Securities Regulation

SECURITIES REGULARIZATIONS IN NON-PROFIT ORGANIZATIONS

The ensuring of the fact that an organization is working as per regulations and is following the code of conduct, while keeping the interest of the public first, are matters which are becoming more and more complicated with the passage of time. Therefore, it can be said with some emphasis, that today one of the most basic issues of many organizations is the issue of Transparency.

Transparency has been defined as being “characterized by visibility of accessibility of information concerning business practices.” [footnoteRef:1] More and more companies are now realizing that in the time and age in which we live, living with these models of ethics is compulsory, if they want to have credibility in the general public. [1: ]

In a study by Christopher Meyer and Julia Kirby, the change in the attitudes of the many corporations and sectors has been studied, and the conclusion reached by them, in their paper is, that the change in the Global scenario and how companies are interacting today, via internet and technological dependent instruments which has made the change surface. This was much evident in the way the tobacco companies dealt with the studies which blamed them for causing Lung Cancer — by completely hiding or burying these studies — and how the food and the restaurant industry reacted when it was discovered that trans fats was not a healthy option — by revising their menus and conducting educational programs in this regard.[footnoteRef:2] [2: ]

Christopher and Julia attribute this change to three possible agents, “the growing scale of companies and their impacts, improvements in sensors that measure impacts and heightened sensibilities of stakeholders.” [footnoteRef:3] [3: ]

There is no doubt that the stakeholder is the major actor in this regard and it is his/her interests which are directly affected when these ethical values are ignored for personal benefits. The law making agencies are realizing the implications of this sort of self-motivated interest and how they can affect the very trust that exists between corporations and the general populace.

The drafting and then the implementations of law have been the direct result of one of the biggest blow to American Economical Working back in 1929 when The Great Depression hit the American Society.[footnoteRef:4] [4: ]

This work however would focus on Non-Profit Organizations (NPO’s) and how transparency is an important element of their working. This transparency becomes more important when Securities Elements, like Bonds, Notes, etc. are involved. Since NPO’s are not meant for any profit, therefore the major contribution to their workforce is created by the voluntary actions of others. And to continue with this relationship of trust, it is important that steps are taken which ensure that no incident takes place which can alter this relationship in any way. Transparency is the only solution and the only key to attain this.

The concept of NPO’s is pretty new and the understanding of how they function is still quite unknown to many. It therefore becomes of primary importance that first an understanding of NPO’s is created before the paper can focus on the real issue of Security Regulation and their relationship with Non-Profit Organizations.

Before the main topic and the question which will be pondered in this paper can be presented it becomes essential to take a look, briefly only, about the financial workings of a Nonprofit Organizations and how they operate and work in a world which reality is a harsh pill to take.

2. WHAT ARE NONPROFIT ORGANIZATIONS?

Introduction:

Before the topic can proceed with establishing its point, it becomes important to take into consideration that how do we exactly define NPO’s. The changing political and economic forces have made NPO’s a very important and integral part of any economic setup and thus the very change in their internal setup and organization requires a deeper understanding. NPO’s are becoming very complex organizations, varying “much in terms of mission, size, mode of operation and impact, particularly in a cross-national sense. Some are closer to the model of a government agency; others may indeed resemble the business firm; and yet others may be little more than an informal network.” [footnoteRef:5] [5: ]

A Non-Profit Organization has been defined as,

“An organization that prohibits distributing any of its profits to individuals with control over the organization such as members, officers, directors, or trustees. While a nonprofit organization can make a profit, the profit it earns must be used toward the organization’s activities. Thus, nonprofits operate for the common good and not individual wealth.” [footnoteRef:6] [6: ]

But in the legal terminologies it should be eligible and in the jurisdiction of In order to be eligible “501(c)(3) corporation, meaning a nonprofit corporation that has received a determination letter from the Internal Revenue Service that it qualifies as an organization of the type described in Section 501(c)(3) of the Internal Revenue Code.” [footnoteRef:7] [7: ]

There are many variations in the number of NPO’s each being identified differently. “The designation “501(c) (3)” identifies the sections of the Internal Revenue Code (IRC) for one type of nonprofit.” [footnoteRef:8] Under the IRC, there are a total of twenty-one categories of nonprofits, and are identified as 501(c) (1), (2), (3), and so on. The distinction is important as each one of them is different in their purpose and how they regulate the concerned NPO under its jurisdiction. These are important especially if the concerned organization wants to continue in maintaining its tax-exempted status. For the purpose of this paper, the majority of identification of NPO would be done as 501 (c) (3) as they are the only one of the NPO “to which contributions are tax-deductible.” [footnoteRef:9] [8: ] [9: ]

The variations of NPO’s include, Private Nonprofit Educational Organizations, under which comes, colleges and universities, auxiliary foundations, including for public college and universities, private elementary and high schools, charter schools, religiously affiliated schools, research institutions, centers, etc.; Cultural Organizations, which may include museums, libraries, aquariums, cultural venues, historical preservation, public broadcasting stations; Recreational Organizations, like local sports facilities, community centers, YMCAs; Charitable Organizations, which include, charities, foundations; Health Care Organizations, which include, hospitals, clinics, multilevel care, assisted living, congregate care; Multifamily Rental Housing, under which comes, low-income housing corporations, lessening the burden of government corporations; Other (Including Public-Private Partnerships), which include student housing, hotels, toll roads, cruise terminals, parking facilities, anything else that can help to “lessen the burden of government.” [footnoteRef:10] [10: ]

In her writings, Anheier has categorized NPO’s into four categories, Organized, Private, Non-profit-distributing, Self-governing and Voluntary,[footnoteRef:11] and all of them being increasingly different from each other in the nature and the way they are organized. [11: ]

Where once Voluntary work was considered to be the essence of NPO’s today that perception is rapidly changing, and management is fast becoming a very important concept and no longer in odds with “voluntarism, philanthropy, compassion and a concern for the public good.” [footnoteRef:12] The change has been due to the way NPO’s are being perceived, which is as an economic force and Political Actors. [12: ]

Today the NPO sector is employing almost 5% of the total employment, and is expanding itself to more than just the concept of Charity, by being involved in Social Sciences, Philanthropy, etc. Their increased role and influence, today, requires them to be as organized and “corporate” in a sense of the word, which has become a need after years of evolution under relatively stable conditions.[footnoteRef:13] These figures represent almost one million 50(c) (3) nonprofit corporations[footnoteRef:14], working for different purposes and causes, ranging from animal cruelty to human rights. [13: ] [14: ]

But the changing economic conditions have meant that today much of the stability that NPO’s had enjoyed for so long is slowly being taken away, as many Governments are now asking them to be less dependent on Government support, which can be cited as another reason for increased management demands.

