Universities Are Targets of Lawsuits over Retirement Plan Fees

August 10, 2016

By Robert W. Patterson

Three lawsuits filed in early August suggest that plaintiffs’ law firms, representing employees of colleges and universities, are looking at higher education retirement plans as potential targets for lawsuits seeking millions of dollars in damages. The New York Times reported[1] that class action lawsuits were commenced on August 9, 2016 against three prominent universities – New York University, Yale, and the Massachusetts Institute of Technology – alleging that the schools had allowed their employees to be charged excessive fees on their retirement savings.  The law firm bringing the lawsuits – Schlichter Bogard & Denton – has already brought and settled many similar lawsuits against companies such as Lockheed Martin, Boeing, and Novant Health, for amounts in the tens of millions of dollars.  The Lockheed Martin settlement, for example, was for $62 million.  The new lawsuits suggest that Schlichter, and potentially other plaintiffs’ law firms, are now looking at college and university plans as potential targets for similar kinds of claims. The new lawsuits are putative class actions, which means that the law firm represents certain named employees who are participants in the universities’ retirement plans, and purports to represent all other similarly situated employee participants – plaintiff classes that may have thousands of members each. Once a handful of the college or university’s employees agree to be part of the lawsuit, it can be brought on behalf of all the employees in the retirement plan. The claims against NYU, MIT and Yale are similar to claims made in many of the previous retirement plan lawsuits brought by the Schlichter firm and others: that retirement plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) to prudently select investment vehicles for the plans so as to maximize returns, often by  minimizing fees.[2] Under ERISA, the “fiduciaries” of a covered retirement plan – plan fiduciaries can include administrative and investment committees and, frequently, officers and other members of management of the college or university – are subject to strict fiduciary responsibilities and can be held personally liable for any losses caused by a breach of these duties.  In short, it means the college or university is obligated to administer the retirement plan funds of employees in a manner that results in the highest possible prudent growth. Beginning about ten years ago, a wave of lawsuits have been brought on behalf of retirement plan participants alleging that fiduciaries had breached their duties by selecting improper investment options, and in particular by allowing excessive fees to be paid from plan assets. If the investment fees paid by a retirement plan are deemed to be excessive, even by a seemingly small margin, the aggregate losses over an employee’s working career can be very large.  A frequently cited calculation stated in a U.S. Department of Labor publication more than 10 years ago – and repeated in the Times article – recites that if investment fees are one percentage point higher than a reasonable amount, the participant’s retirement account will be 28 percent lower after a 35 year career.  If that is true, then for large plans (like those sponsored by the three universities), the potential losses are enormous – the complaint against MIT alleges that the plan could have saved more than $8 million in fees in a single year by selecting investments prudently. (The complaint’s damage claim is of course not limited to a single year’s losses.) Significantly, these lawsuits also involve claims against major college and university retirement plan managers, including TIAA-CREF and Fidelity.  Accordingly, any college currently using these companies for its employee retirement plans could face some of the same claims. To reduce the risk of liability going forward, retirement plan fiduciaries should, among other things:

  • exercise “procedural prudence” in analyzing, vetting, and selecting investment options and advisors for the retirement plan, with a view to the risk, return and cost characteristics of each investment and the plan portfolio as a whole,
  • continually monitor the chosen investments and make changes if and when appropriate,
  • discuss fees and fee options with retirement plan companies to secure the most favorable arrangements for employees,
  • require that retirement plan managers disclose fees and charges so they may be communicated to employees;
  • avoid any conflicts of interest in the selection and monitoring processes, and
  • consult with third party advisors whenever “in-house” fiduciaries lack necessary expertise.

Colleges and universities may also want to confer with existing retirement plan managers regarding responses to questions which may arise at this time from employees about current retirement plans. Attorneys in Bond Schoeneck & King’s Employee Benefits Practice Group frequently counsel clients with respect to best practices for fulfilling fiduciary duties and avoiding ERISA liability. Often this takes the form of “fiduciary training” we provide to retirement plan committees and other plan fiduciaries.  In addition, the firm’s Litigation Group has substantial experience in defending ERISA lawsuits. [1] Tara Siegel Bernard, “M.I.T., N.Y.U. and Yale Are Sued Over Retirement Plan Fees”, NY Times (Aug. 9. 2016, accessed at http://www.nytimes.com/10/your-money/mit-nyu-yale-sued-4013b-retirement-plan-fees-tiaa-fidelity.html. [2] We discussed some of the numerous issues pertinent to these types of claims in previous Memoranda – , for example: ERISA Fiduciary Guidance - Fairness for Defined Contribution Fees, and ERISA Fiduciary Guidance - Making a "Watch List" Work.  

