1. 1 Legal & Insurance Workshop A Fresh Perspective on Nonprofit Law 2011 Fundamental Five+ Non-Profit Capacity Training Series presents Tom Pierce Tom Pierce, Attorney at Law, LLLC February 22, 2011

2. 2 Mahalo to our Sponsors!  Office of Hawaiian Affairs - Community Building Economic Development Grant  Grants Central Station - program founder  Tri-Isle Resource Conservation & Development - Fiscal Sponsor  PlayBook Consulting Group - Fundamental Five+ Series Producer / Coordinator

3. 3 More Free Workshops! Increase Your Skills & Knowledge in these upcoming Fundamental Five+ workshops March 8Fundraising & Development Strategies April 12Grant Strategy & Writing

4. 4 Agenda 8:30 amWelcome & Introductions 8:45 amLegal 9:45 amBREAK & Network & Submit Questions 10:00 amInsurance 11:15 pmBREAK & Network 11:30 pmNonprofit Hypothetical – Problem Solving 12:15 pmWrap-Up, Post-Test, Evaluations 12:30 pmSession Ends

5. 5 Who’s in our Hui?  Public Charities?  Foundations?  Size (by employees) (by income)?  Hospitals, churches, AOAOs, HOAs?  Directors?  EDs?  Staff?  How many at Financial Literacy?

6. 6 I'd rather be chasing Frisbees

7. 7 What we need is...

8. 8 A Fresh Perspective...

9. 9 The best car safety device is a rear-view mirror with a cop in it. ~Dudley Moore

10. 10 A Fresh Perspective...  I can read the fine print.  This legal stuff actually makes sense.  I'll become more confident to act.  My board meetings can be more efficient.  I can avoid time consuming problems.  Our best management practices keep us legal

11. 11 Today's Objectives What we will cover: – 501(c)(3) “Public Charities” – Governance issues (new area of IRS focus) – A few “grey” and possibly overlooked areas – Areas that will improve your nonprofit practices What we won't cover: – The Basics (but will have quick refresher) – Other org types (e.g., social, political, business orgs) – “No brainer” areas – Info covered in Financial Literacy workshop

12. 12 Today's Objectives What today offers you: For startups and prospective nonprofits: – Get it right the first time – Alternative organization types For all other organizations – Ideas for refining existing approach – Tools for spotting and resolving critical issues – Prudently managing risks

13. 13 Covered Today  Quick 501(c)(3) refresher  Governance – Documents – Using Org documents to your benefit – Conflict of interest policy (how/why) – Compensation policy (how/why) – Relationship to Form 990

14. 14 Covered Today (cont'd)  Donation issues – Pledge agreements – Contemporaneous gift acknowledgment – Form 8283 – Meeting and maintaining “public support” test  Brief highlights – Fiscal sponsorship – Employment contracts, handbooks, job review  Liability issues (segue to insurance discussion)

15. 15 Refresher ORGANIZATIONAL ISSUE BASICS – Vision – Mission – Goals/objectives – Strategic Plan – Budget

16. 16 Refresher STATE ISSUE BASICS – HI Nonprofit Law (HI Rev. Statutes 414D) – Nonprofit corp – Membership corp – Articles Purpose – Bylaws – Fiduciary duty

17. 17 Refresher FEDERAL ISSUE BASICS 501(c)(3) Public charity Foundation Supporting organization Private benefit Private inurement Disqualified person Insider Determination Letter Public support Facts and Circumstances

18. 18 Organizational Documents “Organizational documents are your best friend!”

