BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 2327 (Feuer)
As Amended June 25, 2012
Hearing Date: July 3, 2012
Fiscal: Yes
Urgency: No
NR
SUBJECT
Charitable Organizations: Enforcement
DESCRIPTION
Under existing law, the Supervision of Trustees and Fundraisers
for Charitable Purposes Act (Act) governs charitable
corporations, unincorporated associations trustees, commercial
fundraisers, fundraising counsel, and other legal entities who
hold or solicit property for charitable purposes over which the
Attorney General (AG) has enforcement and supervisory powers.
The Act provides that any person who violates any provision of
the Act with the intent to deceive or defraud is liable for a
specified civil penalty.
This bill would authorize the AG to issue cease and desist
orders for violations of the Act including failing or refusing
to produce required records, making a material false statement,
as specified, failing to file complete financial reports, or
engaging in specified prohibited acts. This bill would also
authorize the AG, after giving five days' notice, to impose a
civil penalty of up to $1000 per act or omission, for any act or
omission in violation of the Act. Commencing on the fifth day
after notice, this penalty would accrue at the rate of $100 per
day for each day of noncompliance.
This bill would permit the AG to suspend the registration of any
person or entity who the AG had assessed a penalty against
pursuant to these provisions. This bill would grant any person
or entity subject to penalties under the Act, a review hearing
as specified, so long as the person or entity requests the
hearing within 30 days of receipt of notice of the AG's action.
(more)
AB 2327 (Feuer)
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Finally, this bill would require any fiscal sponsor organization
to carry directors' and officers' insurance and provide proof of
this insurance to the AG, and would permit AG to seek an
injunction, order of receivership, restitution or order of
accounting to ensure due application of charitable funds.
BACKGROUND
Fiscal sponsor organizations (FSO) manage the assets of one or
more nonprofit organizations for a fee. FSOs may enable a number
of nonprofits to share a common administrative platform, thereby
increasing efficiency. FSOs may also provide services including
payroll, employee benefits, publicity, fundraising assistance,
and training.
While the services provided by FSOs may relieve nonprofits of
managerial and administrative duties, thus, allowing them to
focus on the goals and missions of the organizations, media
reports have chronicled the loss of millions of dollars in
charitable revenues as the result of FSOs improperly using
donations. In 2003, PipeVine Inc., a San Francisco-based FSO,
collapsed and later admitted to having misspent at least four
million dollars in charitable contributions. In that case,
concerns were publicly expressed about PipeVine Inc. prior to
the loss of the charitable funds.
Again, in 2010, the Association for Firefighters and Paramedics,
Inc., a FSO based out of Santa Ana, California, misrepresented
how donations were spent and used $33,000 worth of charity funds
for board meetings in San Diego and Las Vegas, and a Caribbean
cruise for board members and their families. The Office of the
Attorney General (AG) reported that "through its investigation,
�then AG] Brown's office obtained a list of California residents
who donated to the Association for Firefighters and Paramedics.
Responses to a questionnaire sent to those California residents
revealed that telemarketers calling on behalf of the charity
told people their donation would be used to help pay for the
care of burn victims in their area, along with supporting the
fire department and paramedics in their town." The AG reported
that 80 to 90 percent of the donations received did not go to
victims, local departments, or charities, but were used to pay
for the fundraising expenses of the FSO. (Harris, Brown Reaches
Settlement with Charity for Burn Victims Over Deceptive
Fundraising Tactics, September 2010, Office of the Attorney
General.)
AB 2327 (Feuer)
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The Supervision of Trustees and Fundraisers for Charitable
Purposes Act (Act) governs charitable corporations and other
legal entities that hold or solicit property for charitable
purposes and is supervised and enforced by the AG. However,
the AG only has the authority to seek fines where there is proof
of fraud or an intent to defraud. This bill would instead
authorize the AG to issue cease and desist orders or fines when
a violation of the Act has occurred, thus removing the need for
proof of fraud before action may be taken.
