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FIDUCIARY DUTIES & LIABILITY OF NONPROFIT/EXEMPT ORGANIZATION DIRECTORS & OFFICERS First Run Broadcast: July 22, 2015 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Serving as a director a nonprofit or exempt organization is as complex and often more burdensome than serving as the director of a for-profit enterprise. There is increased scrutiny from members of organization, the IRS and state attorneys general, continuing pressure to grow endowments and get greater returns, pressure to access to restricted funds to meet operational shortfalls, and increased scrutiny of management practices. Understanding the duties of these nonprofit directors – including those of loyalty, obedience, and care – is essential to avoiding liability and helping ensure the organization serves its mission. This program will provide advisers of nonprofits a practical guide to the duties and liability of directors, forms of indemnification, best practices for endowment management and access to restrict funds, and more. Fiduciary duties of nonprofit/exempt organization directors – care, obedience, loyalty Sources and forms of liability – lawsuits from members, state and federal scrutiny Statutory, contractual and organizational layers and forms of liability Risks of accessing restricted funds – polices, court orders, renegotiation with vendors Investment duties under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) Standards for judging investment decisions, permissibility of pooling, and supervision of delegated authority Organizational best practices for director governance, including IRS standards Speakers: Michele A. W. McKinnon is a partner in the Richmond, Virginia office of McGuireWoods, LLP, where she an extensive tax-exempt organization and charitable giving practice. She has more than 30 years’ experience representing public charities, major colleges and universities, supporting organizations, large private foundations, and charitable trusts. She is a Fellow in the American College of Trust and Estate Counsel and formerly served as its Virginia State Chair. Ms. McKinnon received her B.A. from the University of Virginia, her J.D., magna cum laude, from the University of Richmond School of Law, and her L.L.M. in taxation from the College of William & Mary Marshall-Wythe School of Law. Michael Lehmann is a partner in the New York office of Dechert, LLP, where he specializes in tax issues related to non-profits and in the tax treatment of cross-border transactions. He advises hospitals and other health care providers, research organizations, low-income housing developers, trade associations, private foundations and arts organizations. He advises clients on obtaining and maintaining tax-exempt status, executive compensation, reorganizations and joint ventures, acquisitions, and unrelated business income planning. Mr. Lehmann received his A.B., magna cum laude, from Brown University, his J.D. from Columbia Law School, and his LL.M. from New York University School of Law.

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FIDUCIARY DUTIES & LIABILITY OF NONPROFIT/EXEMPT ORGANIZATION DIRECTORS & OFFICERS First Run Broadcast: July 22, 2015 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Serving as a director a nonprofit or exempt organization is as complex and often more burdensome than serving as the director of a for-profit enterprise. There is increased scrutiny from members of organization, the IRS and state attorneys general, continuing pressure to grow endowments and get greater returns, pressure to access to restricted funds to meet operational shortfalls, and increased scrutiny of management practices. Understanding the duties of these nonprofit directors – including those of loyalty, obedience, and care – is essential to avoiding liability and helping ensure the organization serves its mission. This program will provide advisers of nonprofits a practical guide to the duties and liability of directors, forms of indemnification, best practices for endowment management and access to restrict funds, and more.

• Fiduciary duties of nonprofit/exempt organization directors – care, obedience, loyalty • Sources and forms of liability – lawsuits from members, state and federal scrutiny • Statutory, contractual and organizational layers and forms of liability • Risks of accessing restricted funds – polices, court orders, renegotiation with vendors • Investment duties under the Uniform Prudent Management of Institutional Funds Act

(UPMIFA) • Standards for judging investment decisions, permissibility of pooling, and supervision of

delegated authority • Organizational best practices for director governance, including IRS standards