Recent U.S. Department of Education Dear Colleague Letter Raises the Bar on Standards for Protecting Federal Financial Aid Data

July 12, 2016

doe-logoOn July 1, 2016 the U.S. Department of Education issued a follow-up Dear Colleague Letter to the Dear Colleague Letter of July 29, 2015. This most recent letter reminds institutions of their legal obligation to protect student data under Title IV and sets forth the new standards and methods the DOE will use when evaluating data security compliance. An institution’s Title IV Program Participation Agreement (PPA) requires that they must protect all student financial aid data. The Student Aid Internet Gateway (SAIG) Enrollment Agreement, the system used by educational institutions and third-party servicers to exchange data electronically with the U.S. Department of Education, contains similar requirements. In addition, the letter reminds institutions that the specific requirements of the Gramm-Leach-Bliley Act (GLBA) governing data security at financial services organizations apply to post-secondary institutions. These include implementing a written information security program, designating an individual to coordinate information security, performing ongoing risk assessments, and properly vetting third-party service providers. It is also noted that compliance with the GLBA will be incorporated into the DOE’s annual student aid compliance audit requirements. Most significantly, the letter “strongly encourages institutions to review and understand the standards defined in NIST SP 800-171.”  These standards were developed by the National Institute of Standards and Technology (NIST) to protect sensitive federal information that is used and stored in non-federal information systems and organizations. NIST SP 800-171 sets forth a significant expansion of the data security requirements and controls expected in the handling of student financial aid data and other types of federal data and information. In citing these standards, the DOE acknowledges “the investment and effort by institutions to meet and maintain the standards set forth in NIST SP 800-171” but “strongly encourages those institutions that fall short of NIST standards to assess their current gaps and immediately begin to design and implement plans to close those gaps using NIST standards as a model.” The message from the US DOE is clear – institutions of higher education that use student financial aid data, and other forms of federal data are expected to “immediately” begin to integrate the specific requirements of NIST SP-171.

Updated Clery Act Handbook Released

June 27, 2016

By Paul J. Avery

cleary-actThe Handbook for Campus Safety and Security Reporting (the “Handbook”), which provides important guidance for institutions as it relates to their compliance with the Clery Act’s safety and security requirements, was recently revised and a new version (the 2016 Edition) released by the United States Department of Education. This valuable resource had not been updated since 2011.  The 2016 Edition of the Handbook contains updated provisions with respect to, among other things, the Violence Against Women Reauthorization Act of 2013.

The 2016 Edition of the Handbook, which replaces all previous versions of the Handbook, can be accessed here.

New York Institutions: NYSED Activates Electronic Submission System for Article 129-A and 129-B Compliance

June 26, 2016

By Philip J. Zaccheo

university-building1The New York State Education Department has activated its electronic submission system for institutions to file certificates of compliance with Education Law Articles 129-A and 129-B, as well as the copies of rules and policies required to be filed this year pursuant to Article 129-B.  A link to the portal, as well as instructions for using it, can be found on the Department's website. When making the required Article 129-B filings, institutions are instructed to submit only the documentation specified in the portal, and not copies of MOUs, training session rosters or other materials required or necessitated by Article 129-B's provisions.  Rather, these documents should be retained by the institution as evidence of compliance and provided to the Department, upon request, in connection with compliance monitoring or auditing. All filings are due by July 1, 2016, (though institutions do not risk loss of State funding for failure to file until September 1).

The Second Coming of Fisher: UT Austin’s Race-Conscious Admissions Policy Upheld by SCOTUS

