ASSOCIATION GOVERNANCE Sarbanes-Oxley Thomas E. Arend, Jr. Shaw Pittman ASAE 2003 LEGAL SYMPOSIUM

1 Sarbanes-Oxley Act of 2002 July 30, 2002 – President Bush signs the Act into law July 30, 2002 – President Bush signs the Act into law The Act provides clarity and certainty on a number of highly debated issues by: The Act provides clarity and certainty on a number of highly debated issues by:  Establishing an independent, full-time oversight board (the Public Company Accounting Oversight Board) for SEC-regulation business corporations; the SEC has oversight of the board  Establishing new responsibilities for corporate Audit Committees and corporate officers  Establishing several new public company reporting requirements

2  Defining “nonaudit” services that public accounting firms can and cannot provide to audit clients  Strengthening penalties for corporate fraud  Requiring rules to address conflicts of interest  Significantly increasing the responsibilities and budget of the SEC  Some provisions effective immediately; others are effective at later dates depending on issuance of SEC final rules  Applies to foreign private issuers in the same way it applies to domestic issuers Overview of the Sarbanes- Oxley Act of 2002

Emerging Corporate Governance Issues for Nonprofit Organizations

4 Two New Criminal Law Features Applicable to All, incl. Nonprofits Destruction of documents to thwart federal government investigation Destruction of documents to thwart federal government investigation Retaliation against “whistleblower” reporting to federal authorities Retaliation against “whistleblower” reporting to federal authorities

5 No New Laws, But Existing Legal Principles & New Incentives State nonprofit corporation law State nonprofit corporation law Common law fiduciary responsibility Common law fiduciary responsibility Federal income tax exemption requirements Federal income tax exemption requirements Miscellaneous government/private enforcement rights Miscellaneous government/private enforcement rights Pressure from new “standard practices” of business corporations Pressure from new “standard practices” of business corporations

6 Major Issues Derived from Sarbanes-Oxley Act  Full and Accurate Financial Disclosure  Avoidance of Conflicts of Interest  Personal Responsibility

7 Full and Accurate Financial Disclosure State may mandate for nonprofit corporations State may mandate for nonprofit corporations Case law sparse Case law sparse IRS Form 990 and 990T requirements IRS Form 990 and 990T requirements IRS disclosure requirements for 990 and app. IRS disclosure requirements for 990 and app. State laws on charitable solicitation, etc. State laws on charitable solicitation, etc. Model from Sarbanes-Oxley for business corporations Model from Sarbanes-Oxley for business corporations

8 Avoidance of Conflicts of Interest Derived from common law fiduciary obligation Derived from common law fiduciary obligation Duty of volunteer or executive to disclose Duty of volunteer or executive to disclose Correctives include: Disclosure, Recusal, Resignation Correctives include: Disclosure, Recusal, Resignation Prerogative is for organization, not individual Prerogative is for organization, not individual Private cause of action may be available Private cause of action may be available

9 Personal Responsibility Rarely imposed in nonprofit corporation context Rarely imposed in nonprofit corporation context Tax exemption rules on excess benefits for charitable/educational entities [Sec. 501(c)(3)] Tax exemption rules on excess benefits for charitable/educational entities [Sec. 501(c)(3)] Trend emerging and increasing Trend emerging and increasing

10 Recommendations  Review and Improve Financial Disclosure to: - Board of Directors - Members/Constituents - Public/Press  Promulgate Conflicts of Interest Policy and Procedures  Appoint standing Audit Committee with charter and elements of independence

11 Information Thomas E. Arend, Jr. Attorney Shaw Pittman LLP