FOLLOW-UP REVIEW Regulation of Charitable Solicitations Office of the Secretary of State February 2004 Russell W. Hinton, State Auditor Performance Audit Operations Division Department of Audits and Accounts 254 Washington St, S.W. Atlanta, GA 30334 This is a Follow-up Review of the Regulation of Charitable Solicitations within the Office of the Secretary of State. The Department of Audits and Accounts released a Performance Audit on the Regulation of Charitable Solicitations in May 2001. This Review was conducted to determine the extent to which the Program has addressed the recommendations presented in that report. A copy of the original report can be obtained through the contact information on the back of this Review. Background Information The Secretary of State's Securities Division is responsible for regulating charitable solicitations in the state to protect the citizens of Georgia from fraud and economic loss. The Regulation of Charitable Solicitations (hereafter referred to as the Program) involves the annual registration of charities, paid solicitors, and solicitor agents as required by the Charitable Solicitations Act. The Program is also responsible for investigating potential violations of the Charitable Solicitations Act. As of July 2003, a total of 2,133 charities, 69 paid solicitors, and 756 solicitor agents had registered with the Program. The Program publishes a listing of "Uncharitable Charities" that documents those charities that receive 15% or less of money collected during fundraising campaigns. A 1988 U.S. Supreme Court decision (Riley v. National Federation of the Blind) prohibits states from limiting the amount of contributions retained by a paid solicitor (as an infringement on their right to free speech). However, a 2003 Court decision (Madigan v. Telemarketing Associates, Inc., et al.) held that misleading solicitation is unprotected speech. Paid solicitors are able to retain any amount of contributions but they are prohibited from misrepresenting this amount to the consumer. Synopsis of the Audit Recommendations The purpose of the audit was to determine if the Program was fulfilling its purpose of protecting Georgia citizens from fraud and economic loss involving charitable solicitations. Several areas were found in which action needed to be taken to improve the program's effectiveness and efficiency, including: monitoring the activities of paid solicitors more fully; developing specific goals and objectives that focus on providing information to consumers; revising and updating the rules; and, ensuring that enforcement actions were fully documented. The audit also addressed legislative matters, suggesting consideration be given to: taking additional steps to ensure the legitimacy of the registered charitable organizations, and reg- Follow-Up Review: Regulation of Charitable Solicitations Page 1 ister only those organizations with annual contributions greater than $25,000, thereby providing increased protection for Georgia citizens because the Program could devote more resources to examining registrant materials; implementing guidelines for monitoring internet charities; requiring paid solicitors and solicitor agents to register every two years; developing a fee structure based on the cost of regulation; reconsidering the requirement to register solicitor agents; and, reviewing other states' legislation identified as providing an additional level of consumer protection. Although continued efforts are needed to fully address all of the audit recommendations, the Program should be commended for its efforts over the past two years. For example, the "Uncharitable Charities" list has been improved and now offers more information to consumers. In addition, the agency's website includes Charitable Solicitation Profiles which can be sorted by charitable organization, by paid solicitor, and by percentage of funds retained by a charity. The website also gives a list of charities that are delinquent in financial reporting and provides access to a database of registered charities. Specific actions taken to address the individual findings are detailed below. Status of the Audit Recommendations Recommendation in 2001: The Program should consider taking additional steps to more fully monitor the activities of paid solicitors. Current Status: The Program has taken steps to more actively monitor paid solicitors. According to the Program, in fiscal year 2003 one contract for each newly registered paid solicitor was reviewed. A total of 15 contracts were reviewed to ensure compliance with the Charitable Solicitations Act. Contracts were reviewed to determine if they included a percentage of gross revenue the charity would receive, or a reasonable estimate of the amount the charity would receive, and the assumptions upon which the estimate was based. Of the 15 contracts, 10 had been reviewed at the time of this follow-up with four found to be in compliance with the Act. Problems were identified with six of the 10 contracts, which have since been amended and are now in compliance. Of the remaining five, four were still under review and the status of one could not be determined. The Program plans to continue to review one contract for each new paid solicitor that registers with the Program. In addition to contract reviews, on-site inspections are conducted when deemed necessary based on factors such as a complaint by a consumer, solicitation without registering, or neglecting to file an end-of-campaign report. According to the Program, in fiscal year 2002 an operation focusing on 17 on-site inspections was conducted. In fiscal year 2003, two on-site inspections were conducted. The Program plans to continue to conduct on-site inspections on a "for cause" basis. In addition to the steps described above, HB472 is under consideration this legislative session. This bill would eliminate the requirement of registration for solicitor agents, require disclosure of any employee/solicitor agent that has had disciplinary history, and authorize action against any paid solicitor or charity if they employ such a person. It would also provide authority to bar such a person from affiliation with a paid solicitor or charitable organization. Follow-Up Review: Regulation of