Kendis Key Muscheid, Esq. Fennemore Craig, P.C. kmuschei@fclaw.com Steve Davis, President WGM Associates, LLC sdavis@

1. Arizona Grantmakers ForumSteering Clear of Trouble: What Every Grantmaker Should Know about Conflicts of Interest, Digital Documentation and Liability.April 3, 2014 Kendis Key Muscheid, Esq. Fennemore Craig, P.C. kmuschei@fclaw.com Steve Davis, President WGMAssociates, LLC sdavis@wgmllc.com

2. Program Topics Fiduciary Duties of Officers and Directors Conflicts of Interest – What They Are, A Policy to Deal with Them, Examples Electronic Documentation, Document Retention, Grantee/Donor Privacy Introduction of D&O Insurance, General Liability Insurance, Cyber Coverage

3. Why Talk About Policies? • Does the existence of a policy assure good behavior and compliance? NOPE! • Having policies in place provides a framework an organization’s directors, officers, employees and volunteers may use to address issues as they arise. • Written policies generally clearer than verbal. • Policies are not enough: they must be used and followed to be effective.

4. Why Do We Talk About Conflicts? • Arizona State Law Requires a Conflicts Policy • Internal Revenue Code/IRS Penalties For Engaging in Some COnflicts Transactions • EBT • Self-Dealing • Revocation of Exemption • Annual IRS Form 990 • Asks whether the nonprofit has a written conflict of interest policy • Asks about the process the nonprofit uses to manage conflicts • Asks how the nonprofit determines whether board members have a conflict of interest • APPEARANCES MATTER!

5. Arizona State Law – A.R.S. section 10-3864 • A nonprofit is required to adopt a policy regarding transactions between the nonprofit corporation and “interested persons” including: • sale, lease or exchange of property, • lending or borrowing of monies to or from interested persons by the corporation, or • payment of compensation by the nonprofit for services provided by interested persons. • “Interested person" means an officer or director of a corporation or any other corporation, firm, association or entity in which an officer or director of a corporation is a member, officer or director or has a financial interest. • Exceptions include religious organizations and those nonprofits with assets at the end of its last fiscal year with a book value of less than $10 million or gross receipts or revenues of less than $2 million dollars in its last fiscal year.

6. Fiduciary Duties and Why They Matter • As an Officer or Director of a Nonprofit/501(c)(3), you have fiduciary duties that require you to protect the organization. • Simply because something is a conflict does not mean it is unlawful – in most instances—you must perform due diligence and know basic principles before you will know whether the transaction can move forward. • Allowing conflicting interest transactions to move forward without due diligence to ensure protection for the organization violates the fiduciary duties owed to the organizations…and may put you in jeopardy of penalties at the federal level.

7. Standards of Conductfor Officers and Directors A director’s and officer’s duties are to be discharged: • In Good Faith • With a Duty of Care • With a Duty of Loyalty

8. GOOD FAITH Honesty of purpose and honesty in fact. Be faithful to the organization’s mission and do not act in a way inconsistent with its goals.

9. DUTY OF CARE With the care an ordinarily prudent person in a like position would exercise under similar circumstances.

10. DUTY OF LOYALTY In a manner the director/officer reasonably believes to be in the best interests of the organization.

11. Conflicts of Interest A “conflicting interest" is: The interest an interested person affiliated with the nonprofit has respecting a transaction effected or proposed to be effected by the nonprofit, if at the time of the transaction or decision to enter into the transaction, the person has some financial interest or is related to someone with a financial interest.

12. Who Can Conflicts Be With?(Disqualified Persons) • Board Members and Officers • Donors • Members • Related Persons - Spouses - Grandchildren - Siblings - Ancestors - Great Grandchildren - Children - Spouses of the foregoing - Siblings - 35% controlled entity (Control is defined as owning more than 35% of the voting power of a corporation, more than 35% of the profits interest in a partnership, or more than 35% of the beneficial interest in a trust). • Those with “substantial influence”

13. Excess Benefit Transactions (EBT) • EBTs are federal overlay to Conflict of Interest Transactions. • EBT rules impose penalty on "disqualified persons" (DQP) who receive an "excess benefit" from PC, SO or DAF. • Generally, EBT is a transaction in which PC, SO or DAF provides an economic benefit to DQP and receives less than the value of the benefit in return. • DQP is anyone who, during the five yearspreceding a transaction, was in a position to exercise substantial influenceover the affairs of PC. • For DAFs, DQP includes investment advisors, their family members and entities for which they control 35 percent of voting power, profits or beneficial interest. • DQP includes a Substantial Contributor. • DQP for EBT is more broadly defined than for PF rules.

