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6/28/2016
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TheChanging
LandscapeRetirement Investment Advice will Never BeAdvice will Never Be
the Same
Quest Capital & Risk Management, Inc.Investment Adviser Representative offering Securities and Investment Advisory Services through Cetera Advisor Networks LLC. Member FINRA/SIPC. Cetera is under separate ownership from any other named entity.
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FIDUCIARY RULE CHRONOLOGY
1975 2010 2015 22016 2017 -2018
Original fiduciary
rule adopted
Updated rule proposed in
2010
Revised and re-proposed in 2015
Final rule released 4/6/2016
Compliance deadline
4/10/2017; in 1975 BICE,
1/01/2018
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Really Begins with Financial
Meltdown
• Housing Bubble Bursts
• Fed bails out Bear Stearns
• Countrywide sold to Bank of America
• Lehman Brothers folds
• Fannie Freddie halt foreclosures
• Fed Bail out AIG
• TARP
• Citigroup Bailed-out
• Fed cuts rates to near zero
• Bush signs loans for Big 3
• 2009 – Dow hits 12 year low
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2009
2013Lockheed Martin v. Abbot
LITIGATIONS AIMED AT PLAN SPONSORS
2008LaRue v.
2013Tibble v.
2012Tussey v.
2009Hecker v. Deere
Revenue-sharing
permissible
AbbotClass action can
proceed on
claims, including
imprudent
selection of
stable value
fund.
2015BoeingExcessive
Fees, settled for $57 Million
DeWolffERISA Individual
account vs. plan
losses
.
EdisonFiduciary’s
failure to
investigate use of
lower-cost
institutional
class shares
imprudent
ABB-Fiduciary failed
to follow IPS in
selection of
investments; IPS
disputed as
governing document
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Plan sponsors feel alone, isolated and confused
REGULATION REQUIREMENTS BEGIN RAINING DOWN ON PLAN SPONSORS
408(b)�2
Proposed�and�Final�DOL�Fiduciary�Rule
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April 6, 2016The DOL Fiduciary Rule
Regarding the 1 023 l
Retirement Investment Advice
y
Anyone advising on retirement assets will be
required to recommend what is in the best
interests of clients when they offer guidance on
401(k) plan, individual retirement accounts or
other qualified monies saved for retirement.
1,023-page rule that was six years
in the making “Some changes will be drastic, while
others will be minor, but all
promise to shift the landscape!”
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What�Does�the�Rule�Say?
Conflicted Compensation
Investment products that
compensate the advisor
differently create a
conflict, and require an
exemption
Fiduciary Standard
Advisors held to
Fiduciary Standard when
working with any
retirement assets
Client Interests Come First
Fiduciaries must place
clients interests before
their own, and avoid all
conflicts of interest
Best Interest Contract ExemptionThe BIC Exemption is a
binding written agreement
allowing differential
compensation, but
requiring that all
advisor recommendations
be in client’s best
interest.
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Why is The Rule Necessary?
Fundamental premise:
Investment advice rendered without fiduciary accountability is not consistent with legislative intent and harms investors.
“The�idea�is�that�the�regulation�will�stop�advisers�from�putting�their�own�interests�in�earning�high�commissions�and�fees�over�clients'�interests�in�obtaining�the�best�investments�at�the�lowest�prices.”
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Two Clarifying Questions
What is investment advice?
Who is a fiduciary investment adviser?
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A lot of contention around Broker Compensation
Levelized Compensation vs. Non-Levelized CompensationCompensation
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What is theBIC
Exemption?
Permits variable compensation, but requires that the
investment is deemedand documented to be
in the investor’s best interest.
May prove to be theMay prove to be the cog in the wheel!
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Grandfathering:
The DOL rule allows for continuing compensation based on investments that were made prior to the applicability date.
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April 6, 2016
What we know for sure:
Huge change for certain Financial Advisors, including Broker Dealers, Insurance
Agents and Mutual Fund Firm Representatives who have generally up to now not been required to act to a fiduciary standard
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BEFORE—AND–AFTERSuitability vs.
Fiduciaryy
16Brokerage, advisory
and insurance firms will have to adjust operations and
procedures to comply
CHANGE
MajorDisruption
.
Sales people will now have to enter true
advisory business.
Commission�based�business�will�become�a�lot�less�attractive
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The realities for Majority of the Industry
Likely Impacts on Financial Companies
Revenues profitability Reg lator litigation andRevenues, profitability,and valuations suffer at
BDs.
Continued high M&A activity for advisory
firms
Regulatory, litigation, andreputational risk rise; fiduciary practices must be embedded in firms.
Training, technology, and business intelligence will be needed to transition quickly.
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The realities for Majority of the Industry
Likely Impacts on Brokers and Advisors
Economic ConsolidationEconomicChallenges
Cost of Compliance:
Need to develop new
administrative steps,
technology &
Training.
Cultural FactorsSales to True
Advisory Business..
ConsolidationWithin the
industry and
within Independent
Advisory practices
A lot will Leave the BusinessClients may be
left without an
advisor
“If they are getting out of the business because of this, maybe they should get out!” –Bernie Clark, Schwab
Advisor Services
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Likely Product Impacts
Price and cost compression
Variable and indexed annuity
sales slow, while ETFs, index funds
will gain flows
Compensation comes out of products to avoid BICE
Due diligence drives up product quality
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Likely Impacts on Plan Sponsors
Financial Fid i b tFinancial
Companies &
Brokers will
disappear through
Mergers and
exiting the
business.
Increased risk
of regulations
and litigations
Fiduciary best
practices have to
be adopted to
manage plan.
Products get more cost effective
Partner�with�advisors�who�already�have�established�fiduciary�experience�and�processes.
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High Level Overview ofPlann Sponsor’ss Fiduciaryy Responsibilities
What�stays�the�same�for�Plan�Sponsors:
Plan Sponsor s Fiduciary Responsibilities
As a Fiduciary, the Plan Sponsor has asignificant responsibility andincredible opportunity to positivelyimpact the retirement experience oftheir participants!
3 critically important areas:
1. Effective Plan Design1. Effective Plan Design
2. Successful Investment Experiences3. Cost Containment
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Timeline for Implementation
Department has adopted a "phased" implementation approach for the Best
Interest Contract Exemption and the Principal Transactions Exemption
April 6, 2016:
April 1, 2017 January 1, 2018
April2016
April�2017
January�2018
DOL’s final fiduciary
rule unveiled to
public
Advisors and firms
are now held to a
fiduciary standard
Full compliance with
the exemption will be
required going
forward
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NEXT STEPS
Have a conversation with your relationship manager at Cerini and Associates.
Perform an independent Benchmarking of Plan
• Participant Behavior• Plan Design & Operations• Investment Menu / 404(c)• Costs / 408(b)2
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GET IN TOUCH
Send us a message or visit us
At www.questcapitalmanagement.com
S. Joseph DiSalvo, ChFC631-724-3933
Quest Capital & Risk Management, Inc.23 Bellemeade AvenueSmithtown, NY 11787
Investment Adviser Representative offering Securities and Investment Advisory Services through Cetera Advisor Networks LLC. Member FINRA/SIPC. Cetera is under separate ownership from any other named entity.
