BILL ANALYSIS                                                                                                                                                                                                    





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                             2015-2016  Regular  Session


          AB 556 (Irwin)
          Version: June 19, 2015
          Hearing Date: June 30, 2015
          Fiscal: Yes
          Urgency: No
          RD   


                                        SUBJECT
                                           
                   Charitable trusts:  regulation and enforcement

                                      DESCRIPTION  

          Existing law, the Uniform Supervision of Trustees and  
          Fundraisers for Charitable Purposes Act (Charitable Purposes  
          Act), authorizes the Attorney General (AG) to bring specified  
          civil actions against trustees or other persons holding property  
          in trust for charitable purposes or against any charitable  
          corporation or any director or officer thereof, at any time  
          within 10 years after the cause of action accrued. 

          This bill would apply an identical 10 year statute of limitation  
          to any action brought by the Attorney General: 
           pursuant to specified involuntary trust laws under the Civil  
            Code;  
           arising out of a violation of the Charitable Purposes Act,  
            pursuant to specified involuntary trust laws, or pursuant to  
            the Nonprofit Corporation Law; and
           against a person who aids or abets a violation of the  
            Charitable Purposes Act, specified involuntary trust laws, or  
            the Nonprofit Public Benefit Corporations laws.   

          This bill would modify the definitions of "commercial fundraiser  
          for charitable purposes" and "fundraising counsel for charitable  
          purposes," as specified. 

                                      BACKGROUND  

          The Attorney General (AG) oversees registered charities to  








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          ensure that funds received are properly managed and devoted to  
          charitable programs.  The office derives its authority from the  
          Uniform Supervision of Trustees and Fundraisers for Charitable  
          Purposes Act, which was originally enacted in California in  
          1959.  This law generally requires every person or entity that  
          holds or solicits property for charitable purposes in California  
          to file specified documents and information, including annual  
          financial statements, with the AG.  These reports are in turn  
          used by the AG to investigate and litigate cases of charity  
          fraud and mismanagement by trustees and directors of charities.
          In 1989, in order to protect the interests of a donor and the  
          donee charitable organization, the Act was expanded to also  
          apply to commercial fundraisers who solicit for charitable  
          purposes (a commercial fundraiser is not a charity, but usually  
          an individual or corporation engaged in business for-profit).   
          (SB 502 (Lockyer, Ch. 307, Stats. 1989).)  The provisions for  
          commercial fundraisers were further strengthened in 1991 and  
          1992 by adding a bond requirement for commercial fundraisers and  
          by adding a requirement that any person or entity who for  
          compensation solicits funds or other property for charitable  
          purposes, must disclose that the solicitation is being conducted  
          by a commercial fundraiser for charitable purposes.   
          Significantly, commercial fundraisers were thereafter required  
          to also disclose, upon receiving a written or oral request from  
          a person solicited, the ratio of total expenses of the  
          fundraiser to the total revenue received by the fundraiser.   
          (See AB 838 (Peace, Ch. 569, Stats. 1991); SB 1682 (Boatwright,  
          Ch. 511, Stats. 1992); AB 3066 (Sher, Ch. 249, Stats. 1992).)  

          Then in 1998, AB 1810 (Davis, Ch. 445, Stats. 1998) was enacted  
          in response to an increasing practice by sophisticated  
          commercial fundraisers to hire "fundraising counsels" or enter  
          into partnerships with "commercial conventurers," in order to  
          downplay the extraordinary costs of their fundraising and  
          exclude administrative costs from their annual financial reports  
          because the commercial fundraisers were aware that high  
          fundraising costs and administrative expenses-which translate  
          into smaller distributions to the charity-can discourage donors  
          from making donations.  (See Sen. Judiciary Com. analysis of AB  
          1810 (1998-1999 Reg. Session), Jul. 21, 1998.) Accordingly, AB  
          1810 sought to close any loophole in the law by requiring  
          registration and reporting of fundraising counsels and  
          commercial conventurers.  In doing so, the bill also renamed the  
          Act from the Uniform Supervision of Trustees for Charitable  
          Purposes Act to its current title of the Supervision of Trustees  







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          and Fundraisers for Charitable Purposes Act. 