Speakers: Michele A. W. McKinnon is a partner in the Richmond, Virginia office of McGuireWoods, LLP, where she an extensive tax-exempt organization and charitable giving practice. She has more than 30 years’ experience representing public charities, major colleges and universities, supporting organizations, large private foundations, and charitable trusts. She is a Fellow in the American College of Trust and Estate Counsel and formerly served as its Virginia State Chair. Ms. McKinnon received her B.A. from the University of Virginia, her J.D., magna cum laude, from the University of Richmond School of Law, and her L.L.M. in taxation from the College of William & Mary Marshall-Wythe School of Law. Michael Lehmann is a partner in the New York office of Dechert, LLP, where he specializes in tax issues related to non-profits and in the tax treatment of cross-border transactions. He advises hospitals and other health care providers, research organizations, low-income housing developers, trade associations, private foundations and arts organizations. He advises clients on obtaining and maintaining tax-exempt status, executive compensation, reorganizations and joint ventures, acquisitions, and unrelated business income planning. Mr. Lehmann received his A.B., magna cum laude, from Brown University, his J.D. from Columbia Law School, and his LL.M. from New York University School of Law.

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____Last Name___________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Fiduciary Duties & Liability of Nonprofit/Exempt

Organization Directors & Officers Teleseminar

July 22, 2015 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75

Non-VBA Members $115

NO REFUNDS AFTER July 15, 2015

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: July 22, 2015 Seminar Title: Fiduciary Duties & Liability of Nonprofit/Exempt Organization Directors & Officers

Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

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Fiduciary Duties and Liabilities of Nonprofit Directors

The Uniform Prudent Management of Institutional Funds Act

and

IRS Best Practices for Directors

Michele A. W. McKinnonMcGuireWoods LLP

Richmond, Virginia(804) 775-1060

[email protected]

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The Uniform Prudent Management of Institutional Funds Act

I. Enactment Status. The Uniform Prudent Management of Institutional Funds Act(“UPMIFA”) has now been enacted in all states, other than Pennsylvania, as wellas the District of Columbia.

II. Overview.

A. Date of Adoption. UPMIFA was adopted by the National Conference ofCommissioners on Uniform State Laws in 2006 to succeed and replace theUniform Management of Institutional Funds Act (“UMIFA”) from 1972.

B. Significant Changes. UPMIFA makes several significant changes to theprovisions of UMIFA.

1. It adds express standards for management and investmentdecisions, expenditure decisions, and the delegation ofmanagement and investment duties.

2. UPMIFA eliminates the UMIFA concept of historic dollar value.

3. UPMIFA modifies the rules regarding the release of restrictions.

III. Definitions (Section 21).

A. Institution. UPMIFA applies to “institutions.” An “institution” is a“person” (other than an individual) organized and operated exclusively forcharitable purposes.

B. Person. “Person” is defined broadly to include a corporation, trust,limited liability company, and association, as well as other entities.

C. Charitable Purposes. The term “charitable purposes” is defined similarlyto the provisions of the Uniform Trust Code as well as the Uniform TrustCode. Charitable purposes include:

1. Relief of poverty.

2. Advancement of education or religion.

3. Promotion of health.

4. Promotion of a governmental or municipal purpose.

1 All references to a Section or Sections are to the Uniform Prudent Management of Institutional Funds Act(2006). All references to the Comments or Prefatory Note also are to that Act. A complete copy of the Actwith Prefatory Note and Comments is available at www.upmifa.org.

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5. Any other purpose the achievement of which is beneficial to thecommunity.

D. Institutional Funds. The standard of conduct rules for management andinvestment set forth in UPMIFA apply to institutional funds.“Institutional funds” are funds held by the institution exclusively forcharitable purposes. Institutional funds do not include:

1. program-related assets (i.e., an asset held by an institutionprimarily to accomplish a charitable purpose of the institution andnot primarily for investment),

2. a fund held for an institution by a trustee that is not an institution(unless part of a component trust of a community trust orfoundation), or

3. a fund in which a noncharitable beneficiary has an interest.

E. Endowment Fund. For purposes of UPMIFA, an “endowment fund” isall or part of an institutional fund that is not wholly expendable by theinstitution on a current basis under the terms of a gift instrument.

1. The key to the establishment of an endowment fund is theexistence of a gift instrument that creates the restriction on howmuch is expendable.

2. An endowment fund does not include assets that the institution,rather than the donor, has designated as an endowment fund for itsown use, which is commonly referred to as a board-restrictedendowment or quasi-endowment.