14. Self-Dealing with PF • Self-dealing is defined as various prohibited acts, such as sales, loans, and transfers, whether direct or indirect, between a private foundation (PF) and a DQP. • Nearly all transactions between a PF and a DQP are prohibited – few exceptions, such as reasonable compensation for personal services. • No renting space from DQP, even below FMV. • No purchasing equipment from DQP company, even below FMV. • No loans from DQP, unless no interest (not “low” interest). • Pay attention to differences in definitions of DQP between the categories of EBT and self-dealing…

15. What are the Penalties? • Conflicting transaction voided • Intermediate sanctions for EBT with PC, DAF, SO • Penalties on individuals benefitting from the transaction • pay back EBT, PLUS interest, PLUS… • 25% on DQP and possibly 200% on DQP – pd to the IRS • Penalties on foundation managers approving the transaction (10% of EBT) • Self-Dealing for PF Prohibited Transactions with DQP • Penalties on the self-dealer (DQP) of 10% and possible 200% - pd to IRS • Tax of 5% imposed on a foundation manager who knowingly participated and possible tax of 50% imposed on foundation manager who refuses to agree to correction. • Revocation of exempt status still possible

16. Sample Board of Directors Conflict of Interest Policy and Disclosure FormIn their capacity as directors, the members of the Board of Directors (the “Board”) of the ABC Charity (“ABC”) must act at all times in the best interests of ABC. The purpose of this policy is to help inform the Board about what constitutes a conflict of interest, assist the Board in identifying and disclosing actual and potential conflicts, and help ensure the avoidance of conflicts of interest where necessary. This policy may be enforced against individual Board members as described below. • Board members have a fiduciary duty to conduct themselves without conflict to the interests of ABC. In their capacity as Board members, they must subordinate personal, individual business, third-party, and other interests to the welfare and best interests of ABC. • A conflict of interest is a transaction or relationship which presents or may present a conflict between a Board member’s obligations to ABC and the Board member’s personal, business or other interests. • All conflicts of interest are not necessarily prohibited or harmful to ABC. However, full disclosure of all actual and potential conflicts, and a determination by the disinterested Board (or ABC Executive Committee) members – with the interested Board member(s) recused from participating in debates and voting on the matter – are required. • All actual and potential conflicts of interests shall be disclosed by Board members to the ABC Executive Committee through the annual disclosure form and/or whenever a conflict arises. The disinterested members of the ABC Executive Committee shall make a determination as to whether a conflict exists and what subsequent action is appropriate (if any). The ABC Executive Committee shall inform the Board of such determination and action. The Board shall retain the right to modify or reverse such determination and action, and shall retain the ultimate enforcement authority with respect to the interpretation and application of this policy. • On an annual basis, all Board members shall be provided with a copy of this policy and required to complete and sign the acknowledgment and disclosure form below. All completed forms shall be provided to and reviewed by the ABC Executive Committee, as well as all other conflict information provided by Board members. I have read the ABC Board Conflict of Interest Policy set forth above and agree to comply fully with its terms and conditions at all times during my service as a ABC Board member. If at any time following the submission of this form I become aware of any actual or potential conflicts of interest, or if the information provided below becomes inaccurate or incomplete, I will promptly notify the ABC President & CEO in writing. Disclosure of Actual or Potential Conflicts of Interest:______________________________________________________________________________ ______________________________________________________________________________ Board Member Signature: ________________________________________________________ Board Member Printed Name: _____________________________________________________ Date: _________________________________________________________________________

17. What Should Your Policy Require? • Disclosure • Due Diligence • Decision • Documentation

18. What should one do if there is a possible conflict/EBT? Step 1 Make the “required disclosure”of material facts of the conflict of interest/EBT. Step 2 Disinterested or “qualified”directors, committee members or ACF personnel should evaluate the transaction. (Do we have sufficient facts? Is there a conflict or EBT? If so, do not permit the transaction.)

19. Required Disclosure "Required disclosure" means disclosure by the DQP who has a conflicting interest of both: The existence and natureof the conflicting interest. and All facts known to the DQP respecting the transaction that an ordinarily prudent person wouldreasonably believe to be material to a judgmentabout whether or not to proceed with the transaction.

20. Qualified Director or Committee Member “Qualified Director" means any director who does not have either: A conflicting interest. or A familial, financial, professional or employment relationship with a second director who has a conflicting interest respecting the transaction, which relationship would, in the circumstances, “reasonably be expected to exert an influence on the first director's judgment when voting on the transaction.”

21. Step 3 Decision should be made by the “qualified” directors – without influence of the interested director. Step 4 Basis for the transaction should be adequately documented.

22. Adequately documented… • The terms of the approved transaction and the date of approval; • The members of the authorized bodypresent during debate on the transaction that was approved and those who voted on it; • The comparability dataobtained and relied upon by the authorized body and how the data was obtained; • Any actions by a member of the authorized body having a conflict of interest(e.g., he provided full disclosure of the conflict and material facts); and • Documentation of the basis for the determinationbefore the later of the next meeting of the authorized body or 60 days after the final actions of the body are taken, and the approval of such records as accurate, reasonable, and complete (e.g., minutes delineate the process, documentation, etc.).

