Fiduciary Duties Nonprofit Boards Should Know

Amy: Hello, I'm Amy Thomas, a Delivery Specialist at First Citizens Bank, and I want to welcome you to the First Citizens presentation of Fiduciary Duties Your Nonprofit Board Should Know. We're joined by Mr. Hank Dunbar, Manager of Philanthropic and Charitable Services and our special guest today, Mr. Bob Saunders, who is a partner at Brooks Pierce.

While everyone's getting signed in, I want to walk through a couple of housekeeping items with you. First, today's conference is being recorded, and a replay will automatically be sent to you following today's discussion. Secondly, this webinar is interactive. If you submitted a question during the registration process, thank you. If you'd like to submit a question during today's discussion, please use the Q&A or chat feature on the right-hand side of your screen. I do want to remind you that we try to keep our discussion broad. If you have a specific question about your organization or we aren't able to answer your question during today's webinar, please reach out to your relationship manager at First Citizens, or you can reach out to Hank Dunbar directly, and we'll send you out his contact information. As a reminder, the information you're about to hear is designed for educational purposes only. And with that, Hank, we are ready to go, so I'll turn it over to you.

Hank: Thank you, Amy. Before we get started, I want each of you to take a second and think about the nature of all the people who are on this call. You can't see their faces, but I assure you that each of them is engaged with the charitable organization as a board member, a donor or an employee. These are some of the most passionate and compassionate people you will ever meet. Each person and each organization represented is committed to making the world a better place. As an individual, I am grateful to each of you for what you do. First Citizens Bank, as a corporate entity and as a collection of individuals, is also grateful to each of you for what you do. That's it.

Welcome to First Citizen's presentation of Fiduciary Duties Your Nonprofit Board Should Know. First Citizens is proud of our relationship with nonprofit organizations throughout our footprint, and we strive to provide information that helps you fulfill your missions in the communities we all work and live in. We are resource managers, not just investment managers. With over 270 nonprofit relationships that represent over $1.75 billion in assets, we are committed to guidance on administration, board governance, plan giving, policy development and investment management. Some of you work in large development offices and some of you work in one or two person shops, but all of you seek to be good stewards of the assets that have been entrusted to you by your donors. Today, we are honored to have Bob Saunders, a partner in the law firm of Brooks Pierce, lead our program. Bob is well known across our footprint and is considered one of North Carolina's preeminent nonprofit attorneys. He works with charities, religious organizations, educational organizations, trade associations, social welfare organizations and social organizations, and has the expertise to serve them from start-up to dissolution and advises on tax issues, including unrelated business income, governance and use and governance and use of nonprofits for profit subsidiaries. I'm certain we will all find Bob's knowledge and wisdom beneficial as we work to navigate our current nonprofit environment. Bob is also a friend and a fellow resident of the Boys Creek Community. If you are looking for a good book to read, send Bob an email. You will not be disappointed in any of his recommendations. Bob, thank you and your team at Brooks Pierce for your graciousness today. It is all yours.

Bob: Thanks Hank. Let's go to our first slide, the overview slide, and we'll give you a preview of coming attractions here. I have several nonprofit updates, both from state law and federal law issues that should be of interest for those of you who have been a nonprofit director for quite a while. But I want to do it in the context of our second point, and that is an overview of your fiduciary duties as a nonprofit director. In this discussion, we'll review the duty of care, the duty of obedience and the duty of loyalty. These are three fiduciary duties that you, as a nonprofit director, have a virtue of your position on that nonprofit corporation. If we have time, Hank, I'd like to talk about end of the line options for nonprofits. But if we don't get to it, perhaps you can invite me back for a new session and we'll talk specifically about that.

Hank: Very good.

Bob: Let's go to the next slide and just let me, just list to you the new developments I plan to discuss. COVID has changed the world for everything, including nonprofits, and so we're going to talk about the changes that allow members to meet remotely in order to fulfill their obligation to conduct annual meetings. We'll talk a little bit about a new law that deals with elected officials to serve on nonprofit boards and what additional duties they have to recuse themselves to deal with that conflict. We'll deal with a potential new law that has been enacted that vetoed and its status is still uncertain. And that is whether donor information must be kept confidential and for 501(c)(3) organizations that are incorporated specifically in North Carolina. Finally, we'll talk about some federal tax law issues, and I want to focus on some new rules dealing with nonprofit LLC's who or trying to qualify as a 501(c)(3) organization. And then finally, I want to talk a little bit about impact investing and donor advised fund of rulings and litigation that affect those areas as well. So with that as an overview, let me just say that before we talk about the duty of care, a little reason, kind of why I'm here, why I have been invited. And I think it's important for you as a nonprofit director to understand that you have an obligation to understand these rules to fulfill the mission of the nonprofit. So it's a should-of obligation. You really should do this. You also want to maintain the reputational interests of your nonprofit. And so it's important for you to do that, to accomplish that goal as well. It's an audit question. You ought to be doing this. And I just want to touch on briefly. It's important to understand these rules because you don't want to be personally liable for your actions, so it's accountable you better do this in order to make sure that as you avoid in any kind of liability.

