Weinberg & Jacobs, LLP; Notes

Overview of the Philanthropy Protection Act of 1995

Purposes of the Act:
(1) To limit the scope of a class action law suit brought against all charities that had issued Charitable Gift Annuities ("CGAs") or been trustees of Charitable Remainder Trusts in Texas as well as all charities everywhere that had issued CGAs based upon payout rates set by the American Council on Gift Annuities.

(2) To protect charities in the future from claims of securities violations by codifying existing SEC rules regarding charities' promises to make payments to donors, extend that protection to separate investment funds created by charitable organizations for the same or similar purposes, and preempt State Blue Sky laws on this subject, unless a State adopts a law that specifically regulates such common funds by January 11, 1999. The Act became effective January 1, 1996, with charities having until March 6, 1996 to give notice to existing CGAs and those with interests in its pooled funds as to the nature of those funds.

Related Antitrust Law:
A companion statute, the "Charitable Gift Annuity Antitrust Relief Act of 1995" (P.L. 104-63) also protects 501(c)(3) organizations from liability under Federal anti-trust laws for combined efforts to set CGA payout rates, and preempts State law on this subject unless a given State adopts a law that specifically makes this protection inapplicable by January 11, 1999.

Prior SEC Rules:
Subject to the Anti-Fraud provisions, the Investment Company Act of 1940 exempted nonprofit religious, educational, benevolent, fraternal, charitable and reformatory organizations whose net earnings did not inure to the benefit of private individuals from its registration and other regulatory provisions.

While this and related statutory provisions did not specifically extend the exemption to other pooled funds maintained by charities (such as those for compliance with state CGA requirements, charitable remainder trust investment or pooled income funds), the SEC issued no-action letters to organizations that met the following 4 criteria: (1) they did not place revocable gifts in such accounts, (2) they were entitled to receive tax deductible contributions, (3) each prospective donor received written disclosures fully and fairly describing the fund's operation, and (4) any person soliciting contributions to the fund was either a volunteer or employee of the charity and did not receive compensation based upon the amount given.

Remaining Questions:
(A) Since, by definition, a CGA is a general obligation of the charity, not merely a claim on a particular fund, must charities that are not required to set up such separate accounts make any disclosure (i.e., can they just rely on preexisting law to exempt them without disclosure?)

(B) What is the appropriate level of disclosure? Most of the charities I have contacted have worried about the content a great deal but sent nothing out yet, and the March 6th deadline has past (though I'm not sure how important that will be in reality). While one's first instinct may be to send them a copy of the audited financial statements, unnamed sources upon which one cannot rely at the SEC said that the "grandmother" test (would your bubby understand what is going on) may well be applied by them. They suggested a short statement that tells how much is in the fund and what it's invested in at a stated time, and an offer to supply the audited financials upon request would be better than just sending the financials.

(C) Technically the Act only protects the charity, its trustees, directors, officers, employees and volunteers from being investment advisors or broker dealers. Lawyers or fund raisers are not mentioned. The same SEC source suggested that consultants who are not paid on a percentage basis (but rather on the meager hourly rates lawyers and other wage slaves normally charge) could well be considered the charities' "employees" for purposes of protection under the Act.