BILL ANALYSIS Ó
AB 556
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Date of Hearing: April 14, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 556
(Irwin) - As Amended April 7, 2015
SUBJECT: TRUSTS: REGULATION AND ENFORCEMENT
KEY ISSUE: to prevent circumvention of important disclosure
laws protecting donors to charities, should steps be taken to
strengthen the attorney general's regulation of commercial
fundraisers for charities, and extend the statute of limitations
for the attorney general to bring an enforcement action?
SYNOPSIS
This bill, sponsored by the Attorney General, seeks to revise
the definition of "commercial fundraiser for charitable
purposes" in order to strengthen the Attorney General's ability
to enforce disclosure requirements for charity fundraising
campaigns, and extend the statute of limitations for enforcement
actions against charity fundraising firms and other third
parties who engage in fraud or prohibited conduct. According to
the author, the bill is needed to ensure that companies
soliciting charitable donations cannot exploit an apparent
loophole in the law and circumvent existing disclosure
requirements through the use of commercial fundraisers who
instead register as "fundraising counsel." Among other things,
the bill would (1) require a person or entity that plans,
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manages, counsels, advises, or prepares material for the
solicitation of funds for charitable purposes to register as a
commercial fundraiser if he or she is compensated by a
percentage interest in the funds received through solicitation
rather than by a flat fee; and (2) require a person assisting
but not directly engaging in solicitation who has any ownership
or management interest in any other entity that receives or
controls funds or assets of the charity to register as a
commercial fundraiser, not fundraising counsel, thereby becoming
subject to disclosure requirements protecting donors and the
public.
Additionally, this bill seeks to take the ten-year statute of
limitations that currently applies to fraud by the charity's
directors and officers and apply it to commercial fundraisers,
counsel, and any other persons involved in the fraud. According
to the author, this is needed because the statute of limitations
that applies to fundraisers, counsel and other non-directors or
non-officers is only three or four years depending on the cause
of action, which is an insufficient length of time to prosecute
cases that are typically complex and involve misconduct extended
over long periods of time. Recent amendments to the bill have
helped address concerns previously expressed by some charities
and nonprofit organizations, and the bill is now supported by
the Wounded Warrior Project and has no registered opposition.
The bill will be referred to the new Committee on Privacy and
Consumer Protection should it pass this Committee.
SUMMARY: Revises the definition of "commercial fundraiser for
charitable purposes" in order to strengthen the Attorney
General's ability to enforce disclosure requirements for charity
fundraisers, and establishes a ten-year statute of limitations
for enforcement actions against charity fundraisers, consultants
and other third parties who engage in fraud or prohibited
conduct. Specifically, this bill:
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1)Expands the definition of "commercial fundraiser for
charitable purposes" to include any person or entity that
plans, manages, advises, counsels, consults, or prepares
material for, or with respect to, the solicitation of funds,
assets, or property for charitable purposes and is compensated
by a percentage interest in the funds, assets, or property
received through a solicitation campaign, rather than by a
flat fee.
2)Expands the definition of "commercial fundraiser for
charitable purposes" to include any person or entity that
plans, manages, advises, counsels, consults, or prepares
material for, or with respect to, the solicitation in this
state of funds, assets, or property for charitable purposes
and:
a) Has any ownership or management interest in any other
entity that receives or controls the funds, assets, or
property solicited for charitable purposes, or
b) Receives any material financial benefit, directly or
indirectly, from any other individual or entity that
receives or controls the funds, assets, or property
solicited for charitable purposes, other than the nonprofit
soliciting the funds, assets, or property for charitable
purposes.
3)Exempts from the above definitions certain specified
individuals, including, among others, trustees; charitable
corporations; employees or agents of commercial fundraisers,
and any attorney, investment counselor, or banker who in the
conduct of that person's profession advises a client when
actually engaged in the giving of legal, investment, or
financial advice.
