Executive Vice President—COO's Report
Regulating Foundations:
A Delicate Balance
The Challenge: Foundations Under Heightened Scrutiny
The Facts: A Changing Foundation Sector
The Regulatory Dilemma
Toward More Effective Regulation of the Foundation Sector
Reexamining the Place of Small and Very Small Foundations
The Foundation Sectors Responsibilities
Do No Harm

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In 2004, the Senate Finance Committee (SFC) returned to the issue of nonprofit and foundation governance. In anticipation of a new round of legislation, committee staff produced a discussion draft, which served as the basis for hearings held on June 22, 2004, and a follow-up Charitable Governance Roundtable.
The SFC discussion draft proposed an unprecedented role for the federal government in the management and regulation of the nonprofit and philanthropic sector. Its provisions included:

review of each organization's tax-exempt status every five years, with voluminous filing requirements;

defining as an "administrative expense" any foundation expenditure that is not an extramural grant;

detailed review of intramural expenses greater than 10 percent of a foundation's total expenses, with determination by the Internal Revenue Service (IRS) of the appropriateness of counting those expenses toward the required annual payout;

disallowance of any intramural spending greater than 35 percent of the total as part of the qualifying distribution for meeting the annual payout requirement;

for highly paid managers, substantial documentation and public disclosure of information regarding compensation;

limits on expenses for travel, meals, and accommodation;

incentives for foundations to increase their payout to 12 percent, from the current minimum of 5 percent;

detailed requirements for institutional oversight and management by boards of directors, with confirmation of compliance provided on organizations' IRS tax returns (the 990 for nonprofits, and the 990-PF for private foundations);

a requirement that all organizations change their auditors every five years;

a requirement that boards of directors haveno fewer than three members, and no more than 15;

IRS authority to remove, with cause, any board member of an organization;

prohibition or severe limits on compensation of foundation trustees;

publication on an organization's Web site of all documents required to be filed with regulators;

additional fees to be paid to the IRS for numerous new required filings;

federal support of accrediting agencies for charities and subgroups, such as foundations, with accreditation fees to be paid by organizations and the IRS able to base charitable status on accreditation; and

a requirement that tax returns for organizations include detailed descriptions of annual performance goals and measures.
Many of the governance measures contemplated in the SFC draft originated in the Sarbanes-Oxley Act of 2002, which concerned corporate accountability. Some measures, however, go well beyond those required even in the corporate context—for example, the proposal that organizations change their independent auditors at least every five years.
 
 
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