Ethics & Accountability

Conflicts of Interest - Key Issues for Foundations

council-webteam — Sun, 09 Nov 2014 16:00:46 +0000

Conflicts of Interest - Key Issues for Foundations council-webteam Sun, 11/09/2014 - 11:00

Conflicts of Interest - Key Issues for Foundations

With Congress and the media focusing on corporate governance and foundation administration, now is the time to make sure that all grantmakers have a strong conflict of interest policy in place. Both private foundations and public charities (such as community foundations) should have clear guidelines on financial or other interests that must be disclosed and transactions that must be scrutinized or avoided. The policy should cover both board members and foundation staff. A robust conflicts policy can not only help a grantmaker stay on the right side of the law, but can also keep the organization from engaging in behavior that gives even the appearance of conflict.

While the Tax Code does not require that a charitable organization have a conflicts policy in place, it would be difficult to achieve or demonstrate compliance with applicable provisions of the law without such a document.

The Law on Conflicts

Board members or trustees of a charity have fiduciary duties to the organization. This means that they must be careful stewards of the charity's assets and must put the charity's interests first. On occasion, however, a board member's other involvements–business interests, family relationships, or political or other charitable activities–may make it impossible for him or her to provide disinterested advice to the charity. Especially when the matter affects the financial interests of a board member, this duality of loyalties may become a conflict of interest.

In addition, for private foundations, Section 4941 of the Tax Code prohibits a variety of financial transactions between the foundation and "disqualified persons." This category includes substantial contributors to the foundation and its managers, plus members of both those groups' families and businesses in which they have a large stake. Specifically barred transactions include rent payments to a disqualified person and loans from the foundation to a disqualified person, even when the terms of the deal would benefit the foundation substantially.

There's also a general prohibition on the use of a private foundation's income or assets "by or for the benefit of” a disqualified person. That means that a foundation's grants and other expenditures must not provide tangible economic benefits to disqualified persons. An exception to the bar on self-dealing allows foundations to pay disqualified persons reasonable compensation for very limited personal services that are necessary to the foundation's operation.

For public charities such as community foundations, financial transactions between the charity and its board members, as well as other "insiders,” are covered by the intermediate sanctions rules in Section 4958 of the Tax Code. Insiders also include major donors, charity executives, and their families. If any payments to such insiders, including salaries and payments for goods or services, exceed fair market value, the insiders, and possibly members of the organization's board, will be subject to penalty excise taxes.

In addition to those federal rules, some states have laws that regulate whether a board member or other charity official may participate in voting or other actions when the board member has a financial interest in the outcome.

Getting into Compliance

Legal rules help shape the outlines of the conflicts policy that a charity should have. Both private foundations and public charities should have written rules, approved by the board, that require board members and executives to disclose business or other ties that may result in a conflict of interest or bias (for or against) making a particular grant or investment. Ideally, this disclosure happens on a regular basis, say, at the beginning of the year or when a director's term begins. At the very least, foundation managers must be required to make full disclosure when a relevant matter is under consideration by the foundation.

Depending on what the manager's conflict is, it may be appropriate for him or her to abstain from voting on or even discussing the matter. For example, if a partner in the foundation's investment management firm serves on the board, he or she should not vote on any resolution to retain or dismiss the firm. The minutes of the board or committee meeting should note this abstention.

Foundation staff, too, should be required to disclose positions or interests that may give rise to conflicts. Does the program officer have a spouse who works at a potential grantee? Does the program officer personally receive consulting fees from nonprofits that may apply for funds? Depending on the size and activities of the foundation, it may be wise to have a parallel conflicts policy for staff members.

In addition, foundations should prepare themselves for situations where there may be no legal conflict but there may be the appearance of conflict. A board member's printing firm, for example, might seek the contract to produce the community foundation's annual report. One approach is to bar board members from doing business with the foundation. Another approach is to mandate a rigorous bidding process so that foundation managers can be confident that the best bid, even if it comes from a foundation insider, will win.

The stronger and more comprehensive a foundation's conflict of interest policy is, the easier it should be to spot conflicts and address them before they become a problem. Furthermore, when a foundation has evidence that it has gone through the procedures required by its conflicts policy, it will more easily be able to defend its actions to the media or government authorities.