Therefore what we see today is an environment of uncertainty which is quite new to NPO’s and this situation, a turn towards more successful model, which in comparison is the corporate models, is being seen. Although, this management side in NPO’s is seen to be more or less concentrated towards financial management which is very much unlike the corporate sectors, where the entire organization is being run in an organized manner.

It has been calculated that that NPO’s have been dealing with annual revenues of over $25,000 and therefore maintaining transparency becomes an important element in this regard. IRS regularizations now make it compulsory for all NPO’s to file an annual Form 990 and make the provision of the last three years of these filings accessible to the general public. The statistics show that the interest in these fillings is not at all a low key affair, as almost 700,000 registered users, 11 million searches were conducted in these regards, showing a remarkable show of interest. The details of these have been discussed in the following sections.

The purpose of nonprofit organizations

NPO’s compromise of some of the most important institutes that form an integral part of our lives, and they function with a compassion which overtakes the needs for profits. To get a clearer idea, it becomes important to consider some of the institutes which form a part of these NPO’s. These, therefore, includes, “Schools, Hospitals, Charitable Institutions, welfare societies, clubs, public libraries, resident welfare association, sports club, etc..” [footnoteRef:15] [15: ]

They are increasingly becoming alternatives to the provision of facilities and activities as the Government continues to fail in many sectors due to the growing economic pressures and the impact of recession. In such conditions, NPO’s as appeared as platforms that can help in catering to the many needs of the individuals in the society, including food, Education, Housing, and it is the provision of these needs that become the main purpose of these Organizations and is their defining line, which helps them in procuring funds from the various donors.

All of these institutes are providing services towards the general population, and while they can have a profit markup on the services that they provide, this is not to mean that they can keep the profit for themselves. Instead, the functioning of a NPO is more like a constant cycle, in which the profits earned are kept aside for a time when the lack of stability might push the organization to dip into these funds to subsidize their own programs.

As already discussed in the introduction, the transparency of the various sectors of an organization is a very important part of an organization today. It is with this in mind that the many Laws and Rules writing the U.S.A. make it compulsory for certain regularities on the securities that are being mentioned by the NPO’s.

Tax Exemption for NPO’s

A NPO can be catered for a tax exemption, depending on fulfilling a certain criteria and filing if with the IRS. To fulfill this criteria, however, the organization must fall under one of the categories which have been discussed above, or can even be a trust, corporation, or association which is seeking exemption under IRC 501(c)(3)[footnoteRef:16]. [16: ]

The procedure however, is quite thorough and requires the submission of a form 1023 along with another data which includes “financial data, a description of activities, purpose, standards, and procedures…an Employee Identification Number, and have an exempt purpose.” [footnoteRef:17] [17: ]

The purpose can easily be derived through the language and procedure that are obtainable from the IRS Publication 557 but this also depends on the revenue that is being generated by the organizations. For example, “Churches and other organizations having gross annual receipts of $5,000 or less do not have to apply to be considered tax-exempt organizations.” [footnoteRef:18] [18: ]

Nonprofit Organizations are exempted from tax, although, in this too, it requires the undergoing of a rigid process. The list of organizations that can be exempted is long and includes all those 501 (c )(3) as listed by the IRS.

The exemption, however, is limited to only those properties or activities that are non-commercial or nonprofit tin their nature. Any organization that crosses the threshold of this distinction is automatically removed from this exemption. Or in some cases, those organizations which are involved in nonprofit activities but are performing commercial activities on some part of the property, would be taxed for that part only.[footnoteRef:19] [19: ]

Financial Workings of a NPO

The financial workings of an NPO are not an easy thing to understand, which is getting increasingly complex as the impact of recession and the increase in funds and donations increase. The traditional purpose of these organizations, have therefore changed drastically from just being organizations which provide certain services.

Many an organizations rely on securities bonds, which in most cases of 501(c)(3) are tax exempted. These organizations need these in their times of needs, which can vary from the funding of a new project to cater a fundraising, and now, they have become a source to keep these NPO’s afloat as more and more companies face recession.

The question then arises is that why is there a need for security bonds to rely on, when the major running of NPO’s is being catered though donations? The justification for this relying is that most of the funding that comes from private donors is restricted and conditioned for a certain purpose. This organization is then bounded to use that donation for only that purpose; this leaves little flexibility for the other purposes and programs that an organization may have. In this scenario, securities can be a great help indeed to further the goals of an organization, without depending only on one source of funds.

At the time of selling of these securities, it becomes imperative that the securities are registered with the SEC so that no fraud can be committed against the investor. They are required by the Securities Act of 1933 and Exchange Act of 1934 to act in accordance with the rules and regulations and have all their securities registered. The securities registration allows for the investor to know in wholeness the state and the potential that these securities might have for him, and thus helps him in making an informed decision.

The lack of complying with these rules and regulations can lead to the revoking of the tax-exempted status of these securities. This has been discussed in detail in the next section.

Nonprofit organizations exempt from many securities requirements

Despite this, there are many loopholes that exist today in the NPO’s rules and regulations, many of which do not even require the disclosure of the deals and sells that are made between the investors and the NPO. And it is at this very stage that the doors to fraud and corruption are bound to open.

Already there are many a reports which are indicating that the rate of corruption in NPO’s is slowly and gradually on the rise. And despite the fact that there are many rules that are in place to counter such things, they have not been successful enough as they have enough holes in them to avoid being caught by this very system in place. And it is with this thought in mind that we approach the main question of this research paper.

3. NONPROFIT ORGANIZATIONS NOT EXEMPT FROM SECURITIES REGULATION

The Nonprofit sector or the Independent sector has emerged as a counter sector to fulfill the ever increasing demands of a society, which are exceeding beyond the management and the scope of only Governmental Agencies. It is in the light of this fact that NPO’s are becoming an important part of our societies and thus emerging as a dominant force.

Their ultimate success lies in the faith that people have in them, and if that is lost then their existence in itself would become a question of survival of the fittest. The many corruption charges and fraud cases that have come up against the NPO’s have not been a good sign for this sector as many people are now starting to lose faith in them. This could go on to adversely affect the trust that people have in them and affect their funding, donations and volunteering spirit which makes quite a big chunk of their employment force. This is of prime importance, since as an Independent sector, it is one which relies deeply on the compassion of the people so that they can continue their working.

It therefore becomes empirical that the NPO’s adhere themselves to regularizations and a constant check. There is no arguing that since the 1930’s and especially after The Great Depression, the realization of the importance of transparency has been felt in the overall American system, and indeed rules and regulations tailored to counter any such disaster are in place. But are they enough?

The paper sets for itself the task of evaluating the many rules and regulations that have been put in place and to seek the answer for itself whether enough has been done? And if indeed enough has been done, then why are the many cases of corruption and fraud still coming up? Where does the problem lie and how can it be solved?

