BILL ANALYSIS Ó AB 556 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 556 (Irwin) As Amended June 19, 2015 Majority vote -------------------------------------------------------------------- |ASSEMBLY: | 78-0 | (May 14, |SENATE: | 38-0 | (July 16, 2015) | | | |2015) | | | | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: JUD. SUMMARY: Strengthens the Attorney General's ability to enforce disclosure requirements for commercial fundraisers for charities, and establishes a 10-year statute of limitations for enforcement actions against these commercial fundraisers, consultants and other third parties who engage in fraud or prohibited conduct. Specifically, this bill: 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 but who is disqualified as "fundraising counsel for charitable purposes", as defined. 2)Clarifies the definition of "fundraising counsel for AB 556 Page 2 charitable purposes" to include any individual, corporation, or entity that, for compensation, other than as a percentage of the funds, assets, or property received as a resultof a solicitation campaign, 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. 3)Clarifies that "fundraising counsel for charitable purposes" does not include any person or entity that receives or controls funds, assets or property solicited for charitable purposes, and that such receipt or control is established when any of the following are true of the person or entity: a) It has the right to approve or veto any payment from an escrow account to which funds received from a solicitation for charitable purposes are subject. b) It maintains an interest in an account into which solicited funds are deposited. c) It has the right to access funds, assets, or property received from a solicitation for charitable purposes and held by a caging company. d) It has any ownership or management interest in any other entity that receives or controls the funds, assets, or property solicited for charitable purposes, including, but not limited to, an escrow agent or caging company, but not including any federally insured financial institution. e) It receives any 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 trustee or charitable corporation soliciting the funds, assets, or AB 556 Page 3 property for charitable purposes. 4)Provides that any individual, corporation, unincorporated association, or other legal entity who, 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, but does not meet the qualifications of a fundraising counsel for charitable purposes, shall be deemed to be a commercial fundraiser for charitable purposes, unless specifically exempted. 5)Exempts from the definition of "commercial fundraiser for charitable purposes" certain specified entities, including, among others, trustees; charitable corporations; employees or agents of commercial fundraisers, and any financial institution, escrow agent, or caging company that holds or controls funds received as a result of a solicitation for charitable purposes. 6)Establishes a 10-year statute of limitations for the Attorney General to bring a civil action to enforce the Supervision of Trustees and Fundraisers for Charitable Purposes Act, as well as to enforce existing anti-fraud statutes under Civil Code Sections 2223 and 2224. 7)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. The Senate amendments: 1)Reorganize and clarify elements of the definitions for AB 556 Page 4 "commercial fundraiser for charitable purposes" and "fundraising counsel for charitable purposes" to better distinguish between the two categories, so that it is clearer who must register as a commercial fundraiser for charitable purposes. 2)Clarify which specific entities are excluded from the definition of "commercial fundraiser for charitable purposes," including trustees, charitable corporations, and caging companies, which are defined as businesses that receive contributions, process donor mail, and deposit all contributions into an account under the sole control of a charitable organization. FISCAL EFFECT: According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. 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, this 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 AB 556 Page 5 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 v. Help Hospitalized Veterans, the cost of charitable fundraising was 65% to 72% 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% of California's Gross State Product and employ nearly 1 million people. Nonprofits are also generally highly trusted institutions, with over 80% 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 AB 556 Page 6 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. Revised definition of "commercial fundraisers" and "fundraising counsel" 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 key 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 help close the loophole in the law, by better defining who is a commercial fundraiser, and who is a fundraising counsel. First, this bill would expand the definition of a commercial fundraiser to also include any person or entity who 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, but is otherwise disqualified as a fundraising counsel under the latter's definition. Further, this bill would modify the definition of fundraising counsel to clarify that "compensation" received for its services, is something other than a percentage of the funds, assets, or property received as a result of a solicitation AB 556 Page 7 campaign, and to clarify that a person or entity is deemed "to receive or control funds, assets, or property" - and therefore not a fundraising counsel - if it meets any one of certain conditions reflecting the entity's control or interest in the funds. The author contends this 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 Government Code Section 12596 of the Supervision of Trustees and Fundraisers for Charitable Purposes 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 10 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 10-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 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 10 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. AB 556 Page 8 Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN: 0001279