Some conflicts, once disclosed, turn out not to be conflicts at all. Where a foundation board member serves on the board of an organization seeking a foundation grant, the foundation may generally make the grant without penalty. Disclosing this tie provides other board members with an opportunity to learn about the applicant charity from their colleague. Foundation policy may require that the board member abstain from voting on the grant, although there is no federal legal requirement that he or she do so. Because the board member's dual role has been disclosed, other board members may weigh his or her comments appropriately.

But some conflicts cannot be cured by disclosure. Where a community foundation proposes to pay above-market rates to a fundraising firm operated by the executive's spouse, no amount of disclosure can make the problem go away. Where a private foundation's investment manager uses foundation assets to manipulate the price of a stock held by disqualified persons, there's a genuine conflict (and probably an act of self-dealing, too).

Feeling Conflicted?

Conflicts of interest often give rise to interesting questions for the legal staff at the Council on Foundations. Members with a particular situation that they are uncertain of should not hesitate to contact Council legal staff at legal@cof.org.

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Self-Dealing

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Sample Conflict of Interest Policy

council-webteam — Sat, 09 Nov 2013 16:37:24 +0000

Sample Conflict of Interest Policy council-webteam Sat, 11/09/2013 - 11:37

Sample Conflict of Interest Policy

Editable conflict of interest policies for staff and board members.

This sample document is being provided for informational purposes and is not to be shared without the permission of the Council on Foundations. Use of the sample document does not create an attorney-client relationship, and the information provided is not a substitute for expert legal, tax, or other professional advice tailored to your specific circumstances. The information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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Sample Conflict of Interest Policy

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Public Disclosure Requirements for Foundations

council-webteam — Fri, 08 Nov 2013 18:09:07 +0000

Public Disclosure Requirements for Foundations council-webteam Fri, 11/08/2013 - 13:09

Public Disclosure Requirements for Foundations

Every organization exempt under Section 501(c)(3) of the Internal Revenue Code is required to disclose certain information to the public:

The organization’s exemption application, Form 1023, is subject to public disclosure, along with any documents supporting the application and any letters from the IRS to the organization regarding its request for exemption. Exception: If the organization filed its exemption application before July 15, 1987, and lacked the exemption application on July 15, 1987, it does not need to make available its exemption application.
The organization’s complete¹ Form 990 annual information returns filed within the past three years. Exception: Except for private foundations, donor information included in Schedule B need not be disclosed to the public.
The public must also have access to a foundation’s complete Form 990-T, Exempt Organization Business Income Tax Return including all attachments. Returns filed within the past three years beginning with the due date of the return (including any extension of time for filing) should be provided if requested.

There are two separate required components to public disclosure under federal law. First, a copy of the forms must be made available for public inspection at the foundation’s offices or another reasonable location without exception. If the foundation does not have a physical location, the public can request copies of the materials in writing. The foundation may charge a reasonable fee to cover copying and mailing costs. Second, foundations must supply a copy of each return to individuals who request them.

Copies should be provided immediately when requested in person, or within 30 days in the case of a written request (including email). The organization may charge the requester the actual postage plus up to 20 cents per page. To be able to respond to requests in a timely manner, one hint is to have a folder with all of the documents subject to public disclosure so they can be easily located if a request is made. In addition, making a public disclosure copy of Form 990 in advance allows someone the time to redact the names and addresses of donors from Schedule B to avoid inadvertent disclosure.

An alternative to providing hard copies is to make the foundation’s public disclosure documents available on a website, either its own or as part of a database maintained by another organization. The website must (1) alert readers that the document is available and provide instructions for accessing, viewing, downloading, and printing it in an accessible format; (2) must contain an exact replica of the foundation's documents (public charities may redact donor information); and (3) may not charge for downloading the documents. Note that making the information widely available does not exempt the foundation from the public inspection requirement: inquirers who come to your office should still be provided with a copy for inspection at its office(s).

Failure to comply with these requirements can result in penalties of $20 for those responsible per day for as long as the disclosure delay continues, up to $10,000 for each failure to provide a copy of the organization’s annual return(s). There is no maximum penalty for the failure to provide a copy of an exemption application, Form 1023.

Note that state laws may require additional disclosure requirements. For example, private foundations in New York are additionally required, under state law, to publish a notice in a newspaper annually that their Form 990-PF is available. Charities that solicit funds from the public may be required by state charitable solicitation laws to make certain financial information available to the public.