          Other bills have also been enacted to provide the Attorney  
          General with additional tools and resources in the supervision  
          and enforcement of this Act.  As a result of some of those  
          changes, the Attorney General may now also issue cease and  
          desist orders for violations of this Act or its implementing  
          regulations; impose specified civil penalties for each act or  
          omission that constitutes a violation; suspend the registration  
          of a person or entity where a penalty has been assessed; or  
          apply to a superior court for relief and obtain a temporary or  
          permanent injunctive order.  Notably, the Charitable Purposes  
          Act provides a 10 year statute of limitations for the Attorney  
          General to bring an action 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 with a trust  
          for charitable purposes or to recover property or the proceeds  
          thereof for and on behalf of any charitable trust or  
          corporation.  While this 10 year statute of limitations has been  
          in existence since 1965 and affords the Attorney General's  
          office additional time to investigate and pursue action against  
          those in violation of the law, it is limited with respect to the  
          parties that the Attorney General can bring an action against.  
          Accordingly, this bill, sponsored by the Office of the Attorney  
          General, seeks to provide additional 10 year statutes of  
          limitations under which the AG can pursue various actions  
          against those who violate or aid and abet in violations of the  
          Charitable Purposes Act.  The bill also seeks to close a  
          loophole in the law by better defining the differences between  
          "fundraising counsels" and "commercial fundraisers." 

                                CHANGES TO EXISTING LAW
           
           Existing law  , the Uniform Supervision of Trustees and  
          Fundraisers for Charitable Purposes Act (hereinafter "Charitable  
          Purposes Act," or "Act"), generally governs all charitable  
          corporations, unincorporated associations, trustees, commercial  
          fundraisers for charitable purposes, fundraising counsel for  
          charitable purposes, commercial coventurers, and other legal  
          entities holding or soliciting property for charitable purposes.  
           Existing law provides the Attorney General (AG) with primary  
          enforcement and supervisory powers over these entities, and  
          requires that the AG maintain a register of charitable  
          organizations subject to the Act.  (Gov. Code Sec. 12580 et  







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          seq.) 

           Existing law  specifies that the AG has broad powers under common  
          law and California statutory law to carry out its charitable  
          trust enforcement responsibilities and that these powers  
          include, but are not limited to, charitable trust enforcement  
          actions under:
           the Charitable Purposes Act; 
           specified laws on involuntary trusts under the Civil Code; 
           the Nonprofit Corporations Law; 
           specified provisions under the Probate Code relating to trusts  
            and trustees; 
           the Unfair Competition Law and specified law on false  
            advertising; and 
           specified Penal Code provisions relating to lotteries and  
            charitable solicitations.   (Gov. Code Sec. 12598(a).)  

           Existing law  requires every charitable corporation,  
          unincorporated association, and trustee subject to the  
          Charitable Purposes Act to file with the AG an initial  
          registration form, under oath, as specified, within 30 days  
          after the entity initially receives property, except as  
          specified.  Existing law also generally requires that these  
          entities file with the AG periodic written reports, as  
          specified.  (Gov. Code Secs. 12585, 12586.)   

           Existing law  requires a "commercial fundraiser" to register with  
          the AG's Registry of Charitable Trusts prior to soliciting or  
          receiving and controlling any funds, assets, or property, and to  
          file an annual financial report of funds, assets, or property  
          solicited on behalf of each charitable purpose or organization,  
          as specified.  (Gov. Code Sec. 12599.) 

           Existing law  prohibits a commercial fundraiser for charitable  
          purposes from soliciting in the state on behalf of a charitable  
          organization unless that charitable organization is registered  
          or is exempt from registration with the AG's Registry of  
          Charitable Trusts.  (Gov. Code Sec. 12599(m).)