19. 19 Organizational Documents Articles – The nonprofit's “constitution” – Filed with DCCA – Usual source for... Voting rights information Scope of nonprofit's purpose Scope of directors' power Liability and indemnification information Authorization to amend Articles/Bylaws

20. 20 Organizational Documents Bylaws – Not filed – Easy to amend – Tend to be procedural in nature – What constitutes “quorum” & “action” by board – How board makes decisions (majority, etc.) – Duties/powers: directors, officers, committees, & ED – Spending limits – Authority to bind the organization – May include policies, such as conflicts

21. 21

22. 22 Organizational Documents AGENDAS ID discussion items ID decisions Set timelines ID responsible presenters Remind committees (See template) MINUTES Memorialize decisions Who's responsible for follow up Don't make it verbatim Executive session (See template)

23. 23 Organizational Documents Policies and Resolutions – Policies establish ways of dealing with anticipated situations Conflict of Interest Policy Compensation Policy Policies regarding donors/donations Policies specific to your mission – Resolutions memorialize important decisions (e.g., Resolution to purchase a property)

24. 24 Organizational Documents Organizational Docs are not static. – Understand their uses so you can adjust them as needs arise or problems are solved. Such as... – Does the board keep coming back to some issue again and again? – Are there continuous misunderstandings between the board and staff? – Are third parties confused about how the organization acts on certain matters?

25. 25 Organizational Documents “Secretary Binder” – Articles – Bylaws – Policies – Resolutions – Past minutes – Executive session minutes – DCCA Filings – Determination Letter – Strategic Plan Conduct a yearly “orientation” for all directors

26. 26 Conflicts Policy IRS – Enhanced Scrutiny – Testimony – Form 1023 changes – Form 990 changes

27. 27 Conflicts Policy (IRS Concerns)

28. 28 Conflicts Policy (IRS Testimony)

29. 29 Conflicts Policy (Form 990)

30. 30 Conflicts Policy (Form 990)

31. 31 Conflicts Policy (Form 990)

32. 32 Conflicts Policy (Basic Rule) Can the organization reasonably get a more advantageous transaction or arrangement from someone without a conflict? If not, can the disinterested directors confirm... – In organization's best interest, – For its own benefit, and – Is fair and reasonable

33. 33 Conflicts Policy (Basic Rule) Not all conflicts involve $$ Not just directors can have conflicts – Officers – Employees – Disqualified persons – Other organization agents – Even the organization!

34. 34 Conflicts Policy (Drafting & Use) Policy is contextual to org's activities Make document understandable and easy to apply to a situation For example...

35. 35 Conflicts Policy (Drafting & Use) “Thou shalt not.... excess benefit transaction, et cetera, et cetera...”

36. 36 Conflicts Policy (Drafting & Use) IRS sample policy – avoid, if possible Provide yearly orientation & discussion Sign acknowledgment of review

37. 37 Conflicts Policy (Example Provision) Purpose of Policy The purpose of this policy is to protect the integrity of the decision making process of ORG when persons in a position to influence a decision have a private interest in the outcome of the decision. It is essential for the ethical operation of the ORG and the protection of public confidence that the ORG does not offer special treatment to any person because of that person’s relationship with the ORG. The policy has two sections: Obligations of persons who have a duty of loyalty to the ORG when they have a potential conflict of interest in regard to a decision they are responsible for; and Obligations of the ORG when a proposed action has the potential to benefit a person whose relationship with the Trust creates the possibility, whether real or perceived, of undue influence over the decision.

38. 38 Compensation Policy Excessive compensation most common type of “private inurement” (unreasonable private benefit received by an insider) Instance of private inurement, however small, can mean “intermediate sanctions” (on both charity, deciding “manager,” and the employee or insider) or loss of revocation of charity's tax exempt status IRS questions charities re compensation on both application & 990s

39. 39 Compensation Policy (Form 990)

40. 40 Compensation Policy (Form 990)

41. 41 Compensation Policy “Compensation” includes all benefits, such as: salary, medical, retirement, expense allowance, insurance benefits To be reasonable, must be approx equal exchange of benefits between charity & employee This does not mean a charity cannot pay its employee what he/she is entitled

42. 42 Compensation Policy Whether excessive factors include: – Compensation paid to (1) similar orgs, (2) for equivalent positions, (3) in similar geographical areas – Charity's need for the particular person's services – Person's education, background, experience – Size & complexity of charity's income/assets – Disparity between charity employees' income – Number of hours worked

43. 43 Compensation Policy Key to defending compensation is to show the directors have actively considered factors & can document their decision: – Detailed job description – Show comparative salaries considered – No conflicts in decisionmaking process – All benefits (incl., e.g., cars, laptops), accounted for, including on W-2s Comp policy can assure your okay because IRS has a “rebuttable presumption” policy

