New York’s Charity Crackdown

Proposed fund-raising rules too restrictive, critics say

Charities from across the country are protesting a proposed change in New York State fund-raising law. They argue that the proposal would force nonprofit groups to change the way they do business and give the state too much power to dictate fund-raising contracts and examine confidential financial details, even of law-abiding groups. Some critics say provisions in the proposal violate the U.S. Constitution.

The rules would require charities to do “comparison shopping” for all new contracts with outside fund raisers, including telemarketers and other types of solicitors, direct-mail advisers, and consultants, as well as renewals of existing contracts. Charities’ boards of directors would have to review at least three bids from different fund raisers before hiring one. Charities that sign contracts under which they receive a small percentage of the donations raised would be required to win approval of the contract from three-fourths of the members of the board of directors. Both charities and fund raisers would also be expected to file highly detailed information about their fund-raising campaigns, including private information such as bank-account numbers.

The rules apply to any charity that raises money in New York, including those based in other states. Approximately 40,000 charities are registered with the state to operate there.

New York Attorney General Eliot Spitzer proposed the rules in February, and he made clear that his main concern was to crack down on telemarketing campaigns that pass along only a small percentage of donations to charities. The attorney general publishes an annual report called “Pennies for Charities” documenting the amount that charities actually receive from telemarketers they hire. The most recent report found that in 2000 telemarketers raised $188-million on behalf of charities registered in New York State, and kept more than two-thirds of that, or $129-million.

“The good name of a charity is a valuable asset, and in some cases the boards seem to be renting out the charity’s name to greedy telemarketers, in return for a mere pittance of the funds collected,” Mr. Spitzer said in announcing the proposed rules. “These boards owe a higher duty of care to their donors and to the people they serve. At the very least, they should be soliciting bids from telemarketers, and using only the companies that offer the best return.”

Many States Concerned

The proposed rules are the latest state effort to crack down on unscrupulous fund-raising companies. States have struggled unsuccessfully for years to restrict the percentage of charitable donations that telemarketers may keep for themselves, but have been rebuffed by the courts. In a sign that regulators have become increasingly frustrated by the limits on their legal abilty to impose such restrictions, 19 states recently asked the U.S. Supreme Court to review an Illinois case charging a telemarketer with fraud for not disclosing to donors how little of the money it collected went to charity (The Chronicle, November 14).

Charity officials say that while New York’s proposed rules might force a few bad charities to be more conscientious, they would impose excessive costs on organizations that abide by the law.

Chief among charities’ concerns are the requirements governing contracts. Many nonprofit groups don’t put fund-raising work out for bids each year, preferring to renew annual contracts with the solicitors they have in place. The proposed rules would force them to put those contracts up for bid. Large charities, which may have a half-dozen separate contracts with fund raisers, would have to conduct the process for each one.

Going through the bidding process every year would eat up a lot of staff time and probably would result in hiring the same solicitor anyway, they say. Having the board involved in the process would eat up even more time.

“As a matter of good practice, at the point when we originally selected people, there were bids,” says Bonnie I. Robin-Vergeer, a lawyer with Public Citizen, a Washington consumer-rights advocacy group that raises money throughout the country, including New York. “But now we have a good relationship with the people we have, and we renew our contracts without going through a new process.”

The requirements would force Public Citizen to reapportion board and staff responsibilities, she adds. Currently, contracts are reviewed and approved by the nonprofit group’s president, chief operating officer, and development director. Requiring Public Citizen’s board to take over that responsibility would be very difficult. “The members of our board live all over the country. They just don’t have the time or the level of detail to deal with this level of governance of a nonprofit,” she says. In addition, the board only meets four times a year, meaning that contracts would be held up until the next board meeting, she says.

Not all organizations think the proposals, especially those getting the board more involved in making decisions about what company to hire, are a bad idea. Ronna D. Brown, president of the Better Business Bureau Serving Metropolitan New York, says, “Accountability starts with good governance and we support all measures that help boards understand their responsibilities.”