Before anyone kind of turns off the webinar and starts resigning from nonprofit boards because they're thinking, why? Why am I subject to liability? Let me just give you some words of reassurance. By virtue of serving on a nonprofit corporation, you have limited liability protection because you're not acting in your personal capacity. Again, you're acting as a director of a nonprofit corporation, so your personal assets should not be affected by your activities as a nonprofit director, your house, your car, your bank accounts. However, it doesn't prevent you from being sued, and so if you are sued in your capacity as a nonprofit director, you want to make sure that you're reimbursed for those expenses. And so one way to do that is to make sure that your nonprofit corporation has indemnified you and allow those expenses to be paid. Again, nonprofit corporations are allowed to do this, it's a perfectly legitimate expense, which you want to make sure that your organization has done that to make sure that you can be reimbursed for those legal expenses that you may incur.

But if you think about it Hank, indemnification is really self-insurance, you have a notification claim it's only as good as the organization's assets. They can pay for that. And so kind of a third line of defense that a lot of nonprofits will do is to buy third party insurance, directors and officers liability insurance. And so again, for those directors out there who may be concerned about why am I talking about fiduciary duties and duty of care and liability, rest assured that you are protected because of limited liability protection, because of indemnification by the organization and perhaps third party insurance directors and officers liability insurance.

So with that as a set up, let's talk about the three fiduciary duties that each of you as a nonprofit director have that you need to follow and the first one is the duty of care. This is a duty to act in good faith and be informed when making decisions on behalf of the nonprofit. I call this the duty to stay awake. You have a duty to stay awake during the meetings. Stay awake during this webinar, both literally and figuratively. You want to be informed. You want to go to the meetings. You want to make sure that you're engaged in your duties as a nonprofit director, and if you do that, then you're fulfilling your duty of care as a nonprofit director. A benefit from that is what lawyers call the business judgment rule. You know, when a nonprofit makes the decisions, they always don't turn out right. And so to protect yourselves from being second guessed if you follow the duty of care of acting in good faith in an informed manner, then we're going to presume you've done it correctly, that you did your best and we're not going to second guess you if the outcome turns bad. Another aspect that's important to understand about the duty of care is that you, I've just mentioned indemnification and insurance. And oftentimes those policies or those provisions assume that you're following the duty of care again, that you're acting in good faith, that you have, that you're acting in a fully informed manner. And so to the extent that you want to be protected through insurance, through indemnification, you want to make sure that you're following your duty of care. And the last thing I'll say about the duty of care in our discussion today is I'm a big believer in using policies to help guide your efforts to meet the duty of care. Think of a policy as a guardrail that if you have a well thought through and followed policy, then by following that policy when it comes to investments, when it comes to endowments, when it comes to conflicts of interest, whistle-blowers, document retention, the list goes on, you can then ensure that you're going to be meeting your fiduciary duty, the duty of due care, by following those policies.

Having said that, though, what you don't want to do is just download from the internet, a bunch of policies that look pretty, that look nice and adopt them and not follow them. If you take anything from this webinar today, I just want you to remember this rule, this mantra, that if your practice is not consistent with your policy, you've got two choices. You change your practice, or you change your policy. You cannot let the status quo remain. That's when you get into trouble. I would much rather you not adopt the policy if you can't follow it as opposed to adopting policies that you know you can't. So again, the duty of care is just one of the first fiduciary duties that I think is easily understood. But if I had to just put a label on it, it's the duty to stay awake.

Hank: So, to be present and to communicate and to listen to communication. Bob, I know we've helped some of our clients with some policies, with spending policies, with gift acceptance policies, with investment policies, with endowment policies. If an organization finds itself in a situation where it needs help with policies, who do they go to?

Bob: So there's a lot of sources. I don't think you should just automatically turn to your lawyer on the board and assume that lawyer knows everything that has to do about nonprofit law or finance or tax law, etc. I know we lawyers like to think we're smart, but we are specialized. And so just like you would not come to me for dealing with a traffic ticket or a criminal work, you want to understand that whoever you're looking to for advice, perhaps on your board, is a specialist who understands that again, there are lawyers, like myself and CPAs and nonprofit consultants who work in this area as well. I'm very fond of the North Carolina Center for Nonprofits. I think it's a wealth of information for nonprofits in North Carolina. There are similar organizations in other states, and I'd recommend the independent sector for providing national guidance as well.

Hank: Yeah, and I know, too, in addition to the Centers for Nonprofits in the various states we operate in, some community foundations have individuals on their staffs that specialize in helping agencies in their areas with policies.