44. 44 Compensation Policy IRS Safe Harbor Provision (payments to insiders presumed reasonable if: – Board obtained & relied on comparables (3 needed for charity w/$1myn income) – Board approved in advance total compensation package – No actual or potential conflicts during decision making – Board adequately and contemp- oraneously documented its decision

45. 45 Donations Contemporaneous acknowledgment of gift (WCA) – $250 or more? Written contemporaneous acknowledgment required for donor to obtain deduction – Recent court decisions: No WCA? No deduction (even if other records exist, such as a Form 8283 or canceled checks). – “Contemporaneous” = not later than 1/31 of following year (but don't wait)

46. 46 Donations (WCA) Include this information – Name of organization – Amount of cash donation – Description of non-cash donation – “No goods or services were provided by the organization in return for the contribution” – OR good faith estimate of value of goods/services provided

47. 47 Donations (Pledge Agreements) Large enough donation to require care? Donor directing aspects of the gift? Consider written pledge agreement Draft with care Gift must be voluntary But there may be ways to make pledge binding and enforceable

48. 48 Donations (Form 8283)

49. 49 Donations (Form 8283)

50. 50 Donations (“Public Support Test”) Public Support = (1) “normally,” a (2) “substantial part” of its (3) “total support” qualifies as “public support.” Public Support Fraction Public Support/Total Support = – % of Public Support 33 1/3 % for categorical qualification 10% minimum plus “facts & circumstances” test

51. 51 Donations (“Public Support Test”) Beware: – Small organizations: large multi-year gifts could destroy public support – Large organizations: large endowments could destroy public support – BUT, there is the facts and circumstances test

52. 52 Fiscal Sponsorship Nonprofits can support a nonexempt person or organization financially Must use an accepted practice... – Direct – Independent contractor – Preapproved grant relationship – Supporting organization

53. 53 Employment Issues Employment contracts Job descriptions Employee handbooks Biannual employee review

54. 54 Liability Issues  Liability issues Suits relating to you organization's land or premises Suits relating to the actions or omissions of your organization, or your directors, or your volunteers Suits related to contracts (incl. donation promises) Employment disputes

55. 55 Liability Issues Who is protected? – Nonprofit immunity (not fail safe) – Organization indemnification of directors and other volunteers In articles? In bylaws? By resolution?

56. 56 Liability Issues How to reduce exposure: – Risk management policies and practices – Insurance

57. 57 Quick Wrap-Up  Stay familiar with your governing documents  Adopt and use simple, understandable conflicts and compensation policies  Be diligent and vigilant on donation activities  Consider fiscal sponsorship opportunies  Treat employee relationships with care and memorialize it  Be attentive to liability exposure and affirmatively manage it  Present your CPA with Form 990 governance info

58. 58 Five Action Items for Now 1.Schedule a governance document orientation/discussion meeting 2.Calendar a form 990 review time 3.Check your donation acknowledgment protocol 4.Review your employee relations docs 5.Evaluate how your volunteers are indemnified

59. NETWORKING BREAK 15 minutes Next up: Plotting a SWOT

60. 60 More Free Workshops! Increase Your Skills & Knowledge in these upcoming Fundamental Five+ workshops March 8Fundraising & Development Strategies April 12Grant Strategy & Writing

61. 61 Agenda 8:30 amWelcome & Introductions 8:45 amLegal 9:45 amBREAK & Network & Submit Questions 10:00 amInsurance 11:15 pmBREAK & Network 11:30 pmNonprofit Hypothetical – Problem Solving 12:15 pmWrap-Up, Post-Test, Evaluations 12:30 pmSession Ends

62. 62 2011 Fundamental Five+ Non-Profit Capacity Training Series February 22, 2011 Directors & Officers Insurance and Cyber Liability Insurance A General Overview for Non-Profit Organizations Chuck Pedone, Regional VP Debbie Elliott, Underwriting Manager A Member of the Tokio Marine Group

63. Director’s and Officer’s Coverage: What is Covered? D&O Liability covers the directors and officers for their management decisions on behalf of the organization. Without this coverage, the Directors’ and Officers’ personal assets are at risk.

