BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 556| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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: AB 556 Page 2 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 AB 556 Page 3 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. AB 556 Page 4 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 AB 556 Page 5 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: AB 556 Page 6 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, AB 556 Page 7 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 AB 556 Page 8 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. AB 556 Page 9 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 AB 556 Page 10 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 AB 556 Page 11 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 AB 556 Page 12 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 **** END ****