           Existing law  generally defines "commercial fundraiser for  
          charitable purposes" to mean any individual, corporation,  
          unincorporated association, or other legal entity who for  
          compensation does any of the following:
           solicits funds, assets, or property in this state for  
            charitable purposes; 







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

           Existing law  requires there to be a written contract between a  
          commercial fundraiser for charitable purposes and a charitable  
          organization for each solicitation campaign, event, or service,  
          as specified.  The contract must be available for inspection by  
          the Attorney General and contain specified information.  (Gov.  
          Code Sec. 12599(h).)

           Existing law  requires that a "fundraising counsel for charitable  
          purposes" register with the AG's Registry of Charitable Trusts,  
          prior to managing, advising, counseling, consulting, or  
          preparing material for, or with respect to, the solicitation in  
          this state of funds, assets, or property for charitable  
          purposes, and to file (1) an annual report listing each person,  
          corporation, unincorporated association, or other legal entity  
          for whom the fundraising counsel has performed specified  
          services for compensation, and (2) a statement certifying that  
          the fundraising counsel had a written contract with each listed  
          person, corporation, unincorporated association, or other legal  
          entity that complied with specified requirements.   (Gov. Code  
          Sec. 12599.1.) 

           Existing law  generally defines a "fundraising counsel for  
          charitable purposes" as any individual, corporation,  
          unincorporated association, or other legal entity who is  
          described by all of the following:
           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;
           does not solicit funds, assets, or property for charitable  
            purposes;
           does not receive or control funds, assets, or property  
            solicited for charitable purposes in this state; and
           does not employ, procure, or engage any compensated person to  
            solicit, receive, or control funds, assets, or property for  
            charitable purposes.   (Gov. Code Sec. 12599.1(a).) 








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           Existing law  requires a written contract between a fundraising  
          counsel for charitable purposes and a charitable organization  
          for each service to be performed by the fundraising counsel for  
          the charitable organization, as specified.  The contract must be  
          available for inspection by the AG and contain specified  
          information, such as: 
           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
           a statement that the fundraising counsel will not at any time  
            solicit or receive or control funds, assets, or property for  
            charitable purposes, or employ, procure, or engage any  
            compensated person to solicit, receive, or control funds,  
            assets, or property for charitable purposes.  (Gov. Code Sec.  
            12599.1(f).)

           Existing law  provides the AG authority to investigate  
          transactions and relationships of corporations and trustees  
          subject to the Charitable Purposes Act for the purpose of  
          ascertaining whether or not the purposes of the corporation or  
          trust are being carried out in accordance with the terms and  
          provisions of the articles of incorporation or other instrument.  
           (Gov. Code Sec. 12588.)  

           Existing law  authorizes the AG to refuse to register or revoke  
          or suspend the registration of a charitable corporation or  
          trustee, commercial fundraiser, fundraising counsel, or  
          coventurer whenever the AG finds that the charitable corporation  
          or trustee, commercial fundraiser, fundraising counsel, or  
          coventurer has violated or is operating in violation of any  
          provisions of the Charitable Purposes Act.  (Gov. Code Sec.  
          12598(e).)  

           Existing law  authorizes the Attorney General to bring an action  
          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 with a trust for charitable purposes or to  
          recover property or the proceedings thereof for and on behalf of  
          any charitable trust or corporation at any time within 10 years  
          after the cause of action accrued.  (Gov. Code Sec. 12596.)  

           Existing law  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  







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          to an oral solicitation or sales solicitation, as specified, or  
          at the same time as a written solicitation or sales  
          solicitation: 
           that the solicitation or sales solicitation is being conducted  
            by a commercial fundraiser for charitable purposes; and
           the name of the commercial fundraiser for charitable purposes  
            as registered with the Attorney General pursuant to specified  
            law.  (Bus. & Prof. Code Sec. 17510.85.) 