Bob: Thank you. So let's go to our next slide. And our next duty, and that is the duty of obedience. So this is the second fiduciary duty that you, as a nonprofit director have that you need to follow, and the duty of obedience is just the duty to obey the law. So let's talk about the sources of what law should you follow. For state law, for those of you who are nonprofit corporations, each state has its own nonprofit corporation act, and so you're obligated to follow those rules. Oftentimes, those rules can be adopted or amended by your articles or your bylaws. And so when you talk about the state law governing your nonprofit organization, think in terms of not only the state law, but what your articles say and what your bylaws say. In addition to whatever resolutions and policies that are adopted as part of those articles and bylaws, in some respects, the act, it covers everything, gives you a default set of rules that you can then vary with your article. The articles is the constitution of your nonprofit organization that has to contain the name, that has to contain the purpose and what happens when you dissolve your nonprofit, most nonprofit 501(c)(3) organizations, which we'll talk about in a minute, are required when you dissolve them to have those assets transferred to another 501(c)(3) and those provisions need to be in your articles.

The other area of state law that I want to mention is for those organizations who are engaging in fundraising. You are oftentimes required to get a charitable solicitation license and of the 50 states, 39 states require licensing. All the states in this area require licensing. And so you want to make sure that if you don't, unless you qualify for an exemption, you're required to get a license in order to solicit funds from the public for charitable activities. There is an exemption if your fundraising is $25,000 or less here in North Carolina. If you're associated with an educational institution, then you can also qualify for an exemption. So long as you ask for it. So there's a process where you have to actually file for and qualify. In other federal tax law, there are a lot of different types of tax organizations. There's about 20 different ones, ranging from cemetery associations to high school holding companies to fraternities and sororities. Those are involved with Olympic sports. There's homeowners, all kinds of different organizations. However, most of the charities that I work with are 501(c)(3) organizations. And that's important because all these organizations are tax exempt. They don't have to pay taxes on their related income, but only the 501(c)(3)qualifies you to it for a charitable deduction when you receive a donation or many times, government grants or foundation grants, only 501(c)(3)are eligible to receive those grants.

So under the federal tax law, just a real quick ticking of some of the rules that you have to follow as a 501(c)(3). You can't engage in self-dealing. In other words, the profits of that nonprofit belong to the community, not to the members, not to the directors so you have to make sure that you don't overpay your executive director or somehow have a dividend check coming out of the nonprofit average beyond being a director or being a member. You also can't have too much private benefit, as the organization has got to be primarily focused on creating public benefit, not private benefit. If you are engaged in earned income strategies that you're selling goods and services that if that income is coming out of activity that's unrelated to your exempt purpose, you'll have to pay tax on that. And then finally, as a nonprofit organization, you can do some amount of lobbying, an incidental amount, but you cannot endorse candidates, you cannot fundraise for candidates, you cannot engage in any kind of political intervention on behalf of candidates or parties. That's an obligation of the federal tax law. So you, as an organization, as a director, need to be made aware that under the federal tax law, if certain obligations placed on you by virtue of being a 501(c)(3) organization.

A little bit about articles, bylaws and resolutions, again, the articles and bylaws need to be kind of lean and mean, you know, only the bare essential things need to be put in articles, but bylaws need to have broad principles. Oftentimes, I see a lot of specific things in bylaws that don't belong there. One of my pet peeves is having Robert's Rules of Order governing your organization. But with what I see, most of the compliance work being done that's tailor made for a particular situation is through policies that are adopted by the board and you do that in the form of resolution. So you have, a meeting is called, the resolution is proposed to adopt the investment policy or adopt policy and the policy is attached to that. And so that's again, a guardrail that you have to kind of protect your organization. But if you adopt that policy, your duty of obedience requires you to follow that. That's part of your obligation.

Hank: So before we move on, where, if I'm with a nonprofit organization that is mature, it's been around for 75 years, how do I make certain that I'm following policies that were adopted when the organization was established or that were adopted 25 years after it was established, and amended 25 years later, how do I keep that current and know what I'm obligated to abide by?

Bob: Great point. So in the context of employees. Employees often have an employee handbook that lists all the rules, all provisions, all the policies, and that's where you go to get your answers or employment questions. In the board of directors' world, we largely refer to that as the minute book. So the minute book is not just the book where you keep the minutes, but it's also the place where you keep articles, your bylaws, the resolutions have been adopted, your policies. You may include financial audit information or tax returns, but the minute book, the lawyer is a big, thick book that doesn't necessarily include minutes, but rather all the organizational documents and relevant policies, procedures, and that needs to be reviewed periodically. One committee that you may want to consider forming, for example, the bylaws committee or governance committee, whose duty is to review the various policies and bylaws on a periodic basis. Again, to make sure that your rules are consistent with your practice because if your rules are not consistent with your practice, you got to change them.

Hank: So if I'm a new executive director coming into a foundation or an organization and I go to a board meeting and things are done a certain way, I should not assume that that is the correct way for doing those. I should make myself go back and read through those years of policies and minutes to make sure that the way we are operating today is the way we have been told to operate.

Bob: Absolutely, now, I recognize the fact that I love reading bylaws. That may make me strange, but you as a director have a legal obligation, again, your duty of care and your duty of obedience to make sure that you're following all this and so it's just really important for you to do that.

Hank: Thanks.