F. Gift Instrument. A “gift instrument” is a record or records, including theinstitution’s solicitations, under which property is transferred to or held byan institution as an institutional fund.

G. Record. A “record” is information that is inscribed on a tangible mediumor stored in an electronic or other medium and retrievable in perceivableform.

IV. Standard of Conduct for Management and Investment of Institutional Funds(Section 3).

A. Overview. UPMIFA sets forth the standard of conduct that must beexercised in managing and investing institutional funds (which mayinclude endowment funds).

1. The comments under UPMIFA indicate that the standard ofconduct rule “directs directors or others responsible for managing

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and investing the funds of an institution to act as a prudent investorwould, using a portfolio approach in making investments andconsidering the risk and return objectives of the fund.”

2. The comments specify that the section follows modern portfoliotheory for investment decision making and permits a broad rangeof investments.

B. General Considerations. Under this standard of conduct and subject tothe intent of a donor as expressed in a gift instrument, an institution, inmanaging and investing an institutional fund, must the charitable purposesof the institution and the purposes of the institutional fund.

C. Standard of Care. Each person responsible for management andinvestment of institutional fund must manage and invest the fund in goodfaith and with the care an ordinarily prudent person in a like positionwould exercise under similar circumstances.

D. Costs. The institution may incur costs in connection with the investmentand management of an institutional fund as long as such costs areappropriate and reasonable in relation to the assets, the purposes of theinstitution, and the skills available to the institution.

E. Verification of Facts. The institution is required to make a reasonableeffort to verify facts relevant to the management and investment of thefund.

F. Pooling. An institution may pool two or more institutional funds forpurposes of investment and management.

G. Factors for Consideration. Subject to the intent of a donor as expressedin a gift instrument, when managing or investing institutional funds, theinstitution must consider the following factors if relevant:

1. General economic conditions.

2. The possible effect of inflation or deflation.

3. The expected tax consequences, if any, of investment decisions orstrategies.

4. The role that each investment or course of action plays within theoverall investment portfolio of the fund.

5. The expected total return from income and the appreciation ofinvestments.

6. Other resources of the institution.

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7. The needs of the institution and the fund to make distributions andpreserve capital.

8. An asset’s special relationship or special value, if any, to charitablepurposes of the institution.

H. Overall Portfolio. Management and investment decisions about anindividual asset are to be made not in isolation but rather in the context ofthe institutional fund’s portfolio of investments as a whole and as a part ofthe overall investment strategy having risk and return objectivesreasonably suited to the fund and to the institution.

I. No Limits on Types of Investments. In general, there are no limitationson the type of property in which the institution may invest.

J. Duty to Diversify. The institution is required to diversify the investmentsof an institutional fund unless the institution reasonably determines that,because of special circumstances, the purposes of the fund are betterserved without diversification.

K. Duty with respect to Contributed Property. In the case of contributionsof property to the institution and within a reasonable period of time afterreceiving such property, the institution must make and carry out decisionsconcerning the retention or disposition of the property or to rebalance aportfolio, in order to bring the institutional fund into compliance with thepurposes, terms, and distribution requirements of the institution asnecessary to meet other circumstances of the institution and the standardof conduct imposed by UPMIFA.

L. Special Skills or Expertise. If members of the institutions board orinvestment committee have special skills or expertise, or were selected inreliance upon the person’s representation that he or she has special skillsor expertise, those persons have a duty to use those skills or that expertisein managing and investing institutional funds.

V. Appropriate for Expenditure or Accumulation of Endowment Funds(Section 4).

A. Overview. UPMIFA sets forth rules for appropriating for expenditure oraccumulating endowment fund assets. The UMIFA concept of historicdollar value is abolished under UPMIFA, and in its place UPMIFAincorporates a prudent total return expenditure standard.

B. General Rule. Under this provision of UPMIFA and subject to the intentof a donor expressed in a gift instrument, the institution may appropriatefor expenditure or accumulate so much of an endowment fund as theinstitution determines is prudent for the uses, benefits, purposes, andduration for which the endowment fund is established.