6/28/2016
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$31,500,000$ , ,$10,000,0004.4�MM�
$12 Billi$12�Billion�2.3�MM
2016�New�York�StateLegislative�Update
6/28/2016
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OutlineOutline• Fair�Labor�Standards�Act�� FLSA• NYS�Minimum�Wage• NYS�8�Bills�on�Gender�Equity• NYS�Medical�Marijuana�Program�
“A�fair�day’s�wage�for�a�fair�day’s�work�is�a�right and New York has zero tolerance forright�and�New�York�has�zero�tolerance�for�
those�who�seek�to�exploit�workers�and�deny�them�what�they�are�rightfully�owed.”�“This�administration�will�continue�to�crack�down�
on�wage�theft�and�other�unlawful�employment�practices�across�this�state,�
h l d lhelping�to�ensure�opportunity�and�equality�are�available�to�all.”
Governor�Andrew�Cuomo�9/16/2015
6/28/2016
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Report�Worker�Exploitationp p
1�888�469�7365
F i L b St d d A tFair�Labor�Standards�Act“White�Collar”�Exemptions
1. Professional2 Ad i i i2. Administrative3. Executive
6/28/2016
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F i L b St d d A tFair�Labor�Standards�Act�1. Duties�Test2. Salary�Basis�Test$913 k $47 476 l$913�per�week�or�$47,476�annual
Effective�December�1,�2016Adjustments�every�3�years�January�1,�2020
Professional ExemptionProfessional�Exemption1. The�employee’s�primary�duty�must�be�the�performance�of�work�requiring�
advanced�knowledge,�defined�as�work�which�is�predominantly�intellectual�in�character�and�which�includes�work�requiring�the�consistent�exercise�of�discretion�and�judgment;
2. The�advanced�knowledge�must�be�in�a�field�of�science�or�learning,�including�law,�medicine,�theology,�accounting,�actuarial�computation,�engineering,�architecture,�teaching,�various�types�of�physical,�chemical,�and�biological�sciences, pharmacy, and other occupations that have a recognizedsciences,�pharmacy,�and�other�occupations�that�have�a�recognized�professional�status�and�are�distinguishable�from�the�mechanical�arts�or�skilled�trades�where�the�knowledge�could�be�of�a�fairly�advanced�type,�but�is�not�in�a�field�of�science�or�learning;�and
3. The�advanced�knowledge�must�be�customarily�acquired�by�a�prolonged�course�of�specialized�intellectual�instruction,�which�means�specialized�academic�training�is�a�standard�prerequisite�for�entry�into�the�profession.
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Administrative ExemptionAdministrative�Exemption1. The�employee’s�primary�duty�must�be�the�
performance�of�office�or�non�manual�work�directly�related�to�the�management�or�general�business�operations�of�the�employer�or�the�employer’s�customers;�andh l ’ d l d2. The�employee’s�primary�duty�must�include�the�exercise�of�discretion�and�independent�judgment�with�respect�to�matters�of�significance.
Executive�Exemption1. The�employee’s�primary�duty�must�be�managing�the�enterprise�
in�which�the�employee�is�employed,�or�managing�a�customarily�recognized�department�or�subdivision�of�the�enterprise;
2. The�employee�must�customarily�and�regularly�direct�the�work�of�at�least�two�or�more�other�full�time�employees or�their�equivalent�(for�example,�one�full�time�and�two�half�time�employees�are�equivalent�to�two�full�time�employees);�and
3. The�employee�must�have�the�authority�to�hire�or�fire�other�employees, or�the�employee’s�suggestions�and�recommendations�as�to�the�hiring,�firing,�advancement,�promotion,�or�any�other�change�of�status�of�other�employees�must�be�given�particular�weight.
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Outside Sales ExemptionOutside�Sales�Exemption1. The�employee’s�primary�duty�must�be�making�sales�or�
obtaining�orders�or�contracts�for�services or�for�the�use�of�facilities�for�which�a�consideration�will�be�paid�by�the�client�or�customer.�“Sales”�includes�any�sale,�exchange,�contract�to�sell,�consignment�for�sale,�shipment�for�sale,�or�other�disposition.�It�includes�the�transfer�of�title�to�tangible property, and in certain cases, of tangible andtangible�property,�and�in�certain�cases,�of�tangible�and�valuable�evidences�of�intangible�property;�and
2. The�employee�must�be�customarily�and�regularly�engaged�away�from�the�employer’s�place�or�places�of�business.
Computer�Exemptioncomputer�systems�analyst,�computer�programmer,�software�engineer,�or�p y y , p p g , g ,other�similarly�skilled�worker�in�the�computer�field;�and
1.�The�application�of�systems�analysis�techniques�and�procedures,�including�consulting�with�users,�to�determine�hardware,�software,�or�system�functional�specifications;
2.�The�design,�development,�documentation,�analysis,�creation,�testing,�or�modification�of�computer�systems�or�programs,�including�prototypes,�b d d l t d t t d i ifi tibased�on�and�related�to�user�or�system�design�specifications;
3.�The�design,�documentation,�testing,�creation�or�modification�of�computer�programs�related�to�machine�operating�systems;�or�a�
4.�A�combination�of�the�aforementioned�duties,�the�performance�of�which�requires�the�same�level�of�skills
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$15�New�York�State�Minimum�Wage$ g• Nassau,�Suffolk�&�Westchester
– December�31,�2016�to�2021
• New�York�City– December 31 2016 to 2019– December�31,�2016�to�2019– 10�or�under�/�over�10
• Remainder�of�NY– December�31,�2016�to�2020
Effective�January�1,�2016y ,NYS�Expands�Protections�for��Women�at�Work
“This�State�has�a�legacy�of�leading�the�way�in�advancing�equal�rights�– and�today,�we�are�making�New�York�a�model�of�equality�for�women,”�said�Governor�Cuomo.�“This�comprehensive�set�of�laws�will�help�to�ensure�that�women�are�supported,�protected�and�given�all�of�the�opportunities�they�deserve�in�life.�Today,�New�York�stands�pp y y,once�again�as�a�monument�for�progress,�and�a�sign�of�what�can�be�achieved�when�we�come�together�to�do�the�right�thing�for�women�everywhere.”