Bob: Let's go to the next slide and I want to talk a little bit, just for those who are experienced in directors. Here's the new information, again, to fulfill your duty of obedience, what's new out there that you need to be aware of? One has to do with remote annual meetings. Again, we've mentioned COVID. COVID has a widespread effect throughout the entire economy, including nonprofits and specifically with the annual meeting requirement. So those nonprofit corporation acts require those nonprofits who have members to meet annually, as well as your board of directors. Most statutes provide for remote meetings by board of directors, but they don't provide for remote meetings by members. Usually, that's not a big deal. Usually, you want to conduct your membership meetings in person. That's part of the function of the organization. But you recall in the early days of COVID, we had rules, executive orders that said, you could not have more than 10 people in a room or no more than 20 people in a room. And in that kind of environment, how can you conduct an annual meeting, whether it's a shareholders of a for-profit or members of a nonprofit? So there was compliance problems imposed for those organizations, and that was important for not just meeting the requirements of the act, but if you recall the PPP loans, many banks were requiring that members also approve these transactions. And so if that members can't conduct the annual meeting, you could not get approval. The PPP loans were not being approved as well, so we had an executive order that allowed this to occur despite the authorization from the nonprofit corporation act, and that has now been codified. And so we now by statute, have the right to conduct annual meetings remotely and to make decisions for the annual meeting by electronic ballot. And so I think this is a positive development. And who knows, perhaps people will like to have, conduct their annual meetings remotely and not go back in person. They're not required to. This just gives them an option to do that. And so again, for you who are nonprofit directors of nonprofits who have meetings, this is an additional option that you might want to review your bylaws and make sure you're taking full advantage of.

If we go to the next slide. I want to talk a little bit about the federal tax law updates and certain things that are happening in the federal tax world that you need to be aware of. Again, to fulfill your duty of obedience. So let me start with nonprofit LLCs. You know, Hank, most nonprofit entities or nonprofit corporations are charitable trusts. But for those states who permit nonprofit LLCs, that is a permitted function that they can't qualify for a 501(c)(3)status. And so contributions made to a nonprofit LLC that qualifies as a 501(c)(3) get charitable deduction, grant those donors charitable deductions and so forth. And I think the way to think about nonprofit LLCs, there's two varieties or two flavors. One is a single-member nonprofit LLC in which the parent is the sole member of that LLC. It's like a subsidiary relationship. Another one is a multi-member LLC, which is a standalone independent. Let me talk about the first one first. A single-member nonprofit LLC is using, is being used more and more often by nonprofits to conduct their operations. For example, a nonprofit may hold real estate for liability reasons in a single member nonprofit LLC, you may conduct separate programs. For example, it may be a picker activity that may not be meshed well with other things that the nonprofit's doing. It may want to do some fundraising or some investing through a separate entity. They may want to have a separate board be in charge of that activity. We charge that of those investment functions and so forth. And so I'm beginning to see a lot of nonprofits, you take advantage of the single member nonprofit LLCs. Like for-profit companies are doing with wholly owned subsidiaries because it just makes sense for them, primarily because under the tax law, a single member nonprofit LLC is a disregarded entity. It's what we sometimes refer to as a tax nothing. It's still a separate entity for non-tax purposes, but for tax purposes, it's treated like a division of the nonprofit. In practical terms, what that means is that single member nonprofit LLC does not have to go through the IRS application process. You can use the existing determination letter that the parent has to have that file of the 501(c)(3) status. For those of you who have been through the process of trying to get a file and 501(c)(3) application to the IRS, that is welcomed news because it takes, a couple of years ago, it took up to a year to get one processed. Now the processing is a little bit between six to nine months, but it still takes time. And so with the using a single member nonprofit LLC instead, you conduct real estate activities to conduct programs to have a separate board governing the activity. The single-member nonprofit LLC just makes a lot of sense, and there have been no changes in the law for that. What has changed, though, is the multi-membered LLC. And it is a rare bird. I think sometimes they're used and with hospitals, organizations or schools or joint ventures. But most organizations that I deal with are either nonprofit corporations or charitable trusts. However, there's still an interest in having multi-member nonprofit LLCs qualify as 501(c)(3) status. And so what you need to know as directors is that the IRS is looking at those standards and they've issued some rulings. They've issued a notice saying, here's what you need to do to be approved today, but we want you to know that we're looking at a variety of issues that have a more definitive set of rulings that are going to govern when a nonprofit, a multi-member nonprofit LLC can qualify for a 501(c)(3) status. So just be on the lookout. I think that anyone who's planning to have a multi-member nonprofit LLC, you need to look carefully at the rules. If you don't qualify for the strict standards that are prescribed in that notice, you need to stand back and wait and see what comes. So maybe with another session down the road, I'll bring good news.

The other two areas I want to touch on under the federal tax law update have to do with impact investing. Investment advisors now are beginning to play in the area where they want to do impact investing in both for-profits and nonprofits, and they want to provide investment advice for that world. There has been a rejection of a request for a 501(c)(3) organization from an investment advisor. And so it's important to see when the IRS rejects this kind of ruling, that what we can learn from them. In this particular case, the investment advisor said if a 501(c)(3) to do consulting, investment advising, he was a licensed investment adviser, but he was charging market rates. He was serving both for-profits and nonprofits, and the way he was being regulated, there was an expectation he would make a profit. The IRS looked at all of that and said, this organization isn't charitable, so we're going to deny your application. So for those of you out there who want to use your investment skills to set up your own 501(c)(3), this is a cautionary tale. You want to make sure that you're setting up your organization so it's officially charitable or else your application will be rejected.

