BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  April 14, 2015


                           ASSEMBLY COMMITTEE ON JUDICIARY


                                  Mark Stone, Chair


          AB 556  
          (Irwin) - As Amended April 7, 2015


          SUBJECT:  TRUSTS: REGULATION AND ENFORCEMENT


          KEY ISSUE:  to prevent circumvention of important disclosure  
          laws protecting donors to charities, should steps be taken to  
          strengthen the attorney general's regulation of commercial  
          fundraisers for charities, and extend the statute of limitations  
          for the attorney general to bring an enforcement action?


                                      SYNOPSIS


          This bill, sponsored by the Attorney General, seeks to revise  
          the definition of "commercial fundraiser for charitable  
          purposes" in order to strengthen the Attorney General's ability  
          to enforce disclosure requirements for charity fundraising  
          campaigns, and extend the statute of limitations for enforcement  
          actions against charity fundraising firms and other third  
          parties who engage in fraud or prohibited conduct.  According to  
          the author, the bill is needed to ensure that companies  
          soliciting charitable donations cannot exploit an apparent  
          loophole in the law and circumvent existing disclosure  
          requirements through the use of commercial fundraisers who  
          instead register as "fundraising counsel."  Among other things,  
          the bill would (1) require a person or entity that plans,  








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          manages, counsels, advises, or prepares material for the  
          solicitation of funds for charitable purposes to register as a  
          commercial fundraiser if he or she is compensated by a  
          percentage interest in the funds received through solicitation  
          rather than by a flat fee; and (2) require a person assisting  
          but not directly engaging in solicitation who has any ownership  
          or management interest in any other entity that receives or  
          controls funds or assets of the charity to register as a  
          commercial fundraiser, not fundraising counsel, thereby becoming  
          subject to disclosure requirements protecting donors and the  
          public.  


          Additionally, this bill seeks to take the ten-year statute of  
          limitations that currently applies to fraud by the charity's  
          directors and officers and apply it to commercial fundraisers,  
          counsel, and any other persons involved in the fraud.  According  
          to the author, this is needed because the statute of limitations  
          that applies to fundraisers, counsel and other non-directors or  
          non-officers is only three or four years depending on the cause  
          of action, which is an insufficient length of time to prosecute  
          cases that are typically complex and involve misconduct extended  
          over long periods of time.  Recent amendments to the bill have  
          helped address concerns previously expressed by some charities  
          and nonprofit organizations, and the bill is now supported by  
          the Wounded Warrior Project and has no registered opposition.   
          The bill will be referred to the new Committee on Privacy and  
          Consumer Protection should it pass this Committee.


          SUMMARY:  Revises the definition of "commercial fundraiser for  
          charitable purposes" in order to strengthen the Attorney  
          General's ability to enforce disclosure requirements for charity  
          fundraisers, and establishes a ten-year statute of limitations  
          for enforcement actions against charity fundraisers, consultants  
          and other third parties who engage in fraud or prohibited  
          conduct.  Specifically, this bill:   










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          1)Expands the definition of "commercial fundraiser for  
            charitable purposes" to include any person or entity that  
            plans, manages, advises, counsels, consults, or prepares  
            material for, or with respect to, the solicitation of funds,  
            assets, or property for charitable purposes and is compensated  
            by a percentage interest in the funds, assets, or property  
            received through a solicitation campaign, rather than by a  
            flat fee.


          2)Expands the definition of "commercial fundraiser for  
            charitable purposes" to include any person or entity that  
            plans, manages, advises, counsels, consults, or prepares  
            material for, or with respect to, the solicitation in this  
            state of funds, assets, or property for charitable purposes  
            and: 


             a)   Has any ownership or management interest in any other  
               entity that receives or controls the funds, assets, or  
               property solicited for charitable purposes, or
             b)   Receives any material financial benefit, directly or  
               indirectly, from any other individual or entity that  
               receives or controls the funds, assets, or property  
               solicited for charitable purposes, other than the nonprofit  
               soliciting the funds, assets, or property for charitable  
               purposes.


          3)Exempts from the above definitions certain specified  
            individuals, including, among others,  trustees; charitable  
            corporations; employees or agents of commercial fundraisers,  
            and any attorney, investment counselor, or banker who in the  
            conduct of that person's profession advises a client when  
            actually engaged in the giving of legal, investment, or  
            financial advice.