Governor�Andrew�Cuomo�10/15/2015
6/28/2016
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Achieve Pay EquityAchieve�Pay�Equity• eliminates�a�loophole�in�the�current�law�that�allows�employers�to�prohibit�employees�from�discussing�their�salaries�under�threat�of�termination�or�suspension.�
• Specifically, the bill would allow employeesSpecifically,�the�bill�would�allow�employees�to�discuss�their�wages�with�each�other.�
• 300%�liquidated�damages�available�to�an�employee�if�an�employer�willfully�violates�the�law
P t t Vi ti f S lProtect�Victims�of�Sexual�Harassment
• Expands�the�definition�of�employer�to�ALL employers not just those with 4 orALL employers�not�just�those�with�4�or�
more�employees
6/28/2016
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R B i tRemove�Barriers�to�Remedying�Discrimination
• Allows�employees�to�obtain�attorney�fees if they prevail in a lawsuit basedfees�if�they�prevail�in�a�lawsuit�based�
on�sex�discrimination
E d F il Di i i tiEnd�Family�Discriminating�• Adds�“Familial�Status”�to�the�list�of�protected�traits�under�NYS�Human�
Rights�Law
6/28/2016
10
P t t W fProtect�Women�from�Pregnancy�Discrimination�
• Clarifies�Human�Right�Law�to�require�employers�to�provide�accommodations�to�ALL pregnant�
l t j t th ithemployees�not�just�those�with�a�pregnancy�related�condition.�
NYS H Ri ht LNYS�Human�Rights�Law• Ban�discrimination�against�transgender�people
• Expand�the�definition�of�sex�to�include:– Gender�identity,��–Gender�dysphoria,�and�– Transgender
6/28/2016
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Compassionate Care ActCompassionate�Care�Act• Use�of�Medical�Marijuana�• January�7,�2016• 9 Medical Conditions9�Medical�Conditions
Christine�Ippolito,�SPHR,�SHRM�[email protected]
631�794�7401fwww.compasswfs.com
13B�Lucon�Drive,�Deer�Park,�NY�11729
6/29/2016
1
Accounting UpdateJune 30, 2016
Lisa Epstein, CPAKen Cerini, CPA, CFP, DABFA, , ,
FASB NFP Fi i l St t t P j tFASB NFP Financial Statement ProjectNew CFR ScheduleUpdate on Executive Order 38
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On April 22, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) related to Financial Statement PresentationUpdate (ASU) related to Financial Statement Presentation for Not-For-Profit Entities.The proposed ASU would affect substantially all NFP’s as well as all of those that use their financial statements.The objective is to better enable NFP’s to “tell their financial story” by reexamining existing standards for financial statement presentation focusing on:
l f� Net asset classification� Statement of Activities� Cash Flows� Liquidity
3
Net Asset Classification:� Currently, GAAP requires the presentation of three
net asset classes on the statement of financial position (unrestricted, temporarily restricted, and permanently restricted).� The proposed ASU would reduce this to two classes
of net assets (net assets with donor restrictions and net assets without donor restrictions).
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Statement of Activities:� Under current GAAP the amounts of the net change
in three classes of net assets and of total net assetsin three classes of net assets and of total net assets is presented.� The proposed ASU would:
Present the amounts of the net change in two classes of net assets and total net assets.Present information about expenses by function, nature, or both with enhanced di l i if b h h fdisclosures in notes if both are not on the face of the statement.Present investment return net of related investment expenses.
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Cash Flows:� Under current GAAP, the net amount of operating
h fl d h d h d fcash flows is presented using the indirect method of reporting, with additional presentation of the direct method permitted.� The proposed ASU would present the net amount of
operating cash flows using the direct method of reporting, with additional presentation of the indirect method permitted but not required. In addition, p q ,certain items would be reclassified among the cash flow categories to improve alignment with the statement of activities.
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Liquidity:� Under the proposed ASU there would be enhanced
disclosures related to liquidity. It would require the disclosure of both quantitative and qualitative information about liquidity of assets and near-term demands for cash as of the reporting date.
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The FASB Board began the process of redeliberating significant issues raised through feedback received regarding the proposed ASU.regarding the proposed ASU. The re-deliberations were divided into two phases:
Phase 1:Net asset classification scheme and related issues.Expenses – expenses by function and nature, netting of investment expenses against investment return, disclosure of netted investment expenses and enhanced disclosures about cost allocations.Operating measures improved disclosures.Statement of cash flows – methods of presenting operating cash flows.
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Phase 2:Operating measures – all other elements of the proposal not covered in Phase 1such as whether to require intermediate measures and whether and how to define such measures.Statement of cash flows – Realignment of certain line items.
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Current Developments/Decisions Reached:� NFP’s would no longer be required to provide the
indirect reconciliation when choosing to use the direct method of presenting operating cash flows.� NFP’s would be allowed to use either the direct
method or indirect method of presenting operating cash flows.� As proposed, temporarily and permanently
restricted classes of net assets will be combinedrestricted classes of net assets will be combined into net assets with donor restrictions.� As proposed, unrestricted net assets will be
renamed net assets without donor restrictions.
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Current Developments/Decisions Reached:� As proposed, NFP’s will continue to provide relevant
i f ti b t th t d t f dinformation about the nature and amounts of donor restrictions on nets assets (either on the face of the SOFP or in the notes).� As proposed, NFP’s will be required to disclose the amounts
and purposes of board-designated net assets either on the face of or in the notes to the financial statements.� NFP’s will be required to provide qualitative information in
the notes that communicates how the NFP manages itsthe notes that communicates how the NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the SOFP date.
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Current Developments/Decisions Reached:� NFP’s will be required to provide quantitative information either
on the face of the SOFP or in the notes that communicates theon the face of the SOFP or in the notes that communicates the availability of an NFP’s financial assets at the SOFP date to meet cash needs for general expenditures within one year of the SOFP date. � As proposed, NFP’s will be required to present investment return
net of external and direct internal investment expenses. � As proposed, NFP’s will be required to disclose expenses by
natural classification either on the face of the SOA or in the notes.The Board decided to retain the c rrent req irement for NFP’s to� The Board decided to retain the current requirement for NFP’s to report expenses by their functional classification either on the SOA or in the notes.� The Board decided to require NFP’s to report all expenses by
function and nature in one location.
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Current Developments/Decisions Reached:� As proposed, NFP’s will be required to provide enhanced
disclosures about the methods used to allocatedisclosures about the methods used to allocate expenses among program and support functions.� Transition Method – NFP’s should apply the amendments
on a retrospective basis for all years presented. If presenting comparative financial statements, NFP’s will have the option to omit the analysis of expenses by both functional and natural classification and the disclosures regarding liquidity for any years presented before the year of adoptionyear of adoption.� Effective Date – effective for financial statements for
fiscal years beginning after 12/15/17 with early adoption permitted.
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New CFR Schedule:� OPWDD is adding a new schedule to the CFR.� The name of the schedule is CFR-2A “Agency Fiscal
Data”.� The purpose of the schedule is to collect data from
the providers’ financial statements, in a uniform way, in order for each state agency to have the data readily available for analysis.
P id i f ti f OPWDD t l tProvides information for OPWDD to evaluate the organization’s overall financial health.
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� The proposed form has 4 sections:Section A – Reports – documentation of year-end date, name of the CPA firms, type of financial statements and type of opinion issued., yp yp pSection B – Statement of Financial Position – documentation of the SOFP on a line by line basis including the breakdown of net assets between unrestricted, temporarily restricted and permanently restricted reconciling the beginning of year balance to the end of year balance.Section C – Statement of Activities – documentation of total revenue, total management and general expenses, total interest expense, total income tax expense and total expenses.Section D – Line of Credit & Debt – documentation of maximum borrowing potential, draw downs at year-end and interest rate at year-end.
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OPWDD sent out drafts of the new schedule and the instructions to that schedule to CPA’s and requested comments.The forms and instructions were updated for any comments that were received and was shared with the NYSSCPA’s for their feedback. The new schedule is to be included in all CFR’s starting with the June 30, 2016 filing.