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C. Optional Provision for Presumption of Imprudence. UPMIFAcontains an optional provision, which has been enacted in only a handfulof states, that deems any expenditure over 7%, or other percentageselected by the enacting state, as imprudent.

D. Standard of Care. In determining whether to appropriate or accumulate,the institution’s governing board must act in good faith with the care thatan ordinarily prudent person in a like position would exercise undersimilar circumstances. In addition, the institution’s governing board mustconsider, if relevant, the following factors:

1. The duration and preservation of the endowment fund.

2. The purposes of the institution and the endowment fund.

3. General economic conditions.

4. The possible effect of inflation or deflation.

5. The expected total return from income and the appreciation ofinvestments.

6. Other resources of the institution.

7. The investment policy of the institution.

E. Rules of Construction. It is also important to understand the rules ofconstruction that apply under UPMIFA’s expenditure rules. To limit theinstitution’s authority to appropriate funds for expenditure, the provisionsof the gift instrument for the endowment fund must specifically state thelimitation.

1. UPMIFA interprets certain terms as creating an endowment fundand not otherwise limiting the ability of the institution toappropriate or accumulate.

2. Terms in the gift instrument that designate the gift as anendowment or a direction to use only “income,” “interest,”“dividends,” “rents, issues, or profits,” or “to preserve the principalintact” or similar words will create an endowment fund, but do notlimit the application of the general expenditure rule of UPMIFAset forth above.

F. Additional Guidance in Comments. To understand the intent andpurposes of the expenditure rules, it is helpful to look at the comments toUPMIFA.

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1. The Prefatory Note to the comments indicates that the purposes ofthe changes to the expenditure rules, which eliminated the conceptfrom UMIFA prohibiting appropriation when the endowment fundwas below its historic value, was to provide stricter guidelinesregarding spending and to give organizations the ability to copewith market fluctuations more easily.

2. The Prefatory Note also indicates that the new rules are designedto protect donor intent and states: “When a donor expresses intentclearly in a written gift instrument, the Act requires that the charityfollow the donor’s instructions. When a donor’s intent is not soexpressed, UPMIFA directs the charity to spend an amount that isprudent, consistent with the purposes of the fund, relevanteconomic factors, and the donor’s intent that the fund continue inperpetuity. This approach allows the charity to give effect to donorintent, protect its endowment, assure generational equity, and usethe endowment to support the purposes for which the endowmentwas created.”

3. The comment regarding the expenditure rules provides additionalguidance on the intent of UPMIFA and states: “Instead of usinghistorical dollar value as a limitation, UPMIFA applies a morecarefully articulated prudence standard to the process of makingdecisions about expenditures from an endowment fund. Theexpenditure rule…applies only to the extent that a donor and aninstitution have not reached some other agreement about spendingfrom an endowment. If a gift instrument sets forth specificrequirements for spending, then the charity must comply withthose requirements.

G. Role of Preservation of Principal. Although UPMIFA does not requirethat a specific amount be set aside as “principal,” UPMIFA assumes thatthe institution will act to preserve “principal” (i.e., to maintain thepurchasing power of the amount contributed to the fund) while spending“income” (i.e., making a distribution each year that represents areasonable spending rate, given investment performance and generaleconomic conditions). Accordingly, an institution should monitorprincipal in an accounting sense, identifying the original value of the fund(the historic dollar value) and the increases in value necessary to maintainthe purchasing power of the fund.

VI. Delegation of Management and Investment Functions (Section 5).

A. Overview. UPMIFA also sets forth rules regarding the delegation by aninstitution of the management and investment of an institutional fund to athird party.

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B. Delegation Permitted. Under these rules and subject to the provisions ofa gift instrument or other applicable law, an institution may delegate to anexternal agent the management and investment of an institutional fund.

C. Standard of Care. As long as the institution acts in good faith, with thecare that an ordinarily prudent person in a like position would exerciseunder similar circumstances in selecting an agent, establishing the scopeand terms of the delegation, and periodically reviewing the agent’s actionsand performance, the institution will not be liable for the acts of the agent.

