Feature

Is your attorney general actively looking at the charitable sector in your state? Are you wondering what you can do to build relationships with your state charity regulators to improve the oversight of foundations and public charities and provide effective input on new legislation? This article summarizes the findings of a recently released joint publication of the Council on Foundations and the Forum of Regional Associations of Grantmakers, "The Value of Relationships Between State Charity Regulators & Philanthropy," which highlights the benefits of good working relationships between regulators and the nonprofit sector, and demonstrates how such relationships can be achieved. You can download the full report, a highlights report and case studies from Illinois, Michigan, New Hampshire and Ohio from the Council's website at www.cof.org or from the Forum's website at www.givingforum.org/policy/regulators.html.

The ongoing growth of the charitable sector and recent publicity surrounding misconduct at charitable organizations has put philanthropy under an unprecedented amount of scrutiny by lawmakers, regulators, the media and the general public. Governmental scrutiny is coming not only from the federal level, where Congress is looking into extensive charitable reform legislation, but also from the state level. California has already passed legislation to improve nonprofits' financial practices, and other state legislators and attorneys general are considering new legislation or increased oversight for the charitable sector.

The Role of the Attorney General

All grantmakers interact with the Internal Revenue Service (IRS) when applying for tax-exempt status and know that they are subject to regulatory oversight by the IRS. Many grantmakers, however, do not have a reason to correspond with their state attorneys general and some may not be aware of the role these state officials play in regulating charities.

State attorneys general are the chief legal officers of their states. They serve as legal counselors to state agencies and legislatures and as representatives of the public interest. Their powers, duties and responsibilities are defined and interpreted by state constitutions, legislatures and the courts. A state attorney general enforces the state's laws regulating charitable organizations and charitable solicitations, and ensures that charitable funds are administered in accordance with their intended purposes.

The attorney general is not the only state official authorized to oversee the administration of charitable organizations. Secretaries of state, state tax authorities, boards of education, insurance commissioners and other similar state officials have power to enforce certain rules that may apply to nonprofits engaged in certain activities. However, the attorney general is often the most visible state charity regulator. Attorneys general can be controversial; since they are popularly elected in the majority of states, and many run for governor, attorneys general are often accused of engaging in regulation that is highly visible and politically advantageous. Fortunately, most attorneys general try to carry out their duties in a responsible manner.

The attorney general's top priority in charity regulation is to protect citizens from fraudulent and deceptive charitable solicitations and to ensure that charitable funds are used in accordance with donor intent. However, a string of governance failures in the nonprofit sector in recent years has prompted some state regulators to increasingly focus on the governance of nonprofit organizations: Is the board exercising active oversight? Is the foundation paying excessive compensation to officers and directors or for professional services? Is the charity engaging in related-party transactions that result in private benefit? State attorneys general are looking closely for evidence that nonprofit managers are fulfilling their fiduciary duties of care and loyalty.

The legal remedies available to the attorney general to correct wrongdoing are usually prescribed by statute, but, in the absence of legislation, are as broad as the courts' powers to grant them. The most typical remedies sought by regulators are restitution (the return of funds to the charity), imposition of fines, removal of directors and officers engaged in wrongdoing (and appointment of successors) and, sometimes, dissolution of the charity. Some attorneys general also force charities to institute governance changes as part of a settlement agreement.

Oversight of Charities: A 16-State Review

It is widely acknowledged that most state regulators lack adequate resources to exercise effective oversight of the nonprofit sector. But some states do actively regulate foundations and public charities in a way that positively impacts their compliance with the law.