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After the Agencies for Children’s Therapy Services, Inc. (“ACTS”) won their case against the New York State Department of Health, the Governor’s Office appealed the decision and won.the Governor s Office appealed the decision and won.ACTS then applied for a stay while they requested that the Supreme Court review the ruling.The Supreme Court has decided not to review the case. Therefore, Executive Order 38 now applies in Nassau County as well as Suffolk County.For organizations in Nassau County with June 30th year-ends, EO 38 will be in effect for the year ended June 30, 2017. For those organizations in Nassau County with a December 31st year-end, EO 38 will be in effect for the year ended December 31, 2017.
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Applies to organizations that received more than $500,000 (2 year average) and 30% of their funding (current and prior year) in state funds or state authorized payments (includesyear) in state funds or state authorized payments (includes payments from managed care companies subject to DOH oversight)Covered providers are outlined in EO-38 and pretty much covers any entity receiving State funds or state authorized payments. Specifically excludes governmental units, child care subsidies (Title 5-C of article 6 or section 410 of the social services law), providers of products rather than ), p pservices, etc.State funding excludes funding from the State Education Department
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Impacts Administration costs and executive compensation� Administrative Costs
M&G expenses charged to the state cannot exceed 15%M&G expenses charged to the state cannot exceed 15% of total state fundingCalculation excludes property and equipment costsCan request a waiver
� Executive compensationIncludes only compensation paid to M&G staff (split staff need to document)Includes salary and fringes not provided to rank and file staff (vehicles, pension, below-market loans, etc.)file staff (vehicles, pension, below market loans, etc.)Includes guaranteed payments to owners and compensation based distributionsCan request a waiver (salary study, lower 75%)
QUESTIONS?
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6/29/2016
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NONPROFIT�LAW�UPDATE
Impact�of�New�York’s�Nonprofit�Revitalization�Act
Thursday,�June�30,�2016David�Goldstein,�Esq.
Overview:
o Revitalization Act
(survey�of�some�of�the�most�impactful�provisions)
o Intended�Consequences�
o Unintended�Consequences
o Hypotheticals
o Legislative�&�Regulatory�Fixes
o Revitalization Act Compliance Checklisto Revitalization�Act�Compliance�Checklist
Mandatory�ChangesPermissive�Changes
o Governance:��It’s�not�rocket�science!
6/29/2016
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Nonprofit Revitalization Act: signed into law by Governoron December 18, 2013; effective on July 1, 2014
Governor Cuomo’s approval memorandum: the Legislature has agreed to remedy “certain technical defects and barriers to implementation” contained in the Revitalization Act
Revitalization�Act�not�a�free�standing�statute
Attempt at a systematic amendment of NPCLAttempt�at�a�systematic�amendment�of�NPCL
References�to�Revitalization�Act�are�to�the�original�Act�plus the�multiple�subsequent�amendments
Significant�further�amendment�pending�right�now
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A.10365�B/S.7913�B
passed by�both�houses�at�end�of�legislative�session
not�law;�needs�Governor’s�signature
would�be�effective�180�days�after�it�is�signed
addresses�a�number�of�egregious�Revitalization�Act�provisions�and�outcomes
Amendments�to�bylaws,�policies�&�charters�will�be�needed�to�take�advantage�of�helpful�provisions
Nonprofit Revitalization Act of 2013 effective July 1, 2014
First systematic reform of not-for-profit law since it was originally enacted in 1969
Brings the requirements of the Not-for-Profit Corporation Law up to the level of what in many instances were already best practices – and beyond
According to the Attorney General’s website: “The Nonprofit Revitalization Act gives New York the strongest nonprofit governance regime in the country.”
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The Revitalization Act – Implements Reforms on 3 FundamentalTracks:
modernizes outdated provisions
reduces unnecessary burdens and red tape confronting nonprofits
substantially enhances governance, oversight and accountability for nonprofitsaccountability for nonprofits
Modernizing Outdated Provisions
Participation in Board meetings via video conference
Use of email for granting of proxies by members
Use of email for Board and member meeting notices
Use of email for voting by unanimous written consent in lieu of a meeting
Bylaw Amendments
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Unanimous Written Consent has 3 elements:
o Unanimouso Writteno Consent
All that was changed by the Revitalization Act is the “Written” prong.
Email Authentication:
reasonably determined that the transmission was authorized by the sender
What constitutes “consent” and what constitutesWhat constitutes consent and what constitutes“unanimous” has not been changed.
I consent: David GoldsteinI agree: David Goldstein
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Danger posed by email conventions and informality:
I d ith thi b t h t b t th i d it i h 12?I am good with this, but what about the indemnity in paragraph 12?
Excellent. I love it. Great job. Can you explain the termination provisions?
I agree, but can’t we do better on price?
Need to maintain governance focus, control and discipline to keep email g f , p pconsents on the kind of short leash where there is the same level of clarity as traditional Unanimous Written Consent
Governance Hypothetical #1:
Bylaws state: “Any action permitted to be taken by the Board may be takenwithout a meeting if all of the members of the Board consent in writing to theadoption of a resolution authorizing such action.”
Board has 49 members across a wide geography. Time sensitive important actionneeds to be taken. Board wants to act by unanimous consent in lieu of a meeting.
48 of the 49 directors email their unambiguous consent. One director isunconscious in a hospitalunconscious in a hospital.
Is the consent effective?
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The consent is not effective.
t inot unanimous
even if it was unanimous, email consent in lieu of a meeting is not permitted by the Bylaws of this particular corporation
Moral of this story: Bylaws should be reviewed to make surethat they take advantage of the provisions of the RevitalizationAct, and amended as necessary.Act, and amended as necessary.
The Revitalization Act: Reducing Unnecessary Burdens And Red Tape
Tremendously reduces obstacles to rapid and efficient incorporation:Tremendously reduces obstacles to rapid and efficient incorporation:
Elimination of Types A-D
Regulatory consents drastically reduced
S.6249: specific corporate purposes need not be specified
(This a revolutionary change from the prior state of the law.)( y g p )
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Increasing the annual revenue and support thresholds that trigger the requirement of either review or an audit by an independent certified public accountant
Audit: 7/1/14: $250,000 to $500,0007/1/17: $750,0007/1/21: $1,000,000
Review: 7/1/14: $100,000 to $250,000
Lack of audit or review may be an issue with funders and lenders who rely on the scrutiny of the independent CPA
Approval of Significant Corporate Changes:
sales or other dispositions of all or substantially all of a not-for-profit corporation’s assets
mergers or consolidations
dissolutions of nonprofits with assets to distribute
changes of corporate purposes (very common)
Eliminate the requirement of Supreme Court approval; approval ofli i ate t e equi e e t of Sup e e Cou t app oval; app oval ofthe Attorney General only is sufficient.
Attorney General sometimes requires Supreme Court approval
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Enhancing Governance, Oversight And Accountability
According to the Attorney General’s website: “The Nonprofit RevitalizationAct gives New York the strongest nonprofit governance regime in thecountry.”
Every single New York nonprofit corporation is required to adoptand follow a Conflict of Interest Policy.
b fli b d il d d f hnot a bar to conflicts, but a detailed road map for how tohandle them.