           Existing law  provides that one who wrongfully detains a thing is  
          an involuntary trustee thereof, for the benefit of the owner.   
          Existing law also provides that one who gains a thing by fraud,  
          accident, mistake, undue influence, the violation of a trust, or  
          other wrongful act, is, unless he or she has some other and  
          better right thereto, an involuntary trustee of the thing  
          gained, for the benefit of the person who would otherwise have  
          had it.  (Civ. Code Secs. 2223, 2224.)  

           This bill  would specify that the disclosures required under  
          existing law prior to an oral solicitation or sales  
          solicitation, or at the same time of a written disclosure or  
          sales solicitation, must be in at least 12-point font, and be  
          clear and conspicuous, as specified, if printed or presented  
          electronically. 
           This bill  would authorize the AG to bring an action pursuant to  
          specified laws relating to involuntary trustees at any time  
          within 10 years after the cause of action accrued.  This bill  
          would also authorize the AG to bring a civil action for a  
          violation of the Nonprofit Corporation Law at any time within 10  
          years after the cause of action accrued. 

           This bill  would authorize the AG, notwithstanding the limited  
          application of the Charitable Purposes Act to certain entities,  
          to bring a civil action against a person who aids or abets a  
          violation of that Act, specified laws relating to involuntary  
          trusts, or the Nonprofit Public Benefit Corporations' article  
          providing standards of conduct for directors and management, at  
          any time within 10 years after the cause of action accrued. 

           This bill  would expand the definition of a "commercial  
          fundraiser for charitable purposes" to include a person or  
          entity who 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, but is disqualified as a "fundraising  







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          counsel for charitable purposes" pursuant to the definition of  
          that term. This bill would further clarify that a commercial  
          fundraiser for charitable purposes does not include an escrow  
          agent or "caging company," as specified, which receives or  
          controls funds received as a result of a solicitation for  
          charitable purposes.  

           This bill  would modify the definition of "fundraising counsel  
          for charitable purposes" to clarify that "compensation" received  
          for planning, managing, advising, counseling, consulting, or  
          preparing material for, or with respect to, the solicitation in  
          this state of funds, assets, or property for charitable  
          purposes, is something other than a percentage of the funds,  
          assets, or property received as a result of a solicitation  
          campaign.  

           This bill  would further modify the definition of "fundraising  
          counsel for charitable purposes" to clarify that a person or  
          entity is deemed to receive or control funds, assets, or  
          property if any of the following apply: 
           it has the right to approve or veto any payment from an escrow  
            account to which funds received from a solicitation for  
            charitable purposes are subject; 
           it maintains an interest in an account into which solicited  
            funds are deposited; 
           it has the right to access funds, assets, or property received  
            from a solicitation for charitable purposes and held by a  
            caging company; 
           it has any ownership or management interest in any other  
            entity that receives or controls the funds, assets, or  
            property solicited for charitable purposes, including, but not  
            limited to, an escrow agent or caging company, but not  
            including a federally insured financial institution; or
           it receives any 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 trustee or charitable corporation  
            soliciting the funds, assets, or property for charitable  
            purposes. 

           This bill  would provide that any person or entity who, 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, but does not meet the qualifications of a "fundraising  







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          counsel for charitable purposes," as specified, shall be deemed  
          to be a "commercial fundraiser for charitable purposes," as  
          described, unless excluded by the section defining that term.   
          This bill would specify for these purposes that "commercial  
          fundraiser for charitable purposes" does not include:
           a "trustee" or "charitable corporation," as defined, or any  
            employee thereof;
           an individual who is employed by or under the control of a  
            commercial fundraiser for charitable purposes that is  
            registered with the AG; or
           any federally insured financial institution that holds, as a  
            depository, funds received as a result of a solicitation for  
            charitable purposes, or an escrow agent or "caging company,"  
            as defined, that receives or controls funds received as a  
            result of a solicitation for charitable purposes. 

