drafting an effective conflict of interest policy william h. jordan, esq. sowell, gray, stepp &...
DESCRIPTION
OUTLINE 1. What is a Conflict of Interest? 2. Why is a Conflict of Interest Policy Important? 3. What Should be in a Conflict of Interest Policy? 4. How Do We Get the Most Out of Our Policy?TRANSCRIPT
DRAFTING AN EFFECTIVE CONFLICT OF INTEREST
POLICYWilliam H. Jordan, Esq.
Sowell, Gray, Stepp & Laffitte, LLC(803) 231-7815
OUTLINE1. What is a Conflict of Interest?
2. Why is a Conflict of Interest Policy Important?3.What Should be in a Conflict of Interest Policy?4. How Do We Get the Most Out of Our Policy?
WHAT IS A CONFLICT OF INTEREST?
A conflict of interest is present when a person in a position of authority over an organization, such as an officer, director, or manager, may enjoy a financial benefit from a decision he or she could make in his or her organizational capacity.
WHAT IS A CONFLICT OF INTEREST?
A conflict of interest can include indirect benefits, such as to family members or businesses with which the individual is closely associated.
Why is a Conflict of Interest Policy
Important?
Here’s a Hint . . .
Why is a Conflict of Interest Policy Important?
• The Internal Revenue Code prohibits 501(c)(3) organizations from using their assets for the benefit of corporate insiders, such as the officers, directors, key employees, and their family members.
• This is known as the “private inurement rule.”
Why is a Conflict of Interest Policy Important?
• For nonprofits that violate the private inurement rule, the IRS has the authority to:• Impose sanctions; and• (In egregious cases) revoke
the tax-exempt status. • Subject to federal income tax
on net income• No deductions for donors
Why is a Conflict of Interest Policy Important?
• South Carolina’s Nonprofit Corporation Act (S.C. Code 33-31-101, et seq.)• Requires officers and directors to
discharge their duties in good faith, with reasonable care, and in a manner the director reasonably believes to be in the best interest of the corporation.
• Defines, and (unless specific procedures are followed) prohibits, conflict of interest transactions.
Why is a Conflict of Interest Policy Important?
• Neither the Internal Revenue Code nor South Carolina law require nonprofit organizations to have conflict of interest policies.
• But, the IRS asks about conflict of interest policies in the nonprofit tax return.
Why is a Conflict of Interest Policy Important?
As a general rule, when the IRS asks about your conflict of interest
policy, you don’t want your response to be . . .
What Should be in a Conflict of Interest Policy?
1. What is the purpose of the policy?2. What is a conflict of interest?3. Who is covered by the conflict of interest
policy?4. What is the duty to disclose and how do
covered individuals disclose possible conflicts?
5. What are the procedures for managing conflicts?
6. What happens if a covered individual violates the policy?
1. What is the purpose of the policy?
• What are you trying to do?
Protect the organization’s interests when the organization is considering entering into a transaction or arrangement that might benefit an officer, director, or a manager with decision-making authority.
2. What is a conflict of interest?
• Consider using a definition
similar to the definition we used earlier.
2. What is a conflict of interest?
• You can provide a non-
exhaustive list of areas in which conflicts of interest may arise.• e.g., business transactions,
donor relations, compensation, etc.
3. Who is covered by the conflict of interest policy?
• Officers• Directors• Management level employees
with decision-making authority
*Remember to reference family members
4. What is the duty to disclose and how do covered individuals disclose possible conflicts?
1. Make it clear that individuals covered by the policy have a duty to disclose all actual or possible conflicts of interest.
4. What is the duty to disclose and how do covered individuals disclose possible conflicts?
2. Specify that disclosure should be made to the directors or the members of the committee responsible for making the decision relating to the potential conflict of interest.
4. What is the duty to disclose and how do covered individuals disclose possible conflicts?
3. The individual should have the opportunity to disclose all facts relating to the potential conflict.
5. What are the procedures for managing conflicts?
Conflict Disclosed
(Disclosing Party No Longer
Involved)o
Board/Committee
Determines if Conflict Exists
If So, Individual or Committee Appointed to Investigate
Alternatives to Proposed
Transaction
If a more advantageous transaction is not available,
Board or Committee
determine (by majority vote of
disinterested members) whether
moving forward is in the best
interest of the organization
and is fair and reasonable
6. What happens if a covered individual violates the policy?
• The policy should make it clear that individuals who violate the conflict of interest policy (i.e. fail to disclose an actual or possible conflict) will be subject to disciplinary action.
How Do We Get the Most Out of Our Policy?
1.Follow it!!
How Do We Get the Most Out of Our Policy?
2. Once a year, distribute a certification and disclosure form on which:• Employees certify that (1) they’ve received, read, and
understand the conflict of interest policy; (2) they agree to comply with it; and (3) they understand the importance of it.
• Employees either (1) certify that they have no actual or potential conflicts of interest to report or (2) describe possible conflicts of interest.
How Do We Get the Most Out of Our Policy?
3. Consider creating and maintaining a list of possible conflicts within the organization.
How Do We Get the Most Out of Our Policy?
4. Document, Document, Document!!• Meeting minutes, etc. should
reflect the entire process of addressing a potential conflict.
• Personnel files should contain certification and disclosure forms.
QUESTIONS?William H. Jordan, Esq.
Sowell, Gray, Stepp & Laffitte, LLC(803) 231-7815