Conflict of Interest Policy - Traps for the unwary:
conflict of interest disclosure statement annually, but also prior to each director’s initial election to the Board.
many pre-existing conflict of interest policies (including the IRS Sample Conflict of Interest Policy) are not compliant.Conflict of Interest Policy) are not compliant.
Duty of Obedience; breach of fiduciary duty
invalidity or voidability of corporate actions
judicial proceedings brought by the Attorney General
extremely adverse publicity for the organization; potential personal liability for Directors.
September 2015 NY Times front page article: Ronald Perelman’s Bitter Departure Shocks Carnegie Hall Trustees
Leverage in internal disputes
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Conflict of Interest: extensive mandatory provisions and procedures, including
Policy applicable to directors, officers and also to “key employees”
Definition of the circumstances that constitute a conflict of interest
Procedures for disclosing a conflict of interest to the audit committee or Board
Not be present at or participate in Board or committee deliberation or vote
Prohibition against attempt to influence improperly the deliberation or voting
Existence and resolution documented in the minutesExistence and resolution documented in the minutes
Procedures for disclosing, addressing, and documenting related party transactions in accordance with the related party provisions of the Revitalization Act
Disclosure Statement prior to initial election of director, then at least annually
Disclose persons, entities and transactions with respect to which a conflict mayp , p yexist
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Related Party Transactions:
must be determined by the Board to be fair, reasonable and in the corporation's best interest atthe time of such determination.
director, officer or key employee who has an interest in a related party transaction must discloseth t i l f t i h i t tthe material facts concerning such interest.
Related Party Transaction involving a charitable corporation and in which a related party has a substantial financial interest:
P i i i h i id l i io Prior to entering into the transaction, consider alternative transactions to the extent available;
o Approve the transaction by not less than a majority vote of the directors or committee members present at the meeting;
o Document in writing the basis for the Board or authorized committee's approval, including its consideration of any alternative transactions.
(“substantial financial interest” is not defined.)
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Definitions:
"Related Party" means (i) any director, officer or key employee of the corporation or any affiliate of the corporation, or any other person who exercisescorporation or any affiliate of the corporation, or any other person who exercisesthe powers of directors, officers or key employees over the affairs of the corporation or any affiliate; (ii) any relative of any individual described in clause (i); or (iii) any entity in which any individual described in clauses (i) and (ii) of this subparagraph has a thirty-five percent or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of five percent.
"Related Party Transaction" means any transaction, agreement or any other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant.
"Relative" of an individual means his or her (i) spouse or domestic partner, (ii) ancestors, brothers and sisters (whether whole or half blood), children (whether natural or adopted) grandchildren great-grandchildrenchildren (whether natural or adopted), grandchildren, great-grandchildren,or (iii) the spouse or domestic partner of brothers, sisters, children, grandchildren, and great-grandchildren.
"Key Employee" means any person who is in a position to exercise substantial influence over the affairs of the corporation, as referenced in 26 U.S.C. §4958(f)(1)(a) and further specified in 26 CFR § 49 53.4958-3(c), (d) and (e), or succeeding provisions to the extent applicable.
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Governance Hypothetical #2:
It is proposed that the husband of the great-granddaughter of an individualwho four years ago was a very significant donor to the nonprofit corporationprovide services for a fee to the organization. Because of his affinity for the
i i h i b i id d ll b l korganization, these services are being provided at well below market rate.The donor has had no other relationship with the organization.
The donor has not made a donation to the organization during the past fouryears. The husband of the great-granddaughter has no other relationship withthe nonprofit (for example, he is not a director, officer or employee, nor doeshe have any other relative who is).
Is the proposed transaction with the husband of the great-granddaughterIs the proposed transaction with the husband of the great-granddaughtersubject to the Conflict of Interest Policy?
Is this proposed transaction a related party transaction, subject to theheightened requirements and procedures for related party transactions?
The husband of the great-granddaughter would be a related party if he is a “ l i ” f “k l ”“relative” of a “key employee.”
The donor/great-grandparent could be a “key employee” even though never serving as an employee because, as a very significant donor, the great-grandparent may have been “in a position to exercise substantial influence over the affairs of the corporation” within the 5 year look-back period of the federal statutes referenced in the Revitalization Act definition of “Key Employee.”
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Governance Hypothetical #3:
A t d l i ti ( h it bl fit d th NPCL)Auto-dealers association (a non-charitable nonprofit under the NPCL).
• We want to enter into a contract with Yoenis Cesspedes or Derek Jeter for a multi-media ad campaign to promote our vehicles
Is the proposed transaction with the spokesperson subject to the Conflict ofInterest Policy?
Is this proposed transaction a related party transaction subject to theIs this proposed transaction a related party transaction, subject to theheightened requirements and procedures for related party transactions?
• Who is on our Board: principals of the auto dealerships – as we might expect
They are directors of the Association so they are related partiesThey are directors of the Association so they are related parties
They have a financial interest in the transaction, as the individual dealerships they own would benefit from the ad campaign
And therefore: they cannot participate in deliberations or voting: a recipe for paralysis because no one on the Board can make this necessary decision!
Similar issues arise in other non-charitable nonprofits – HOAs; trade associations; country clubs and other clubs.
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Prior Amendments Did Not Remedy The Results Under This Fact Pattern.
Th AG’ G id O C fli t A d RPT Did N t R dThe AG’s Guidance On Conflicts And RPTs Did Not RemedyThe Results Under This Fact Pattern.
Pending Legislation May Remedy The Results Under This Fact Pattern (A.10365-B/S.7913-B).
Carve out if: a�transaction�constitutes�a�benefit�provided�to�a�related�party�solely�as�a�member�of�a�class�of�thebeneficiaries that the corporation intends to benefit asbeneficiaries�that�the�corporation�intends�to�benefit�as�part�of�the accomplishment�of�its�mission�which�benefit�is�available�to�all�similarly�situated�members�of�the�same�class�on�the�same�terms.
Audit Oversight Provisions
If required to obtain independent CPA audit, the “independent directors” on the Board or an Audit Committee composed exclusively of independent directors, is required to perform specified audit oversight functions
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Oversee the corporation’s accounting and financial reporting processes and the audit of its p g pfinancial statements
Annually retain or renew the retention of an independent auditor to conduct the audit
Review the results of the audit and any related management letter with the independent auditor
If the corporation has annual revenue in excess of $1,000,000:
Review with the independent auditor the scope and planning of the audit prior to the audit's commencement
Upon completion of the audit, review and discuss with the independent auditor: (a) any material risks and weaknesses in internal controls identifiedby the auditor; (b) any restrictions on the scope of the auditor's activities or access to requested information; (c) any significant disagreements between the auditor and management; and (d) the adequacy of the corporation's accounting and financial reporting processes
Annually consider the performance and independence of the independenty p p pauditor
If the duties required by this section are performed by an audit committee, report on the committee's activities to the Board
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Definitions:
“Independent Director" means a director who: (i) is not, and has not been within the last three years, an employee of the corporation or an affiliate of the corporation, and does not have a relative who is, or has been within the last three years, a key employee of the corporation or an affiliate of the corporation; (ii) has not received, and does not have a relative who has received, in any of the last three fiscal years, more than ten thousand dollars in direct compensation from the corporation or an affiliate of the corporation (other than reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director as permitted by paragraph (a) of section 202 (general and special powers)); (iii) is not a current employee of or does not have a substantial financial interest in, and does not have a relative who is a current officer of or has a substantial financial interest in, any entity that has made payments to, or received payments from, the corporation or an affiliate of the corporation for property or services in an amount which, in any of the last three fiscal years exceeds the lesser of twenty-five thousand dollars or two percent of such entity's consolidated gross revenues; or (iv) is not and does not have a relative who is a current owner whether wholly or partially director officer or employee of the corporation'scurrent owner, whether wholly or partially, director, officer or employee of the corporation'soutside auditor or who has worked on the corporation's audit at any time during the past three years. For purposes of this subdivision, "payment" does not include charitable contributions, dues or fees paid to the corporation for services which the corporation performs as part of its nonprofit purposes, provided that such services are available to individual members of the public on the same terms.