           This bill  defines a caging company for purposes of the above  
          definitions as a business that receives contributions, processes  
          donor mail, and deposits all contributions into an account under  
          the sole control of the charitable organization.

           This bill  would make other technical or non-substantive changes.  


                                        COMMENT
           
          1.    Stated need for the bill  

          According to the author: 

            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 or  
            squandered through fraud or other means.  [ . . . ]

            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 solicit money on behalf of  
            charitable organizations, "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  







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            activities for profit but do not directly engage in  
            solicitations - are not subject to the same transparency  
            requirements.  Both commercial fundraisers and fundraising  
            counsel are required to register with the Attorney General's  
            office. 

            The distinctions between commercial fundraisers and  
            fundraising counsel are that commercial fundraisers hold  
            assets and do the direct solicitation, while fundraising  
            counsel do not. Sometimes, in order to avoid falling into the  
            commercial fundraiser category, which requires disclosure to  
            consumers that the solicitation is being conducted by a  
            commercial fundraiser, fundraising companies will make it  
            falsely appear that the company providing advice and the  
            company receiving donations are separate.  Other times,  
            fundraising counsel will receive substantial portions of a  
            charity's donations through fundraising fees, because they own  
            more than one company involved in the charity's fundraising  
            program. 

            Cases involving charity fraud are often complex,  
            fact-intensive, and cover misconduct occurring over an  
            extended period of time.  Existing law allows the Attorney  
            General a 10 year statute of limitations for fraud conducted  
            by officers and directors of the charity.  Other parties such  
            as fundraisers, accountants, etc. who directly participate in  
            or aid and abet the fraud[, however,] are subject to either a  
            three or four year statute of limitations, depending on the  
            cause of action. 

            AB 556 will close loopholes in for-profit solicitation  
                                                         disclosure laws by requiring fundraisers who have any  
            ownership or management interest in any other entity also  
            involved in a charitable solicitation to register as  
            commercial fundraisers and therefore be subject to disclosure  
            to donors. The bill also states that if a fundraiser takes a  
            percentage of the funds raised through the solicitation rather  
            than a flat fee, they should register as commercial  
            fundraisers.  The bill will also extend the 10 year statute of  
            limitations to include all persons and entities involved in  
            the fraud.  [Accordingly,] AB 556 will uphold consumer and  
            donor confidence in charitable giving by increasing  
            transparency and accountability for charitable fundraisers.

          The sponsor of this bill, the Office of the Attorney General  







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          (AG), indicates that recent litigation exposed some of the  
          shortcomings with both the existing 10 year statute of  
          limitations and the laws that distinguish a "commercial  
          fundraiser" from a "fundraising counsel," which is discussed  
          further in Comment 2 below.  The AG writes that: 

            AB 556 will address and correct both legal deficiencies  
            identified in the Help Hospitalized Veterans litigation and  
            improve transparency and accountability for all for-profit  
            charitable fundraisers.  The bill expands existing  
            transparency requirements for "commercial fundraisers" to  
            include "fundraising counsel," closing the loophole in current  
            law that allows for-profit fundraisers to avoid disclosing to  
            prospective donors whether a portion of their gift will be  
            diverted to a paid company.  The bill also broadens the  
            Attorney General's statute of limitations for enforcement  
            actions to include commercial fundraisers, fundraising  
            counsel, and other third party entities that aid and abet  
            charity fraud, ensuring that all culpable parties are held  
            equally accountable.

            This legislation will significantly improve the Attorney  
            General's ability to protect charitable assets and empower  
            responsible charitable giving. By enhancing existing  
            safeguards against fraud, AB 556 will maintain consumer  
            confidence in donating to the many nonprofit organizations  
            that work to make a difference in their state.

          2.    Bill seeks to better distinguish commercial fundraisers for  
            charitable purposes from fundraising counsels for charitable  
            purposes.  
            