Charitable Solicitations Page 2 Recommendation in 2001: The Program should continue to work with the Office of Planning and Budget (OPB) to develop specific goals and objectives that focus on providing consumer protection through information and education. Current Status: The Program has not developed specific goals focusing on information and education of consumers. However, the Office of the Secretary of State hired a Director of Consumer Advocacy to focus on consumer outreach for the entire agency. While the activities of this position include consumer awareness for charities, the Director of Consumer Advocacy does not solely focus on these issues. In addition, the Program noted that it has also implemented an investor education and financial literacy program. This program includes all aspects of financial literacy, including charitable contributions. Recommendation in 2001: The Program agrees that it needs to revise and update its rules to reflect current provisions of the Charitable Solicitations Act. Current Status: The Program has made revisions to the Rules which are now ready to be adopted. There are two area in which the Act and the Rules are not in agreement. However, both areas are currently addressed in HB472 and, according to Program staff, once the legislative session is completed the Rules will be revised as appropriate to reflect any changes in statute as a result of HB472. Recommendation in 2001: The Program has taken steps to ensure that its enforcement actions are fully documented in its case files. Current Status: A new database should enable the Program to ensure that its enforcement actions are fully documented. The database allows Program officials to view information about activities that have taken place on a particular case. The database also allows the Program to classify cases by program and by type of case. While the database is helpful in monitoring the activity, the Program should continue to review the cases to ensure the activity is properly documented in the database. Status of Legislative Recommendations As noted before, HB472 has been introduced and will address some of the legislative recommendations. In addition, Program staff have taken steps to address some of these recommendations. The findings and action taken are noted below: The audit recommended consideration be given to modifying the Charitable Solicitations Act to provide increased assurances that the registered charities are benevolent, philanthropic, or patriotic organizations. In October 2001, the Program began performing background checks on the people that have custody of donations in the charities that are applying for registration. Also, the Program is currently pursuing two cases involving fraud by paid solicitors. Additionally, HB472 states that executive officers of the charitable organizations shall submit a set of fingerprints to the Georgia Bureau of Investigation or other specified law enforcement agency for processing a criminal history records check. The Secretary of State and her staff are authorized to review the information and promulgate rules for administering this function. The audit recommended that consideration be given to registering only those organizations that have more than $25,000 in annual contributions from Georgia citizens. This would allow the Program to focus its regulatory activities on those charitable organizations whose solicitation efforts have a significant impact on Georgia's citizens. HB472 would accomplish this change by Follow-Up Review: Regulation of Charitable Solicitations Page 3 exempting any charitable organization whose total contributions from contributors within the State of Georgia has been less than $25,000 for both the immediately preceding and current calendar years. It should be noted that, at the time of the audit, charities could choose to register with the Program even though their collections did not meet the established threshold. It was recommended that this practice be discontinued as the practice provided little consumer protection and created unnecessary paperwork. This practice continues and the Program's position is that they will continue to register these charities because the information is now available to consumers. The audit recommended that the General Assembly consider implementing guidelines for monitoring Internet charities. Although this has not been addressed by legislation, the Program uses the advisory guidelines issued by the National Association of State Charity Officials regarding Internet solicitations. The Program stated that it is also constantly evaluating regulatory approaches that improve public protection. HB472 also provides that the Secretary of State shall have the authority to adopt rules and regulations regarding the registration of paid solicitors and charitable organizations conducting Internet solicitations. The audit recommended that consideration be given to developing a fee structure based on the cost of regulation in order to offset the cost of processing the registration and renewal applications. In fiscal year 2003, the Program collected $154,820 in fees and penalties, which account for approximately 35% of the Program's expenses. The audit recommended that consideration be given to requiring paid solicitors and solicitor agents to renew their registration every two years instead of annually as a means of reducing administrative paperwork without adversely impacting public protection. The Program's position is that shorter effective terms of registration are more conducive to monitoring solicitors. In addition, it was recommended that the need to register solicitor agents be reconsidered by the General Assembly as it was likely to be ineffective due to the high turnover rate of agents and the fact that the paid solicitors who employ the agents are already regulated and should be held accountable for the actions of their employees. HB472 eliminates the requirement of registration for solicitor agents. For additional information, or to request a copy of the original report, please contact Paul E. Bernard, Director at 404.657.5220 Or see our website: http://www.audits.state.ga.us/internet/pao/rpt_main.html Follow-Up Review: Regulation of Charitable Solicitations Page 4