Finally, many organizations are choosing to disclose other information in the spirit of transparency. For example, community foundations confirmed in compliance with the National Standards for U.S. Community Foundations™, also make their annual audit available upon request. Similarly, the Council’s Stewardship Principles for Family Foundations list as a practice option to the principle of welcoming public interest and communicating openly to make public (on the Web and/or in print) the foundation's board of directors, mission, guidelines, grant process (including whether unsolicited proposals are accepted), finances, procedures, timetable, grantee list with amounts and purpose, etc.

For further information on public disclosure requirements, please visit the IRS FAQ on this topic. The IRS also has a helpful compliance guide for public charities and private foundations that includes a section on public disclosure.

¹With the exception of redacting donor information (non-private foundations only), everything else in your Form 990 is subject to disclosure, so be careful not to list any non-required sensitive information. For example, if your foundation administers a scholarship program, do not include the recipient’s social security number or contact information.

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Lunch with Legal Counsel: Motivations for Corporate Giving – Proceed with Caution!

kelsey.gerber@cof.org — Thu, 17 May 2018 15:05:48 +0000

Lunch with Legal Counsel: Motivations for Corporate Giving – Proceed with Caution! kelsey.gerber@… Thu, 05/17/2018 - 11:05

Lunch with Legal Counsel: Motivations for Corporate Giving – Proceed with Caution!

Webinar Recording

Suzanne Friday, Senior Legal Counsel and Vice President of Legal Affairs at the Council, will discuss the goals and motivations driving corporate giving, with a particular focus on corporate foundations. Also, take this opportunity to meet Lindsay Mason, the new Director of Corporate Philanthropy.

After a brief review of the applicable legal rules, we will discuss how corporate foundations can focus giving in different ways and for different purposes. Whether it is limiting grantmaking activity to the communities or populations the corporation serves, assisting company employees in times of hardship or disaster, funding research in areas related to the company’s business, or simply generating goodwill for the company, we will discuss legal issues that might arise as well as recent criticism surrounding corporate giving for perceived political influence.

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Governance and Compliance Issues for Foundation Financial Management

stephanie.mcgencey@cof.org — Thu, 19 Nov 2015 21:14:58 +0000

Governance and Compliance Issues for Foundation Financial Management stephanie.mcge… Thu, 11/19/2015 - 16:14

Governance and Compliance Issues for Foundation Financial Management

This white paper provides a review of critical governance issues that foundations must consider to remain in compliance with prevailing and emerging laws and regulations. Readers can expect content focused on trustee fiduciary responsibilities as relates to duties of care, loyalty, and responsibility.

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Governance and Compliance Issues for Foundation Financial Management

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Corporate Disclosure and the Sarbanes-Oxley Act of 2002

council-webteam — Sat, 16 Nov 2013 19:13:13 +0000

Corporate Disclosure and the Sarbanes-Oxley Act of 2002 council-webteam Sat, 11/16/2013 - 14:13

Corporate Disclosure and the Sarbanes-Oxley Act of 2002

What is the Sarbanes-Oxley Act?
The Sarbanes-Oxley Act of 2002 was designed to rebuild public trust in the corporate community in the wake of the Enron scandal and other corporate and accounting scandals. Sarbanes-Oxley requires publicly traded companies to adhere to governance standards that expand board member roles in overseeing financial transactions and auditing procedures.

Sarbanes-Oxley’s Effect on Corporate Philanthropic Organizations
Nonprofit organizations—including corporate foundations—are required to comply with two Sarbanes-Oxley provisions: whistle-blower protection and document destruction. However, incorporating other internal controls and policies included in the act may lead to greater accountability and transparency by nonprofits to their boards of directors, their donors, and the general public.

Legislative History
Introduced in the House of Representatives by Rep. Michael Oxley (R-Ohio), chair of the Financial Services Committee, the bill (H.R. 3763) was passed by the House on April 24, 2002, as the Corporate Auditing Accountability, Responsibility, and Transparency Act. It contained a provision requiring the Securities and Exchange Commission to adopt rules mandating the disclosure of relationships between companies—including their directors and officers—and nonprofit organizations. The House referred the bill to the Senate Banking Committee, chaired by Sen. Paul Sarbanes (D-Maryland), who was preparing his own proposal. The Senate Committee passed that bill (S. 2673) and the full Senate followed suit on July 15, 2002. The House and Senate then formed a conference committee to reconcile the differences between S. 2673 and H.R. 3763.