4)Clarifies that any person or entity who indirectly maintains
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an interest in an escrow account into which solicited funds
are deposited, or who indirectly maintains access of the right
to access funds, assets, or property received by a caging
company as a result of a solicitation, falls under the
definition of "commercial fundraiser for charitable purposes."
5)Establishes a 10-year statute of limitations for the Attorney
General to bring a civil action to enforce this Act, as well
as to enforce existing anti-fraud statutes under Civil Code
sections 2223 and 2224.
6)Provides that specified disclosures about fundraising counsel
that entities that solicit funds for charitable purposes with
the participation of fundraising counsel must make at the time
of solicitation shall be clear and conspicuous and appear in
at least 12-point type, if printed or presented
electronically.
EXISTING LAW:
1)Governs charitable corporations, trustees, commercial
fundraisers, fundraising counsel and commercial co-venturers
who solicit or hold property for charitable purposes through
the Supervision of Trustees and Fundraisers for Charitable
Purposes Act (Act), and generally provides the Attorney
General with supervisory and enforcement powers over these
entities. (Government Code Section 12580 et seq.)
2)Requires commercial fundraisers and fundraising counsel, both
as defined, to register with the Attorney General's Registry
of Charitable Trusts and to file an annual financial report of
funds solicited on behalf of each charitable purpose or
organization. (Gov. Code Sections 12599, 12599.1.)
3)Defines "commercial fundraiser for charitable purposes" to
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mean any individual, corporation, unincorporated association,
or other legal entity, except as specified, who for
compensation does any of the following:
a) Solicits funds, assets, or property in this state for
charitable purposes.
b) As a result of a solicitation of funds, assets, or
property in this state for charitable purposes, receives or
controls the funds, assets, or property solicited for
charitable purposes.
c) Employs, procures, or engages any compensated person to
solicit, receive, or control funds, assets, or property for
charitable purposes. (Gov. Code Section 12599(a).)
4)Requires, not less than 10 working days prior to commencement
of each solicitation campaign, the filing with the Attorney
General's Registry of Charitable Trusts of a notice setting
forth, among other things, the person responsible for
directing and supervising the work of the commercial
fundraiser under the contract and the fundraising methods to
be used. (Gov. Code Section 12599(h).)
5)Requires a written contract between commercial fundraisers and
charities for each solicitation campaign or event containing,
among other things, a statement of charitable purposes of the
campaign or event; if the commercial fundraiser is to be paid
a fixed fee, a statement of the fee and a good faith estimate
of what percentage the fee will constitute of the total
collections; if the commercial fundraiser is to be paid a
percentage fee, a statement of the percentage of contributions
that the charity will receive; a requirement that all funds in
the control or custody of the commercial fundraiser be
deposited into the charity's bank or delivered to the charity
within five working days of receipt; and specified contract
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termination provisions. (Gov. Code Section 12599(i).)
6)Defines "fundraising counsel for charitable purposes" to mean
any individual, corporation, unincorporated association, or
other legal entity, except as provided, who is described by
all of the following:
a) For compensation plans, manages, advises, counsels,
consults, or prepares material for, or with respect to, the
solicitation in this state of funds, assets, or property
for charitable purposes.
b) Does not solicit funds, assets, or property for
charitable purposes.
c) Does not receive or control funds, assets, or property
solicited for charitable purposes in this state.
d) Does not employ, procure, or engage any compensated
person to solicit, receive, or control funds, assets, or
property for charitable purposes. (Gov. Code Section
12599.1(a).)
7)Requires fundraising counsel for charitable purposes to file
annually with the Attorney General, a report listing each
person, corporation, unincorporated association, or other
legal entity for whom the fundraising counsel has performed
any specified services, and a statement certifying that the
fundraising counsel had a written contract with each listed
person, corporation, or other legal entity that complied with
specified requirements. (Gov. Code Section 12599.1(d).)