64. Even Non-Profits NEED D&O! Nonprofits By the Numbers - There are 1.3 million charities, private foundations and religious congregations in U.S. - The number of charitable organizations has doubled since 1974. - NP sector includes 11.7 million paid employees (9% of U.S. workforce) work in the nonprofit sector.

65. Non-Profit figures (cont.) Job growth in Nonprofit Sector (2.5%) outpaces growth in business (1.8%) and government (1.6%) Sectors. Diverse Group – Includes Healthcare, Education, Social Services, Foundations, etc. About 50% of all adults volunteer each year. 9 out of 10 households make charitable contributions. $207 billion in individual donations annually. $41 billion in corporate contributions are made annually.

66. Breakdown of Charitable Organizations by Budget Size $0 - $500,000 73% Over $10 Million 3.8% $5 Million - $10 Million 2.7% $1 Million - $5 Million 11.8% $500,000 - $1 Million 8.7% Source: National Center for Charitable Statistics, Urban Institute (2003)

67. What is covered? Types of Allegations / Causes of Damages Breach of Duties – Duty of Care – Duty of Loyalty – Duty of Obedience Mismanagement -Business Judgment Rule Error & Omission (broad) Improper Disclosure or Failure to Disclose

68. Who is covered? Directors & Officers, Governor, Trustee Employee, Volunteer Spouses (vicariously) Estates/Heirs Entity (including majority owned subs) Management Committee Member or member of the Board of Managers (LLC) Others – specifically named

69. Potential Claimants Insiders – staff member, employee Outsiders – Third parties with a business or other relationship with the nonprofit The Entity itself – Derivative suits brought by its members Directors – Board members suing each other Beneficiaries (service recipients) – Those whom the nonprofit is in business to help alleging wrongdoing or injury from the NP’s actions OR failure to act Members – allegations of harming the interests of the member Special Relationships – Includes groups such as students, patients, etc. Government Officials – State Attorneys General, IRS, Federal regulators

70. EPLI Employment Practices Liability:  -> 17 defined acts including retaliation and mental anguish or emotional distress  The BIG THREE:  WRONGFUL TERMINATION  SEXUAL HARRASMENT  DISCRIMINATION  3 rd party: “current customer, supplier, vendor, business invitee or other client of the Private Company” alleges discrimination or harassment CLAIM EXAMPLES:  A shareholder and former employee of a private company sued the Company and its CEO alleging that after he opposed the Company’s purchase of the assets of another corporation the CEO partially owned, he was terminated. Wrongful termination/retaliation of a hostile work environment claim  An age discrimination lawsuit was brought by a 62 year old sales representative who was employed by the Insured. He was terminated by the Insured for not meeting his sales quotas. His job was then given to a younger employee with less experience. There existed no documentation of poor performance or disciplinary actions. Paid out $350,000.

71. Fiduciary, Workplace Violence, Internet Liability Fiduciary Liability - Provides coverage for negligent acts, errors or omissions in the administration of a benefit plan and/or acting in a fiduciary capacity for a company plan subject to laws of ERISA. This includes: - Giving counsel to employees - Providing interpretations and handling records - Effecting enrollment, termination or cancellation of employees or participants under any benefit plan Workplace Violence – Provides coverage in the event of a Workplace Violence Act - Workplace Violence Act include actual or alleged intentional and unlawful use of or threat to use deadly force with the intent to cause harm - Damages include business interruption expense and public image restoration expense Internet Liability - Coverage for the publishing exposure that a non-profit has as a result of having a website - Libel, Slander, defamatory or disparaging material - Infringement of copyright, service mark, trademark, trade name, title or slogan - Improper use of literary or artistic titles, formats or performances