June 23, 2016

By Joanna L. Silver

college-higher-ed-blogYesterday, the U.S. Supreme Court upheld the University of Texas at Austin’s use of race in its admissions policies and procedures by rendering a decision in the second case brought by Abigail Fisher, a white woman who was rejected for admission to UT Austin over eight years ago. In June 2013, the Supreme Court remanded Ms. Fisher’s case to the U.S. Court of Appeals for the Fifth Circuit so it could reconsider the constitutionality of the university’s race-conscious admissions policies and procedures under the strict scrutiny standard articulated in prior affirmative action Supreme Court decisions.  In July 2014, the Fifth Circuit again held in favor of UT Austin, finding that its use of race in admissions was constitutional since the university had considered race-neutral alternatives in its admissions process and still could not achieve sufficient diversity.  Dissatisfied, Ms. Fisher appealed to the Supreme Court again, arguing that UT Austin’s use of race in its admissions process disadvantaged her and other non-minority applicants. In yesterday’s Fisher v. University of Texas at Austin decision, the Supreme Court found that UT Austin’s use of race in its admissions process meets the strict scrutiny standard since the university’s goal to provide its students with educational benefits that result from having a diverse student body advances a compelling interest.  Further, the Court found that UT Austin validly demonstrated that race-neutral alternatives (e.g., scholarships, outreach programs, etc.) were not sufficient to achieve a diverse student body, even when used in conjunction with Texas’ Ten Percent Plan which guarantees Texas students graduating in the top tenth of their class admission to a public college or university of their choice in the state. While this decision puts an end to Ms. Fisher’s case against UT Austin and appears to be a win for the use of affirmative action by colleges and universities in admissions, the Court’s decision did include a warning to UT Austin – and colleges and universities across the country -- that the need for race-conscious admissions processes may change over time. In the Court’s majority opinion, Justice Anthony M. Kennedy stressed that institutions must periodically reassess the constitutionality of their admissions processes and procedures.  Specifically, he stated that the university “must continue to . . . scrutinize the fairness of its admissions program; to assess whether changing demographics have undermined the need for a race-conscious policy; and to identify the effects, both positive and negative, of the affirmative-action measures it deems necessary.”  Given this charge, colleges and universities that use race as a factor in their admissions process should avoid complacency and periodically audit their policies and procedures to ensure compliance with the Court’s mandate.

New York Institutions: NYSED Posts Update on Status of Article 129-A and Article 129-B Filing System

June 16, 2016

By Philip J. Zaccheo

university-building5In a new update posted to its website, the New York State Education Department has indicated that it is continuing work on its electronic system for the submission and recording of this year’s required certificates of compliance under Education Law Articles 129-A and 129-B, and the copies of written rules and polices required to be filed this year pursuant to Article 129-B. As before, the Department indicates that once the system is operational, information will be posted on its website on how to access the system and submit the required documentation. As institutions are aware, the statutory deadline for filing certifications, rules and policies is July 1 (though institutions do not risk loss of State funding for failure to file until September 1).  However, all documentation must be submitted through the yet-to-be-released electronic filing system, and the Department will not accept, or record as received, hard copy documents or documents submitted via email.  Consequently, institutions necessarily find themselves in a holding pattern until further notice.

Highlights of New York State Guidance on N.Y. Education Law Article 129-B

June 8, 2016

By E. Katherine Hajjar

vt-300x134On June 2, 2016, the New York State Education Department and the New York State Office of Campus Safety published a 52-page joint guidance document (“Guidance”) on New York Education Law Article 129-B (“the Law”), also often referred to as “Enough is Enough.” The Guidance is helpful in that it clarifies previously opaque points in the Law and acknowledges some of the practical problems faced by colleges and universities.  The Guidance arrives in time to make adjustments before the July 1, 2016 deadline by which institutions are required to file their relevant policies and procedures with the State Education Department. Among the more interesting points in the 52-page Guidance are the following: When A Report is Received Section 6444(2) of the Law states that every institution must ensure that at the first instance of disclosure of an incident of domestic violence, dating violence, stalking, or sexual assault by a reporting individual, the recipient institutional representative presents the following information:

You have the right to make a report to university police or campus security, local law enforcement, and/or state police or choose not to report; to report the incident to your institution; to be protected by the institution from retaliation for reporting an incident; and to receive assistance and resources from your institution.

