Government Regulation of Fund Raisers: Far Trickier Than It Seems

By HARVY LIPMAN

In recent years, state regulators and the Federal Trade Commission have intensified

their oversight of commercial fund raisers, collecting data from telemarketers, issuing reports on the share of charitable donations that fund raisers keep, and occasionally prosecuting solicitors for illegal activity.

But the government’s approach has upset both supporters of the commercial solicitation industry and its critics. Industry supporters say that regulators collect information on professional solicitors in ways that sometimes unfairly tarnish the reputation of charities and fund-raising companies. Critics of the industry, on the other hand, complain that state and federal authorities aren’t doing enough to protect innocent donors and charities.

Since 1997, the F.T.C. has undertaken two campaigns in conjunction with state officials to crack down on deceptive fund-raising activities. The efforts have resulted in nearly 100 lawsuits against professional solicitors.

Many states also devote substantial resources to investigating fraudulent fund-raising campaigns. New York and California, for example, have nearly 50 regulators apiece who spend a good portion of their time monitoring charitable fund raising.

But some states collect little or no financial data from telemarketers. Texas, for example, requires filings only from telemarketers that raise money for police-related organizations. Florida asks charities for the names of the professional fund-raising companies they use, but does not require breakdowns of the money raised and provided to the charities in each campaign.

Burt Solomons, a Republican state representative in Texas who chairs the legislative subcommittee that deals with telemarketing issues, says he has tried for several years to strengthen Texas’s oversight of the industry. But, he says, industry lobbyists and other lawmakers criticize his bills as creating an undue burden on business, or on charities. In the eyes of the critics, Mr. Solomons says, “Even something as simple as filing a report becomes an undue regulatory burden.”

Supreme Court Rulings

Besides trying to resist pressure from lobbyists, the states must comply with a series of decisions by the U.S. Supreme Court in the 1980’s that curbed government’s regulatory power over commercial fund raisers — including the power to limit what percentage of donations solicitors can keep.

A campaign in behalf of a controversial cause might be very expensive to run, the court reasoned, and thus the fund raiser would be able to turn over only a small percentage of money raised to charity. If states were allowed to set a minimum on the percentage that a commercial fund raiser must distribute to the charity, the justices concluded, charities that espouse controversial ideas might not be able to find a company willing to represent them, thus restricting their right to free speech.

As a result of those rulings, government regulators say they have a tough time succeeding in lawsuits against solicitors who pocket a significant percentage of the proceeds raised in a charity campaign.

In response to the Supreme Court limits, many states have sought to protect donors by collecting and distributing information on commercial fund raisers. Some states, for example, produce annual reports showing what percentage of donations raised by commercial solicitors go to charity. Some states also require fund raisers to post bonds of up to $50,000, which can be forfeited if the companies are found guilty of fraud or other deceptive practices.

Problems for Charities

But critics say that some rules aimed at rooting out abuses can instead hurt charities.

Errol Copilevitz, a lawyer in Kansas City, Mo., who represents commercial solicitors and nonprofit organizations, says that a charity he represented in New York hired people temporarily to make phone calls for a fund-raising promotion. Under New York law, they were defined as telemarketers, and the charity had to pay registration fees for each one.

“The charity wound up paying the state more for the telemarketers that they hired than they netted from their fund-raising campaign,” he says.

Regulators counter that their fees amount to a very small percentage of what is raised in most fund-raising campaigns, and that the money the states receive helps to pay for efforts to protect the public from fraud.

Registration fees are not the only form of regulation that bothers supporters of the commercial fund-raising industry. They also charge that donors are misinformed by the way many states collect and distribute information on commercial solicitors.

Lee M. Cassidy, executive director of the Direct Marketing Association Nonprofit Federation, in Washington, points out that states typically do little more than report the total amounts raised in charities’ behalf and how the money was apportioned between the charities and the fund-raising companies. Yet, Mr. Cassidy says, a state report showing that a fund-raising company gives its charity clients only a small percentage of the money donated in their behalf does not necessarily mean that the charities are being cheated. The report could be ignoring the fact that the campaign wasn’t designed primarily to raise funds, he says.

“Is it to raise a lot of money?” Mr. Cassidy says the states should ask of a specific campaign. “Is it to re-contact donors a charity has lost contact with? Is it to find out if people would be amenable to a mail appeal? Is it to entice people who have been small donors to become large donors?”

Because each of those types of campaigns carries different costs and donation expectations, he says, comparing one type of commercial fund-raising operation to another is unfair.

What’s more, Mr. Cassidy says, many states don’t identify what sort of fund raising is being evaluated. While some states list only telemarketers, others include fund-raising events, publications, and direct-mail campaigns. Thus, he says, the reports inevitably lead to unfair comparisons.

Revised Approach

Not all state officials dismiss such criticisms. In fact, the California attorney general’s office revamped its annual commercial fund-raiser report this year, dividing campaigns into different categories in an effort to provide the sort of detailed information Mr. Cassidy is calling for.

Other state officials say they do the best they can with the financial and legal resources available to them.

“We are very careful to tell donors these figures are not the only thing that they should look at, and we advise them that different campaigns are conducted for different purposes,” says Karin Kunstler Goldman, a New York assistant attorney general in the Charities Bureau, which produces an annual report on telemarketing campaigns called Pennies for Charity. “We think it’s our responsibility to advise them of the limits of this report. It’s not a complete picture of any of the charities.”

Ms. Goldman says her office has fielded hundreds of calls from donors wanting the agency to stop fund raisers from keeping as much of the money as they do. “It is upsetting to a lot of people to know that, regardless of the purpose of the solicitation, very little of their money in some of these campaigns ever gets into the hands of the charity,” she says.

But Mr. Copilevitz, the lawyer in Kansas City, argues that serious harm can result from state reports that don’t differentiate among types of campaigns.

He cites the case of a nonprofit organization that recently hired a telemarketer to test out a new donor list in California. The charity, which he would not name, knew it would probably not make any money from the effort, but thought it might identify potential new contributors for future campaigns. But the California attorney general’s report listed the charity as having paid a telemarketer hundreds of thousands of dollars and getting nothing in return.

“They got letters from donors all over the country saying, ‘I’ll never give you another penny,’” Mr. Copilevitz says. “That’s the harm these reports can do.”