Whistleblower Policy:
If the nonprofit has 20 or more employees and annual revenue in excess of one million dollars in the prior fiscal year, a Whistleblower Policy is required to protect persons who report suspected improper conduct from retaliation.
(Note: this Revitalization Act provision does not distinguish between full and part time employees. Each employee must be counted.)
Whistleblower Policy shall provide:
No director, officer, employee or who in good faith reports any action that is illegal fraudulent or in violation of any adopted policy of the corporation shallillegal, fraudulent or in violation of any adopted policy of the corporation shallsuffer intimidation, harassment, discrimination or other retaliation or, in the case of employees, adverse employment consequence.
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Whistleblower Policy – additional mandatory provisions:
procedures for the reporting of violations of laws or corporate policiespolicies
procedures for preserving confidentiality
employee, officer or director of the corporation designated to administer the Whistleblower Policy and to report to committee of independent directors or the Board
policy distributed to all directors, officers, employees and to volunteers who provide substantial services to the corporation (note: “substantial services” is not defined)
Committees:
Revitalization Act changes the law on Committees:
Now only 2 kinds of committees
Board CommitteesCommittees of the CorporationCommittees of the Corporation
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Board Committees:
Delegated Board authority and functions
Can only be comprised of Board members
Can be appointed only by action of a majority of the entire Board (number of directors that would constitute the Board if there were no vacancies)(Pending Amendment, A.10365-B/S.7913-B)( g , )
Minimum of 3 members
Classic standing committees
Committees of the Corporation:
Advisory function. May have non-Board members y yas voting members of committee but cannot be delegated with any Board authority and cannot bind the corporation.
Consequences of improperly constituted committee:
Actions taken are not properly authorized valid actionsActions taken are not properly authorized valid actions
Breach of Duty of Obedience by entire Board
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Non�Profit�Revitalization�ActChecklist�of�Certain�Compliance�Items
In�your�materials:
A�handy�non�comprehensive�checklist�to�assist�with�Revitalization�Act�governance�actions�and�compliance.
Some of the Act’sSome�of�the�Act s�Mandatory�Changes:
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adopting�and�implementing�a�Conflict�of�Interest�Policy that�complies�with�the�demanding�requirements�of�the�Revitalization�Act;�there�are�extensive�mandatory�provisions�and�procedures�y p prequired�in�the�Conflict�of�Interest�Policy
utilizing�a�Conflict�of�Interest�Disclosure�Form that�collects�the�information�necessary�for�compliance�with�the�Revitalization�Act;�obtaining�an�initial�disclosure�form,�and�obtaining�updated�disclosure�forms�at�least�annually
carefully�following�the�complicated�steps�and�procedures to�h dl fli f i d l d ihandle�conflicts�of�interest�and�related�party�transactions�disclosed�(the�Revitalization�Act�requires�that�compliance�with�these�requirements�be�carefully�documented�in�the�meeting�minutes)
if�the�corporation�is�required�to�file�an�audit�report with�the�Attorney�General,�the�Revitalization�Act�requires�that�the�corporation�implement�, q p pmore�active�Board�oversight�of�the�accounting�and�financial�reporting�processes and�of�the�corporation’s�audit�(including�mandatory�provisions�regarding�audit�committee�composition�and�responsibilities);�
these�requirements�may,�in�turn,�necessitate�amendments�to�the�corporation’s�Bylaws�and/or�Audit�Committee�Charter;
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if�the�corporation�has 20�or�more�employees and�annual�$revenues�exceeding�$1,000,000,�the�corporation�must�adopt�
and�implement�a�Whistleblower�Policy
in�addition,�this�policy�must�contain�certain�mandatory�provisions�and�procedures
changes�in�the�provisions�of�the�Not�for�Profit�Corporation�Law�regarding�the�structure,�establishment�and�composition�of�Board�and�other�committees,�which�may,�in�turn,�necessitate�amendments�to�the�corporation’s�Bylaws
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Some�of�the�Act’s�Permissive�Changes:
Bylaw�amendments to�take�advantage�of�the�provisions�of�the�Revitalization�Actthat�permit:
the�use�of�email�for�Board�meeting�notices;
the�use�of�email�for�member�meeting�notices;�
email�actions�by�unanimous�consent;�
the�granting�of�proxies�by�members�via�email;
participation�in�Board�and�committee�meetings�via�video�conference.
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Adjustments to Conflict of Interest Policy, Bylaws andAdjustments�to�Conflict�of�Interest�Policy,�Bylaws�and�Whistleblower�Policy�in�light�of�amendments�in�S.5868—A�2015�(effective�December�11,�2015):
Amendment�to�§715(h):
(revises�the�prohibition�on�a�related�party�participating�in�deliberations�or�voting�relating�to�any�related�party�transaction to�a�more�narrow�prohibition�on�participating�in�deliberations�or�voting�relating�to�a�related�party�transaction�in�which�he�or�she�has�an�interest)
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Amendment�to�§102(a)(19)�(amending�definition�of�affiliate)
Amendment�to�§102(a)(21)�(amending�definition�of�independent�director)
Amendment�to�§102(a)(22)�(amending�definition�of�relative)
Amendment�to�§102(a)(23)�(amending�definition�of�related�party)
Amendment to §102(a)(25) (amending definition of keyAmendment�to�§102(a)(25)�(amending�definition�of�key�employee)�
Amendment�to�§708(d)�(directors�who�are�present�at�a�meeting�but�not�present�at�the�time�of�a�vote�due�to�a�conflict�of�interest�or�related�party�transaction�shall�be�determined�to�be�present�at�the�time�of�the�vote�for�purposes�of�the�determination�of�a�quorum)
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Governance Hypothetical #4:
Entire Board 7
Q 5Quorum 5
Action Majority Vote of Board Members Present
Conflict/Rel. Party 3
At Meeting 5 (3 with conflict + 2 others)
There is a quorum because the 3 conflicted directors are counted towardsThere is a quorum because the 3 conflicted directors are counted towardsquorum, but the threshold for Board action cannot be met because the 3 conflicted directors are counted as present and the threshold is a majority of those present (majority of 5 is 3) but only the 2 non-conflicted directors can vote.