Another area I want to touch on real briefly, and that is Donor Advised Funds. Again, very popular. In particular, they're useful when you have a sale of a company. If I'm owning a company and I want to reduce my tax burden, I will sometimes transfer some of the stock into a Donor Advised Fund to create a tax deduction as part of the overall transaction. It may be in my interest to make sure that when the Donor Advised Fund is set up and the sponsor organization receives the stock as to when they will liquidate that stock. Here's the tension. Most sponsor organizations have policies that say that when we receive stock, we're going to sell it right away. We don't, we're not in the business of holding stock and we want to be diversified, etc. However, the donor who's making that gift may not want to have that stock liquidated right away. It may affect the price of their other holdings in that stock. And so the policy may conflict with the practice of what's being told to the donor by the development of a person. So again, when you have misunderstandings like that, you oftentimes have litigation. And so there have been situations where donors have sued the sponsor organizations saying, hey, you promised that you would not dispose of the stock until I said so, or a prearranged schedule. And most of those cases, until recently, had just been dismissed out outright. There's no fiduciary duty at all. However, in California and other states, there are examples in which those cases are surviving the filing. They're not being rejected out of hand and they're going to discovery. None have proven successful, so far, but this is a situation where you need, the takeaway I would offer the folks out there who are dealing in this area, is that if you're a sponsor organization, you want to make sure that your policies are consistent with your practice. And if your policy says you liquidate the stock upon receipt that you have your development folks trained to say that, to understand that, and your donors who are giving the stock in the situation, understand that's your policy and you plan to enforce it. If I'm on the giving side, on the donor side, that if this is important to me, I want to build in some protection to have some say as to when the stock might be sold. Again, cautionary tale. But this is a part of your fiduciary duty, the duty of obedience, to make sure that you understand recent developments. And so hopefully that's proven helpful.

Hank: So with a lot of our clients, we help them establish a gift acceptance policy, and that policy usually reiterates the board's policy on selling a gift as soon as it's received. And that's what we encourage our clients to do. Let's not play the market. Let's not run any risk. Let's get it in and get it out and liquidate it and put the assets to use, either by investing them or paying for current operating expenses. So the point of that, which you said, is just make sure that the development officer understands that part of the policy and does not make promises to a donor that they cannot keep.

Bob: Exactly, correct. And just on the side, this often times happens with real estate. Lots of sponsor organizations and charitable organizations have in their gift acceptance policies that we don't hold real estate, we get rid of it right away. And so you want to make sure if that's your policy, that you're following it. If you want to create exceptions for it, then create exceptions for it in your policy so you know how to go about doing that. But also make sure that the donor understands what you intend to do with the property once its gifted.

Hank: Right.

Bob: Let's go to our third fiduciary duty, Hank, and that is the duty of loyalty. And there's again, two types of duties. Two flavors of this. One has to do with the duty that a director has to disclose conflicts of interest. If I'm on the board of a nonprofit, then I have, my primary duty, is to make sure that the interest of the nonprofit are being served. And if I'm involved with a transaction where I'm personally benefiting from that, then I have an obligation under the Nonprofit Corporation Act to tell my fellow directors, say, I got to tell you that I'm going to be affected by this transaction, I'm going to benefit from it personally, and you need to know that to take that into account. That's the bare minimum of the law is simply disclosure, and your vote doesn't count for approval. So if I’m on your board and I'm trying to buy a piece of property from the nonprofit, I would disclose the conflict and when it came time for approval, I could still vote, but my vote wouldn't count. This has to be the majority of the disinterested directors to approve that transaction.

Hank: So you may as well not vote.

Bob:Well, I would say this, though, I think what I see lots of nonprofits do is that they have additional protection because if I'm the founder and I'm voting, even if my vote doesn't count, I may have some influence over my fellow directors since I picked them or I made my reputation. So what a lot of nonprofits do is that in addition to disclosure, they also say, we want you to recuse yourselves from both voting and participating. So in other words, I disclose the conflict. I don't vote at all.

Hank: And you get out of the room.

Bob: Yeah, I get out of the room. Now, some organizations want you out of the transaction altogether. Others want to have information. I mean, it may be helpful for the nonprofit directors to hear what you have to say. And so you may be present for part of the discussion just to give information to answer questions. But at some point during that meeting, you need to recuse yourself, if your policy requires this, to get up and leave the room, leave the Zoom call, however you're doing this, to make sure that it's reflected and be sure that this all is reflected in your minutes. A similar kind of conflict has to occur with executive directors to get paid. You want to make sure that your executive director is, whatever the payment arrangements are, it's done with a full board vote. It's not a handshake between the president and executive director. That the executive director is not present during the discussion of setting salary and not voting on it, if they're on the board, and there's something done to validate the fair market value of what's being paid. Again, you can pay someone as a nonprofit for their services as long as it's for reasonable value, fair market value. You just can't overpay them. That's when you get in trouble. So really, if you have nepotism issues, if you have family, friends who are serving on the board or you want to hire and so forth, typically your copy of the interest policy would address that as well.

