To Charities and Board Members: Beware and Be Aware of Collateral Damage that May Ensue from Unrelated Legal Proceedings – Part III

November 4, 2013Articles White Collar Defense & Compliance Blog

Part III of this blog entry will discuss and provide a list of ideas as to how charities may identify and respond to events affecting individual board members and others, such as convictions, consent decrees and admissions of wrongdoing, that may require disclosure in State Reports. (Capitalized terms not otherwise defined in this Part III shall have the meanings assigned to them in Parts I andII.)

Disclosure and Governance Considerations for Charities Filing State Reports

As mentioned in Part II, charities need to exercise the same level of discipline in responding to questions in State Reports as they do for a Form 990 to be filed with the IRS. The primary focus by charities in recent years has generally been on preparing and filing Forms 990, not State Reports. However, any person signing a State Report on behalf of the charity must be aware that, similar to the Form 990, the State Report makes it clear that, under penalty of perjury, the signer is stating that the information contained in the filing is true, correct and complete (or words similar to that effect).

It is incumbent on every charity that files one or more State Report(s) to provide a questionnaire for Individuals that will allow the charity to answer all applicable questions that may be contained in each State Report that it files. The State Report questions may be included as part of the charity’s annual conflicts of interest questionnaire to Individuals that is used to respond to Form 990 governance questions or may be in a separate supplemental questionnaire. The charity will then have a documented basis to respond to such questions in the State Reports.

Further ideas with respect to these issues for charities include the following:

1. Charities should take the time to prepare the appropriate questions to Individuals in a questionnaire that will cover all State Reports required to be filed. (There may be different questions in each State Report, as well as variations in the way a question is asked in one State Report as compared to a similar question that is asked in another State Report.)

2. For a charity that is required to file State Reports in multiple states, determine whether the URS can be used for filing in most or all of the required states, thereby limiting the number of questions that can be generated by item 1 above and the number of separate State Report forms that need to be prepared and filed.

3. For a charity that must file State Reports in multiple states that include states which do not accept the URS (“Non-URS States”), be certain that the questionnaire is delivered to all Individuals for whom questions are asked in such Non-URS State Reports, especially those Individuals who may not be covered by the URS.

4. For a charity that must file State Reports in multiple states that include some Non-URS States, be certain that the questionnaire covers all questions that may be asked in both the URS and Non-URS State Reports, especially variations from the form of questions in the URS.

5. Should an event identified in response to a questionnaire or otherwise relating to an Individual appears to require disclosure and explanation in a State Report(s), the executive committee or other appropriate committee of the board of the charity (“Board Committee”) should review among other things, with the advice of legal counsel, the following:

a. the charity’s bylaws insofar as they relate to resignation or the removal process of an Individual by the board and potential rights of appeal by the Individual;

b. the nature and potential effect on the charity, its stakeholders and the Individual of any affirmative response that will require an explanation (“Response”) in a State Report that is a matter of public record; and

c. the potential for media exposure and difficult questions for the charity, its governing board and the Individual.

6. The Board Committee should investigate the matter promptly, invite participation by the Individual and his/her legal counsel in the process, and endeavor to come to an amicable resolution that appears to be appropriate for both the charity and the Individual.

7. In the event that such an amicable resolution cannot be achieved, the Board Committee should make recommendations as promptly as practicable to the board as to how the charity should deal with its Response and the future of the relationship of the Individual to the charity. (Note that if the Individual is a board member, in many states he or she has an absolute right as a fiduciary to participate fully in the board meeting at which the matter is being discussed, unless the Individual voluntarily chooses to absent himself/herself from the meeting.)


Charities and their board members must be vigilant to have mechanisms in place to identify and respond to convictions, consent orders and/or admissions of wrongdoing by board members, officers and others to limit the adverse effects of such events to the charity, the charity’s governing board, the affected individual and their respective images in the community.