          Under the Supervision of Trustees and Fundraisers for Charitable  
          Purposes Act ("Charitable Purposes Act," or "Act"), all  
          charitable entities that hold or solicit property for charitable  
          purposes must register with and disclose certain information to  
          the Attorney General.  Most pertinent to this bill are  
          commercial fundraisers and fundraising counsel.  


          These classifications, and the distinctions between those  
          entities, are quite significant.  Indeed, AB 1810 (Davis, Ch.  
          445, Stats. 1998) sought to close loopholes that had previously  
          enabled sophisticated commercial fundraisers to hire  
          "fundraising counsels" in order to downplay the extraordinary  







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          costs of their fundraising and exclude administrative costs from  
          their annual financial reports which might otherwise discourage  
          donors from making donations due to the fact that high  
          administration costs translate into less money for the charity.   
          (See Sen. Judiciary Com. analysis of AB 1810 (1998-1999 Reg.  
          Session), Jul. 21, 1998.)  Accordingly, while under the current  
          Act, both charitable fundraisers and fundraising counsel must  
          register with and file certain documents and information with  
          the AG, commercial fundraisers must disclose to donors that the  
          solicitation is being conducted by a commercial fundraiser for  
          charitable purposes and, upon request, disclose their percentage  
          of total fundraising expenses (which signals to the donor how  
          much money actually ends up going to the charitable purposes).   
          (See Bus. & Prof. Code Sec. 17510.85 and Gov. Code Sec.  
          12599(j).)  



          Additionally, while fundraising counsels have to provide the AG  
          with an annual list of the charitable organizations for which  
          the fundraiser has performed services and make its written  
          contracts with those charitable organizations available for  
          inspection to the AG, commercial fundraisers must not only make  
          their contracts available for inspection, but also specifically  
          disclose to the AG, on an annual basis, their: (1) total  
          revenue; (2) the fee or commission charged by the commercial  
          fundraiser for charitable purposes; (3) salaries paid by the  
          commercial fundraiser for charitable purposes to its officers  
          and employees; (4) fundraising expenses; (5) distributions to  
          the identified charitable organization or purpose; and (6) the  
          names and addresses of any director, officer, or employee of the  
          commercial fundraiser for charitable purposes who is a director,  
          officer, or employee of any charitable organization listed in  
          the annual financial report.  (See Gov. Code Secs.  
          12599.1(d)-(f), 12599(d).) 
            
          Indeed, the more onerous filing and disclosure requirements for  
          commercial fundraisers appear justified given that the  
          definition of fundraising counsel presumes that the fundraising  
          counsel's involvement generally stops at managing, advising,  
          counseling, consulting, or preparing materials for, or with  
          respect to, the solicitation of donations.  Unlike their  
          commercial fundraiser counterparts, entities seeking to register  
          as fundraising counsel must not solicit the donation directly,  
          or receive or control the donation, or employ anyone to engage  







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          in such activities.  That being said, the AG, the sponsor of  
          this bill, provides information that suggests that the lines  
          between these two types of entities engaged in charitable  
          activities is being blurred by some who seek to take advantage  
          of the "fundraising counsel" classification, but then engage in  
          activities that would seem to fall under the category of  
          commercial fundraising.  As described by the sponsor: 

            In 2012, Attorney General Harris filed suit against Help  
            Hospitalized Veterans (HHV), a charity that solicited  
            donations to support programs serving veterans and active-duty  
            military improperly diverted more than $4.3 million in funds  
            toward the purchase of golf memberships, condominiums, and  
            excessive executive compensation.  The scheme included loans  
            made by HHV to American Target Advertising, a for-profit firm  
            that directed the charity's vast direct-mail fundraising  
            operation while making substantial payments to HHV's former  
            president.  Another fundraising firm, Creative Direct  
            Response, made deceptive statements in its direct mail  
            solicitations to imply that there were minimal or no  
            fundraising expenses associated with the campaign, while in  
            actuality, HHV incurred substantial costs. Meanwhile, the  
            nonprofit used accounting gimmicks to inflate the amount of  
            income purportedly spent on providing veterans' services while  
            artificially minimizing the amount reportedly spent on  
            fundraising.  [Footnote excluded.]