72. Claim examples Discrimination (race, sex, age, membership, etc.) Civil Rights and other Statutory violations (ADA, FMLA, ERISA, EPA) Wrongful Termination of employees and improper hiring practices Inefficient administration or supervision Waste of corporate assets Misleading reports or representations Libel and Slander (publishers, bloggers, newsletters, web pages) Failure to deliver services Acts beyond granted authority Breach of fiduciary duty (duties of care, loyalty and obedience) Antitrust Claims (accreditation, restriction of trade)

73. Cyber Liability Emerging Risk Information and Intellectual Property are an organization’s most valuable asset today No longer a “Bricks & Mortar” world Impact of a data breach on an organization is huge – Financial – Business Distraction – Loss of Customers – Damage to Reputation

74. Filling the Gaps The Cyber Risks to which an enterprise is exposed fall into two general categories and insurance coverage is available for both: 1) Those losses suffered by an enterprise (1 st Party Losses) 2) An enterprise's liability to third parties (3 rd Party Losses) Standard Property, Liability or Crime policies will not traditionally cover damage to or loss of intangible assets (data and systems) so there exists a significant gap in coverage, both in terms of exposure and because of the ever greater dependency on technology to be able to do business. PHLY’s Cyber Security Liability policy works to fill these gaps.

75. Perils Fraud Virus Transmission Natural Disaster Employee Sabotage System Malfunction Power failure Human Error Hacker Attack Computer Network

76. The Need 46 States and many foreign jurisdictions including the European Union have enacted privacy breach laws to protect consumers HIPAA requires that Personal Health Information (PHI) be safeguarded with specific fines per patient California requires that companies must notify their CA customers whenever there is a security breach of their Personally Identifiable Information (PII) – note the law applies based on residency of the customer, not the company responsible for the breach Emerging laws – Massachusetts, FTC Red Flag Rules, others

77. Who is Exposed to Privacy Risk Any organization holding: Sensitive customer/patient information Sensitive employee information Confidential third party information Industries Financial Institutions Healthcare Organizations Retail Service Providers Outsourcing, Call Centers, Payroll, etc.

78. PCI Credit Card Standards A worldwide information security standard developed by the Payment Card Industry Security Standards Council (PCI SSC) Created to help organizations who process card payments to prevent credit card fraud through increased controls around data and its exposure to compromise The standard applies to all organizations which hold, process, or pass cardholder information from any card branded with the logo of one of the card brands

79. HIPAA Privacy Standards Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, was enacted on August 21, 1996 Protects all "individually identifiable health information" held or transmitted by a covered entity or its business associate, in any form or media, whether electronic, paper, or oral. The Privacy Rule calls this information "protected health information (PHI)." HIPAA governs Healthcare Providers, Health Plan Providers, and Healthcare Clearinghouses

80. HIPAA Privacy Standards cont’d Prior to 02/18/2009 On or after 02/18/2009 Penalty Amount Up to $100 per violation $100 to $5,000 per violation Calendar Year Cap $25,000$1,500,000 Penalties for Noncompliance Violations

81. Data Breach – Costs are Significant Regulatory issues – notice requirements, fines/penalties, injunctive relief 70% of a Company’s assets are tied to information resources Harm to reputation Hard dollar remediation costs, including liability issues Costs to re-secure the data Hackers, Cyber terrorists, Malware, Spear Phishers, Industrial Spies Improper Disposal, In-house Incompetence and Negligence 87% of breaches are avoidable with proper controls/methods

82. Questions/ Suggestions ??? Contact your Insurance Agent Contact Philadelphia Insurance Companies Chuck Pedone, cpedone@phlyins.comcpedone@phlyins.com Debbie Elliott, delliott@phlyins.comdelliott@phlyins.com

83. 83 Test Your Knowledge  Our funder (and we!) want to know how effective this workshop was for you.  This 5-minute Post-Workshop Quiz helps us gauge your progress and our success. Mahalo.

84. 84 Help Us Serve You Better! Please take 5 more minutes to complete the Workshop Evaluation so that we can improve this and future offerings Mahalo.

85. 85 Mahalo For More Information or to Register for an Upcoming Workshop Leslie Mullens (808) 875-0500 Leslie@ThePlayBookGroup.com Fundamental Five+ Nonprofit Capacity Training Series