          4)Clarifies that any person or entity who indirectly maintains  








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            an interest in an escrow account into which solicited funds  
            are deposited, or who indirectly maintains access of the right  
            to access funds, assets, or property received by a caging  
            company as a result of a solicitation, falls under the  
            definition of "commercial fundraiser for charitable purposes."


          5)Establishes a 10-year statute of limitations for the Attorney  
            General to bring a civil action to enforce this Act, as well  
            as to enforce existing anti-fraud statutes under Civil Code  
            sections 2223 and 2224.


          6)Provides that specified disclosures about fundraising counsel  
            that entities that solicit funds for charitable purposes with  
            the participation of fundraising counsel must make at the time  
            of solicitation shall be clear and conspicuous and appear in  
            at least 12-point type, if printed or presented  
            electronically.


          EXISTING LAW:   


          1)Governs charitable corporations, trustees, commercial  
            fundraisers, fundraising counsel and commercial co-venturers  
            who solicit or hold property for charitable purposes through  
            the Supervision of Trustees and Fundraisers for Charitable  
            Purposes Act (Act), and generally provides the Attorney  
            General with supervisory and enforcement powers over these  
            entities.  (Government Code Section 12580 et seq.)  
          2)Requires commercial fundraisers and fundraising counsel, both  
            as defined, to register with the Attorney General's Registry  
            of Charitable Trusts and to file an annual financial report of  
            funds solicited on behalf of each charitable purpose or  
            organization.  (Gov. Code Sections 12599, 12599.1.)


          3)Defines "commercial fundraiser for charitable purposes" to  








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            mean any individual, corporation, unincorporated association,  
            or other legal entity, except as specified, who for  
            compensation does any of the following:


             a)   Solicits funds, assets, or property in this state for  
               charitable purposes.
             b)   As a result of a solicitation of funds, assets, or  
               property in this state for charitable purposes, receives or  
               controls the funds, assets, or property solicited for  
               charitable purposes.


             c)   Employs, procures, or engages any compensated person to  
               solicit, receive, or control funds, assets, or property for  
               charitable purposes.  (Gov. Code Section 12599(a).)


          4)Requires, not less than 10 working days prior to commencement  
            of each solicitation campaign, the filing with the Attorney  
            General's Registry of Charitable Trusts of a notice setting  
            forth, among other things, the person responsible for  
            directing and supervising the work of the commercial  
            fundraiser under the contract and the fundraising methods to  
            be used.  (Gov. Code Section 12599(h).)


          5)Requires a written contract between commercial fundraisers and  
            charities for each solicitation campaign or event containing,  
            among other things, a statement of charitable purposes of the  
            campaign or event; if the commercial fundraiser is to be paid  
            a fixed fee, a statement of the fee and a good faith estimate  
            of what percentage the fee will constitute of the total  
            collections; if the commercial fundraiser is to be paid a  
            percentage fee, a statement of the percentage of contributions  
            that the charity will receive; a requirement that all funds in  
            the control or custody of the commercial fundraiser be  
            deposited into the charity's bank or delivered to the charity  
            within five working days of receipt; and specified contract  








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            termination provisions.  (Gov. Code Section 12599(i).)


          6)Defines "fundraising counsel for charitable purposes" to mean  
            any individual, corporation, unincorporated association, or  
            other legal entity, except as provided, who is described by  
            all of the following:


             a)   For compensation plans, manages, advises, counsels,  
               consults, or prepares material for, or with respect to, the  
               solicitation in this state of funds, assets, or property  
               for charitable purposes.
             b)   Does not solicit funds, assets, or property for  
               charitable purposes.


             c)   Does not receive or control funds, assets, or property  
               solicited for charitable purposes in this state.


             d)   Does not employ, procure, or engage any compensated  
               person to solicit, receive, or control funds, assets, or  
               property for charitable purposes.  (Gov. Code Section  
               12599.1(a).)


          7)Requires fundraising counsel for charitable purposes to file  
            annually with the Attorney General, a report listing each  
            person, corporation, unincorporated association, or other  
            legal entity for whom the fundraising counsel has performed  
            any specified services, and a statement certifying that the  
            fundraising counsel had a written contract with each listed  
            person, corporation, or other legal entity that complied with  
            specified requirements.  (Gov. Code Section 12599.1(d).)