            [. . . D]espite the fact that American Target Advertising and  
            Creative Direct Response each unilaterally orchestrated  
            elaborate fundraising campaigns for HHV-designing fundraising  
            materials, managing prospective donor mailing lists,  
            etc.-neither were legally registered as "commercial  
            fundraisers" because the direct mail was turned over to HHV  
            for final mailing.  Instead, both companies filed as  
            "fundraising counsel." A "caging operation" was used to siphon  
            donations off to the firms, paying out millions of dollars in  
            fees before turning any money over to the charity. Because  
            these firms stopped just short of physically sending the  
            solicitations they designed, none of the materials contained  
            written disclosures that would have been required if the  
            campaigns were conducted by "commercial fundraisers."  In  
            total, between 65-72 percent of the annual gross revenue HHV  
            received from donors over the years went to the charity's  
            fundraising operation.
           







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          This bill would help close the loophole in the law, by better  
          defining who is a commercial fundraiser, and who is a  
          fundraising counsel.  First, the bill would expand the  
          definition of a commercial fundraiser to also include any person  
          or entity who 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, but is otherwise disqualified as a  
          fundraising counsel under the latter's definition.  Further, the  
          bill would modify the fundraising counsel definition to clarify  
          that "compensation" received for its services, is something  
          other than a percentage of the funds, assets, or property  
          received as a result of a solicitation campaign, and to clarify  
          that a person or entity is deemed "to receive or control funds,  
          assets, or property"-and therefore not a fundraising counsel-if  
          it: 
           has the right to approve or veto any payment from an escrow  
            account to which funds received from a solicitation for  
            charitable purposes are subject; 
           maintains an interest in an account into which solicited funds  
            are deposited; 
           has the right to access funds, assets, or property received  
            from a solicitation for charitable purposes and held by a  
            "caging company" (defined as a business that receives  
            contributions, processes donor mail, and deposits all  
            contributions into an account under the sole control of the  
            charitable organization);  
           has any ownership or management interest in any other entity  
            that receives or controls the funds, assets, or property  
            solicited for charitable purposes, including, but not limited  
            to, an escrow agent or caging company, but excluding a  
            federally insured financial institution; or
           receives any 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 trustee or charitable corporation soliciting  
            those donations. 

          3.    Specified actions by the Attorney General to enforce the  
            Charitable Purposes Act are already subject to a 10 year  
            statute of limitations  

          Under the Charitable Purposes Act, the AG may bring an action  
          against trustees or other persons holding property in trust for  
          charitable purposes or against any charitable corporation or any  







          AB 556 (Irwin)
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          director or officer thereof, to enforce a charitable trust or to  
          impress property with a trust for charitable purposes or to  
          recover property or the proceeds thereof for and on behalf of  
          any charitable trust or corporation, for up to 10 years after  
          the action accrued.  

          According to the AG, however, in the Help Hospitalized Veterans  
          case, "despite significant evidence that Creative Direct  
          Response had made serious misrepresentations in its  
          solicitations to over 40,000 potential donors, subject to over  
          $4 million in civil penalties, the firm was successful on  
          demurrer and was not held accountable for its role in the HHV  
          fraud."  The sponsor explains that this occurred because of the  
          narrow application of the 10 year statute of limitations under  
          existing law:  

            [E]ven though the Attorney General's enforcement authority  
            under the Supervision of Trustees and Fundraisers for  
            Charitable Purposes Act applies to fundraising counsel, the  
            express language of the Act's special 10-year statute of  
            limitations covering officers and directors of charities does  
            not cover causes of action against third parties, including  
            fundraisers, even though they participate in the charity  
            fraud. The court in the HHV case instead applied the standard  
            3-year statute of limitations for fraud to Creative Direct  
            Response's conduct and ruled that the action could not proceed  
            against the fundraiser.  Since charitable trust enforcement  
            actions are often complex, fact-intensive, and cover an  
            extended period of time, a 10-year statute of limitations is  
            necessary in order to ensure that all who commit misconduct  
            involving charities are held accountable for their actions.