D. Duty of Agent. In addition, in performing a designated function, an agentowes a duty to the institution to exercise reasonable care to comply withthe scope and terms of the delegation. Bu accepting delegation of amanagement or investment function from an institution, the agent alsosubmits to the jurisdiction of the applicable courts in all proceedingsarising from or related to the delegation or the performance of thedelegated function.

E. Additional Permissible Delegations. The institution may also delegatemanagement and investment functions to its committees, officers, andemployees.

F. Additional Guidance in Comments.

1. The comments under UPMIFA provide: “Section 5 permits thedecision makers in an institution to delegate management andinvestment functions to external agents if the decision makersexercise reasonable skill, care, and caution in selecting the agent,defining the scope of the delegation and reviewing theperformance of the agent. In some circumstances, the scope of thedelegation may include the authority to redelegate to investmentmanagers with expertise in particular investment areas. Alldecisions to delegate require the exercise of reasonable care, skill,and caution in selecting, instructing, and monitoring agents.

2. The comments further state that, when delegating, the institutionshould be mindful of the requirements of the investment andmanagement provisions directing the institution to incur onlyreasonable costs in managing and investing an institutional fund.

G. No Delegation of Spending Decisions. The institution cannot delegateendowment expenditure decisions.

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VII. Release/Modification of Restrictions on Management, Investment, orPurpose (Section 6).

A. Release by Agreement with Donor or by Court. UPMIFA also includesrules regarding when a restriction on the management, investment, orpurpose of a fund can be released or modified. Under these rules:

1. Restrictions on a fund can be modified with the donor’s consent ina record as long as the fund is still used for a charitable purpose ofthe institution.

2. The court, upon application of the institution and with notificationto the Attorney General, may modify a restriction on managementor investment of the fund if the restriction has becomeimpracticable or wasteful, impairs the management or investmentof the fund, or will further the purposes of the fund because ofcircumstances not anticipated by the donor.

3. The court, upon application of the institution and with notificationto the Attorney General, may modify the purpose of a fund orrestriction on its use if the use has become unlawful, impracticable,impossible to achieve, or wasteful.

B. Special Rules for Small Funds. UPMIFA also provides rules forreleasing restrictions on small funds without court approval. If therestriction on management, investment, or use is unlawful, impracticable,impossible to achieve, or wasteful, the institution, with 60-days’ notice tothe Attorney General, may modify the purpose or restriction if the fundhas a total value of less than [$25,000] and has been in existence for morethan [20] years.

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IRS Best Practices for Directors

I. IRS Focus on Governance and Compliance.

A. The focus on governance is not going away.

B. The IRS continues to state its belief that a well-governed organization ismore likely to be a tax-compliant organization.

C. The IRS does not want to micromanage organizations, but does expectthem to have appropriate internal controls.

D. If organizations have not already done so, now is the time to get thearticles of incorporation, bylaws, and policies in order.

E. The IRS released a governance checksheet a few years ago for use by itsagents in audits.

1. The checksheet is to be used to determine if an organization usescertain governance practices that might indicate whether theorganization is in compliance with the rules for maintaining tax-exempt status.

2. The checksheet asks about the organization’s mission statement,compensation arrangements, control of the organization, includingfamily or business relationships among directors, officers, trustees,or key employees, financial oversight of the organization, andboard review of the organization’s Form 990.

3. In many cases, the checksheet overlaps with the questions asked onthe revised Form 990 as implemented in 2008.

4. The IRS plans to use the data collected with the governancechecksheet in a long-term study of the intersection betweengovernance practices and tax compliance.

5. The checksheet information may be a way for the IRS to determinewhich organizations will be selected for a more extensive reviewof operations.

F. The IRS also has its “life cycle” and governance policies for nonprofits onits website containing six topic areas:

1. Mission Statement.

a. Clearly articulated.

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b. Guide to the organization’s work.

c. Aspirational in nature.

d. Separate from the Articles of Incorporation.

2. Organizational Documents.

a. Articles of Incorporation – govern the relationship between

the entity and the state.

b. Bylaws – govern the relationship by and between theofficers and directors.