4. FEDERAL SECURITIES LAWS THAT APPLY TO NONPROFIT ORGANIZATIONS

The section would focus itself on covering the many rules, regulations, amendments and acts that have been put in practice to regulate the sales of Securities. These rules are not exclusive to NPO’s and therefore their effects and their connections with the nonprofit organization would be dealt with separately, under each law.

Securities Act of 1933

The Securities Act of 1933, also known as the “truth in securities” Law was the result of a need after the Great Depression and since then has been instrumental in the way NPO’s function. It works under the umbrella of two basic objectives:

• require that investors receive financial and other significant information concerning securities being offered for public sale; and • prohibit deceit, misrepresentations, and other fraud in the sale of securities.[footnoteRef:20] [20: ]

In the ever complicated world, in which fraud and cheat has become quite common, it is essential for the NPO’s to disclose such information to the probable investor, so that it can help in their decision making process. This disclosure requires that the financial information and securities that the NPO has acquired for itself be registered with the SEC.

The process of filing out the form is not as easy, and is indeed a complicated process, but coves the answers with regards to, • “A description of the company’s properties and business;

• A description of the security to be offered for sale;

• Information about the management of the company; and • Financial statements certified by independent accountants.

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

• Private offerings to a limited number of persons or institutions;

• Offerings of limited size;

• Intrastate offerings; and • Securities of municipal, state, and federal governments.” [footnoteRef:21] [21: ]

The complexity of the Act continues to increase as part of Section 3(b) of the Securities Act authorizes the SEC to exempt the registration of small securities offerings, under Regulation A. This regulation exempt’s registration of public offerings which do not exceed the mark of $5 million in any 12-month period. This is conditional to the filing of an offering statement by the concerned company.[footnoteRef:22] [22: ]

Some of the factors that are to be considered when selling off of securities include the Section 3 (a)(11),formally titled as the “intrastate offering exemption” which makes it a must that all selling of the securities would be done within the jurisdiction of the state concerned. If, however, they are sold outside of the state jurisdiction then the exemption on the securities would be cancelled.[footnoteRef:23] [23: ]

Private Offering Exemption or Section 4(2) of the Securities Act are for those investors which have the understanding of the risks that might be involved and also agree not to resell the securities to the public and are done in the first place even without any public offering.[footnoteRef:24] There are many problems with this section as well since the relationship and the limits of this clause has not been defined, and has been left on the NPO’s to decide for themselves.[footnoteRef:25] [24: ] [25: ]

In Section 3(b) of the Securities Act, small offerings are completely exempted from registration with the SEC. Therefore in Regulation A, an exemption has been accommodated for all public offerings which do not exceed the $5 million in any 12-month period. However, it does require the filing of an offering statement, “consisting of a notification, offering circular, and exhibits, with the SEC for review.” [footnoteRef:26] [26: ]

Regulation A of this Act allows for the companies to provide the potential buyer with an offering circular, but in this scenario, there is no restriction on the selling or trading of these securities in the market. However, there are many differences that exist between the registered as compared to those that have been done taking advantage of this clause. The most basic of these advantages include:

There is no need to auditing, thus making the financial statements much simpler.

No reporting needs to take place on the offering that is made unless the offering unless the company reaches a level in which its core value is calculated to be $10 million and having more than 500 shareholders;

The Regulation also provides the option of researching the markets first, or “test the waters” in a way so to ensure whether there is any interest in the securities that the company is offering. This step can be instrumental in making sure that the securities which the company is offering are worth something or not. This can also result in taking an alternative decision.

Revenues worth $1.5 million can be earned and through the use of Regulation A and thus provides a good opportunity for the many shareholders. These regulations are valid for almost all sorts of companies except those which come under the umbrella of “blank check” companies, whose designation and business is unspecified.

Regulation D. has three different parts to it, these being Rule 504, which provides an exemption for sales and offers of up to $1,000,000 of securities in a 12-month period, conditioned to the fact that the company with which business is being conducted is not a blank check company and “is not subject to Exchange Act reporting requirements.” [footnoteRef:27] Further on the deal is restrictive in nature as it doesn’t allow the advertising or public selling of these securities, making them “restricted” in nature. Any selling of the securities would be permitted only after the proper registration or an applicable exemption. The exemptions are again very complex in nature and allow for a public offering only under certain conditions. These conditions include, the registration of the offering in selective states subjected to a “publicly filed registration statement and delivery of a substantive disclosure document to investors,” [footnoteRef:28] the registration and selling in a “state that requires registration and disclosure delivery and also sell in a state without those requirements, so long as you deliver the disclosure documents mandated by the state in which you registered to all purchasers”[footnoteRef:29]; or the securities are sold to an accredited investor,[footnoteRef:30] in which condition you are permitted to advertise the said securities. [27: ] [28: ] [29: ] [30: An Accredited investor may be defined to be an investor which is either in the form of a bank, insurance company, investment company, a charitable organization or even an individual whose net worth is at least $1 million and can exceed $200,000 or a joint income with a spouse who exceeds $300,000. Source: ]

Rule 505 exempts the registration of offers and sales of securities of up to $5 million in any 12-month period. However, the advantage of this rule is that the sell is open to an unlimited number of accredited investors and to any other 35 individuals. The securities cannot be advertised and therefore the reliance on accredited investors becomes a compulsion. These securities are then, however, bounded to an “investment only” status and cannot be resold and therefore can be defined as having a “restricted” status. Any sells of these securities within a year would require the registering of such transactions. This rule, furthermore, is subjected to an intense scrutiny and requires that all financial statements are certified by an independent public accountant. In case this is not possible, a company except for a limited partnership, can submit the company’s balance sheet, “to be dated within 120 days of the start of the offering, must be audited.” [footnoteRef:31] Interested Limited partnerships are in such a scenario are required to make their financial statements audited and prepared under the federal income tax laws. [31: ]

The last part of Regulation D. has been dubbed as the “safe harbor” and is known in the legal terms as Rule 506. It has been dubbed so as it provides a safe harbor for the private offering exemption, conditioned to the fact that the concerned organization has the potential to raise an unlimited amount of capital; however, for the selling of the securities advertising cannot be employed as a tool, but there is no limit to the number of accredited investors[footnoteRef:32] and up to 35 other purchasers, as has been the condition in the above clause as well. The rest of the conditions, too, are the same as has been discussed in the Rule 505, including the restive nature of the securities. [32: ]

Section 4(6) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million.

The definition of accredited investors is the same as that used in Regulation D. Like the exemptions in Rule 505 and 506, this exemption does not permit any form of advertising or public solicitation. There are no document delivery requirements. Of course, all transactions are subject to the antifraud provisions of the securities laws.