          Accordingly, this bill seeks to provide a broader 10-year  
          statute of limitation that would allow the AG to also bring an  
          action at any time within 10 years after the cause of action  
          accrued: (1) pursuant to specified involuntary trust laws under  
          the Civil Code; (2) arising out of a violation of the Charitable  
          Purposes Act, pursuant to specified involuntary trust laws, or  
          pursuant to the Nonprofit Corporation Law; and (3) against a  
          person who aids or abets a violation of the Charitable Purposes  
          Act, specified involuntary trust laws, or the Nonprofit Public  
          Benefit Corporations laws.   

          As a matter of public policy, shorter limitations periods serve  
          important policy goals that help to preserve both the integrity  







          AB 556 (Irwin)
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          of our legal system and the due process rights of individuals.  
          Their purpose is to prevent the assertion of stale claims and,  
          ultimately, "to promote justice by preventing surprises through  
          the revival of claims that have been allowed to slumber until  
          evidence is lost, memories have faded, and witnesses have  
          disappeared."  (3 Witkin Cal. Proc. Actions Sec. 433.)  That  
          being said, here, existing law already envisions providing the  
          AG with longer periods of time to bring enforcement  
          actions-albeit against a narrower number of individuals.  This  
          longer period is largely justified by the potential complexity  
          of the underlying cases and the time and work that can be  
          required to both uncover fraud and to pursue those involved.   
          Arguably, therefore, the 10 year statute of limitations should  
          be based upon the underlying act, and not necessarily a small  
          subset of potential bad actors against whom the action would be  
          brought against. 


           Support  :  American Cancer Society Cancer Action Network;  
          California Association of Nonprofits (CalNonprofits); Christian  
          Appalachian Project; Disabled American Veterans; DMA Nonprofit  
          Federation; Easter Seals; Feed the Children; Food and Water  
          Watch; Food for the Poor; March of Dimes California Chapter;  
          Network American Institute for Cancer Research; Wounded Warrior  
          Project, Inc. 

           Opposition  :  None Known 

                                        HISTORY
           
           Source  :  Attorney General

           Related Pending Legislation  :  None Known 



           Prior Legislation  :

          AB 2327 (Feuer, Ch. 483, Stats. 2012) revised the enforcement  
          provisions of the Charitable Purposes Act.

          SB 1262 (Sher, Ch. 919, Stats. 2004) See Background. 

          SB 2015 (Sher, Ch. 475, Stats. 2000) amended the Charitable  
          Purposes Act to grant the AG additional enforcement tools and  







          AB 556 (Irwin)
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          resources, including:  ability to assess late fees; authority to  
          suspend or revoke registrations; the ability to impose criminal  
          penalties for violations of the Act; and the appropriation of  
          all fines, penalties, attorney's fees and costs to the AG for  
          the administration and enforcement of the Act.

          AB 1810 (Davis, Ch. 445, Stats. 1998) See Background. 

          SB 1682 (Boatwright, Ch. 511, Stats. 1992) See Background.

          AB 3066 (Sher, Ch. 249, Stats. 1992) See Background.

          AB 838 (Peace, Ch. 569, Stats. 1991) See Background.  

           Prior Vote  :

          Assembly Floor (Ayes 78, Noes 0)
          Assembly Appropriations Committee (Ayes 17, Noes 0)
          Assembly Privacy and Consumer Protection Committee (Ayes 11,  
          Noes 0)
          Assembly Judiciary Committee (Ayes 10, Noes 0)

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