The Council's and the Forum's joint report reviewed how attorneys general in 16 states (California, Florida, Illinois, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina and Texas) supervise charities, such as private foundations, that do not fundraise from the general public, and therefore do not have to register with the attorney general under separate statutes regulating charitable solicitations. The states reviewed were selected based on the ten states with the largest number of private foundations, plus any other states where charities must register and report to the attorney general even if they do not fundraise. Sixty-four percent of all private foundations and 57 percent of all public charities are located in those 16 states. Here are a few highlights of that review:

Registration and reporting: Between the 1940s and 1960s, several states passed legislation to increase the supervisory powers of attorneys general by requiring registration of and reporting by charities regardless of whether they solicit funds from the general public. New Hampshire became the first state to enact such legislation in 1943, and was followed by Rhode Island (1950), South Carolina and Ohio (1953), and Massachusetts (1954). Several other states have enacted versions of the 1954 Uniform Act for Supervision of Trustees for Charitable Purposes, which has several provisions intended to strengthen the attorney general's supervision of charities. These states include California (1955), Illinois (1961), Michigan (1961), Oregon (1963), New York (1967) and Minnesota (1989).

Staffing and organization: Within the attorney general's office, the oversight of charities often falls under the purview of the consumer protection division or an equivalent division within the office. In most states, the attorneys and staff are assigned to supervise charities as necessary and there are no separate charities sections or units. However, in almost all of the 16 states reviewed, the attorneys general have created separate charities sections or units—usually within the larger consumer protection division—to handle and coordinate the charity oversight work.

Based on surveys conducted in the 1970s and 1990s and the current review of 16 states, it is fair to say that over the past several decades there has not been a significant change in the number of attorneys assigned to charity oversight. Among the 16 states reviewed, those with the most fulltime attorneys in their charities sections are New York (20), Pennsylvania (12), California (11) and Ohio (10). In the states with fewer charities, Oregon has three attorneys and New Hampshire has one. At least six of the 16 states also employ auditors or financial investigators to assist with the review of reports filed by charities and with active audits or investigations of charities. Additional staff handles the actual registration functions, which can consume significant time and resources.

Funding: In most states, there are no funds earmarked to support the attorney general's enforcement of charitable organizations. In the 11 states with general registration and reporting statutes, the filing fees imposed in four states are deposited in the general treasury, while five states earmark fees for the attorney general's oversight and enforcement function of charities (the use of funds in the other two states could not be confirmed). In some states, attorneys' fees, fines and penalties collected from charity enforcement actions are also earmarked for charity oversight. Registration and reporting fees are generally modest, and there is little uniformity in the fee structure imposed among the states reviewed.

Reciprocal Relationship Models

In some states, charity regulators and the charitable sector have developed ongoing, productive and mutually beneficial relationships. These types of relationships tend to follow one of three basic models:

Legal mandate of a charitable advisory or working group: Under this model, a group created by statute provides guidance to charity regulators on issues affecting the charitable sector. An example is at work in Illinois. The Illinois general assembly passed groundbreaking legislation in 2001 to create the Charitable Advisory Council (CAC) as a permanent body to advise the Illinois attorney general on issues related to charities and charitable giving in the state. In its first few years of operation, the CAC has helped the attorney general's office understand and negotiate the many issues involved in regulating and strengthening charitable organizations in Illinois. CAC members are approved by the attorney general with recommendations coming from the attorney general's office or from CAC members.

Voluntary/ad-hoc charitable advisory or working group: Under this model, a group created by charity regulators provides the regulators with guidance on issues affecting the charitable sector. An example of this model is at work in Michigan. Michigan's charitable sector is among the largest and strongest in the country, and it enjoys a long and positive relationship with the Michigan attorney general's office. In 2004, that relationship reached a milestone with the launch of the Nonprofit Council for Charitable Trusts (NCCT), a voluntary advisory/working group providing consultation to the attorney general on issues related to charities and charitable giving throughout the state. The attorney general approves NCCT members, but the Michigan Nonprofit Association and the Council of Michigan Foundations can suggest individuals for NCCT membership.

Project-based collaboration to provide education and information: Under this model, representatives from the charitable sector and charity regulators work together on specific projects to develop educational materials or information resources for the sector. Examples are at work in New Hampshire and Ohio. In New Hampshire in 2004, the charitable sector and the attorney general's office launched the Excellence in Nonprofit Governance project to jointly develop resources to strengthen nonprofit governance in the state. In Ohio, the attorney general's office and the philanthropic sector jointly created two guides for grantmaking foundations during the past two years—one to help foundation leaders understand their registration and reporting requirements under Ohio law, and one that describes the legal duties and best practices of foundation board members.

