of Charitable Trusts. As of February 28, 2003, the latest date for which information is available, there were 85,455 registered charities in California holding over $200 billion is assets and receiving over $70 billion in annual revenues.

Specifically exempted are entities primarily organized as hospitals, educational institutions, or religious organizations. However, the Attorney General's Office has jurisdiction to investigate alleged mismanagement of assets belonging to nonprofit schools and hospitals.

SB 1262 took effect January 1, 2005.

What are the provisions of SB 1262?

Nonprofits with gross revenues over $2 million, not counting funds for which a governmental entity requires an accounting, must comply with these requirements:

1. Audit.

Annual CPA-audited financial statements using generally accepted accounting principles. Nonprofits under the control of another organization may meet this requirement with a consolidated financial statement prepared by the controlling organization. The audited financial statements must be available for inspection by the Attorney General and by members of the public no later than nine months after the close of the fiscal year to which the statements relate.

2. Independent auditor.

The financial statements must be audited by an independent auditor whose relationship with the charity must satisfy the Government Auditing Standards issued by the Comptroller General of the United States.

3. Public disclosure.

The audited financial statements must be available to members of the public on the same basis as its Form 990 (currently, IRS requires nonprofits to make copies of their three most recent Form 990s, excluding donor information, available upon request)no later than nine months after the close of the fiscal year to which the statements relate.

4. Audit committee.

A charitable organization that is a corporation must have an audit committee appointed by the Board of Directors from among the directors or others appointed by the board. A charity that has a finance committee must have a separate audit committee, the chairman of the audit committee may not be a member of the finance committee, and members of the finance committee must be a minority on the audit committee. In addition, the audit committee may not include any members of the staff, including the President or CEO and the Treasurer or CF0, but the board has the option to appoint members to the audit committee who are not members of the board. Members of the audit committee may not receive any compensation from the corporation other than in their capacity as members to the Board of Directors, and may not have any material financial interest in any entity doing business with the corporation. The audit committee is responsible for retaining and terminating the auditor; setting the auditor’s compensation; conferring with the auditor to satisfy themselves that the financial affairs of the corporation are in order; and reviewing and approving the audit.

5. CEO/CFO Compensation.

The Board of Directors of the charity must review and approve the compensation, including benefits, of the corporation’s President or CEO, and its Treasurer or CFO, "to assure that it is just and reasonable." Separate review and approval is not required if a modification of compensation extends to substantially all employees.

All nonprofits, whatever their size, registered with the Attorney General must comply with these requirements:

1. Public disclosure.

If they prepare financial statements that are audited by a CPA, nonprofits must make their audits available to the public on the same basis as their IRS Form 990.

2. Accelerated registration requirement.

Nonprofits must register with the Registry of Charitable Trusts within 30 days (instead of 6 months) after they first acquire or accrue assets.

3. Notice of commencement of solicitation.

With the exception of disasters and emergencies, SB 1262 requires that notice of a solicitation campaign by a "commercial fundraiser for charitable purposes" must be filed at least 10 days before the commencement of the solicitation campaign, events, or other services. The notice will be on a form prescribed by the Attorney General.

4. Contracts with commercial fundraisers and fundraising counsel.

Each contract must be signed by an official of the nonprofit, and include all of a list of provisions detailed in Section 8 (commercial fundraisers) and Section 9 (fundraising counsel) of the bill.

5. Misrepresentation.

SB 1262 prohibits a charity from misrepresenting or misleading anyone about its purpose, or the nature, purpose, or beneficiary of a solicitation.

6. Control.

A nonprofit is expressly required to "establish and exercise control over its fundraising activities conducted for its benefit, including approval of all contracts and agreements, and shall assure that fundraising activities are conducted without coercion."

7. Registration.

Charities are prohibited from contracting with any commercial fundraiser or fundraising counsel, or to raise funds for any other charity required to be registered, unless the other party is registered with the Registry of Charitable Trusts prior to the commencement of the solicitation.

8. Prohibitions:

Twelve acts and practices in the planning, conduct, or execution of any charitable solicitation or sales promotion are prohibited by SB 1262. The prohibitions apply, according to SB 1262, "regardless of injury" (see Section 11).

Other changes impacting all nonprofits registered with the Attorney General:

1. Unincorporated associations:

SB 1262 sweeps unincorporated associations into the list of entities whose activities are regulated by the Uniform Supervision of Trustees and Fundraisers for Charitable Purposes Act (California Government Code Sections 12580-12599.5).

2. Financial records:

SB 1262 adds the Governmental Accounting Standards Board to the list of entities whose accounting principles may be used for maintaining nonprofit records.

Please note: this information is a summary of selected provisions of SB 1262, which amends Section 17510.5 of the Business and Professions Code, and to amend Sections 12581, 12582, 12583, 12584, 12585, 12586, 12599, and 12599.1 of, and to add Sections 12599.3, 12599.6, and 12599.7 to, the Government Code, relating to charitable organizations. For the complete text of SB 1262 and links to the code sections which SB 1262 amends, visit http://www.leginfo.ca.gov. Nothing in this document or its constituents should be construed or used as legal advice. For legal advice consult an attorney. For information about compliance with SB 1262 , contact the Attorney General at 1-800-952-5225 (Toll-free in CA) or (916) 322-3360.