News and analysis
February 12, 2013

Government Regulators Need More Money and Data, Experts Say

State charity regulators need more money, better tools, and greater access to information so they can monitor rapid changes in the nonprofit environment, including new ways of raising money for social causes, participants in a conference on charity regulation said last week.

Government officials, academic experts, lawyers, and others complained that both state and federal regulatory systems were inadequate to the task of monitoring more than 1 million charities—especially as they face new challenges like the growth of online and mobile fundraising and “hybrid” corporations that combine social missions with profits.

“One problem that plagues us all is getting resources to do the cases we ought to be doing,” said David Vladeck, who stepped down in December as director of the Federal Trade Commission’s Consumer Protection Bureau. “We’re all doing triage.”

The FTC works with states when it can to crack down on charitable fraud but cannot pursue all of the cases that come to its attention—partly because it has jurisdiction only over people or corporations that are carrying out for-profit activities, Mr. Vladeck said.

Meeting New Needs

Speakers at the conference, which was organized by Columbia University Law School’s Charities Regulation and Oversight Project and attracted regulators from 40 states, called for new laws or a new federal regulatory body more fitting for today’s nonprofit environment.

Putnam Barber, a nonprofit scholar affiliated with both the Urban Institute and the University of Washington, said the model law governing charitable solicitations, which was drawn up by state attorneys general in 1988 to guide states in drafting their own rules, badly needs updating to take account of new technologies.

Robert Carlson, a charity regulator in Missouri, provided real-world examples of the new fundraising techniques that are worrying regulators. One is “peer-to-peer” solicitations, he said, highlighting a tweet from a woman who said she was selling T-shirts to benefit Hurricane Sandy victims.

Not only was it unclear which Sandy victims would benefit, Mr. Carlson said, but he couldn’t tell even which state the woman was operating in, much less where her bank accounts were located.

“Could I blast subpoenas all over the place and get an answer in 18 months? Yeah, probably,” he said. “I guarantee you the money will be gone by then.”

Seeking a New Regulator

Marcus Owens, a lawyer and former head of the Internal Revenue Service’s nonprofit division, revived a proposal he made a few years ago to create a Charity Oversight Board, an alternative to regulation by the IRS, which conference participants agreed is too overstretched to provide effective enforcement.

The new agency would be a public-private organization similar to the Financial Industry Regulatory Authority, which regulates securities firms and is overseen by the Securities and Exchange Commission. It would report to the IRS and be financed largely by member dues from charities.

Asked to respond to the proposal, Lloyd Hitoshi Mayer, professor of law at the University of Notre Dame, said he worried about the ability of the IRS to provide proper oversight of the body, the administrative burden small charities would face in adapting to a new entity, and possible “mission creep” of the board beyond federal tax laws into issues like charity governance.

But James Tierney, director of Columbia’s National State Attorney General Program, praised Mr. Owens for planting a seed, noting that the new Consumer Financial Protection Bureau that was created in response to the recent financial crisis, got its start in a “thought paper” several years ago by Elizabeth Warren, then a Harvard professor and now a U.S. senator.

However, he said, that agency was created after the government faced intense pressure because millions of people had lost their homes, adding, “We don’t have that kind of crisis.”

Social-Good Businesses

Charity regulators are also starting to pay more attention to new legal forms for companies with a dual mission of making money and doing good—for example, benefit corporations, low-profit limited liability corporations (often called L3Cs), and flexible-purpose corporations. While not now subject to state laws governing charitable activities, David Edward Spenard, a charity regulator in Kentucky, said states will need to “fashion a regulatory response” over the next five years. “One of the things that needs to take place is an improvement in monitoring the discussion about what is what,” he said. “We have individuals freely talking about social return and freely talking about social enterprise as if they are interchangeable with charitable benefit and charitable enterprise, and they’re simply not.”

Elizabeth Grant, a charity regulator in Oregon, said the distinction between charitable activities and for-profit “social benefit” will eventually break down, adding that “the public perception is that these are charities.” Therefore, she said, regulators need to ensure that “the public trust is not co-opted into private gain,” just as it does with traditional charities.

But Robert Wexler, a lawyer who specializes in the new hybrid legal forms, said that the new entities are already subject to laws covering for-profit companies, as well as to legal action by shareholders, and should not be regulated as charities.

Training Board Members

Several speakers called on the IRS to share more of the data it collects from charities with state regulators and states to provide more information about charities on their Web sites.

Given the limited resources at their disposal, some regulators said they are stepping up their efforts to educate nonprofits and their boards in hopes that will help them practice good governance.

Jason Lilien, head of New York’s charity-regulation bureau, described a program the attorney general had introduced, Directors U, to provide free or low-cost training to nonprofit board members.

Even New York, which has one of the country’s biggest charity-regulation bureaus, can’t police all of the state’s 100,000 nonprofits, he said.

“The reality,” he said, “is we live in a self-regulated system.”

Send an e-mail to Suzanne Perry.