DRAFTING AN EFFECTIVE CONFLICT OF INTEREST POLICY William H. Jordan, Esq. Sowell, Gray, Stepp & Laffitte, LLC (803)

OUTLINE 1. What is a Conflict of Interest? 2. Why is a Conflict of Interest Policy Important? 3. What Should be in a Conflict of Interest Policy? 4. How Do We Get the Most Out of Our Policy?

WHAT IS A CONFLICT OF INTEREST? A conflict of interest is present when a person in a position of authority over an organization, such as an officer, director, or manager, may enjoy a financial benefit from a decision he or she could make in his or her organizational capacity.

WHAT IS A CONFLICT OF INTEREST? A conflict of interest can include indirect benefits, such as to family members or businesses with which the individual is closely associated.

Why is a Conflict of Interest Policy Important?

Here’s a Hint...

Why is a Conflict of Interest Policy Important? The Internal Revenue Code prohibits 501(c)(3) organizations from using their assets for the benefit of corporate insiders, such as the officers, directors, key employees, and their family members. This is known as the “private inurement rule.”

Why is a Conflict of Interest Policy Important? For nonprofits that violate the private inurement rule, the IRS has the authority to: Impose sanctions; and (In egregious cases) revoke the tax- exempt status. Subject to federal income tax on net income No deductions for donors

Why is a Conflict of Interest Policy Important? South Carolina’s Nonprofit Corporation Act (S.C. Code , et seq.) Requires officers and directors to discharge their duties in good faith, with reasonable care, and in a manner the director reasonably believes to be in the best interest of the corporation. Defines, and (unless specific procedures are followed) prohibits, conflict of interest transactions.

Why is a Conflict of Interest Policy Important? Neither the Internal Revenue Code nor South Carolina law require nonprofit organizations to have conflict of interest policies. But, the IRS asks about conflict of interest policies in the nonprofit tax return.

Why is a Conflict of Interest Policy Important? As a general rule, when the IRS asks about your conflict of interest policy, you don’t want your response to be...

What Should be in a Conflict of Interest Policy? 1. What is the purpose of the policy? 2. What is a conflict of interest? 3. Who is covered by the conflict of interest policy? 4. What is the duty to disclose and how do covered individuals disclose possible conflicts? 5. What are the procedures for managing conflicts? 6. What happens if a covered individual violates the policy?

1. What is the purpose of the policy? What are you trying to do? Protect the organization’s interests when the organization is considering entering into a transaction or arrangement that might benefit an officer, director, or a manager with decision-making authority.

2. What is a conflict of interest? Consider using a definition similar to the definition we used earlier.

2. What is a conflict of interest? You can provide a non-exhaustive list of areas in which conflicts of interest may arise. e.g., business transactions, donor relations, compensation, etc.

3. Who is covered by the conflict of interest policy? Officers Directors Management level employees with decision-making authority *Remember to reference family members

4. What is the duty to disclose and how do covered individuals disclose possible conflicts? 1. Make it clear that individuals covered by the policy have a duty to disclose all actual or possible conflicts of interest.

4. What is the duty to disclose and how do covered individuals disclose possible conflicts? 2. Specify that disclosure should be made to the directors or the members of the committee responsible for making the decision relating to the potential conflict of interest.

4. What is the duty to disclose and how do covered individuals disclose possible conflicts? 3. The individual should have the opportunity to disclose all facts relating to the potential conflict.

5. What are the procedures for managing conflicts? Conflict Disclosed (Disclosing Party No Longer Involved)o Board/Committee Determines if Conflict Exists If So, Individual or Committee Appointed to Investigate Alternatives to Proposed Transaction If a more advantageous transaction is not available, Board or Committee determine (by majority vote of disinterested members) whether moving forward is in the best interest of the organization and is fair and reasonable

6. What happens if a covered individual violates the policy? The policy should make it clear that individuals who violate the conflict of interest policy (i.e. fail to disclose an actual or possible conflict) will be subject to disciplinary action.

How Do We Get the Most Out of Our Policy? 1. Follow it!!

How Do We Get the Most Out of Our Policy? 2. Once a year, distribute a certification and disclosure form on which: Employees certify that (1) they’ve received, read, and understand the conflict of interest policy; (2) they agree to comply with it; and (3) they understand the importance of it. Employees either (1) certify that they have no actual or potential conflicts of interest to report or (2) describe possible conflicts of interest.

How Do We Get the Most Out of Our Policy? 3. Consider creating and maintaining a list of possible conflicts within the organization.

How Do We Get the Most Out of Our Policy? 4. Document, Document, Document!! Meeting minutes, etc. should reflect the entire process of addressing a potential conflict. Personnel files should contain certification and disclosure forms.

QUESTIONS? William H. Jordan, Esq. Sowell, Gray, Stepp & Laffitte, LLC (803)