Furthermore, there is also a “California Limited Offering Exemption – Rule 1001” which provides an exemption as well, in case the securities amounts to up to $5 million and is able to satisfy the conditions of 25102(n) of the California Corporations Code. This Rule exempts “from California state law registration offerings made by California companies to “qualified purchasers” whose characteristics are similar to, but not the same as, accredited investors under Regulation D. This exemption allows some methods of general solicitation prior to sales.” [footnoteRef:33] [33: ]

Lastly, it is the “Exemption for Sales of Securities through Employee Benefit Plans – Rule 701” which exempts if they are being done to compensate the employees but is limited to only those companies that are not subject to Exchange Act reporting requirements. In this scenario, a company can sell at least $1,000,000 worth of securities despite the size of the company. Any sells which go beyond the $5 million mark in a period of 12-month, are subjected to limited disclosure documents to their employees. Like Rule 505 and 506, these securities too are “restricted securities.”

Application to nonprofit organizations

Securities are increasingly being used by the many nonprofit organizations to fund the many projects that have been in the pipeline for a very long time. These projects can be in the shape of expansion of their facilities or the expansion of their project. And as such securities bonds have been a good investment that many of the NPO’s had made, but as per the Security Act of 1933, it becomes important for all NPO’s to disclose their securities to the general public. The point behind this exercise is to ensure that the probable buyer has a clear idea of the investment it is about to buy.

The filing of the securities with the SEC is a three phased process, including a pre-filling period, the waiting period and the post-effective period.[footnoteRef:34] Within this again, there are many regularizations and steps to cater to before the securities can be sold. While many of the securities may be exempted from registration, they would still be subject to the anti-fraud terms that exist.[footnoteRef:35] [34: ] [35: ]

Securities Exchange Act of 1934

The Exchange Act was implemented and made a part of the Law in 1934 by Congress. It was also this step which led to the ultimate establishment of SEC, Securities and Exchange Commission, a federal agency whose core responsibility includes the regulating of the securities markets.

Since then the powers of the SEC have expanded beyond just the implementation of the Exchange Act, and today it includes the Sarbanes-Oxley Act of 2002, besides many other legislation. An important aspect of the Act and thus of SEC directly is to ensure that the disclosure requirement is being met by all the concerned companies. This requirement requires that the companies file their periodic filings with the SEC at regular intervals. This information is then available for the general public to see on the website of EDGAR, its online filing system for all interested investors to consult. Besides this, this information is also made available to the public through postal mode.

The extent of their responsibilities goes on to include the “registering and establishing rules for the conduct of market participants and for exchanges and self-regulatory organizations (SROs). Under the Exchange Act, the SEC can sanction, fine, and otherwise discipline market participants – both organizations and associated individuals – who violate federal securities laws. The SEC, in enforcing the various statutes, can also issue rules pursuant to specific provisions, to help effectuate those provisions.” [footnoteRef:36] [36: ]

The basic purpose of this Act is to ensure the transactions of “securities in the secondary market – that is, sales that take place after a security is initially offered by a company (the issuer).” [footnoteRef:37] [37: ]

The Act makes it compulsory for the issuers to or however is selling the securities to disclose in no clear terms that are related in aiding the decision regarding the securities so that the investor can make a decision. Besides this, the Exchange Act also acts as a regulator of the securities once they have appeared in the market.

The complexity of the Act and even the thoroughness of the Act can be understood by the fact that the mandatory disclosure system operates and the required disclosures and the forms of disclosure vary from each other depending on the need and the situation for which they are needed. In this aspect, it can be concluded that the Law has covered multi-faceted options in this business.

The Act requires under Section 13(a) that companies which are registered publicly and have public held securities and are of a considerable size are called in the Law as “reporting companies,” and as such have the condition implied on them that they must continuously disclose their financial statements through the filing of annual reports (10Ks), quarterly reports (10Qs), and reports when certain events occur (8Ks), as per the SEC rules. Besides the information regarding securities which can help in investors make an informed decision, other information include information regarding the company’s “officers and directors, the company’s line of business, audited financial statements, the management discussion and analysis section (in which the company’s management discusses the prior year’s performance and plans for the next year), and audited financial statements.” [footnoteRef:38] [38: ]

However, the disclosure is not limited to only these points in the year as has been discussed above. Instead the Exchange Act also makes it compulsory that the disclosure is don’t as demanded at some certain crucial points, which would be beneficial for the investors and their decision.

“Sections 14(a), 14(b), and 14(c) govern disclosure during proxy contests, when various parties might solicit an investor’s vote on a corporate action or to vote for certain board members.” [footnoteRef:39] This can be considered as one of the crucial point at which disclosure becomes compulsory. More so, “if a party makes a tender offer, by attempting to buy up 5% or more of the company’s stock on the open market, the Williams Act governs (Sections 13(d), 13(e), 14(d) and 14(e)). A tender offer must also file disclosure documents with the SEC that disclose its future plans relating to its holdings in the company, among other information; this allows investors to decide whether to sell or not.” [footnoteRef:40] [39: ] [40: ]

The Exchange Act is one of the fundamental laws that were drafted in the U.S. History to protect the investors from any sort of fraud that can occur and thus take a direct toll on the economy as was seen during the time of The Great Depression. More so, the role of the Exchange Act is also put in place to ensure that fraud and cheating doesn’t take place that can harm the interest of the investors. In case this does happens, then it is through this Act that severe penalties are established for those who are found guilty of defrauding the investors or are using some privileged information to do trading that can be beneficial for their individual self.

In such a scenario, the SEC is responsible for enforcing a civil enforcement action and in some cases even criminal actions can also be taken against those who have committed such violations.

The Exchange Act is different from the Securities Act as it gives the power to the investors in pursuing a private suit against those market participants who have defrauded them. Some of the action that can be taken against these defrauds is categorized as under Section 10b and Rule 10b-5, which is the principal statutory weapon against fraud. While Section 10b is drafted with regards to the antifraud provision of the Exchange Act, Rule 10b-5 takes into consideration “the rule the SEC promulgated under that section.” [footnoteRef:41] [41: ]

Rule 10b-5 makes it clear in prohibiting the use of mode or medium to commit fraud against the investor and as such goes on to create liabilities for any error that may occur in the form of a misstatement or omission of any information that could have been relevant from an investor point-of-view. The implicated party for this act can include a wide array of people and involved parties, which can include “brokers to issuers to company employees”[footnoteRef:42] [42: ]

The wide array of crimes that can be included to be used against the culprits due to the Exchange Act antifraud provision include” from misleading statements in company filings and documents used to sell the securities, to insider trading (where corporate insiders use information unavailable to investors to trade profitably) to market manipulation cases in which companies bought and sold their own stock so as to affect the market price of the company’s stock.” [footnoteRef:43] [43: ]

The most common suit in this regard includes the 10b-5 suits, through which the Plaintiffs “can recover the excess of what they paid over the actual price of the security.” [footnoteRef:44] Taking this action can ensure that the “actual price” which has been defined as the “average price of the security within a 90-day window of the disclosure of the fraud” can be estimated. And as such damages calculated can be indicated under 21D (e), “which was added as part of legislation to reform securities litigation.” [footnoteRef:45] Other sections that can also help in this regard include Section 10b and Rule 10b-5. [44: ] [45: ]

Application to nonprofit organizations

The Exchange Act of 1934 was never written with keeping in mind the nonprofit organizations, however, due to the many variations that have come about in the original rule, some amendments now do show relevance to their application upon nonprofits as well. The Sarbanes-Oxley Act which was passed in 2002 has two such points which are highly relatable to the nonprofit organizations.