3. Governing Body.

a. Board size will depend upon the size of the organization.

b. Board should include individuals who are deeply engagedin the activities of the organization and who have expertise.

c. Board must be independent.

d. Minutes of board meetings are critical.

4. Governance and Management Policies.

5. Financial Statements and Form 990 Reporting.

6. Transparency and Accountability.

II. Governance and Management on Revised Form 990. The Form 990 requestssubstantial information about the governing body and management of theorganization.

A. Number of voting members of the board.

B. Number of independent voting members of the board.

C. Family and business relationships among officers, directors, and keyemployees.

D. Delegation of management duties to third parties.

E. Changes to articles and bylaws during the tax year.

F. Material diversion of assets.

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G. Existence of members or stockholders.

H. Contemporaneous documentation of board and committee meetings.

I. Existence of local chapters and affiliates and policies with respect to them.

J. Provision of copy of Form 990 to directors before filing.

K. Conflict of interest policy.

1. Existence of written conflict of interest policy.

2. Annual disclosure requirements under conflict of interest policy.

3. Method of monitoring and enforcing conflict of interest policy.

L. Other policies.

1. Existence of whistleblower policy.

a. Process for handling complaints, unethical conduct,

suspected financial improprieties, and misuse of the

organization’s resources.

b. Encourage reports by employees of possible violations.

c. Prohibit retaliation, demotion, or other adverse action

against reporting employee.

2. Process for determining compensation of president or CEO andother officers and key employees.

3. Existence of written policy regarding joint venture arrangements, ifthe organization participates in such ventures.

M. Public disclosure of:

1. Form 990 and Form 990-T.

2. State filing of Form 990.

3. Articles of Incorporation and Bylaws.

4. Conflict of Interest Policy.

5. Financial Statements.

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III. Other Policies Frequently Adopted by Nonprofit Organizations.

A. Investment Policy

B. Spending Policy

C. Fundraising or Gift Acceptance Policy

D. Document Retention and Destruction Policy

IV. What Does It Mean for a Nonprofit Organization?

A. The organization should undertake a review of the organizationaldocuments at least every five years and add modernized language anddelete obsolete language.

B. Directors should:

1. Attend board meetings;

2. Review meeting minutes and committee reports;

3. Review financial information and tax filings; and

4. Review audit reports and letters.

C. Officers should have consistent job expectations and descriptions, keep theboard informed, and stay within their authority.

D. The Board of Directors should establish policies and adhere to them.

Dechert LLP

FIDUCIARY DUTIES AND LIABILITY OF NONPROFIT/EXEMPT ORGANIZATION

DIRECTORS

Michael LehmannDechert, LLP - New York City

(212) [email protected]

SEGMENT 1: FIDUCIARY DUTIES OF DIRECTORS OF NONPROFITCORPORATIONS

Background: The subject of the “fiduciary duties” of directors of nonprofit corporations is oftendiscussed. What are these, to whom do they apply, what are the consequences of violating them,and who can press claims of violation?

1. What are fiduciary duties?

A. “Fiduciary” derives from the Latin for trust (“fidere,” “fiducia” and “fiduciarius”).

B. A fiduciary, then, is someone tasked with responsibility for the needs/concerns/welfare ofanother person, not him/herself.

2. What specific fiduciary duties do directors have?

A. Care – carrying out duties with ordinary prudence.

B. Loyalty – carrying out duties with undivided concern for the entity.

C. Obedience – carrying out duties faithful to purpose/mission.

3. Who can bring fiduciary claims?

A. Aggrieved members (usually).

B. Aggrieved directors.

C. Aggrieved officers.

D. State attorneys general.

E. Some federal agencies.

4. Who cannot bring fiduciary claims?

A. Usually not beneficiaries.

B. Usually not creditors.

C. Usually not the IRS.

5. What are the consequences of breach of fiduciary duty?

A. Personal liability for directors – monetary damages.

B. Removal from position – nonmonetary.

C. Being barred from future service - nonmonetary.

SEGMENT 3: INDEMNIFICATION OF NONPROFIT DIRECTORS/OFFICERS

Background: As we have seen above, directors of a nonprofit corporation can be personally liablefor money damages in the case of breaches of fiduciary duty. Through indemnification, theirexposure to such liabilities, and the cost of defending claims for such liabilities, can beameliorated.