Karin Kunstler Goldman, who heads the charities bureau in the New York Attorney General’s office, declined to respond to the criticisms, saying the office is still evaluating objections it has received. However, she seemed to suggest the uproar over the rules is a bit out of proportion. She said most of the proposed rules simply clean up and streamline old regulations. “Clearly, there’s a need for them because the prior rules are outdated,” she says.

Time and Expense

Fund-raising companies also object to New York’s proposal, saying that gathering the information needed to submit a bid is time-consuming and expensive. They won’t want to rebid for contracts at charities where they lost a bid a year earlier, say company officials. “Serious bidding may no longer be possible because people won’t respond to an RFP [request for proposals] if they think it’s for nothing,” says Robert S. Tigner, general counsel for the Association of Direct Response Fundraising Counsel. “It’s a lot of work to do them.”

Some charity representatives say the rules are written too broadly, especially if their goal is stopping unscrupulous telemarketers.

“They are a blunt instrument where a scalpel would have been preferable,” says Sean Delany, formerly head of the attorney general’s charities bureau, where he oversaw the first “Pennies for Charities” report in 1995. Although “Pennies for Charities” singles out telemarketers, the proposed rules would apply not just to telemarketing but to all types of fund raising, he says.

Mr. Delany, now executive director of the Lawyers Alliance for New York, a nonprofit group that provides free legal help to community-based nonprofit groups such as child-care centers, says a consultant advises the alliance on its solicitation of law firms. “We’ve used the same adviser for more than 10 years now. They give us advice, but they don’t handle any money and they don’t make any solicitations,” Mr. Delany says. “It shouldn’t be necessary to put out [their work] for competitive bids.” Nonetheless, that’s what the rules would require, he says.

In addition, the new rules are so complicated they could discourage alliance clients, whose budgets have been hurt by government cutbacks, from even trying to raise money on their own, Mr. Delany says. “It will take time and money to solicit these bids and entertain these offers,” he says.

In addition to the contract requirements, charities also objected to other portions of the rules, which they said would require them to release sensitive information to the state, such as donor lists and bank-account information. They also objected to the broad disclosure required of fund raisers, saying it could discourage solicitors from working in New York, and the cost of complying probably would be passed on to the charity. Critics said that if many solicitors chose to stop working in New York, lack of competition among remaining companies would significantly drive up prices for fund-raising consulting.

The requirements ask for details about the fund raiser’s business and clients’ fund-raising strategies, including fund raisers’ bank-account numbers, home addresses, and breakdowns of all revenue received and expenses incurred for each campaign. “The information reveals to the public, and certainly to competitors, intricate details about the fund raiser’s business,” says Jonathan A. Small, president of the Nonprofit Coordinating Committee of New York, which helps its 1,100 members deal with government policy and other issues in the state.

Authority to Regulate

Charity officials also said the attorney general did not have the authority to issue some of the requirements. Ms. Robin-Vergeer of Public Citizen, says the attorney general does not have the authority to regulate contract negotations of out-of-state charities. The commerce clause of the Constitution limits each state’s ability to regulate conduct that occurs outside its borders, she says. “It just seems so blatantly unlawful,” she says.

The rules could produce the opposite effect from what’s intended, says Mr. Tigner, because they might drive charities into multiyear contracts with telemarketers or other fund raisers, to avoid repeating the bidding process every year. “That strikes me as completely counterproductive,” Mr. Tigner says. “The industry has moved entirely in the other direction, partly in response to pressure from attorneys general and the public not to bind charities in long-term contracts with the professionals they hire. This would push things in the opposite direction.”

The attorney general’s office plans to publish a response to the comments it has received, probably in the next few months. After that it will either issue another proposal or simply decide to issue a final version of the regulations. Comments were supposed to be submitted by October 24 but the office is still accepting responses. They may be sent to New York State Attorney General Charitable Trusts Bureau, 120 Broadway, Third Floor, New York, N.Y. 10271-0002. The proposed rules were published in the September 25 edition of the state register. Single copies of the register may be requested free from: New York Department of State, Division of Administrative Rules, Albany, N.Y. 12231-0001; (518) 474-6957.