8)Requires a written contract between a fundraising counsel for
charitable purposes and a charitable organization for each
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service to be performed by the fundraising counsel for the
charitable organization, that shall be available for
inspection by the Attorney General and shall contain, among
other things:
a) A statement of the charitable purpose for which the
solicitation campaign is being conducted.
b) A clear statement of the fees and any other form of
compensation, including commissions and property, that will
be paid to the fundraising counsel; and
c) A statement that the fundraising counsel will not at any
time solicit funds, assets, or property for charitable
purposes; receive or control funds, assets, or property
solicited for charitable purposes; or employ, procure, or
engage any compensated person to do so. (Gov. Code Section
12599.1(f).)
9)Requires any individual, corporation, or other legal entity
who for compensation solicits funds or other property in this
state for charitable purposes to disclose prior to an oral
solicitation or sales solicitation made by direct personal
contact, radio, television, telephone, or over the Internet,
or at the same time as a written solicitation or sales
solicitation that a) the solicitation or sales solicitation is
being conducted by a commercial fundraiser for charitable
purposes, and b) the name of the commercial fundraiser for
charitable purposes as registered with the Attorney General.
(Business and Professions Code Section 17510.85.)
10)Provides for a 10-year statute of limitations for any action
brought by the Attorney General against trustees or other
persons holding property in trust for charitable purposes or
against any charitable corporation or any director or officer
thereof to enforce a charitable trust or to impress property
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with a trust for charitable purposes or to recover property or
the proceeds thereof for and on behalf of any charitable trust
or corporation. (Government Code Section 12596.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: This bill, sponsored by Attorney General Kamala
Harris, seeks to revise the definition of "commercial fundraiser
for charitable purposes" in order to strengthen the Attorney
General's ability to enforce disclosure requirements for charity
fundraising campaigns, and extends the statute of limitations
for enforcement actions against charity fundraising firms and
other third parties who engage in fraud or prohibited conduct.
According to the author, the bill is needed to ensure that
companies soliciting charitable donations cannot exploit an
apparent loophole in the law and circumvent existing disclosure
requirements through the use of commercial fundraisers who
instead register as "fundraising counsel." Using one recent
example, the author explains:
Existing law regulates for-profit companies that raise
money on behalf of a charity but keep a portion of the
money raised as profit. Companies that raise money on
behalf of charitable organizations, known as
commercial fundraisers, are required to disclose to
donors that a paid professional fundraiser was
involved in the solicitation campaign. "Fundraising
counsel," persons or entities that plan, manage, or
advise charities on their charitable solicitations
activities and receive a portion of the funds raised,
are not subject to the same transparency requirements.
In the recent charity enforcement case brought by the
Attorney General's Charitable Trusts Section, People
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v. Help Hospitalized Veterans, the cost of charitable
fundraising was 65 to 72 percent of the gross annual
revenue received from donors. Because the professional
fundraisers were classified as "fundraising counsel,"
Help Hospitalized Veterans was not required to
disclose to donors that paid professional fundraisers
were involved in the solicitation campaigns.
Background on oversight of charity fundraising. According to
the 2014 Causes Count report by CalNonprofits, there are more
than 70,000 active 501(c)(3) public charities in California.
California's charitable organizations contribute 15 percent of
California's Gross State Product and employ nearly 1 million
people. Nonprofits are also generally highly trusted
institutions, with over 80 percent of Californians surveyed by
the Causes Count report stating that they are confident that
nonprofits act on the public's behalf and deliver quality
services.
To preserve this public trust and safeguard against fraud and
questionable solicitation practices, the Attorney General is
responsible for regulating charities and the professional
fundraisers who solicit on their behalf. The purpose of this
oversight is to protect charitable assets for their intended use
and ensure that the charitable donations contributed by
Californians are not misused and squandered through fraud or
other means. All charitable trustees and fundraising
professionals are required to register and file annual financial
disclosure reports with the Registry of Charitable Trusts in the
Attorney General's office before soliciting in California. The
attorneys and auditors of the Attorney General's Charitable
Trusts Section investigate and bring legal actions against
charities, their officers and directors, and fundraising
professionals that misuse charitable assets or engage in
fraudulent fundraising practices.
