Under Pressure, N.Y. Scraps Rules That Worried Many Charity Solicitors

After a flurry of protests from charities, the New York attorney general has decided not to require

charities and their boards to obtain more than one bid before signing a contract with an outside fund raiser — at least for now.

But in issuing the final version of new rules for charities and solicitation companies that seek donations in the state, Attorney General Eliot Spitzer has left open the possibility that he will add such bid requirements in the future. Even without them, the rules, which take effect July 1, tighten standards for charities and fund raisers, nonprofit leaders and their lawyers said.

As a result of the new rules, “Charities are going to have to be more careful about how they choose outside fund-raising consultants and fund raisers,” said Seth Perlman, a lawyer in New York City who represents charities. “They should be aware the state will take a dim view if there isn’t at least an attempt to talk to more than one fund raiser.”

The new 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. Unlike the version state officials proposed last August, the new rules do not require charities to “comparison shop” for contracts with outside fund raisers, and do not require their boards of directors to approve the terms of those contracts.

Mr. Perlman and others said that companies that solicit in a charity’s behalf will find that they need to supply far more information to the New York attorney general’s office under the new rules.

Effects on Charities

The rules will have less direct impact on charities, although some charities that are not required to file federal information returns with the Internal Revenue Service will have to do so in New York if they want to raise money there. Also, charities that fail to file their annual financial reports on time with the state will automatically lose their registration.

The new rules are the latest state effort to crack down on unscrupulous fund-raising companies. States have tried 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 ability to impose such restrictions, 19 states recently asked the U.S. Supreme Court to review an Illinois case in which the state charged a telemarketer with fraud for telling donors their money would be used for charitable purposes while keeping 85 percent of all funds collected (The Chronicle, November 14).

New York Attorney General Spitzer first proposed new filing requirements for fund raisers in February 2002. 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 matter took on more urgency after the 2001 terrorist attacks, when public concern grew that too many donations were not reaching the victims and instead were diverted to expenses or other uses, state officials say.

In the most recent version of a report called “Pennies for Charity,” the New York attorney general’s office found that telemarketers raised $184.7-million in 2001 on behalf of charities registered in the state, and kept more than two-thirds of that, or $125.8-million.

In issuing the final rules, the attorney general stepped back from some of the more stringent provisions that were originally proposed. Under the earlier version, charities would have been required to “comparison shop” for all new contracts with outside fund raisers; each member of their boards of directors would have been required to personally review at least three bids from different fund raisers before hiring one; and three-fourths of a charity board would have been required to approve contracts under which the organization received a small percentage of the donations raised.

The attorney general’s office received 41 comments from charities and fund raisers who complained that those requirements would be difficult or impossible to meet.

“We are delighted that our comments have been taken into account,” said Jonathan A. Small, president of the Nonprofit Coordinating Committee of New York, which was among the charities that wrote the attorney general to protest the bidding requirements. “Of course, charities should exercise great care and diligence in selecting fund raisers and negotiating contractual terms with them,” added Mr. Small, whose organization represents 1,100 charities.

Reporting Details

Professional fund raisers had also objected to requirements that they file highly detailed information about their fund-raising campaigns, including bank-account numbers. Those requirements remain in the final version of the rules.

Mr. Perlman said the requirements are highly burdensome for fund raisers, and he expressed skepticism that the new information will reveal anything new. “I think once they start looking at it, they’ll realize the profit margins for these telemarketers are not that great,” he said.

Karin Kunstler Goldman, who heads the charities bureau in the New York attorney general’s office, said the state will continue to look for ways to ensure that charities get a fair deal on fund-raising contracts. In the meantime, “we believe it’s prudent for boards to be involved in the contractual process and make sure they’ve gotten the best deal for the charity,” she said. “They shouldn’t be inactive or asleep at the wheel.”

The fund-raising rules are available on the attorney general’s Web site at http://www.oag.state.ny.us/charities/charities.html.