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Public Disclosure of Form 990-T for Private Foundations and Public Charities

council-webteam — Mon, 11 Nov 2013 23:43:21 +0000

Public Disclosure of Form 990-T for Private Foundations and Public Charities council-webteam Mon, 11/11/2013 - 18:43

Public Disclosure of Form 990-T for Private Foundations and Public Charities

Under the Pension Protection Act of 2006 (PPA), the rules for public disclosure of the Form 990-T by public charities and private foundations became identical to those for Form 990.

Which forms are affected?

Any Form 990-T filed after August 17, 2006.

What are the public disclosure requirements?

In general, under public disclosure laws, charities must provide any Form 990 (or 990-PF)—and now, Form 990-T—filed within the past three years to individuals requesting such information if the request is made either in person or in writing. Copies of all schedules and attachments should be included. (Public charities may redact names and addresses of donors from Schedule B of Form 990.) If a request for any of these documents is made in person, an organization must generally provide a copy of the requested documents on the day of the request. If the request is in writing (including e-mail) an organization must respond within 30 days of the request. The organization may charge the requestor a reasonable fee for the cost of copying (currently defined by the IRS as $.20 per page) plus postage.

An alternative to providing hard copies of requested documents is to make copies of these documents “widely available.” For example, an organization may provide the document free of charge in PDF format on the organization’s website. Then, if the organization receives requests for the information, it can simply direct the requestor to the documents on the website.

What information can be redacted from the Form 990-T prior to disclosure?

Generally, information may be redacted if the public availability of the information would adversely affect the charity. In particular, information relating to a trade secret, patent, process, style of work, or apparatus of the organization could be redacted if the Treasury Secretary determines that public disclosure would adversely affect the charity.

Disclaimer

The information provided in this resource is based on our continuing analysis of the Pension Protection Act. Every effort has been made to ensure the accuracy of this information. Due to the complexity of the PPA and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information is subject to change. Please check back here and on the IRS website (www.irs.gov) for updates. This information is not a substitute for expert legal, tax, or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of the PPA and related guidance on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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IRS Publication 1771: Charitable Contributions–Substantiation and Disclosure Requirements

council-webteam — Mon, 11 Nov 2013 20:17:15 +0000

IRS Publication 1771: Charitable Contributions–Substantiation and Disclosure Requirements council-webteam Mon, 11/11/2013 - 15:17

IRS Publication 1771: Charitable Contributions–Substantiation and Disclosure Requirements

Explains the federal tax law for organizations such as charities and churches that receive tax-deductible charitable contributions, and for taxpayers who make contributions.

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IRS Publication 1771: Charitable Contributions–Substantiation and Disclosure Requirements

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Sample Conflict of Interest Policies from Council Members

council-webteam — Sat, 09 Nov 2013 16:32:48 +0000

Sample Conflict of Interest Policies from Council Members council-webteam Sat, 11/09/2013 - 11:32

Sample Conflict of Interest Policies from Council Members

Sample conflict of interest policies from the Community Foundation of Switzerland County and Triangle Community Foundation.

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Sample-Conflict-of-Interest-Policies-From-Council-Members.pdf

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Conflicts of Interest and Form 1023

council-webteam — Sat, 09 Nov 2013 16:28:09 +0000

Conflicts of Interest and Form 1023 council-webteam Sat, 11/09/2013 - 11:28

Conflicts of Interest and Form 1023

Ordinarily, established private foundations and public charity grantmakers would ignore the IRS's revision of Form 1023, Application for Recognition of Exemption from Federal Income Tax. After all, these groups have already received their determination letters. But the revised Form 1023 and the accompanying instructions that the IRS issued on November 1, 2004, merit grantmakers' attention.

Form 1023 is in the vanguard of IRS forms that are designed to educate tax-exempt organizations and help halt abusive transactions. In addition, the form and instructions contain questions and information about conflicts of interest that all grantmakers should consider.

The new Form 1023 focuses on policies and processes that charities can use to safeguard against abuses in areas such as compensation and self-dealing. Parts of the form set out a listing of what the IRS apparently deems best practices; if applicants indicate that they are not following these recommended steps, they must explain how they intend to achieve compliance with the law. The IRS has already stated that it plans to incorporate questions like these into Form 990 and Form 990-PF, the annual information and tax forms that public charities and private foundations file.

It asks applicants whether they have adopted a conflict of interest policy that is consistent with a sample included in the instructions. If the answer is "yes," applicants must include a copy of the policy; if the answer is "no," applicants must answer further questions on the subject: "What procedures will you follow to assure that persons who have a conflict of interest will not have influence over you for setting their own compensation?" and "What procedures will you follow to assure that persons who have a conflict of interest will not have influence over you regarding business deals with themselves?" The form notes that a conflict of interest policy is recommended but not required for exemption.