          8)Requires a written contract between a fundraising counsel for  
            charitable purposes and a charitable organization for each  








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            service to be performed by the fundraising counsel for the  
            charitable organization, that shall be available for  
            inspection by the Attorney General and shall contain, among  
            other things: 


             a)   A statement of the charitable purpose for which the  
               solicitation campaign is being conducted.
             b)   A clear statement of the fees and any other form of  
               compensation, including commissions and property, that will  
               be paid to the fundraising counsel; and  


             c)   A statement that the fundraising counsel will not at any  
               time solicit funds, assets, or property for charitable  
               purposes; receive or control funds, assets, or property  
               solicited for charitable purposes; or employ, procure, or  
               engage any compensated person to do so.  (Gov. Code Section  
               12599.1(f).)


          9)Requires any individual, corporation, or other legal entity  
            who for compensation solicits funds or other property in this  
            state for charitable purposes to disclose prior to an oral  
            solicitation or sales solicitation made by direct personal  
            contact, radio, television, telephone, or over the Internet,  
            or at the same time as a written solicitation or sales  
            solicitation that a) the solicitation or sales solicitation is  
            being conducted by a commercial fundraiser for charitable  
            purposes, and b) the name of the commercial fundraiser for  
            charitable purposes as registered with the Attorney General.   
            (Business and Professions Code Section 17510.85.)


          10)Provides for a 10-year statute of limitations for any action  
            brought by the Attorney General against trustees or other  
            persons holding property in trust for charitable purposes or  
            against any charitable corporation or any director or officer  
            thereof to enforce a charitable trust or to impress property  








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            with a trust for charitable purposes or to recover property or  
            the proceeds thereof for and on behalf of any charitable trust  
            or corporation.  (Government Code Section 12596.)


          FISCAL EFFECT:  As currently in print this bill is keyed fiscal.


          COMMENTS:  This bill, sponsored by Attorney General Kamala  
          Harris, seeks to revise the definition of "commercial fundraiser  
          for charitable purposes" in order to strengthen the Attorney  
          General's ability to enforce disclosure requirements for charity  
          fundraising campaigns, and extends the statute of limitations  
          for enforcement actions against charity fundraising firms and  
          other third parties who engage in fraud or prohibited conduct.   
          According to the author, the bill is needed to ensure that  
          companies soliciting charitable donations cannot exploit an  
          apparent loophole in the law and circumvent existing disclosure  
          requirements through the use of commercial fundraisers who  
          instead register as "fundraising counsel."  Using one recent  
          example, the author explains:


               Existing law regulates for-profit companies that raise  
               money on behalf of a charity but keep a portion of the  
               money raised as profit. Companies that raise money on  
               behalf of charitable organizations, known as  
               commercial fundraisers, are required to disclose to  
               donors that a paid professional fundraiser was  
               involved in the solicitation campaign. "Fundraising  
               counsel," persons or entities that plan, manage, or  
               advise charities on their charitable solicitations  
               activities and receive a portion of the funds raised,  
               are not subject to the same transparency requirements.  
                


               In the recent charity enforcement case brought by the  
               Attorney General's Charitable Trusts Section, People  








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               v. Help Hospitalized Veterans, the cost of charitable  
               fundraising was 65 to 72 percent of the gross annual  
               revenue received from donors. Because the professional  
               fundraisers were classified as "fundraising counsel,"  
               Help Hospitalized Veterans was not required to  
               disclose to donors that paid professional fundraisers  
               were involved in the solicitation campaigns.


          Background on oversight of charity fundraising.  According to  
          the 2014 Causes Count report by CalNonprofits, there are more  
          than 70,000 active 501(c)(3) public charities in California.  
          California's charitable organizations contribute 15 percent of  
          California's Gross State Product and employ nearly 1 million  
          people.  Nonprofits are also generally highly trusted  
          institutions, with over 80 percent of Californians surveyed by  
          the Causes Count report stating that they are confident that  
          nonprofits act on the public's behalf and deliver quality  
          services.


          To preserve this public trust and safeguard against fraud and  
          questionable solicitation practices, the Attorney General is  
          responsible for regulating charities and the professional  
          fundraisers who solicit on their behalf.  The purpose of this  
          oversight is to protect charitable assets for their intended use  
          and ensure that the charitable donations contributed by  
          Californians are not misused and squandered through fraud or  
          other means.  All charitable trustees and fundraising  
          professionals are required to register and file annual financial  
          disclosure reports with the Registry of Charitable Trusts in the  
          Attorney General's office before soliciting in California.  The  
          attorneys and auditors of the Attorney General's Charitable  
          Trusts Section investigate and bring legal actions against  
          charities, their officers and directors, and fundraising  
          professionals that misuse charitable assets or engage in  
          fraudulent fundraising practices.  