CHANGES TO EXISTING LAW
Existing law establishes the Supervision of Trustees and
Fundraisers for Charitable Purposes Act (Act), which provides
that charitable corporations or trustees, commercial
fundraisers, fundraising counsel, or coventurers who hold or
solicit property for charitable purposes are required to file a
registration statement, articles of incorporation, and an annual
financial report with the Attorney General (AG). (Gov. Code
Sec. 12580 et seq.)
Existing law establishes the primary responsibility for
supervising charitable trusts, for ensuring compliance with
trusts and articles of incorporation, and for protection of
assets held by charitable trusts and public benefit
corporations, in the AG. (Gov. Code Sec. 12598(a).)
Existing law provides that the AG shall be entitled to recover
from defendants named in a charitable trust enforcement action
all actual costs incurred in conducting that action. (Gov. Code
Sec. 12598(b).)
Existing law provides that any person who violates the Act with
intent to deceive or defraud any charity or individual is liable
for a civil penalty not to exceed $10,000. (Gov. Code Sec.
12591.1(a).)
Existing law provides a fine not to exceed $1000 for a first
offense under the Act and a fine not to exceed $2,500 for all
subsequent violations. (Gov. Code Sec. 12591.1(b)(1) et seq.)
Existing law requires all moneys recovered by the AG to be
deposited into the General Fund and be used to offset the costs
of future charitable trust enforcement actions by the AG. (Gov.
Code Sec. 12598(d).)
AB 2327 (Feuer)
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This bill would authorize the AG to issue a cease and desist
order when an entity or person subject to the provisions of the
Act has committed a violation of the Act including:
failing or refusing to produce required records of the
organization;
making a material false statement in any application,
statement or report;
failing to file financial reports, or filing incomplete
financial reports; or
engaging in specified prohibited acts.
This bill would permit the AG, after giving five days' notice,
to impose a civil penalty not to exceed $1,000 per act or
omission, for any act or omission in violation of the Act.
Penalties would accrue at the rate of $100 per day for each day
of noncompliance, commencing on the fifth day after notice.
This bill would authorize the AG to suspend the registration of
any person or entity assessed penalties under the Act.
This bill would grant any person or entity subject to penalties
under the Act, a review hearing, as specified, so long as the
person or entity requests the hearing within 30 days of receipt
of notice of the AG's action.
This bill would authorize the AG to seek an injunction, order of
receivership, restitution or order of accounting to ensure due
application of charitable funds.
This bill would require fiscal sponsor organizations to carry
directors' and officers' insurance and provide proof of that
insurance to the AG.
COMMENT
1.Stated need for the bill
According to the author:
The Supervision of Trustees and Fundraisers for Charitable
Purposes Act regulates persons or entities that raise funds
for nonprofits. The Attorney General enforces the Act, but
the Act precludes the Attorney General from imposing a
penalty for any violation unless the Attorney General proves
fraud. This bill would remove that limitation and allow the
assessment of penalties for any violation of the Act.
AB 2327 (Feuer)
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There have been high-profile incidences of fiscal sponsor
organizations that used or lost the funds they managed for
other not-for-profit organizations. This may be devastating
to an organization that has trusted the fiscal sponsor
organization with all of its financial assets. The amendments
add a requirement for those fiscal sponsor organizations that
hold onto and manage the assets of other organizations to
carry director and officers insurance. This provides relief
to victim organizations in the event a fiscal sponsor
organization spends or otherwise loses the assets of an
organization of which they manage.
2.Preventative measures to protect assets held by charitable
trusts
This bill would create a number of preventative measures,
including fines and cease and desist orders that the Attorney
General (AG) may use in enforcing the Supervision of Trustees
and Fundraisers for Charitable Purposes Act (Act). Under
existing law, the powers of the AG to enforce the Act are
limited to instances where there is proof of an intent to
defraud a nonprofit client, or a series of penalties which may
be imposed for noncompliance with reporting requirements.
Arguably, these enforcement mechanisms lack necessary power to
enable the AG to protect charitable assets, as required by law.