Hank: And there are national standards for it.

Bob: There are, but I will say this that I have seen organizations operate differently. I think having a policy and having it work is more important than having just a uniform policy. Again, it gets back to my mantra here. Your practice is going to be consistent with your policies. The other type of duty of loyalty that you the director need to be aware of is a duty of confidentiality. There's no need to have a NDA among your board members. There's no need to have confidentiality agreements. That duty is already imposed upon you by virtue of being a nonprofit director by law. Under the duty of loyalty, you have a duty to keep confidential things confidential. But the problem is that you sometimes don't know when things are to be kept confidential. Here's a practical tip. If you're conducting a transaction that you want to emphasize the confidential nature of the transaction, go ahead and meet an executive session. We sometimes take executive sessions are only used for HR matters. Not true. You can conduct an executive session for any reason. And so if you want, if you engage in a business transaction, purchasing land, for example, you may want to meet in executive session and have those people with a conflict either removed or not part of that. Keep separate minutes. Make sure the minutes are kept in a confidential place, etc. And that's another way that you can help fulfill your duty of loyalty.

Hank: And that would be a place that you might disengage staff members.

Bob: Exactly, exactly. You may have a staff member who has some relevant information be present but if you wanted to make sure that it is kept confidential from staff, then they don't have a right to know that and so you can exclude that as well. You know sometimes, Hank, I get a question particularly from those who are involved with the government about open meetings, laws or public records, acts and things like that. And so I got good news for most of you, that as a nonprofit, you are not subject to open meetings laws. You are not subject to public records requests. So the public does not have the right to attend your board meetings or your membership meetings. They don't have the right to look at your documents. So this is a little bit different than a governmental agency. There are some exceptions. If you're a nonprofit doing a certain type of economic development work, you may be required to follow those rules. If you're a charter school, operating as a nonprofit under the charter school act, you're required to conduct and follow the Open Meetings laws. But by and large, the only document that's public are those that are filed with the Secretary of State's office. And those that are filed with the IRS, other than the Schedule B that we'll talk about in a minute for donor disclosure that's available either through the IRS or organizations like GuideStar. So let's go to some of the updates then under the duty of loyalty, and so the first one is again a confidentiality matter, and that's the donor disclosure matter.

So with our next slide, we'll go and look at a new provision that has not yet been approved. So let me give you some background on this. I mentioned to you that a nonprofit has got to disclose their donors under 990 to the IRS, and those 990s are generally publicly available, except for the schedule list of donor information, that's kept confidential. Some states, though, won't have access to that information. And so California, New Jersey and other states adopted laws that said we can require nonprofits to submit that schedule, the schedule of a list of donors, to us as well. This has been challenged in the courts on First Amendment grounds that this infringes on the right of donors to fairly associate by having a rule that requires a disclosure of their contributions without sufficient reason to do so. The IRS would like to have this information because they want to make sure that the charity, charitable deductions, that you're entitled to the charitable deduction, and this is one way they check on that. But the other states who try to have access to information were unable to articulate a sufficient reason to why they wanted to have that information. And so the Supreme Court struck down California law on First Amendment grounds. So the California Voter Disclosure Law is not in effect. Other states, including North Carolina, went a step further, though, and they proposed a law that could require the consent of donors before giving that information out. And if you violated that, then you could be subject to penalties and attorneys' fees. That law was passed by the General Assembly, but vetoed by the Governor, and we don't know what the status is going to be and whether it would be overridden or not. But that's an area to be on the lookout for is that I think it would be additional attempts to maintain the confidentiality of donor information. So again, you as the director by virtue of your duty of loyalty, need to be aware of these laws.

Hank: Bob, quick question. When I am preparing my 990 and I have to list donors on Schedule B, am I listing all of my donors on Schedule B or am I only listing at a certain level and above? Is it a certain percentage?

