Calling all trustees: registration requirements have changed

California CPA, Nov, 2004 by Bruce C. Allen

Many CPAs act as private trustees for specific clients. Legislation effective in 2004 required those acting as the trustee for six or more families or individuals to register with the California Department of Justice by Jan. 1, 2005. New legislation, SB 1248 (Bowen), signed by the governor in September, lowered that number to those acting as trustees for four or more families and/or individuals.

The number of trust beneficiaries does not count for the purposes of calculating if a trustee falls within this exclusion. Once registered with the attorney general, the registration must be renewed every three years. The attorney general is allowed to charge a reasonable fee for the registration. The fee is $385 for three years.

The process can be initiated online at www.ag.ca.gov. Registering trustees are required to report the aggregate amount of funds under supervision and the names of the trusts. Registration requires that college transcripts be submitted for any degree claimed in the application.

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Failure to register before Jan. 1, 2005 could constitute cause for removal. The registration requirement does not apply when the person is related to the trustor by blood, marriage, adoption or registered domestic partnership. Trust companies and FDIC insured institutions, their holding companies, subsidiaries or affiliates also are exempted. For a copy of the new law, visit www.leginfo.ca.gov/bilinfo.html.

Related legislation, AB 1155, requires the California Judicial Council to develop mandatory continuing education requirements for conservators and guardians by Jan. 1, 2006.

NonProfit Integrity Act of 2004 Signed Into Law

Gov. Schwarzenegger signed SB 1262 (Sher) Sept. 30, which was sponsored by the California Attorney General. It impacts all California charitable organizations and those out of state or foreign organizations that conduct activities or hold property in California. The new law makes significant changes in the way these organizations are governed and how funds are raised.

The new law takes effect Jan. 1, 2005 and affects charitable corporations, unincorporated associations and charitable trusts that are required to file reports with the attorney general. Exempt from the new law are educational institutions, hospitals, cemeteries and religious organizations.

Charities with gross revenue of $2 million or more in a year are required to have an annual audit. Grant or contract income from the government is not included in the charity's gross revenue as long as the government entity requires an accounting of those funds.

The audit must be performed in accordance with generally accepted accounting principles. If the audit firm also performs nonaudit services for the charity, the audit firm must conform to the standards for auditor independence contained in Government Auditing Standards ("The Yellow Book").

All audited statements by any charity required to file reports with the attorney general must be made available to the general public within nine months of the fiscal year close. The applicable standards for public inspection are the disclosure rules that apply to Form 990.

Those corporate charities that are required by the act to have an annual audit also are mandated to have an audit committee appointed by its board of directors. Non-board members may serve on the audit committee, but no charity staff member may serve, including the top management or any person with a material financial interest in any organization doing business with the charitable organization.

The chair of the audit committee may not be a member of the finance committee and members of the finance committee must make up less than half of the audit committee members. Compensation for audit committee members may not exceed compensation paid to members of the board of directors. The audit committee is responsible for recommending to the board the hiring or termination of the auditors, the compensation of the auditor, meeting with the auditor to satisfy the audit committee that the financial affairs of the charity are in order, reviewing the audit and approving any nonaudit services provided by the audit firm.

The act also requires that the board of directors, or an authorized committee of the charity, review and approve the compensation and benefits of the CEO and CFO as just and reasonable. This applies to all charities. The only exception is if the change in compensation applies to virtually all other employees.

The act mandates that charities exercise control over their fund-raising activities, including approval of all written contracts. Fund raising must be conducted without coercion. Commercial fund-raisers used by any charity must be registered with the attorney general.

The act also prohibits misrepresentation of the organization's purpose and misrepresentation of the purpose or beneficiary of the solicitation. Misrepresentation can be established through word or conduct or failure to disclose a material fact. The remainder of the act deals with regulation of the activities of commercial fundraisers and fundraising counsel.