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          Revised definition of "commercial fundraisers" to ensure  
          continued transparency in solicitation activities.  For-profit  
          companies that solicit money on behalf of charitable  
          organizations but keep a portion of the money raised as profit  
          are regulated as "commercial fundraisers" under existing law,  
          which requires them to disclose to donors that the solicitation  
          is being conducted by a commercial fundraiser for charitable  
          purposes, and to identify themselves by the name under which  
          they are registered with the Attorney General.  By contrast,  
          "fundraising counsel" are persons or entities that plan, manage,  
          or advise charities on their charitable solicitations activities  
          for profit but do not directly engage in solicitations, and are  
          not subject to the same disclosure requirements.  For this  
          reason, whether a person falls under the statutory definition of  
          "commercial fundraiser" or "fundraising counsel" is important  
          with respect to the Attorney General's ability to enforce these  
          transparency protections under existing law.


          According to the author, recent enforcement cases have  
          highlighted examples where persons performing professional  
          fundraising services attempted to circumvent disclosure  
          requirements by registering as fundraising counsel rather than  
          as commercial fundraisers.  In response, this bill would revise  
          the definition of "commercial fundraiser for charitable  
          purposes" to include additional actions and types of fee  
          arrangements that the author believes warrant a disclosure to  
          the public that the actions are being carried out by a third  
          party fundraiser for compensation.  For example, the bill would  
          require a person or entity that plans, manages, counsels,  
          advises, or prepares material for the solicitation of funds for  
          charitable purposes to register as a commercial fundraiser if he  
          or she is compensated by a percentage interest in the funds  
          received through solicitation rather than by a flat fee.


          Under existing law, if a person raising funds for a charity did  
          not directly hold the charity's assets or do the direct  
          solicitation, but maintained an interest in the escrow account  








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          in which the solicited funds were deposited, then he or she  
          could technically avoid disclosing to donors his or her paid  
          role in the solicitation campaign by claiming to be and  
          registering as fundraising counsel.  (This was the case in the  
          aforementioned People v. Help Hospitalized Veterans case.)  To  
          address this problem, this bill provides that, if as a result of  
          solicitation of funds for charitable purposes a person  
          indirectly controls those funds by maintaining an interest in  
          the escrow account in which the solicited funds were deposited,  
          or maintaining access to funds received by a caging company as a  
          result of the solicitation, then he or she would be deemed a  
          commercial fundraiser and be required to disclose to the public  
          that the solicitation is being conducted by a commercial  
          fundraiser for charitable purposes.  The author contends the  
          bill will help close loopholes in the disclosure statutes by  
          requiring persons helping to raise funds who have any ownership  
          or management interest in any other entity that receives or  
          controls funds or assets of the charity to register as  
          commercial fundraisers, not fundraising counsel, and thereby  
          become subject to disclosure requirements protecting donors and  
          the public.


          Extended statutes of limitation for enforcement actions.  Under  
          Section 12596 of the Act, the Attorney General may bring an  
          enforcement action for fraud or other violations by the  
          trustees, officers, or directors of a charitable organization at  
          any time within ten years of the cause of action.  Because cases  
          involving charity fraud are often complex and cover misconduct  
          from an extended period of time, the author contends, the  
          ten-year statute of limitations is appropriate.  However,  
          Section 12596 does not apply to other parties such as  
          fundraisers, consultants, or accountants who may have directly  
          participated in, or aided and abetted the fraud; instead they  
          are subject to either a three or four year statute of  
          limitations, depending on the cause of action.  The author notes  
          that in the Help Hospitalized Veterans case, the Attorney  
          General was unable to bring an action for civil liability  
          against the persons registered as "fundraising counsel" who  








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          participated in the fraud because they were not officers or  
          directors of the charity, so the applicable three year statute  
          of limitations on filing charges against them had already  
          passed.  Accordingly, this bill would establish a ten year  
          statute of limitations for all persons or entities involved in  
          the fraud to make this consistent with the same period that  
          applies to directors and officers of the charity.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Attorney General Kamala Harris


          Wounded Warrior




          Opposition


          None on file




          Analysis Prepared by:Anthony Lew / JUD. / (916) 319-2334













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