While the variety of the rules and regulations stated in the act are relevant to the publicly-traded corporations, the two provisions which relate to nonprofit organizations are with regards to the “retention and retaliation against whistle blowers.” More so, the responsibility that has been assigned directly to the boards — who are deemed responsible for their corporations — has also made many legislators follow suit. The ultimate result has been that today many lawmakers are proposing and passing “legislation extending similar good governance requirements to charitable and nonprofit corporations.” [footnoteRef:46] [46: ]

The other provisions of the Act are quite common to what has already been discussed so far, with regards to the holding back of information from any possible investor or buyer and in some cases even the public. With regards to this, it can be argued that for nonprofit organizations as well this holds true. The withholding of any information that has to do something with their financial statements is a crime and is punishable by the many rules and amendments, including criminal crime as well. The violations of the disclosure clause or the distributing of false information can lead to fines as well as imprisonment up to 20 years.[footnoteRef:47] [47: ]

Another aspect is the retention of documents with regards to payroll records especially, to avoid any possible lawsuits that can occur. The situation would only get worse for the nonprofits organizations, already short on funds, to engage in such a lawsuit when they can save money by simply saving up the paperwork for a certain period of time. “Section 802’s likely applicability to nonprofit organizations provides one more reason to adopt a written policy.” [footnoteRef:48] This could be further established by NPO’s by developing a timeline which would help in “maintaining various categories of documents (financial, fundraising, personnel, contracts, leases, etc.) in accordance with applicable state and federal requirements, and should cover electronically held materials such as e-mails and voice mails as well as printed documents.” [footnoteRef:49] Such a timeline would also help in any lawsuit that might come up after a material has been disposed off, because the argument that can be created in such a scenario would consider the lack of documentation as a normal course of office routine and not a self-interest or self-motivated act to hide something. [48: ] [49: ]

For nonprofits, the concept of whistleblowers is essential important since an early intervention can help in preserving the trust of the people in the firm. The many procedures that can be taken by a whistleblower include three different options. It can either require the establishment of audit committees which can establish” procedures for dealing with complaints about suspicious accounting and auditing practices”[footnoteRef:50] within the firm or the second option can be the a “civil cause of action at the Department of Labor for whistle blowers who have faced retaliation, and the third makes it a crime to retaliate against whistle blowers.” [footnoteRef:51] [50: ] [51: ]

Section 1107 makes it explicitly clear that no action can be taken against the whistle blower and any such act would be considered a felony. This information can be extremely useful for the law enforcing agencies, since they can use this information to develop a case or seek the facts. Although the act makes no compulsion, but the placing of a whistle blower as[footnoteRef:52] part of a “written whistle blower policy” can mean that the reputation of the organization can be held in the positive light in front of the public. This would also provide and extra shield against any possible fraud or mismanagement of funds that are taking place within the organization and can be attended to pretty early in the course of the crime. A written policy would go a long way in making the employees feel encouraged that they can come and report any wrong incident, and this can be considered extra beneficial if the clause of anonymity is also included. Any threats or action taken against this in a negative manner by the company to hush up the entire case or to intimidate the whistle blower can result to criminal and felony charges by the concerned authorities. [52: ]

It should be noted however that these laws are not for nonprofit organizations per say but can be applied on them and can even be taken up by the NPO’s for themselves and their organization as signs of good governance.

Trust Indenture Act of 1939

Approved by President Roosevelt in the year 1939, The Trust Indenture Act “establishes standard and imposes requirements to be met in the drafting of indentures for certain kinds of securities, which are repeatedly referred to in the Act as ‘indenture securities’.” [footnoteRef:53] The Act was the result of the concerns of Congress members upon the Securities Act of 1933 and thus it became necessary to address these concerns. The ultimate result of finding solutions for these concerns resulted in the inception of this Act. [53: ]

The need for the Act was felt due to the passive attitudes of the committees and trust who failed due to their incompetence to protect the interest of the holders.[footnoteRef:54] In this scenario, it became important to have a law that implied their responsibility upon them and held them accountable for it as well. [54: ]

The application of the Trust Indenture Act or TIA is required when dealing with a large amount of securities, which ultimately requires the services of a financial institution itself to handle the many affairs that are involved in such matters. The services are rendered by the issuer of the securities and the financial institute therefore assumes the role of a trustee during these deals. The role of the trustee can be understood as that of a conduit for the issuer and oversees the “payments of principal and interest from the issuer to the investors, and handles a variety of administrative functions relating to the debt.” [footnoteRef:55] [55: ]

Under some circumstances, there exists the possibility of the trustee to act on behalf of the debt holders themselves, even in situations where the proceedings are against the issuer himself.[footnoteRef:56] [56: ]

The Act is clear on a lot of things, even the way it describes the connection and the contract that exists between the various interest groups. The contract which exists between the issuer and the trustee has been termed as the ‘Indenture’ and the role of the parties, including the “duties of the trustee as a third-party administrator”[footnoteRef:57] has been clearly written out. And it is therefore the indenture which would define the working of the proceedings and even the “obligation of the borrower to make payments, and often sets forth so-called ‘affirmative covenants’ and/or ‘restrictive covenant’s” relating to the issuer’s activities. The indenture also contains the remedies available to the debtholders if the issuer defaults under any of its obligations.”[footnoteRef:58] [57: ] [58: ]

Like its predecessors, this act too was designed to protect the basic rights and the interest of the investors, but more than that it was the first Law of its kind that bounded, legally, the trustees in what role they are supposed to play. By defining that out, they have assured the very safety of the investors and provided the investors with proper legal option to consider in cause of any fraud or cheat that may be done against their financial interests.

The biggest difference between the Securities Act and the Securities Exchange Act of 1934 and The Trust Indenture Act of 1939 is that while the former is more of a disclosure Act, requiring the organization to disclose the true information regarding the securities that they are offering, the latter is a law which explicitly lays down the responsibilities on the concerned parties.

