BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 556


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          556 (Irwin)


          As Amended  June 19, 2015


          Majority vote


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          |ASSEMBLY:  | 78-0 | (May 14,      |SENATE: | 38-0 | (July 16, 2015) |
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          Original Committee Reference:  JUD.


          SUMMARY:  Strengthens the Attorney General's ability to enforce  
          disclosure requirements for commercial fundraisers for  
          charities, and establishes a 10-year statute of limitations for  
          enforcement actions against these commercial fundraisers,  
          consultants and other third parties who engage in fraud or  
          prohibited conduct.  Specifically, this bill:   


          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 but who is  
            disqualified as "fundraising counsel for charitable purposes",  
            as defined.


          2)Clarifies the definition of "fundraising counsel for  








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            charitable purposes" to include any individual, corporation,  
            or entity that, for compensation, other than as a percentage  
            of the funds, assets, or property received as a resultof a  
            solicitation campaign, 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.


          3)Clarifies that "fundraising counsel for charitable purposes"  
            does not include any person or entity that receives or  
            controls funds, assets or property solicited for charitable  
            purposes, and that such receipt or control is established when  
            any of the following are true of the person or entity:


             a)   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.


             b)   It maintains an interest in an account into which  
               solicited funds are deposited.


             c)   It has the right to access funds, assets, or property  
               received from a solicitation for charitable purposes and  
               held by a caging company.


             d)   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 any federally insured financial institution.


             e)   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  








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               property for charitable purposes.


          4)Provides that 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,  
            but does not meet the qualifications of a fundraising counsel  
            for charitable purposes, shall be deemed to be a commercial  
            fundraiser for charitable purposes, unless specifically  
            exempted.


          5)Exempts from the definition of "commercial fundraiser for  
            charitable purposes" certain specified entities, including,  
            among others, trustees; charitable corporations; employees or  
            agents of commercial fundraisers, and any financial  
            institution, escrow agent, or caging company that holds or  
            controls funds received as a result of a solicitation for  
            charitable purposes.


          6)Establishes a 10-year statute of limitations for the Attorney  
            General to bring a civil action to enforce the Supervision of  
            Trustees and Fundraisers for Charitable Purposes Act, as well  
            as to enforce existing anti-fraud statutes under Civil Code  
            Sections 2223 and 2224.


          7)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.


          The Senate amendments:  


          1)Reorganize and clarify elements of the definitions for  








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            "commercial fundraiser for charitable purposes" and  
            "fundraising counsel for charitable purposes" to better  
            distinguish between the two categories, so that it is clearer  
            who must register as a commercial fundraiser for charitable  
            purposes.


          2)Clarify which specific entities are excluded from the  
            definition of "commercial fundraiser for charitable purposes,"  
            including trustees, charitable corporations, and caging  
            companies, which are defined as businesses that receive  
            contributions, process donor mail, and deposit all  
            contributions into an account under the sole control of a  
            charitable organization. 


          FISCAL EFFECT:  According to the Senate Appropriations  
          Committee, pursuant to Senate Rule 28.8, negligible state costs.


          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, this 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  








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               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  
               v. Help Hospitalized Veterans, the cost of charitable  
               fundraising was 65% to 72% 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% of  
          California's Gross State Product and employ nearly 1 million  
          people.  Nonprofits are also generally highly trusted  
          institutions, with over 80% 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  








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          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.  


          Revised definition of "commercial fundraisers" and "fundraising  
          counsel" 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 key 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 help  
          close the loophole in the law, by better defining who is a  
          commercial fundraiser, and who is a fundraising counsel.  First,  
          this 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, this bill would modify the definition of  
          fundraising counsel 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  








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          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 meets any one of certain  
          conditions reflecting the entity's control or interest in the  
          funds.  


          The author contends this 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  
          Government Code Section 12596 of the Supervision of Trustees and  
          Fundraisers for Charitable Purposes 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 10 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 10-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  
          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 10 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.










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          Analysis Prepared by:                                             
          Anthony Lew / JUD. / (916) 319-2334  FN: 0001279