Under existing law, the AG may fine a nonprofit organization if
it fails to file its annual registration statement, fails to
file a report, or fails to correct deficiencies in a report or
statement. (Gov. Code Sec. 12586.1.) The AG must first notify
the nonprofit organization of the violation, and give the entity
30 days to cure the violation before a fine may be issued. The
first fine may not exceed $1,000, and each subsequent fine may
not exceed $2,500. (Gov. Code Sec. 12591.1.) An nonprofit
organization is also liable for a penalty, not to exceed
$10,000, if the AG proves violation of the Act with an intent to
defraud.
In light of the amount of funds that have been misused by FSOs
highlighted in the media (see Background), these fines appear to
be inconsequential, and do not function as a sufficient
deterrent against misuse of charitable assets. Furthermore,
allowing a FSO 30 days to cure a violation, or 10 days to
correct deficiencies in a statement or report before a fine may
be issued, creates little incentive for FSOs to comply with
existing requirements. To address those issues, this bill would
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authorize the AG to fine for both non-compliance and
misstatements, thus creating incentives to produce accurate and
timely reports. This bill would also authorize the AG to issue
cease and desist orders, which would give the AG an additional
enforcement mechanism in the event that fines and penalties are
not compelling sufficient compliance with the Act. Arguably, if
it becomes probable that a FSO is misappropriating charitable
assets, the authority to issue a cease and desist order will
also operate to freeze remaining funds held by the FSO, and as a
result, maximize the amount of donations that may be returned to
nonprofit clients.
This bill would also authorize a FSO, who has been the subject
of an enforcement action by the AG, to request a hearing for a
review of that enforcement action. Arguably, the availability
of a hearing ensures that the due process rights of the FSO will
be protected.
3.Directors' and officers' insurance
This bill would require all fiscal sponsor organizations (FSO)
to carry directors' and officers' insurance and to provide proof
of this insurance to the Attorney General (AG).
Directors' and officer's insurance is protection against a
breach of a duty by the directors or officers. Although each
insurer defines coverage in its own way, directors' and
officers' insurance generally includes actual or alleged acts or
omissions, errors, misstatements, neglect, or breach of a duty
by an insured person in the discharge of his or her duties.
Claims under this type of insurance may include failure to
provide services or mismanagement of assets.
As indicated by the media reports, often when the management
problems of an FSO surface, the funds entrusted to the
organizations by nonprofit clients have already been
misappropriated. For example, the International Humanities
Center, a Los Angeles-based FSO, was short nearly $900,000 when
it closed its doors earlier this year. The Los Angeles Times
reported:
Directors for many of the nonprofits, which included such
diverse groups as the Campaign to End Israeli Apartheid,
Saving Wild Tigers, Champions Against Bullying, the Malibu
Realtors Fund, the Southern California Bluebird Club, and
Shanti House L.A., said they believe their money has
vanished.
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The Pasadena-based Afghan Women's Mission, which supports
schools, clinics and other programs in the war-battered
country, said it had $400,000 banked with the Humanities
Center. It has told donors on its Web page that its money is
probably gone. (Gottlieb, Nonprofits fear money in center's
care vanished, Feb. 14, 2012, Los Angeles Times.)
Arguably, requiring FSOs to carry directors' and officers'
insurance would ensure that in the event that charitable
assets were misappropriated by an FSO, nonprofit clients
would still be able to collect, at least in part, the value
of donations which rightfully belong to them.
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
SB 2015 (Sher, Chapter 475, Statutes of 2000) amended the
Uniform Supervision of Trustees and Fundraisers for Charitable
Purposes Act to grant the Attorney General additional
enforcement tools and 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 Attorney General for the administration and
enforcement of the Act.
SB 1262 (Sher, Chapter 919, Statutes of 2004) imposed audit
requirements on charities that receive or accrue a gross revenue
of 500,000 dollars or more, require specific disclosures during
a solicitation or fundraising campaign, and require specific
provisions in written contracts between fundraisers and the
charitable organization.
Prior Vote :
Assembly Floor (Ayes 62, Noes 10)
AB 2327 (Feuer)
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Assembly Appropriations Committee (Ayes 16, Noes 1)
Assembly Judiciary Committee (Ayes 9, Noes 0)
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