Top Ten Legal Resolutions for Nonprofit Leaders in 2016

With the new year upon us, our hope is that all of our nonprofit clients will thrive in 2016, fulfilling their organizational mission and impacting their communities.  As attorneys, we understand the importance of legal compliance for an organization’s mission, governance, and success.  The following is a list of ten critical legal areas that may impact nonprofit organizations in 2016.  Resolve to address them throughout the year, especially any deficiencies that warrant further action.

1.         Develop nonprofit website privacy and cybersecurity protections and policiesNonprofits regularly gather personal information from people who visit their organizational websites.  A major legal development in the last few years is the need for many nonprofit organizations to implement a privacy policy or user agreement for their websites.  The policies should establish protocols for collection, use, and storage of website users’ private information. They should also provide appropriate disclosures to users, such as analytics information, cookies, security measures such as encryption, and how organizations may share data.  Significantly, nonprofits that permit financial transactions on their sites, such as receiving donor contributions should ensure their payment systems are PCI DSS compliant.  These are emerging but important areas as internet traffic increases along with corresponding privacy concerns. 

2.         Use Social Media Well.  Social media is a powerful tool for many nonprofits.  Continual improvements can help promote an organization’s mission and nurture its good reputation.  Unfortunately, many nonprofits fail to take the time to understand how copyright and trademark laws govern their use of photos, videos, or other media in their posts.  In using social media, nonprofits need to teach their workers how to identify and comply with applicable copyright or trademark restrictions, for which a license or other protection may be needed.  Nonprofits should also consider individual privacy interests related to posts and obtain consents or provide other disclosures as warranted prior to posting information about beneficiaries, donors, or others.  Finally, nonprofits should take steps to protect their reputations by developing a procedure or policy that ensures employees and volunteers refrain from using the organization’s social media for disparaging comments or to express views contrary to the mission. 

Endowments: Long-Term Funding for Nonprofits

When should a nonprofit establish – and maintain – an endowment?  The term “endowment” typically refers to funds set aside, either internally within a nonprofit or externally through a separately-created entity for the charity’s benefit.   Whether internally maintained or separately developed, endowments provide significant opportunities for financial stability, donor development, and risk management.  But there are some drawbacks to this strategy, and nonprofit leaders should pay attention to these fundamental considerations.

What Does an Endowment Look Like?

A nonprofit may set up a special fund after receiving a large gift from a key donor (or donors).  The donor may make certain restrictions, such as to engage in only certain charitable activities or to provide scholarships for certain educational pursuits.  The nonprofit typically must invest the principal gift and promise to spend only income generated from the principal.  The nonprofit organization must honor such restrictions through development of an investment policy, continued monitoring, and financial reporting.  A nonprofit organization should avoid donor-imposed conditions that would cause the organization to move beyond its mission (absent intentional organizational changes).  

Alternatively, donors may impose minimal or no restrictions.  In that case, the nonprofit directors must determine how best to steward this valuable resource for the organization’s long-term well-being.  The directors may decide among themselves to restrict the endowment funds, such as to use them only for a building campaign or for other specific goals.  Little or no reporting requirements or restrictions will apply, which is helpful for optimal flexibility.

Mandatory Donor Disclosures: Less Than Appealing

What do the California Attorney General, charitable donors, and the First Amendment have in common?  They have been tangled up in litigation over California’s new mandatory disclosures of confidential donor identification information.  On November 9, 2015, the U.S. Supreme Court declined to address whether compelled disclosure of donor information – by itself – constitutes a First Amendment injury compelling enough to foreclose such governmental intrusion, in Center for Competitive Politics v. Harris.  The case of Americans for Prosperity Foundation v. Harris now waits in the wings, on the related question of whether such compelled disclosure violates the First Amendment, if shown to actually chill speech and result in harassment of donors.  These cases are important for both nonprofits engaged in charitable solicitations and our country more broadly, given the serious free speech and freedom of association constitutional rights at stake. 

From AG Annual Reports to the Courtroom

Both cases began when the organizations challenged the California Attorney General (AG)’s demand to submit their IRS Form 990 Schedule B as part of their annual AG reports, in connection with their charitable solicitation activity in California.  The AG’s demand resulted from a 2013 change in its policy; consistent with most other states, the California AG’s office had never before required such disclosures.  Form 990’s Schedule B requires nonprofits to list major donors’ names, addresses, and amounts given.  The IRS collects this information but is legally required to keep it confidential.  Both civil and criminal sanctions are available for improper disclosure of such information, and nonprofits may legally redact such information in their publicly available Form 990s. 

In contrast, California law provides no such protections against donor disclosure.  Instead, under California law, nonprofits that fail to comply with such disclosure requirements face serious consequences:  their state income tax exemption is invalidated; late fees are imposed, for which directors and officers are personally liable; and the noncompliant organizations may not engage in fundraising within California.  The incentive for nonprofits to disclose otherwise confidential donor information is thus quite compelling.