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Revised definition of "commercial fundraisers" to ensure
continued transparency in solicitation activities. For-profit
companies that solicit money on behalf of charitable
organizations but keep a portion of the money raised as profit
are regulated as "commercial fundraisers" under existing law,
which requires them to disclose to donors that the solicitation
is being conducted by a commercial fundraiser for charitable
purposes, and to identify themselves by the name under which
they are registered with the Attorney General. By contrast,
"fundraising counsel" are persons or entities that plan, manage,
or advise charities on their charitable solicitations activities
for profit but do not directly engage in solicitations, and are
not subject to the same disclosure requirements. For this
reason, whether a person falls under the statutory definition of
"commercial fundraiser" or "fundraising counsel" is important
with respect to the Attorney General's ability to enforce these
transparency protections under existing law.
According to the author, recent enforcement cases have
highlighted examples where persons performing professional
fundraising services attempted to circumvent disclosure
requirements by registering as fundraising counsel rather than
as commercial fundraisers. In response, this bill would revise
the definition of "commercial fundraiser for charitable
purposes" to include additional actions and types of fee
arrangements that the author believes warrant a disclosure to
the public that the actions are being carried out by a third
party fundraiser for compensation. For example, the bill would
require a person or entity that plans, manages, counsels,
advises, or prepares material for the solicitation of funds for
charitable purposes to register as a commercial fundraiser if he
or she is compensated by a percentage interest in the funds
received through solicitation rather than by a flat fee.
Under existing law, if a person raising funds for a charity did
not directly hold the charity's assets or do the direct
solicitation, but maintained an interest in the escrow account
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in which the solicited funds were deposited, then he or she
could technically avoid disclosing to donors his or her paid
role in the solicitation campaign by claiming to be and
registering as fundraising counsel. (This was the case in the
aforementioned People v. Help Hospitalized Veterans case.) To
address this problem, this bill provides that, if as a result of
solicitation of funds for charitable purposes a person
indirectly controls those funds by maintaining an interest in
the escrow account in which the solicited funds were deposited,
or maintaining access to funds received by a caging company as a
result of the solicitation, then he or she would be deemed a
commercial fundraiser and be required to disclose to the public
that the solicitation is being conducted by a commercial
fundraiser for charitable purposes. The author contends the
bill will help close loopholes in the disclosure statutes by
requiring persons helping to raise funds who have any ownership
or management interest in any other entity that receives or
controls funds or assets of the charity to register as
commercial fundraisers, not fundraising counsel, and thereby
become subject to disclosure requirements protecting donors and
the public.
Extended statutes of limitation for enforcement actions. Under
Section 12596 of the Act, the Attorney General may bring an
enforcement action for fraud or other violations by the
trustees, officers, or directors of a charitable organization at
any time within ten years of the cause of action. Because cases
involving charity fraud are often complex and cover misconduct
from an extended period of time, the author contends, the
ten-year statute of limitations is appropriate. However,
Section 12596 does not apply to other parties such as
fundraisers, consultants, or accountants who may have directly
participated in, or aided and abetted the fraud; instead they
are subject to either a three or four year statute of
limitations, depending on the cause of action. The author notes
that in the Help Hospitalized Veterans case, the Attorney
General was unable to bring an action for civil liability
against the persons registered as "fundraising counsel" who
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participated in the fraud because they were not officers or
directors of the charity, so the applicable three year statute
of limitations on filing charges against them had already
passed. Accordingly, this bill would establish a ten year
statute of limitations for all persons or entities involved in
the fraud to make this consistent with the same period that
applies to directors and officers of the charity.
REGISTERED SUPPORT / OPPOSITION:
Support
Attorney General Kamala Harris
Wounded Warrior
Opposition
None on file
Analysis Prepared by:Anthony Lew / JUD. / (916) 319-2334
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