The TIA makes it a law that the appointment of an independent and qualified trustee takes place, whose job description includes “to act for the benefit of the holders of the debt securities” besides also specifying “a variety of substantive provisions that must be included in the trust indenture”[footnoteRef:59] [59: ]

The procedure includes the filing of the “Form T-1,” with the SEC, the main purpose of which is to determine whether the trustee is eligible for the desired responsibility. Within this form, it also becomes important to mention the key provisions of the indenture. In case that an indenture had not been filed yet, then the preparation of negotiated indenture becomes impossibility. However, it then becomes important that the form which is submitted is as close to the probable negotiating version as it can be, so that a limited amount of modification is required at the time of finalization.

Another realization, with regards to keeping the law relevant to the current times, made possible the inception of an amendment which was signed on 15 November 1990, called “The Indenture Reform Act of 1990.” [footnoteRef:60] The Act was implemented so that the various clauses can be updated to incorporate some of the other concerns that have arisen over the years. [60: ]

Application to nonprofit organizations

Again this law is not connected or related to the nonprofit organizations; however, if a NPO is interested in having an indenture with a company, there is a probability of that. However, there is no precedence or much literature to support this point-of-view.

But considering that Finance handling and management is becoming one of the most important aspects of NPO’s, the recruiting of a trustee to take care of the securities is not a bad idea. It can in a fact help to ensure that the concerned responsibility is catered to with the utmost care. And since expertise are also a characteristics that the trustee should have, there is no doubt that this endeavor is bound to help out the NPO with their financial situation. And even assist them in maintaining a watchdog for their financial securities.

Investment Company Act of 1940

The rule has been defined as having “the genius” as it “tempers the pervasive regulation with a flexibility that allows for innovation and change in products, services and investor protections.” [footnoteRef:61] And therefore the success of the mutual fund industry has been placed on the shoulders of this very Act. The reason for the declaration of this act was felt in 1940 by the Congress to eliminate the abuses that people faced due to Investment Trust and therefore a need was felt for tighter and stricter federal security laws, since the existing one failed on many levels.[footnoteRef:62] [61: ] [62: ]

The Act has been defined as being nothing more than “a large pool of liquid assets.” [footnoteRef:63] The Act demanded of all Investment Companies to be regulated to a set of rules which defined how they would do transactions with regards to securities. The other provisions also included the Custodial requirements for holding assets, restrictions on granting of stock options and have a minimum of 60% independent directors.[footnoteRef:64] The law however makes exemption of Government Securities and securities that are being issued by majority owned subsidiaries. [63: ] [64: ]

The Act in its text makes it clear enough that any company that falls under the category of an investment company is bound for registration with the SEC. However, the scope of traditional mutual funds has been enlarged immensely through Section 3 of the Act, despite the intention of the original company concerned.

One of the major concerns that the Act covers is, again like its predecessors, the establishment of transparency and timely information that can assist in the decision making process of the probable investor. It is with this concern that any sort of affiliated transactions in which the funds are used for self dealing and for the advantage of the same people who are linked with the funds are completely prohibited. Indeed, the fair pricing of the funds with respect to the Market Value is also one of the primary objectives of the Act.

Application to nonprofit organizations

Within the text of the Act, Section 3(c) of the Investment Company Act, makes it clear that certain companies are excluded from the list some companies and issuers from the definition of an investment company. These include broker-dealers, charitable organizations or nonprofit organizations, pension plans, and church plans.[footnoteRef:65] [65: ]

Investment Advisor Act of 1940

While most of the Laws that have been discussed so far focus on the Investment, worth of Securities, Fraud and Transparency. But what has been ignored in those previous laws is that these decisions are subjected to the advice of special advisors and even departments in some cases. But the responsibility has not been adhered to these advisors so far. Therefore the Investment Advisor Act of 1940 is no doubt a law that is very much welcome.

These advisors, as per this law are subjected to regulations as well, both from a federal as well as a state level. It therefore becomes necessary that the advisors themselves are knowledgeable with respect to the regulatory requirements that exist and is applicable to both the broker-dealers and investment advisers.[footnoteRef:66] [66: ]

Section 202(a) (11) defines the Investment Advisor as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” [footnoteRef:67] However they may differ from state to state defining their own set of rules for the registration of investment advisers. [67: ]

The registration process too has evolved a lot and today doesn’t require the registering of the Investment advisers with both the SEC and with each state in which they are working. Now the registration with either one of these parties is sufficient enough, however this doesn’t change the jurisdiction of each of these regulator over the advisers.

The form which needs to be filled in relation to this Act is the Form ADV consisting of some 73 pages, which has been estimated to take the average adviser up to 9 hours to completely fill the form. The registration can now take place electronically as well through IARD, which is a secure Internet-based data system and is the first step towards the registration. The antifraud rules and regulations are still applicable to the adviser, and are even subjected to an annual audit.[footnoteRef:68] [68: ]

The recordkeeping is also an important element of the law, which makes it compulsory for the advisors to have an updated record system which is guided by policies. The requirement of policies is only in place so that the communication and any sort of lapse can be countered or caught immediately. Also is required the assurance that any sort of unauthorized alteration or use of these records doesn’t take place, especially with regards to any destruction of documents.

This aspect of the law has been very important in regards to uncovering many scandals and therefore is now a state mandated policy. SEC makes it explicitly clear that during an investigation these records can be asked for from the advisor. In this regard, email records have become an important source and there “recent SEC examinations have focused on reviewing investment advisor e-mails. The request can come in many forms such as: (i) show all of the correspondence with a particular client, including e-mails, (ii) show all e-mails for a particular period of time, and (iii) show all of a particular employee’s e-mails.” [footnoteRef:69] [69: ]

However, the consistency of the Law and Regulations since the 1933 continues in this Act as well with the mention of the Antifraud activities which would be punishable by law under Section 17(a) of the 1933 Act and Rule of 10b-5 of the 1934 Act.[footnoteRef:70] [70: ]

Application to nonprofit organizations

As mentioned already and in the previous section, finances are one of the toughest aspects of the NPO’s. they are subjected to the trust and are answerable to the public and the very donors on which they rely upon for their source of capital. The handling of the capitals is therefore an essential element. The Investment Advisor Act of 1940 in this regard is an important Act for the NPO’s as well, whose decisions are based on the advice that they may receive by their advises.

Therefore the adherence of some responsibility as well as legal binding upon these important actors is no doubt a welcoming Act for the NPO’s.

