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Charity Oversight: An Alternative Approach

Owens, Marcus S.

A number of years ago, I suggested that the time might be ripe to consider a new model for charity regulation, one modeled on the combination of self-regulation and government oversight provided to U.S. security markets by the Securities Exchange Commission (“SEC”) and the National Association of Securities Dealers (“NASD”) and similar self-regulatory organizations. The intervening years have not been quiet for either the charitable community or the securities industry. On the charitable side, we have seen the passage of extensive charity reform legislation in the Pension Protection Act of 2006 (the “PPA”), which, while aimed at some well-publicized and clear abuses, is written so broadly that it creates new prohibitions, administrative burdens, and legal uncertainty for many legitimate charities. In the securities industry, the SEC has considered whether the self-regulation model needs to be revisited, and the trend is toward more consolidated and more publicly accountable mechanisms for industry self-regulation, as evidenced by the structure of the Financial Industry Regulatory Authority (“FINRA”), the result of a merger of the NASD and the regulatory functions of the New York Stock Exchange (“NYSE”). Developments in both the charitable and financial sectors continue to persuade me that restructuring the federal regulation of charities along the lines of FINRA or other hybrid public/private regulators makes sense. In addition, the federal/state structure for the investigation and prosecution of Medicaid fraud, as embodied by Medicaid Fraud Control Units, suggests a model for federal/state cooperation in charities oversight. In this paper, I expand on what a new public/private charity regulator might look like, taking into account lessons from the financial sector and Medicaid fraud investigation. While there are obviously numerous points along the spectrum between a purely public regulator like the IRS and a purely private “regulator” like a voluntary standard-setting organization, the regime I favor features a strong regulator with minority representation from the sector along with significant government representation. Its closest analogues in the securities industry are FINRA itself and the Public Companies Accounting Oversight Board (PCAOB) created by the Sarbanes-Oxley Act of 2002 to oversee public company auditors. Although there are important differences between these models, both offer several advantages over the current IRS-managed enforcement structure. They also preserve important advantages of a self-regulatory model while mitigating its potential drawbacks.

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