According to the Guidance, institutions may instruct employees to carry this paragraph with them for easy access, or, alternatively, allow employees to access the paragraph on a website and provide or read the information to reporting individuals. This second approach is only compliant if the institution trains those who are likely to receive a report on how to access the paragraph online. See pg. 19 of Guidance. An institution also must be neutral when explaining to students their options to notify law enforcement, request the assistance of campus authorities in notifying law enforcement, or to decline to notify law enforcement. See pg. 13 of Guidance. Institutions should review their policies to make sure that policy language discussing reporting options is absolutely neutral – i.e. does not recommend, suggest, or encourage any one option. Repetition of Report to Authorities The Guidance explains that the intent of Subdivision 7 of the Students’ Bill of Rights (the right to repeat an account to as few people as practicable) is to minimize impact so that students will not want to withdraw from the process. Subdivision 7 says “as few as practicable” not as “few as possible,” which, according the Guidance, affords institutions reasonable leeway to ask a student to repeat an account for legitimate reasons. See pgs. 14–15 of Guidance.  For example, colleges may ask a student to repeat pertinent portions of an incident in a hearing or to a fact-finder. Emergency Access to Title IX Coordinator While the Law requires that reporting individuals have “emergency access to a Title IX Coordinator or other appropriate official trained in interviewing victims of sexual assault,” the Guidance clarifies that “emergency access” does not mean 24/7 access. See pg. 16 of Guidance. Amnesty The Law requires an assurance that students who make good faith reports of domestic violence, dating violence, stalking, or sexual assault will not be subject to disciplinary action for violations of alcohol and/or drug use policies occurring at or near the time of the reported incident.  The Guidance clarifies that the mandatory amnesty provision does not, however, prevent an institution from removing students from clinical or residency programs where a drug or alcohol violation would indicate unsuitability to participate. See pg. 12 of Guidance. Explaining Standards of Proof Institutions are expected to educate students and employees who may receive a report about the differences between standards of proof in the criminal justice system (beyond a reasonable doubt) and the standard of proof used by the institution (preponderance of the evidence). The Guidance points out that SUNY has developed a document that may be helpful in explaining these differences: http://system.suny.edu/sexual-violence-prevention-workgroup/College-and-Criminal-Resource/. Charges The Law states that a student has the right to request that the institution bring disciplinary charges, but the Guidance clarifies that it is within the institution’s discretion to decide whether or not the evidence merits doing so. See pg. 25 of Guidance. Access to Case File The Law states that students have the right to review (and present) relevant evidence in the case file, or otherwise in the possession or control of the institution.  The Guidance clarifies that this access requirement means reasonable, in person access at a time, place, and manner determined by the institution. Institutions are not required to provide the parties with copies of the case file.  Further, this provision is not a generalized discovery requirement, in that the institution must only provide access to evidence that is “directly relevant to the specific case, as reasonably determined by the institution.” Institutions may restrict access to sensitive information in the file that is not directly relevant to the issues raised, as well as further restrict access if the institution determines that a student and/or advisor is merely engaged in a “fishing expedition.” See pg. 31 of Guidance. Response to Reports The Guidance addresses how charges may be adjudicated. It clarifies that while the Law refers to a “hearing,” institutions may opt for an investigator model in lieu of a traditional hearing format. Therefore, a college or university may rely on an investigator to gather the factual information, conduct interviews, summarize what is credible, and offer a determination as to whether the evidence supports the charges.  Section 6444(5) does not require that evidence be offered during a hearing or in the presence of other parties or witnesses. See pg. 27 of Guidance. Advisors of Choice The Guidance contains helpful clarifications on the ability of institutions to place reasonable limits on the role of advisors, including (a) validation of rules restricting advisors from speaking during meetings or hearings; (b) a statement that institutions can prevent advisors from circumventing such restrictions, such as by writing questions that the advisee reads verbatim in real time; (c) authority to remove advisors who violate procedural rules without an obligation to adjourn the hearing or allow the student to replace the advisor; and (d) validation of institutional policies placing reasonable restrictions on scheduling accommodations for advisors (such as limiting requests for delays to allow for scheduling conflicts of advisors to a specified number of business days).  See pgs. 28–29 of Guidance. Transcript Notations The Guidance notes that if a court vacates a college’s finding of responsibility for a violation of institutional policy, the corresponding transcript notation must be removed. The Guidance does not address, however, whether a transcript notation may be removed if the parties agree, as a condition of litigation settlement, to vacate a finding of responsibility.  See pg. 37 of Guidance. Legal Resources The Law mandates that reporting individuals receive assistance from the institution “in initiating legal proceedings in family court or civil court,” but the Guidance confirms that this does not require that institutions bring actions on behalf of reporting individuals, provide attorneys, or provide actual direct support. Still, institutions should be able to direct individuals to resources. The Guidance cites another SUNY resource page on this topic: http://www.suny.edu/violence-response/. See pg. 18 of Guidance. Student Training The Guidance clarifies that that an institution need only offer onboarding training to all new students, and that there is no requirement, with the exception of student athletes and student leaders, that every student complete training in order for an institution to be in compliance with the onboarding training requirements.  The Guidance does, however, prohibit, or at least strongly discourage, the use of online programs as the only component of onboarding training. Relatedly, the Guidance provides welcome flexibility as to the timing of the required training for leaders of student organizations and student athletes (who, unlike other students, must complete training).  Specifically, the Guidance allows fall sport athletes to begin competition or student organization officers to begin their service prior to training, with an understanding that they will be trained within a short period thereafter. See pg. 45 of Guidance. Climate Surveys The Law’s climate survey requirement becomes effective in July 2016 and requires institutions to conduct surveys “no less than every other year.”  However, the Guidance states that the first climate survey must be completed by July 2017. See pg. 39 of Guidance. Audits The Guidance notes that the State Education Department will conduct random audits, at any time after September 1, 2016, to ensure compliance with the provisions of the Law. See pg. 2 of Guidance. Therefore, institutions should revise policies as needed and review case handling protocols that are impacted by the Guidance.