Bob: It is a certain level and above and again, sometimes the rule is different, whether you're a private foundation or whether you're public charity. But again, that information is kept confidential by the IRS and for cease fires purposes only. Let me give you another development that affects your duty of loyalty. And that's the next slide dealing with elected officials of nonprofit boards. And so on this next slide, this is the area where I'm getting the most pushback of all the new developments we've talked about so far. This is in North Carolina, and it deals with when you have an elected official serving on your nonprofit board in which the nonprofit board is receiving a grant or a loan, or funds from that legislative body that elected official serves, then there is an additional new requirement that that elected official recuse themselves from voting on the budget that's being adopted by the legislative body. Now, as a side, I would just say that I like the idea of having elected officials serve a nonprofit. I think it's a valuable thing and it helps the nonprofits, it helps the community, the IRS encourages it. And so I'm a little concerned. The purpose of this law was to address certain bad apple cases. There were certain abuses in certain situations where elected officials misuse their position, and this was a reaction to that. And this part of the rule that has strict recusal rules, in my judgment, is an overreaction. If you think about what that means to the elected official, if I'm on the city of ACME, use a generic word. If I'm on a board that's receiving funds that I can't vote on the nonprofit where, say, I'm receiving funds, that I can't vote on the city budget or the county budget that's awarding that grant, I'm recused from the entire thing. Now there's certain things you can do. I mean, you could, the city could obviously separate, or the county could separate out the nonprofit funding in a separate bill, I recuse myself from that vote by voting on others, but that requires some work and effort on other government entities. The nonprofits can convert my position from being on the board to liaison or some advisory capacity. However, I would like, if you were asking what I would like, I would like to see this law remain in effect but instead of having a strict recusal, that is, a per say, one rule, one size fits all, that we have a notice requirement and then each community can then have its own under cover rules that kind of address that kind of situation. So that, I think is a summary of our fiduciary duties. Giving you the kind of context and the updates and I'm just ready to kind of take questions.

Hank: Okay, thank you.

Bob: Before we take questions, let me just say, yes, I realize that we're not going to be able to cover all the questions today, and there may be some questions you don't want to ask publicly so I'm going to make an offer for everyone who's attending the webinar here, that each of you are entitled to one free phone call, yours truly, if you want to raise a question that has not been asked. My contact information is included in the slides. So feel free to kind of raise those questions. I'll say that sometimes these calls can kind of turn into lunches and dinners, I'm sometimes referred to as a lawyer who works for food, and you can tell business has been great. So ahead of that, let's just go to the questions we have.

Hank: So I would add to that, we all know what lawyers' fees are like, so that's a very valuable offer for many of us. The first question we have, what is the standard that separates the responsibilities that are governing the work from the responsibilities of the employees of the organization? Can there be overlap? And I'm going to interpret that to what decisions should be made by the staff and what decisions should be made by the board? And is there ever a time when it's appropriate for staff and board to work together to make a decision?

Bob: So from the legal prospective employees are governed by employment law and board of directors are governed by the Nonprofit Corporation Act, so there are distinct differences with the standards and so forth. But where the interaction comes into play is not in, certainly, a legal way, but in a more of a best practices way. And how do we make decisions when you have a decision that needs to be made, at what point is the decision a staff only decision? In what time? At what point is it a board only decision? A staff only decision might be, where do we put the coffee pot? We're going to need to decide where that is. So the location of the coffee pot in the office, that's a staff decision, the selection of the CEO might be a board only decision. And so those are two extremes. In my view. I think most decisions come to be either a board decision, with staff input. So think of your staff making recommendations about this particular policy. It's the final call of the board, but it's done by a staff recommendation and then the flip side, and sometimes not always thought through, there are staff decisions that may require board input. The staff may, in other words, it's the staff's obligation to decide, legal duty to decide, under the articles and bylaws, that we're going to decide how we pay people? That's a role for the CEO. But at some point, you may want to get input from the board to help influence that decision. So I think the answer to this question is not necessarily a legal question. It's really how you do decision making when you have two different groups like that.

Hank: The next question, and thank you all for asking these questions, and if you want to add some more, you can go to the chat or the Q&A information on your screen. The next question. Bob, do you see an increase in collaboration between foundation, between foundations to leverage fundraising opportunities as opposed to giving happening in silos?

Bob: I do, and I'll just give an anecdote. But during the Great Recession of 2008, a lot of my practice was affected by people wanting to form a new nonprofit 501(c)(3) and so there was an influx of, you know, forming new organizations, setting them up, going through the IRS application process, etc. With the COVID recession, it's not necessarily new organizations, but there's a greater interest in mergers and dissolutions or reorganizations of a consolidation of the nonprofit community. And so that's what, where the majority of my new work has been done in a reaction, and I think that has been a function of not just the code conditions or the economic conditions, but funders who want to see further collaboration, further cooperation and maybe seeing merger or some reorganization as a way to accomplish that.

Hank: Okay, alright. Who should sign the annual form 990, the CEO, the CFO or the board chair?

Bob: I would say whoever is authorized, so you will, and this is not a bylaw question, this really needs to be decided by a board, by the board resolution, but each of those, each of those individuals could be authorized to sign the return. So long as the board agrees who signs it. I think the more interesting question is who needs to read it before it gets filed? Most of you probably have financial audits where the auditors come in and do the PowerPoint presentation, etc., and that's treated very, very seriously. And that's important. And you should do that. But that audit is only read by those who you give it to, be the donors, could be someone else. The 990 is reviewed by the world. That's available. I teach a class at UNCG, whereas both students and CEOs attending it, and so when I tell the class that you can find out what your boss makes by going on GuideStar and downloading the return, half the class, eyes wide open and excited, the other half the class, you can see heads down. That kind of information is available, and so you need to treat the 990 very seriously, reviewed by the board, maybe even have a policy adopted so that it shows how much more time and preparation ought to go into reviewing that 990.