Amendment to §702 (allowing non membershipAmendment�to�§702�(allowing�non�membership�corporations�to�change�the�number�of�directors�by�action�of�the�board�under�the�specific�provisions�of�a�bylaw�provision)
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Amendment�to�§715�b(b)(3)
(amending�the�Whistleblower�Policy�distribution�requirement�to�provide�that�posting�the�policy on�the�corporation's�website or�at�the�corporation's�offices�in�a�conspicuous�location�accessible�to�employees�and�volunteers will�satisfy�the�distribution�requirement).
Common�mistakes�o o s a esfound�in�Bylaws:
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Statement�of�Corporate�Purposes�in�Bylaws:��absolutely�permitted�under�the�statute,�common�practice,�but�dangerous�permitted�under�the�statute,�common�practice,�but�dangerous�because�inevitably�the�Board�starts�amending�the�purposes�in�the�Bylaws�without�adjusting�the�purposes�in�the�Certificate�of�Incorporation.
Removal�without�cause only�by�members;�if�a�Board�only�nonprofit�,�then�there�can�only�be�removal�for�cause���� NPCL�706
Bylaw�provision�establishing�a�classified�Board�can�only�be�adopted�by�the�members.��A�Board�only�nonprofit�cannot�have�a�classified�Board�via�a�bylaw�provision.��In�Certificate�of�Incorporation�only.����� NPCL�704
Fill�vacancies:��only�until�next�annual�meeting�(in�which�election�of�directors�in�regular�order�of�business)�NOT�for�remainder�of�unexpired�term.����� NPCL�705
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Regular�Meeting�of�Board�vs.�Special�Meeting
Time�&�place�of�regular�meeting�either�fixed�under�the�Bylaws�or�fixed�by�the�Board.��Note:��not�a�schedule�distributed�by�Chair�or�ED.
Regular�meetings�can�be�held�without�notice;�special�meetings�require�notice
Consequence:��think�you�are�having�a�regular�meeting,�but�having�an�improperly�called�special�meeting�and�actions�are�subject to challenge and potential invaliditysubject�to�challenge�and�potential�invalidity
Minutes:��seldom�given�attention�they�warrant;�wonderful�tool�if�someone�wants�to�sue�the�directors�for�breach�of�duty What they do say; what they don’t say can beduty.��What�they�do�say;�what�they�don t�say,�can�be�problematic.��Conflicts�&�RPTs�– compliance�needs�to�be�documented�in�the�minutes.
Annual�Meeting�(elections;�Annual�Financial�Report)
Annual�Financial�Report�(delivery;�timing)
Board�Committee�formalities�(majority�of�entire�board;�3�member�minimum).
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Fundamental Legal Duties of a Nonprofit Director Under New York Law:
Duty of Care
Duty of Loyalty
Duty of Obedience
Duty of Obedience:
Least understood and most often neglected of the 3primary legal duties
Why? The other 2 primary legal duties exist in thefor-profit world, but the Duty of Obedience isstrictly a not-for-profit law concept
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What is the Duty of Obedience?
i h h i i li i hto insure that the organization complies withapplicable laws and regulations and its internalgovernance documents and policies
• Compliance with applicable laws and regulationsis even more difficult than it sounds
• Multiple layers of laws and regulations
Duty of Obedience - Compliance with Internal Governance Documents and Policies:
Certificate of Incorporation
Charter from New York State
The document that creates the corporation and gives it the authority to exist and operate under state law
Contract between the organization and the Stateg
Corporate Purposes are set forth in the Certificate of Incorporation
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Potential Personal Liability of Board Members for failure to strictly adhere to corporate purposes
A diversion from corporate purposes no matter how worthy is a breach of fiduciary duty.
Bylaws:
Contract between the organization and the Board (and members, if applicable) as to how the organization will operate
Not filed with or reviewed by the State – so amendments can be too easy!
Bylaws are rules by which legitimate corporate decisions are made
Following the rules is a roadmap to protect Directors from breach ofFollowing the rules is a roadmap to protect Directors from breach offiduciary duty allegations
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Potential Personal Liability of Board Members
Always follow the roadmap that your Bylaws provide!
Make sure that your Bylaws are consistent with The Not-for-Profit Corporation Law of the State of New York!
Bylaws should be drafted by an attorney; no changes except by an attorney
Failure to strictly adhere to requirements of Bylaws, or having Bylaws that are inconsistent with the law, is a breach of the Duty of Ob di C i l d d i i th lidit fObedience. Consequences can include undermining the validity ofcorporate decisions and actions.
Documents
NPCL�§102�[Certain]�DefinitionsNPCL�§402�Certificate�of�IncorporationNPCL�§605�Notice�of�Meeting�of�MembersNPCL�§614�Action�by�Members�Without�a�MeetingNPCL�§708�Action�by�the�BoardNPCL�§711�Notice�of�Meetings�of�the�BoardNPCL�§712�a�Audit�OversightNPCL�§715�Related�Party�TransactionsNPCL�§715�a�Conflict�of�Interest�Policy�ContentsCharities�Bureau�� Right�From�The�StartCh iti B C fli t f I t t P li i U d th R it li ti A tCharities�Bureau�� Conflict�of�Interest�Policies�Under�the�Revitalization�ActCharities�Bureau�� Audit�Committees�and�the�Revitalization�ActS.5868—A�2015�(effective�December�11,�2015)Revitalization�Act�Compliance�Checklist
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FEGS, A Lesson for the Sector
Can it happen to you?
Presented by Shari Diamond, CIADirector of Internal Audit & Ken Cerini, CPAManaging Partner
About FEGSA $250 Million Dollar Human Services Organization, one of the largest in the StateD li d f t l h lth di biliti h i h dDelivered an array of mental health, disabilities, housing, homecare, and employment servicesWorked with over 120,000 households and individualsBeen in business for more than 80 yearsEmployed 1,900 peopleT F fit S i l t i ffili tTwo For-profit Social enterprise affiliates
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About FEGS
In 2014, FEGS posted losses in excess of $20 millionIts closing blindsided City and State agencies (had to find other programs to take over more than 350 programs and sites)Left creditors holding the bag for more than $47 million in debt
Significant QuestionsHow could such a large and well-established organization like FEGS implode? Was FEGS unique or symptomatic of the financial challenges facing the
fit h i t h l ?nonprofit human services sector as a whole? How many other organizations are in trouble, and how many people would be affected if they close? How can more closures, and the associated consequences, be averted? What will it cost if this industry collapses? Wh t i i d t th t thi d t h ?What is required to ensure that this does not happen?
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Human Services Council Study FindingsHuman services nonprofits have a higher rate of insolvency than other types of nonprofitsT d t t l l ith l d bl t t d l hTend to run extremely lean with low expendable net assets and low cash reserves (60% are financially distressed, with less than 90 days in cash) Organizations with budgets from $10 million to $49 million are more likely to be in financial distress than those with budgets of less than $1 million, as they rely much more heavily on government funding, and fundraising is a much smaller part of their overall budgetp g
Human Services Council Study FindingsUnderfunded government payment rates are the primary driver of financial distress. Government contracts typically don’t fund 100% of the costs of a programprogram Government contracts dominate provider budgets but pay only about 80 cents or less of each dollar of true program delivery costs, leaving budget holes that private funders cannot, or should not, fill
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Human Services Council Study FindingsUnderfunding leads to salaries so low that many nonprofit employees depend on safety net programs, such as food stamps and Medicaid. E i d t ff ft l f hi h i j b l iExperienced staff often leave for higher paying jobs, leaving more inexperienced staff requiring higher levels of supervision and trainingUnderfunding also results in inadequate investment to keep facilities safe and in good repair.