Philanthropy Protection Act of 1995

The Philanthropy Protection Act of 1995 makes It compulsory on every not for profit organization to provide a disclosure statement to all annuitants in a “Gift Annuity Fund and also to provide the same to all prospective donors at the time of solicitation, using a letter or pamphlet format.” [footnoteRef:71] Besides this, the Law also made it compulsory for the charitable organizations to provide its investors and donors with information regarding their investment assets from time to time.[footnoteRef:72] The conditions for exempted charitable organizations however are slightly different, but are none the less bounded by the anti-fraud laws. [71: ] [72: ]

Application to nonprofit organizations

To maintain the integrity as well as the trust of the NPO’s, it is important that the environment of transparency is maintained between the donors and the organization. And in this regard, this Act which is the first of its kind which is exclusively focused on the NPO is no doubt a good act.

It needs to be emphasized though that it was not until 1995 that the importance of laws for this sector exclusively were realized and then made a part of the law. This realization is certainly an important aspect since it is one of the most growing sectors in U.S., with revenues that are grossing in 6 figures now.

The application of the entire Act is upon the nonprofit organization and therefore binds them for the first time in a legal bounding which makes it impossible for them to avoid by any rationale. However it is highly disturbing that the Act is just a play of words on the already existing laws that existed in the form of the Securities Act of 1933 and the Exchange Act of 1934.

National Securities Markets Improvement Act of 1996

“The National Securities Markets Improvement Act of 1996” (NSMIA) was passed by the Congress in October of 1996, and amended and updated many of the provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, all of which have been discussed in great detail already.

It is in this bill that a new terminology was introduced called the “Covered Security” which made a reference to under state securities laws or “Federal Covered Security,” which was just a new name for “A class of securities, created by the National Securities Market Improvement Act that enjoys federally imposed exemptions from state restrictions and regulations. Most stock trading in the U.S. are covered securities.” [footnoteRef:73] The main purpose of this Act was to eliminate the many various regulations that existed due to the difference of state and have them standardize across the U.S. This would have meant less complications and confusions for all the parties involved. [73: ]

This new law incorporated within itself several different categories of securities that had existed, the major one of which included the Securities that had been authorized and listed by New York or NASDAQ Stock Market, or any other form of a national exchange which the SEC recognized; Securities that had been issued by an open or close ended mutual fund, unit investment trust, or face amount certificate company; Securities offered under the provision of Rule 506 of Regulation D. under the Securities Act of 1933; Securities offered by a municipal/governmental issuer; Securities that are the subject of non-issuer secondary trading transactions under section 18(b)(4)(A) of the federal Securities Act of 1933 etc.[footnoteRef:74] All of these are however subject to certain conditions. [74: ]

The impact of NSMIA is also upon the state broker dealer and investment adviser licensing provisions. However, all of these clauses are subjected to the anti-fraud clauses guided by the Securities Act of 1933.

The implementation of NSMIA divided the responsibility between the SEC as well as the states. While the SEC holds the licensing authority, exclusive in its nature for investment advisors managing $25 million or more in assets, while the responsibility of the states is to uphold the anti-fraud clauses of its Law.

Application to nonprofit organizations

The law can be considered as an important entity from the nonprofit point-of-view since it made every kind of security as protected under its jurisdiction. From that point-of-view, the protection of NPO’s finances is much more guaranteed, provided that there is no internal fraud going on. The liquid assets is also an important financial point in the nonprofit organizations system and can indeed be a great seat to fall back upon in times of recession and dry seasons of donations.

The main purpose of this section has been to show the evolution that can be seen in the gradual build up of the Rules and Regulations associated with investment in Securities. While there is a display of concern in these rules and Regulations, shown by the constant amendments and upgrading or addition of new aspects of the business into the law, what cannot be denied is the fact that while every single angle and aspect has been covered, the association and the implementation of these laws to the nonprofits sector is missing. The application that has been ascertained to these rules and regulations towards the nonprofit organizations seem forced even at times. But that is unavoidable considering that the exclusivity of laws pertaining to the NPO Sector didn’t emerge in any form until 1995. However, this is a topic of discussion that will be addressed in much detail in the next section.

5. ARE THE FEDERAL LAWS TO STRICT OR TOO LAX? IS THERE ROOM FOR IMPROVEMENT?

In the previous section an attempt was made to try and present a summary of every sort of rule that exists with regards to the Securities, which may exist in any form. While there should be no doubt that the investment that is made in the form of such securities are sometimes the lifesavings of many in the general public, and are extremely important for them. But in an NPO it can be argued that the lives of many are dependent on a system whose fair working can provide them with many resources which they are unable to get for themselves. These securities are the tools through which the provision of many a services is deemed possible. Despite this dependence of many factors in society on the NPO’s, any special laws and regulations made for NPO’s exclusively was not seen until 1995.

There are many laws that have been designed keeping in mind the concerns of the probable investor. The laws are strict in their implementation and require the companies and NPO’s to register their bonds and securities of any sort with the SEC. This topic has been covered in much detail already in the preceding chapters. The basic application on such transactions is implied by the Securities act of 1933 and the Exchange Act.[footnoteRef:75] [75: ]

But the main question that is to be answered in this section is whether these very rules that have been mentioned and discussed already, are in a fact incompetent in their extend to avoid fraud against the general public. While the practice and the concepts of nonprofits are very idealistic and even utopian in theory, what remains to be seen is, whether, if indeed the practice of these organizations, within the legal framework — which is in a fact designed to curb any negative activities — is indeed as promising in reality as well.

The proof so far has been much divided and thus the lead to an answer is not as easy as one would suspect. The nonprofits are in a grey zone, and thus labeling them as either good or bad is not an easy task.

While a lot of good work has been done by many organizations, there are a few cases indeed which have made one question the entire system of how nonprofits work. These incidents are indeed the one which raises question regarding the strictness and the effectiveness of the laws which govern these NPO’s and regularizes the many aspects of these organizations.

The case of the Maryland’s Legal Aid Bureau is indeed an example that raises several questions regarding the mismanagement of funds within the NPO’s and which in a fact lead to the questioning of the Legal Services Corp (LSC) Vice President, who herself had worked for the Maryland group in the past. The question now being realized to her now is whether her department is being “too cozy with the nonprofit groups it funds or too lax in its enforcement.” [footnoteRef:76] [76: ]

This is a direct question of the concerned laws and their implementations, since the laws are nothing more than words until and unless there are instruments available to ensure that the law is implemented in its full strength.