So what does the IRS think a conflict of interest policy should look like, and does the IRS model work for grantmakers? The IRS's sample policy was drafted back in the late 1990s as a guide for healthcare organizations. It was developed with public charities in mind and with a particular focus on financial conflicts of interest between a charity and directors and officers. Private foundations may want to evaluate whether the sample policy is a good fit for them, and all grantmakers may wish to include statements about non-economic conflicts of interest. Following is a summary of some of the document's provisions, with comments on how grantmakers might consider revising the policy.

Purpose

The IRS's policy states that it is meant to protect a charity's interests when it is contemplating transactions that may benefit the private interests of officers or directors or that might result in excess benefits to foundation insiders.

Comment: Public charity grantmakers' conflicts policies often cite a desire to maintain public trust. Private foundations may cite the importance of exhibiting fairness or integrity or upholding the values of a founding family.

Definitions

The policy defines an "interested person" as "any director, principal officer, or member of a committee with governing board delegated powers, who has a direct or indirect financial interest." A person has a "financial interest," directly or indirectly, through business, investment, or family, if the person has an actual or potential ownership or investment interest in any entity with which the charity has or is negotiating a transaction or arrangement, or has a compensation arrangement with the charity or with any entity or individual with which the charity has a transaction or arrangement. The policy clarifies that not every financial interest is a conflict of interest.

Comment: Grantmakers often have all manner of established advisory committees in operation; the policy should clearly show how it applies to members of those groups. Grantmakers' policies may also cover staff members and should probably define who constitutes a member of an interested person's family. Grantmakers may also wish to note that not every conflict of interest is financial; directors and staff members may have personal or political involvements that may cause them to have dual and conflicting loyalties in connection with a grant or other foundation expenditure. Private foundations must keep in mind that the definition of "interested persons" is different from, and less inclusive than, the tax code's definition of "disqualified persons," that group of donors, directors and their family members and business interests with which the foundation is barred from entering into an array of financial transactions.

Procedures

The IRS's sample policy provides that an interested person must disclose any actual or possible conflict of interest and all material facts relevant to the conflict. After disclosure to the board or appropriate committee, the interested person must leave the meeting room. The board or committee will then discuss the matter and vote on whether a conflict of interest exists. If a conflict of interest exists, the board or committee shall, if appropriate, determine whether the charity can obtain a more advantageous arrangement that would not pose a conflict of interest. If an alternative arrangement is not possible, the board or committee shall determine by a majority vote of disinterested directors whether the transaction is in the charity's "best interest, for its own benefit, and whether it is fair and reasonable."

Comment: This procedure tracks many states' laws on how to deal with conflicts of interest. Where a vote of disinterested directors is not possible, an outside authority such as a court may validate a transaction if it can be shown to be fair and reasonable. No amount of disclosure or independent ratification can correct an act of self-dealing that occurs between a private foundation and a disqualified person.

Compensation

The sample policy also states that a voting member of a board or committee who receives compensation for services from the charity is prohibited from voting on matters related to his or her compensation arrangement.

Comment: Both private foundation and public charity grantmakers should exercise great caution when they hire foundation insiders, family members or board or committee members, to perform professional services.

Annual Statements & Periodic Reviews

To ensure compliance, the conflicts policy requires that directors and officers annually sign a statement declaring that they have received, read, understood and intend to comply with the policy. The charity is obligated to carry out periodic reviews to ensure that the organization does not serve private interests at the expense of its charitable mission. The periodic compliance check will include, at a minimum, a review of whether "compensation arrangements and benefits are reasonable, based on competent survey information, and the result of arm's length bargaining," and whether transactions with management organizations are reasonable and do not result in impermissible private benefit.

Comment: This provision requires only an annual certification that the directors and officers have read and understood the policy and agree to comply with it; some foundations require periodic statements from individuals covered by conflicts of interest policies that disclose the financial, vocational and charitable ties that may give rise to conflicts.

The key features that appear in most conflicts of interest policies can be reduced to a few simple (and alliterative) ideas: disclose, discuss, decide (by disinterested directors whenever possible) and document. The IRS's sample policy requires all of those actions. With a little tweaking, this policy can help grant-makers ensure that their assets are being used for charitable, not private, ends.

Additional Resources

Form 1023, Application for Recognition of Exemption

Form 1023 Instructions

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