BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 556|
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CONSENT
Bill No: AB 556
Author: Irwin (D)
Amended: 6/19/15 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE: 7-0, 6/30/15
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 78-0, 5/14/15 (Consent) - See last page for
vote
SUBJECT: Charitable trusts: regulation and enforcement
SOURCE: Attorney General
DIGEST: This bill establishes additional 10 year statutes of
limitations for the Attorney General (AG) to bring an action (1)
pursuant to specified involuntary trust laws under the Civil
Code; (2) arising out of a violation of the Uniform Supervision
of Trustees and Fundraisers for Charitable Purposes Act
(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
Nonprofit Public Benefit Corporations laws. This bill also
modifies the Charitable Purposes Act's definitions of
"commercial fundraiser for charitable purposes" and "fundraising
counsel for charitable purposes," as specified.
ANALYSIS:
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Existing law:
1)Governs, generally, 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 under
the Charitable Purposes Act (hereinafter "Charitable Purposes
Act," or "Act"). Existing law provides the 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.
2)Specifies that the AG has broad powers under common law and
California statutory law to carry out its charitable trust
enforcement responsibilities, including, but not limited to,
enforcement actions under: the Charitable Purposes Act;
Nonprofit Corporations Law; Unfair Competition Law; specified
provisions of the Civil Code on involuntary trusts; among
other specified laws.
3)Requires, generally, every charitable corporation,
unincorporated association, and trustee subject to the Act to
file with the AG an initial registration form, under oath, as
specified, within 30 days after the entity initially receives
property, as well as certain periodic written reports.
4)Requires a "commercial fundraiser for charitable purposes" 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. Existing law further
prohibits a commercial fundraiser from soliciting in the state
on behalf of a charitable organization unless that charitable
organization is registered or is exempt from registration with
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the AG's Registry of Charitable Trusts.
5)Defines, generally, "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;
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.
1)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 AG and contain specified information.
2)Requires a "fundraising counsel for charitable purposes" to
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: (a) an annual report listing each person,
corporation, unincorporated association, or other legal entity
for whom the fundraising counsel has performed certain
services for compensation; and (b) a statement certifying that
the fundraising counsel had a written contract with such
persons or entities, as specified.
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3)Generally defines a "fundraising counsel for charitable
purposes" as any individual, corporation, unincorporated
association, or other legal 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;
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.
1)Requires a written contract between a fundraising counsel and
a charitable organization for each service to be performed by
the fundraising counsel for the charity, 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
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control funds, assets, or property for charitable purposes.
1)Authorizes the AG to investigate transactions and
relationships of corporations and trustees subject to the
Charitable Purposes Act to ascertain whether or not the
purposes of the corporation or trust are being carried out in
accordance with the articles of incorporation or other
instrument.
2)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 such a person or entity has
violated or is operating in violation of any provisions of the
Charitable Purposes Act.
3)Authorizes the AG 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.
4)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, as specified, or at the same time as a written
solicitation: (a) that the solicitation is being conducted by
a commercial fundraiser for charitable purposes; and (b) the
name of the commercial fundraiser as registered with the AG,
as specified.
This bill:
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1)Specifies that the disclosures required under existing law
prior to an oral solicitation, or at the same time of a
written disclosure, must be in at least 12-point font, and be
clear and conspicuous, as specified, if printed or presented
electronically.
2)Authorizes the AG to bring an action pursuant to specified
laws relating to involuntary trusts at any time within 10
years after the cause of action accrued, and as well as for a
violation of the Nonprofit Corporation Law at any time within
10 years after the cause of action accrued.
3)Authorizes, further, the AG, notwithstanding the limited
application of the Charitable Purposes Act to certain persons
or 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.
4)Expands the definition of a "commercial fundraiser" 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 counsel for charitable purposes" pursuant to the
definition of that term. Further clarifies that a commercial
fundraiser does not include an escrow agent or "caging
company," as defined, which receives or controls funds
received as a result of a solicitation for charitable
purposes.
5)Modifies the definition of "fundraising counsel" 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,
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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.
6)Modifies, further, the definition of "fundraising counsel" to
clarify that a person or entity is deemed to receive or
control funds, assets, or property 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;
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
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.
1)Provides 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
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state of funds, assets, or property for charitable purposes,
but does not meet specified qualifications of a "fundraising
counsel," shall be deemed a "commercial fundraiser," as
described, unless excluded pursuant to the statute defining
that term. Further specifies for these purposes that
"commercial fundraiser" 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.
1)Makes other technical or non-substantive changes.
Background
The AG oversees registered charities to ensure that funds
received are properly managed and devoted to charitable programs
under the Charitable Purposes Act, which was originally enacted
in California in 1959. The Act generally requires every person
or entity that holds or solicits property for charitable
purposes in California to file certain documents and
information, including annual financial statements, with the AG.
In turn, the AG uses the reports to investigate and litigate
cases of charity fraud and mismanagement by trustees and
directors of charities.
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In 1989, to protect the interests of a donor and of the donee
charitable organization, the Act was expanded to 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, Chapter 307, Statutes of 1989).) The commercial
fundraiser provisions were strengthened further 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, Chapter 569, Statutes of 1991); SB 1682
(Boatwright, Chapter 511, Statutes of 1992); AB 3066 (Sher,
Chapter 249, Statutes of 1992).)
Then in 1998, AB 1810 (Davis, Chapter 445, Statutes of 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, in recognition of the fact that high fundraising costs
and administrative expenses-which translate into smaller
distributions to the charity-could discourage donors from making
donations. As such, AB 1810 sought to close any loophole in the
law by requiring registration and reporting of fundraising
counsels and commercial conventurers.
Over the years, other bills have sought to expand the tools and
resources available to aid the AG in the supervision and
enforcement of this Act. For example, the AG may 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
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apply to a superior court for relief and obtain a temporary or
permanent injunctive order. Notably, the Act provides the AG a
10 year statute of limitations 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
AG additional time to investigate and pursue action against
charities in violation of the Act, it is limited with respect to
the parties that the AG can bring an action against.
This bill 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
Act. This bill also seeks to close a loophole in the Act by
better defining "fundraising counsels" and "commercial
fundraisers."
Comments
As stated by 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
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fundraiser was involved in the solicitation campaign.
"Fundraising counsel" - persons or entities that plan, manage,
or advise charities on their charitable solicitations
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
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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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified7/13/15)
Attorney General (source)
American Cancer Society Cancer Action Network
California Association of Nonprofits
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: (Verified7/13/15)
None received
ASSEMBLY FLOOR: 78-0, 5/14/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
AB 556
Page 13
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,
Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,
Wilk, Williams, Wood, Atkins
NO VOTE RECORDED: Linder, Medina
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
7/15/15 14:58:57
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