State Regulators Make a Misguided Push to Tighten Control Over Charities

State regulators are trying to persuade lawmakers to pass a dangerous new measure that would give them greater control over how a charity uses its money and other resources.

Regulators are pushing a new model law in the hopes that all states will adopt the same version of a new Oversight of Charitable Assets Act. The model law, which regulators hope to approve next month and then will promote to the states, would authorize state attorneys general to investigate charities and other nonprofits and determine whether they are using their assets properly. Properly, but by whose standards?

The new act doesn’t account for the fact that many regulators know very little about how nonprofits work or how to manage charitable assets. What’s more, it would add costly red tape for nonprofits by creating yet another requirement for charities to register with states.

The model law would also allow attorneys general to intervene in private lawsuits or proceedings in which nonprofits are parties. Anybody who opposes a charity would be able to institute proceedings that could tie it up for months or years in requests for paperwork.

Most worrisome of all is that the oversight act’s reach—and its lack of standards and protections for nonprofit organizations—violate the Constitution. No matter whether charities were unfairly asked to produce documents or other records, there is no provision allowing them to ask a court to protect them from unwarranted intrusions or harassment.

State regulators started down this road because they wanted to clarify an aspect of common law known as visitation. That doctrine is based on the maxim, “He who gave the money controls its use.”

That concept was the subject of an 1819 landmark case Trustees of Dartmouth College v. Woodward.

The Supreme Court’s chief justice, John Marshall, distinguished government’s authority over “public” or civic corporations, such as townships or universities established by government, from “private” entities and charities, meaning those established by individuals.

He wrote: “All eleemosynary corporations are private bodies. They are founded by private persons, and on private property. The public cannot be charitable in these institutions. … The very object sought in obtaining [a state] charter, and in giving property to such a corporation, is to make and keep it private property, and to clothe it with all the security and inviolability of private property.”

Regulators crafting the new model law hope to get the power to investigate and control charity assets by simply saying they believe it is “in the public interest” to do so.

But that subjective, discretionary standard has already been rejected by the courts and would have been illegal even under the English (common law) version of search warrants that contributed to the American Revolution and led to the creation of the Fourth Amendment to the Constitution

The Fourth Amendment protects against unreasonable searches and seizures and requires certain safeguards to protect a person or organization’s rights. The new oversight act goes far beyond even the most permissive court rulings on the Fourth Amendment, which have greatly expanded the ability of government to review records while at the same watering down safeguards to protect individuals and organizations from unwarranted requests.

American courts have held that Fourth Amendment protections apply to government investigations of private corporations, which, of course, include nonprofits.

Through some judicial contortions, courts now allow administrative and civil investigations to say simply that they have “reasonable cause” to believe a person or group has violated the law when they seek out documents or other materials. That standard has replaced the Fourth Amendment’s stricter one, probable cause. Nonetheless, government officials must still have some grounds for their suspicions of unlawful activity other than “the public interest” before they may gain access to an organization’s records.

An assistant attorney general once demanded that I produce documents on behalf of an organization I represented. I asked her to state what illegality she was concerned about and what basis she had for her belief that a law had been violated. In other words, I asked her for what lawyers call “cause.”

She replied by saying all that state law required of her was to put her demand for documents in writing. I told her to watch a few episodes of Law & Order to learn the meaning of “cause” and get back to me. That was that.

Historically, subpoenas for documents could be issued only under authority of courts. As Congress created new federal agencies throughout the 20th century with special expertise to regulate interstate commerce, the courts allowed those agencies to issue their own calls for witnesses and documents under a legal theory known as “constructive searches,” a term found neither in common law nor in the Fourth Amendment.

Standards and prerequisites for government investigations remain nonetheless. Government officials must still have reason to believe a clearly defined law has been or is about to be violated before they can seek to inspect documents and that the investigation is intended to go no further than the focus on potential legal violations.

The charity oversight act, however, would allow regulators to pursue investigations even without demonstrating any concern for legal violations. The act would allow regulators to take action whenever they had questions about whether a charity was using its assets for its mission or “to prevent and correct breaches of fiduciary duty.” Those reasons are too broad and ill-defined to meet Fourth Amendment standards.

Unlike federal agencies with expertise in specific areas of jurisdiction, attorneys general have broad, far less specific jurisdiction in their states, and little or no expertise in charitable matters. And, given its poorly defined purposes, the oversight act is ripe for mistakes and abuse.

What’s more, the act violates the due-process procedures guaranteed by the Constitution because it does not allow a nonprofit to seek court action if it believes it has been unfairly and illegally asked to produce records, that the investigation is just a ruse to cramp a nonprofit’s rights or coerce a nonprofit to accept an unreasonable interpretation of law.

State regulators are notorious for attempting to impose their own unreasonable—oftentimes unlawful—interpretation of laws. I already consider them the biggest violators of the laws governing nonprofits. The model law would add yet another tool for them to impose their wills on nonprofits.

The best way to describe the act is that it’s a busybody’s free-for-all, not just for attorneys general but also for any antagonist of a nonprofit group that hopes to bury the organization in document requests and anything else it can persuade a friendly attorney general to pursue.

An angry, unjustified small-dollar contributor could thereby paralyze a nonprofit by filing suit and notifying an attorney general. The attorney general could then bring to bear a state’s resources to pursue a long, burdensome, and expensive investigation even on the weakest, most frivolous grounds.

It’s not just constitutional protections on searches and due process that are worrisome but also another important guarantee for nonprofits—the First Amendment right to free speech.

Charity fund-raising appeals are, of course, protected by the First Amendment. Since such appeals require a charity to spend money to conduct them—and then collect money in response—the oversight act’s broad, discretionary authority would, in practice even if not intent, reach charitable solicitations.

Many charities are ideological and sometimes controversial critics of government and other large institutions. Government investigations have long been used to silence or chill nonprofit speech. In the 1950s, Alabama subpoenaed the list of members of the NAACP. That led to the landmark decision NAACP v. Alabama, which blocked the subpoena on First Amendment grounds.

More recently, in a well-publicized court case challenging global warming, the University of Virginia raised First Amendment objections after Ken Cuccinelli, Virginia’s attorney general, issued a subpoena for documents under Virginia’s taxpayer-fraud statute.

Even though Virginia’s attorney general had clear authority to investigate the use of state funds at a state university, a Virginia county court quashed his initial subpoena because it failed to state the legal reason and grounds (cause) that a violation of law was suspected.

Those who desire more law enforcement against, or oversight of, miscreant nonprofits mustn’t use illegal or unconstitutional means for those ends. Poorly designed laws burden the innocent and let miscreants escape. The Oversight of Charitable Assets Act would be such a law.