The Value of Working Together

In states where charity regulators and the charitable sector have developed ongoing, productive relationships, everyone involved views as the primary value of these relationships their contribution to a strong charitable sector. At their core, these relationships help ensure that foundations and public charities are accountable to the public for use of their charitable assets. Whether the task is to educate the charitable sector on its roles and responsibilities, inform the public about the sector or enforce laws and regulations in the sector, the consensus is that effectiveness and efficiency increase when states' charitable sectors and charity regulators work together.

Other benefits of a positive working relationship between the charitable sector and charity regulators include:

Improved legislation and regulation. When a regulator seeks input from the charitable sector on proposed legislation or regulations affecting the sector, the regulator will quickly learn how new rules will affect charities and can revise regulations to make them more effective. Proposed charity legislation by attorneys general in both Massachusetts and New York was revised after extensive input from the sector. A charity regulator's top priority will always be to supervise the charitable sector. But by developing a good relationship with regulators, the sector can increase regulators' understanding of its needs and concerns and thus decrease the likelihood of any unduly burdensome legislation or restrictions being proposed.

Regulator access to charity expertise. Working with representatives of foundations and charities allows a regulator to tap into their extensive expertise in the sector, which can be particularly helpful when creating educational or information resources for the sector.

Increased support for charitable self-regulation. Regulators who develop good relationships with the charitable sector are more likely to support the sector's efforts at self-regulation, particularly through the development and promotion of guiding principles and best practices for the field.

Strengthened public trust. A good working relationship between the charitable sector and charity regulators can deepen trust in the sector.

How to Nurture the Relationship

People involved in ongoing, productive relationships between a state's charity regulators and its charitable sector offer several lessons for the charitable sector on how to develop and maintain a relationship:

• Get support from the top. It is difficult, if not impossible, to develop a good relationship without the full support of the attorney general and the heads of any other agencies involved in regulating the charitable sector.  
• Make expectations clear. Given the inherent barrier that exists when a regulator builds a relationship with the organizations it regulates, take care to ensure that everyone involved in the relationship has a clear and common understanding of their roles and responsibilities, purpose, authority and limitations.  
• Find win-win situations. The relationship will function best when both sides work together in mutually beneficial ways, finding the right balance between the needs of regulators to oversee the sector and the needs of the sector to advocate for foundations and charities.  
• Be patient. Recognize that it can take time to develop a relationship and accomplish goals, since the process involves people who are working in a voluntary capacity and have varying time constraints and perspectives.  
• Involve the right people. Whether you are dealing with a charitable advisory/working group or working on a specific project, take care to ensure that the people involved from the charitable sector are committed professionals who represent the diversity of the sector and who have political savvy, an in-depth understanding of the sector, and a willingness to roll up their sleeves and get things done.  
• Be proactive. Since the charitable sector is not typically at the top of any regulator's agenda, the sector must be willing to take an ongoing, proactive stance in reaching out to regulators and developing a relationship with them.  
• Provide staffing support. Regulator-philanthropy relationships tend to be most successful if the charitable sector is willing and able to provide the bulk of the staffing support for any collaborative projects or advisory/working groups.  
• Recognize and support the attorney general's regulatory role. If the charitable sector wants charity regulators to support its self-regulation efforts, then it must also stand up and support the regulators when they prosecute violators.

A Win-Win Situation

State attorneys general and other charity regulators are often the front line of supervision of nonprofits and foundations, and their oversight role has expanded in recent years. Although states vary in the level and scope of oversight, all states can benefit from an ongoing and productive relationship between the regulators and the regulated. In looking at states where the charitable sector and charity regulators have made concerted efforts to develop and maintain these relationships, it is clear that the cooperation can improve the effectiveness of government oversight, enhance the accountability of charities and, ultimately, strengthen the charitable sector.