1. What is indemnification?

A. The basic idea of indemnification is making a person whole for certain losses or claims.

B. Indemnification is not limited to the context of directors and officers but can be found inalmost any kind of contract.

C. As discussed below, indemnification is not the same as advancement of expenses, althoughthey are closely linked. One must carefully examine each circumstance to ascertain whether bothare available.

2. Why provide for indemnification?

A. Primarily it is an inducement to potential directors and officers to take on the responsibilitiesof being a director by providing a measure of protection against financial risk.

B. While insurance is another means of protecting against the financial risks of service as adirector or officer, corporate indemnification is typically seen as superior, at least conceptually,because it typically has no direct cost, typically has no dollar limits (other than corporate assets),typically is subject to few exclusions, and typically is perpetual.

3. How is indemnification effectuated?

A. Statutory indemnification.

B. Charter/By-law provisions.

C. Contract.

D. Board resolution.

4. Statutory Indemnification.

A. Statutory indemnification is based on – and is entirely subject to parameters set forth in - statelaw.

(i) New York: Sections 719-726 of the Not-for-Profit Corporation Law.

(ii) Delaware: Section 145 of the General Corporation Law

(iii) California: Section 5238(b) of the Corporation Law

B. Statutory indemnification is often limited to officers and directors – NOT employees.

B. Statutory indemnification is often limited to directors and officers- and NOT employees.

C. Statutory indemnification is often divided into mandatory indemnification (indemnificationthat must be provided) and permissive indemnification (indemnification that is optional). Querywhy anyone would serve as a director/officer with less than full indemnification?

5. Indemnification Through Charter/By-Laws.

6. Indemnification by Contract – Because of the way most state laws are drafted,indemnification contracts are generally the primary means of indemnifying employees.

7. Indemnification by Board Resolution.

8. Advancement of Expenses – NOT THE SAME THING AS INDEMNIFICATION! Aprovision on advancement of expenses means that in addition to providing g the ultimatefinancial protection of indemnification, the corporation will assist the director/officer defendagainst the claim. Query why anyone would serve as a director/officer with less than fulladvancement of expenses?

9. Directors & Officers Insurance – This is typically a backstop to corporate indemnification,providing protection where it may not be available under state law or because of insolvency.D&O insurance can also reimburse a corporation for costs it incurs in indemnifying officers anddirectors.

SEGMENT 5: ACCESS TO RESTRICTED FUNDS AND RELATED ISSUES

Background: The financial meltdown from 2008-2009 seriously squeezed the resources of manynonprofit organizations through reductions in charitable contributions, foundation grant support,government grants and contracts, and endowment returns. Nonprofit organizations began thengiving, and continue to give, serious examination to other ways to raise cash, such as accessingrestricted funds and selling (or selling and leasing back) assets.

1. Access to Restricted Funds

A. The first issue is to confirm whether restricted funds are donor restricted or merely boardrestricted – often there is confusion on this point and restricted funds are less donor restricted lessoften than one thinks.

(i) The key is maintaining proper records that make this investigation feasible.

(ii) What can be done if investigation reveals that funds ARE donor restricted?

B. Renegotiation with donors – if they are living and can be found. Donors are under noobligation to renegotiate restrictions or release them – and not infrequently, do not!

C. Renegotiation with foundation grantors.

D. Cy Pres proceeding – court petition.

(i) Cy pres proceedings are a matter of state law standards.

(ii) Typically the relevant state attorney general’s office must participate, and the finaldecision is generally made by state court.

2. Some NYUPMIFA Distinctives

A. New York has a special “small and old” rule for funds of $100,000 that have been in existencefor 20 years or more.

B. An organization can go to court even if donors are not co-operative on notice to the donor andthe Attorney General – and executors/heirs are not considered “donors,” so they are not entitled tonotice!

3. Selling Assets

A. May be subject to donor restrictions.

B. May be subject to court approval or attorney general oversight.

C. Sale/leasebacks may also provide creative sources of cash.

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