Hank: So have a policy that all the board members are required to review and maybe even sign off on the review, that, you know, a positive statement that they've read and reviewed and have no issues with. So that's one policy and then a policy about, and it can include in that policy, who signed.

Bob: Absolutely.

Hank: And that should be more memorialized as a policy, not in the bylaws, because we don't want to stuff bylaws.

Bob: Exactly, you want your bylaws, again, mean and lean and that kind of issue is best addressed, I think, by adopting a policy.

Hank: Okay, so, can you give a few rules of thumb for attorneys who are directors of the nonprofit board, for example, when should such a board member recuse himself or herself based on the fact that the board member has provided advice on a particular subject? Can an attorney board member negotiate with an adverse party on the board's behalf, draft demand letters, and/or respond to demand letters?

Bob: This is a great question. When you have an attorney serving on the board as I do training with my fellow partners and associates at the law firm of that kind of you as an attorney, understanding the advantages and disadvantages of working with nonprofits, I think that if I'm a attorney on a nonprofit board, I've got to be very careful that I'm not giving legal advice. I'm a nonprofit director. I have not been asked to give legal advice. I can have some influence or some say about what I think the law is, but I am not acting as an attorney representing that nonprofit, and oftentimes as I'm asked to do this, to work with a nonprofit and to serve on their board, I will sometimes say, I don't want to serve on your board, but I will represent you maybe on a pro-bono basis. So I know what my role is, what hat I'm wearing. I'm not a nonprofit director, I'm outside counsel that's providing you legal advice. And so all those questions, I think, really can be answered by making sure that the attorney understands, are they wearing their director hat or are they wearing their outside counsel hat?

Hank: So you would advise one or the other, but not both.

Bob: Ideally, now I understand nonprofits like to have lawyers and accountants and other folks for free advice. I think for those of you, you need to understand that there are some pitfalls of that. It's not just with the ethical obligation that question suggests, but not every attorney knows all areas of the law, like I mentioned before. So just because you have an attorney on your board doesn't mean that person is qualified to answer that question.

Hank: So the next question, my board needs to adopt an investment policy, do we need a legal advisor or a financial advisor to help describe the policy? And I have neither on the board, so I will answer that, so you can take a glass of water. But you should have a financial advisor help you establish an investment policy. And typically that would be the person you hire or the agency you hire to do your investment management for you. Anyone, I don't know, we do a lot of this, is help people build an investment policy statement from the ground up or we go in and help them review investment policy statements and modify them so that they are working documents. I think that is something that happens not just with investment policies, but with lots of documents that we create. We make them completely invaluable and they're so stiff that it takes an act of Congress to change anything. We have ways to help you design an endowment document in particular that moves in accordance to different things that are going on in the world and doesn't completely hog tie you.

Bob: And I'll just say, I second that emotion. You do not want a lawyer managing your funds, want to have someone who's qualified to do this.

Hank: Two questions together just probably with the couple of minutes we have left. What's a common mistake you see boards make that can be easily avoided and what's a common best practice that boards can implement to help their organization stay on track?

Bob: So I think that having a periodic review of your bylaws and policies is probably the best thing you can do and look to those policies that you're not following. I'll give you two examples. Oftentimes, I see bylaws that have board attendance requirements that say something along the lines of if I missed three meetings, I'm automatically removed as a director. Well, if I want to challenge a close vote, then I'm going to look to see whether directory was voting improperly because they should have been taken off because of the attendance requirements. Those kinds of requirements, if you're going to have them, need to be strictly followed and there are alternatives of that. So that's one kind of trap I see. Another one, just a pet peeve of mine, is Robert's Rules of Order. Now I love Robert's Rules of Order in the right place. The Robert's Rules of Order is best for a crowd of 500 when you're trying to imagine a convention or assembly. It does not need to be used for a group of five, a board member, a typical board size, where you are trying to make decisions, I think is an impediment. And if you have in your bylaws that you conduct your director's meetings on Robert's Rules of Order and you're not following it again, you've got a situation where your policy conflicts with your practice.

Hank: And policy conflicts with practice, we cannot maintain the status quo. There's our quote for the day. And the last is the comment that I can answer or speak to. I have several trustees who wanted to join but have a conflict, will this be recorded so that I might share the recording? Yes, it is recorded and sometime in the next couple of days you will receive, everybody who registered for the discussion today will receive a link that will take them to the recording and that you may share that link with others. Again, if there are other questions or comments that we didn't get to, please feel free to talk to the relationship manager who you work with at First Citizens or send an email directly to me. My email address will be included in the links you get for the meeting.

Thank you very much. Very informative. Lots of information to cover. I would also want to invite you to our Making Sense Market Update Webinar. There was one question that we did not answer about the current market volatility. I promise you that if you log into that market update webinar, you will get lots of information on what's going on in the market today. From all of us here at First Citizens, thank you for trusting us to bring you this information. Thank you for working with us at many different levels. It is not something we take for granted. We appreciate you and we appreciate the opportunity to work with all of you and hopefully work with a few more of you. Thank you so much and have a good day.