23. Example • Donny Donor is a Director on the Board of Grants R Us, a well known Foundation in Yuma. Donny also sits on the Grants Recommendation Committee of the Board of Grants R Us. • Donny desires to support a SAVE THE ENVIRONMENT’s fundraiser by paying the venue fee for SAVE THE ENVIRONMENT’s upcoming forum. • Donny plans to have Grants R Us make a grant from Donny’s DAF to SAVE THE ENVIRONMENT that will be used to pay for part of the venue and catering fees for the event. SAVE THE ENVIRONMENT has requested a $5,000 grant to pay for the catering, speaker stipend and travel fees, as well as some miscellaneous items for the forum. • Donor’s Family Trust has 75% ownership interest in the venue. CONFLICT FOR DONNY? WHAT SHOULD HE DO? WHAT SHOULD GRANTS R US DO?

24. Example • SAVE THE ENVIRONMENT’s fundraiser is being planned and the evening event will be black tie. Betty, one of the Board members, has a sister who is married to a chef that has a catering company. Betty tells her sister to have her husband submit a bid for the event. • Charlie Chef submits a bit for the event. • Betty must make a disclosure of the potential conflict for Charlie being considered, get it on the record, remove herself from any due diligence or deliberations about the catering selection. • Documentation, documentation, documentation!

25. Example • ABC Fund is looking at a possible joint initiative with XYZ Foundation on an education project. One of ABC’s Board members and an education committee member, Bob, is also Chair of XYZ’s Board and is very enthusiastic about the joint initiative. • XYZ will benefit greatly from using ABC’s name and significant resources in this joint venture. Bob is spending much of his time trying to convince other Board members of ABC to agree to the joint initiative. He also provided XYZ with some internal information from ABC’s education committee. • What should Bob do? Not do? How should the two entities handle this?

26. Example • Public Help Foundation is about to fund a proposal from FEED AND HOUSE THE HOMELESS for $150,000 for a social enterprise business of a bistro and lunch catering business. The proposal includes line items for $80,000 for various consultants for business planning, space planning and related items. • Bob is a board member for Public Help Foundation. He spends much of his time out of state in NY where he operates a real estate firm, but he owns several businesses in Arizona, one of which is Consulting For All, LLC. • CFA is a consulting business operated by Paul, Bob’s 50% partner in the business. CFA has an excellent reputation in the community and is known for charging reasonable fees for high quality work product. Paul is widely known as an expert in start-up ventures, particularly restaurants. Bob knows how good Paul is, so Bob suggests that Public Help Foundation require in its grant that FEED AND HOUSE must use CFA for the business plan process.

27. Document Retention and Destruction Steve Davis President – WGM Associates LLC April 3, 2014

28. Document Retention Policy • Why is it needed? • Sample Policy • Consider How, Who and Where • Is it enough?

29. Requirements for Record Keeping Who Requires You to Retain Records Additional Issues Consolidating records into a single location Facilitating legal holds Accommodating e-discovery Consistentlyimplementing retention periods Providing Business Continuity (BCDR) • State Laws • Federal Law and Regulations • State and Federal Tax Laws, Regulations and Rulings • Federal and State Courts - Rules of Civil Procedure • Insurance Carriers • Partners, Contracts, Grantors, Etc. • Others?

30. Records You are Required to Keep Some General Examples Some Records You May NotHave Considered E-mails Calendars Electronic Files Pictures Voice Mails • Corporate • Accounting and Corporate Tax • Bank • Payroll and Employment • Employee • Grant Files • Legal Insurance and Safety

32. Information Governance Challenges to Consistent Implementation • No dedicated “records” or information manager • How to balance historical reference vs litigation response • Individual Email Boxes • Voice mails • Requires manual intervention • Difficult to search

33. Information Governance and Technology Sample Screen Shots

34. Information Governance Portals Examples • Open Text (DOCS Open) • (HP) Autonomy iManage • Microsoft SharePoint • Hyland OnBase • WorldDox

35. Main Page (top) Search Web Part Documents Web Part Calendar Web Part

36. Main Page (lower) Contacts Web Part Pictures Web Part Forms Web Part

37. Document Management and Properties

39. Uploading from a Local Computer

40. Setting Document Metadata After Uploading a Document

42. Search Results (Searches in Document and Metadata)

43. Grantee/Donor Privacy • Target Breach • Information Security and Privacy Policies • Acceptable Use • Passwords (complexity and duration) • Clean Desk • Secure Destruction of retired IT assets Compliance & Security • IT Best Practices • Monitoring • Firewalls, Antivirus and Patch Management • Event Logs • Penetration Testing • Encrypted email • Device Detection

44. D&O Insurance and Cyber-Liability Insurance