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Assessing state reform initiatives.

Q: Are states following the lead of the federal government in exploring nonprofit reform initiatives?

A: Yes, some states have begun to consider reform legislation that may affect nonprofits. California, for example, has already passed a law that imposes new rules on certain nonprofits. The California Nonprofit Integrity Act of 2004, which went into effect January 1, 2005, primarily affects 501(c)(3) charitable organizations including charitable corporations, charitable trusts, and charitable unincorporated associations. Hospitals, educational institutions, and religious organizations, however, are exempt from the act. Overall, California organizations formed for "charitable purposes" and, more important, organizations "doing business" in the state should heed this law.

Designed to strengthen the governance of charitable organizations and prevent abuse in the area of fundraising, the act, among other things, requires the disclosure of financial reports and the review of compensation (including benefits) paid to the president or CEO and treasurer or chief financial officer. Additional requirements such as the creation of an audit committee separate from a finance committee are imposed on organizations with gross revenues of $2 million or more. To learn more about this new California law, check out the November issue of the Legal Section's newsletter, Association Law & Policy, by going to, selecting Association Law & Policy, and then selecting "Current Issue."

Note: When signing the bill into law, Governor Arnold Schwarzenegger indicated that should this law result in "unnecessary expense to the nonprofit community," the state legislature should revisit this matter.

In other developments, New York Attorney General Eliot Spitzer proposed a series of reforms in 2003 to strengthen corporate accountability laws. The proposals, which garnered considerable attention, were designed to help prevent situations like Enron and to provide similar protections against abuses by nonprofit organizations.

--Submitted by David C. Evans, partner, Reed Smith LLP; Evans is a member of the ASAE Legal Section Council and a member of the Ask the Legal Section Committee. The "Legal" item is not intended as legal advice but rather as an educational overview.
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Title Annotation:LEGAL
Author:Evans, David C.
Publication:Association Management
Geographic Code:1USA
Date:Mar 1, 2005
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