Human Services Council Study FindingsChronic delays in contract payments force providers to undertake costly borrowing to make payroll and rents, often accruing interest not covered by government contractsgovernment contracts Multiple and redundant audits, along with unfunded mandates and other oversight mechanisms, add up to staggering administrative costs. No longer a matter if you get audited, it is a matter of when and audits mean retroactive take-backs which agencies don’t have adequate reserves to repay
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Human Services Council Study FindingsThe transition to Medicaid Managed Care poses considerable risk for human services providers and there is no assurance that any of the substantial State investment to prepare for this new system will flow to human servicesinvestment to prepare for this new system will flow to human services organizations. Many organizations have not been able to analyze their costs to be able to negotiate viable ratesGovernment has not fully leveraged the expertise of human services providers to design programs, missing a significant opportunity to innovate and develop appropriate metrics and requirements that maximize the potential of government spending and effectiveness
Human Services Council Study FindingsToo many government regulations are redundant and unnecessary. The multiplicity of procedures that accompany government contracts detracts from the focus on mission and utilizes resources that could be better used tofrom the focus on mission and utilizes resources that could be better used to provide programmatic endeavorsHuman services providers need to expand their risk assessment and management capacity to ensure that the executive staff and the board’s focus is effectively on organizational sustainability and continued delivery of services to the community. This means deeper engagement, training, and information
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Human Services Council Study FindingsBecause of weak internal financial and programmatic reporting, providers may not be alerted to short-term and long-term fiscal dangers early enough to address themaddress them. Inadequate funding of indirect expenses has contributed to the lack of resources available for investment in effective risk identification mechanismsEO-38 has exacerbated the situation by limiting management and general spending to 15%
Human Services Council Study FindingsThe philanthropic community is a crucial partner in the capacity building efforts of nonprofit human services providers and should better facilitate investment in these functionsinvestment in these functionsToo many dollars are restricted and can’t be used to build infrastructure, fiscal viability, and capacityShrinking government funding has agencies chasing new programs and dollars resulting in mission creep
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FEGS by the NumbersFEGS received severe audit findings by the OMIG
Of the $81 million that Medicaid reimbursed to FEGS Home Attendant Services from 2006 through 2009 OMIG estimated that the agency had overcharged Medicaid by2006 through 2009, OMIG estimated that the agency had overcharged Medicaid by $21 million. OMIG reported with very high confidence that the overpayment was at least $14 million, the amount they requested in reimbursementFEGS did not have the financial wherewithal to repay this amount
ReasonPoor Quality Assurance protocolsPoor compliance monitoringLack of adequate reserves
FEGS by the Numbers
FEGS Continued to Fund its For-Profit Subsidiaries:
FEGS set up for-profit companies underneath the non-profit and passed funds from the non-profit to contractors in the for-profit.
The charity began transferring millions of dollars to the for-profit subsidiaries by 2011. Returns show FEGS moved $8.6 million from the nonprofit side to one for-profit information technology company, All-Sector, in 2011. In 2012, the charity transferred $9.1 million.
An investment in its failed for-profit subsidiary SinglePoint lost FEGS $2 million in 2014.
FEGS had made substantial payments to another subsidiary called HR Dynamics which had more than a half-dozen creditors as of July 2014, according to a review of financing statements filed with New York’s state department.
All-Sector signed financing agreements with at least five different creditors, dating back to 2009, using the company’s equipment as collateral.
HR Dynamics opened two separate lines of credit from Chase Manhattan Bank and JP Morgan Chase beginning in, 1999.Reason
Poor board oversight
Lack of adequate financial reporting
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FEGS by the Numbers
Between 2013 and 2014:Salary grew by 14% while revenue only grew by 4%Salary grew by 14% while revenue only grew by 4%FEGS wrote off $8 million in bad debts during 2014FEGS owed $90 million in leases in future years.FEGS was in technical default on three bond issues, one being a $12 million bond.The CFO had left the organization after only five months at the company.FEGS claimed that the expiration of contracts for two programs funded by the city’s Human Resources Administration would cost $11 million.$To build up its housing portfolio, FEGS routinely had gone to a variety of city and state funding sources over the past decade, seeking millions of dollars’ worth of advances on construction and capital costs for their new facilities, taking out low-interest loans that it didn’t have the means to pay back.
FEGS by the Numbers
FEGS’ did not present a classified statement of financial position in its audited financial statements. This made it much more difficult to identify FEGS’ liquidity problem
FEGS had two for-profit subsidiaries that it continued to invest money in. The transactions between FEGS and its for-profit subsidiaries p y pwere not clearly identified
The tax returns prepared would have made it very difficult for the Board to understand which assets belonged to the nonprofit and those that belonged to its for-profit subsidiaries, obscuring the financial status of its for-profit
There were signs of trouble that were apparent by July 2014; however, it was not publicly acknowledged for another 5 months.
The organization had a 26-member board of directors, and four officers. Its 2013 tax returns show 17 key employees and medical directors, each of whom earns low- to mid-six-figure salaries to manage the nonprofit.
The investments in the subsidiaries might have raised alarms if they’d been subject to wider review. But because of the way the payments were accounted for, they were hard to notice.
As FEGS continued to pour money into its ill-fated for-profit subsidiaries, FEGS itself continued to expand, building up its shelter and housing services for developmentally disabled, elderly and impoverished clients.
The organization’s $250 million annual budget was propped up largely by grants and roughly $200 million in annual revenue from state and federal Medicaid dollars; however, its debt obligations continued to grow.
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Lessons to be LearnedThe government does a poor job of funding administrative costs:
If you’re agency is going to grow through government funding, you need to make an assessment of how administrative shortfalls will be made upassessment of how administrative shortfalls will be made up
Do you have the capacity for increased fundraisingDo you have adequate reservesLack of reserves, coupled with increasing loss contracts create growing instability within an organization
Organizational growth brings with it risksIncreased programs for auditp gThe need for additional oversight and quality assuranceThe need for stronger recordkeeping, staying abreast of changing regulations, and the potential of costs rising faster than contract amounts
Lessons to be Learned
Boards need to be better informed about the organizations they manageBoards need to be better informed about the organizations they manageCreate regular fiscal reporting that considers such things as
Days in cashLiquidityExpendable Net AssetsDebt ratiosDiversification of revenue streamDiversification of revenue streamProgrammatic profit and lossAdministrative overhead borne by program
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Lessons to be Learned
Organizations need to be forward thinking and stay ahead of potential i krisksProject into the future
Do you have long-term leases? What the trend in market rates?
Understand your exposureInvest in compliancePerform regular internal audits/risk assessments of your government funding streams to identify potential exposure Review OMIG, OSC, and other websites to understand what funders are looking at
Spend time at board meetings focusing on compliance
Thank You!
Ken Cerini, CPA, CFP, DABFA
Managing Partner(631) 582-1600 x203
Shari Diamond, CIA
Director, Internal Audit(631) 582-1600 x243
[email protected] cerinicpa.com
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