Another big scandal that made headlines and again raised questions about the functioning of the NPO’s was the United Way Scandal, in which the former President William Aramony was able to steal from the organization almost six hundred thousand dollars.[footnoteRef:77] Besides this, the disclosure and the lack of accountability and track of money which have been allotted to the NPO’s have raised some serious questions with regards to how well they are performing and how much is the Law actually able to do to curb any negative activity of such sort. [77: ]

The answering of this question is further complicated by the fact that most charitable organizations and NPO’s are in a fact self-regulated organizations, which place watch dogs on themselves.[footnoteRef:78] [78: ]

The second agent that is being given the status of a watch dog is the general public that has been given this status by the Congress. The watch that the public is supposed to maintain is ensured by a Form 990, which is “an annual reporting return that certain federally tax-exempt organizations must file with the IRS. It provides information on the filing organization’s mission, programs, and finances.” [footnoteRef:79] The non-submitting of this form for three-year in a row can automatically result in the cancellation of the organizations tax exempted status.[footnoteRef:80] [79: ] [80: ]

The form requires for the companies to disclose information regarding the top five most paid employees, contractors and expenses regarding their fundraising programs.[footnoteRef:81] The concept behind this form is that as the form is available to the public, it would mean a greater watch is being maintained on these NPO’s and their financial activities. While the form and the action and intent it implies may project the image that transparency can be obtained, the fact of the matter remains, that this information is being open to a watch dog that has little understanding of the complexity of the law.[footnoteRef:82] [81: ] [82: ]

In the context of the laws that have been cited and the analysis that precedes these laws, it can be concluded that for the time being there is a strict lagging in the practicality of the laws. They are utopian and may seem perfect, but from a practical point-of-view, there are some serious issues in regards to what they can actually accomplish.

6. SECURITIES REGULATION OF NONPROFIT ORGANIZATIONS (BIG PICTURE)

“The life of the law has not been logic: it has been experience” — Olive Wendell Holmes Jr., 1881

If law is analyzed or reviewed upon from only one side of the coin, then chances are that one party would always be dissatisfied with the functioning of the law and complaints of injustice and unfair play would not be so uncommon. But the fact of the matter remains, that law in itself is an entity that takes into consideration the point-of-view and considerations of a vast majority of people. It is their interest and rights that are being safeguarded and protected by the legal framework. A law that favors one part or an individual, due to their status or power, is corrupt in its essence and cannot be counted upon to deliver anything worthwhile to the masses.

Having said that, it cannot be denied that there exists a “fundamental tensions between the idealized image of law and what we may discover about the realities of law”[footnoteRef:83] This is the same scenario that has been seen in the entire discussion that has taken place till now. With regards to Federal Laws that are applied on nonprofit organizations, there exists a huge gap between the desires of the legislators and the general public and the realities that exist. While the laws are there and they do seem to be as perfect as they can be on paper, they are not so much when it comes to their implementation in the real world sense. All the while the rise of fraud in NPO’s is slowly on the rise,[footnoteRef:84] with the numbers getting ever so bigger. [83: ] [84: ]

However, despite that the first law to be written exclusively from the point-of-view of the nonprofit organizations didn’t become a reality until the 1995 in the form of the Philanthropy Act of 1995. The law is 62 years late since the first law was designed to protect the investors, in the form of the Securities Act of 1933, and even they were subjected too much attention and review reflected in the constant updating of these rules and regulations.

However, that has not been the case for the laws and regulations which have been made for NPO’s that is when and if they have been considered. It was only in 1995 that this ne Act was introduced which in its very name addressed the Nonprofit Sector. But despite the time that the legislators had to build up on the precedence that they have in the shape of the various rules and regulations, they were able to provide little more that a rewording of the Securities Act basic characteristics that being of disclosure.

The Act does little to add on anything new or exclusive to the concerns and the problems of the NPO sector and in this regard lacks the maturity of drafting a Legislation that was the first of its kind. The law adds little new to its own text and therefore can simply be defined as nothing more than the repackaging of the Securities and the Exchange Act in a new box.

The application of the laws before the Philanthropy Act of 1995 had to be bounded and forced to fit onto the nonprofit sector and therefore lacked the extremity of the legal and moral bounding that it has now. There is no doubt that it is a step in the right direction. However what is needed now is a stricter and more focused legislation that takes into account every aspect of the nonprofit organization sector and then is drafted, thus addressing exclusively the demands of this sector.

7. FEDERAL AND STATE LAW, IS SOMETHING MISSING?

There is no doubt that there is more than enough rule for improvement and reconsideration on many of the Law and Acts that have been discussed. This holds especially true for the nonprofit sector whose rules and regulations have just started to be taken into consideration, almost 60 years after the initial realization of the importance of safeguarding such investments.

As has been seen throughout the course of this discourse there are little or no laws that implement the workings and the regularization of securities in nonprofit organization. The many laws that do exist can only be made applicable for the NPO’s that exist and how they function in the financial world.

The many cases of frauds and cheats within the nonprofit world has made it clear enough that the need of the hour is the establishment of Laws and Acts that would be specifically designed for the need and the workings of a nonprofit organization.

To this end, these laws and their makers need to have an understanding of the many actors that are involved in the setup of a nonprofit organization and how each has the power to influence the other. Currently there are simply no rules as the Securities Act of 1933 and the Exchange Act of 1934 are not designed to be applied on NPO’s. They have been made to twist and turn and then be made to apply.

While the most serious crimes that is being addressed is fraud in these laws, there are no specific policies, both on the state level as well as on the Federal level that can guide the NPO’s in ensuring the transparency that is required.

Custom made laws and regulations are the need of the time as the recession and the corruption both go on to influence the overall functioning of the NPO’s. There is a serious lacking on both fronts to address the NPO’s.

Half of the Acts and Laws do not even require full disclosure more or less, which only goes to play in advantage of those who may have some negative ideas or self interst in their minds. To counter those, special laws need to be designed.

Today the NPO’s are an industry which has a major stake in the employment ratio of the country, not to mention that currently they are even producing revenues that can be calculated to amount to almost $665 billion.[footnoteRef:85] With so much capital involved, it would not make sense to ignore the issue anymore. [85: ]

So yes, it needs to be said that much is needed still before a point can be reached where the interests and the investments of the majority of people, especially a community can be safeguarded from self-interested motives. It becomes important to realize that transparency in itself cannot be the solution, when the majority of those people who are watching for a blunder are unaware of the legal technicalities that are involved in the Law and Legislations to which the NPO’s are tied up to.

Therefore the weight of the burden of the responsibility needs to be on the shoulders of the Government and the Legislators. This is not to say that the disclosure policy in its current state is ineffective; it is only to imply the fact that while, yes the accessibility has been made easy, the tools to keep a watch are not effective enough. More debates and concentration has to be diverted towards this topic before a solution that is truly genius in its approach can be reached.

The Nonprofit Organizations is an important sector, which has been established beyond any doubt in the length of this paper. Their services to the society and the community are important, and no doubt noble. But their importance lies in the fact that they are parallel to the Government in finding ways to provide for people who are in need. Whether they are privately funded or by the Government, the fact of the matter remains that their services are important and thus by default the resources which are used to render these services are also important.

To continue with this provision of services, it becomes important to start taking their interest as seriously as possible and then come up with detail oriented legislations that take into account every single aspect of the NPO sector and then moves forward with this task. It is only then that we can expect a serious change to come about in the overall sector.

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