New York State Education Department Publishes Interpretative Guidance on “Enough is Enough” Legislation

June 3, 2016

By Philip J. Zaccheo
On June 2, 2016, the New York State Education Department published joint guidance from the Department and the New York State Office of Campus Safety that is intended to assist colleges and universities in complying with Education Law Article 129-B (the "Enough is Enough" sexual misconduct legislation). The guidance contains numerous interpretations of specific statutory provisions, many of which are consistent with consensus interpretations among New York institutions since the legislation's adoption, but others of which provide new (and in some cases surprising) leeway to institutions in implementing the statutory requirements and/or appear to create additional obligations in doing so. The guidance is intended to be a “living document,” with the Department indicating that “[a]s we receive additional comments and suggestions, we will work with the four higher education sectors, the Governor, and Legislature to make changes to the guidance as needed to ensure that the intent of the law is met.” We will provide additional information and commentary on the guidance in the near future; in the meantime, the guidance can be found here.

Office of Civil Rights Releases “Dear Colleague” Letter on Transgender Students

June 3, 2016

By Robert F. Manfredo
On May 13, 2016, the U.S. Department of Education’s Office of Civil Rights (OCR) released a Dear Colleague Letter (DCL) addressing a school’s Title IX obligations regarding transgender students, and explaining how the U.S. Department of Education (ED) and the U.S. Department of Justice (DOJ) will evaluate a school’s compliance with those obligations.  This DCL comes on the heels of a recent Fourth Circuit Court of Appeals decision discussing whether Title IX requires schools to allow transgender students to have access to restrooms consistent with their gender identities. Title IX of the Education Amendments of 1972 states, “no person shall on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving federal financial assistance.” In the DCL, the Departments make clear that they treat a student’s gender identity as the student’s sex for purposes of Title IX and its implementing regulations. Therefore, schools may not treat a transgender student differently from how they would treat other students of the same gender identity. The Departments state that when a student or the student’s parent or guardian (as applicable) notifies the school administration that the student will assert a gender identity that differs from previous representations or records, Title IX requires that “the school will begin treating the student consistent with the student’s gender identity.” The Departments note that Title IX does not impose any type of medical diagnosis or treatment requirement that students must meet as a prerequisite to being treated consistent with their gender identity. The DCL goes on to discuss several areas where schools must provide transgender students with equal access to education programs and activities – “even in circumstances in which other students, parents, and community members raise objections or concerns” – and describes the steps that schools must take to ensure equal access. Some of the highlights from the DCL include:
  • Safe and Nondiscriminatory Environment – “If sex-based harassment creates a hostile environment, the school must take prompt and effective steps to end the harassment, prevent its recurrence, and, as appropriate, remedy its effects.”
  • Identification Documents, Names, and Pronouns – “[A] school must treat students consistent with their gender identity even if their education records or identification documents indicate a different sex.” Accordingly, school staff and contractors must use pronouns and names consistent with a transgender student’s gender identity.
  • Sex-Segregated Activities and Facilities – “When a school provides sex-segregated activities and facilities, transgender students must be allowed to participate in such activities and access such facilities consistent with their gender identity.” The Departments do, however, appear to acknowledge that schools may continue to use students’ legal names on records where such use is legally required.
  • Restrooms and Locker Rooms – “A school may provide separate facilities on the basis of sex, but must allow transgender students access to such facilities consistent with their gender identity.” “A school may, however, make individual-user options available to all students who voluntarily seek additional privacy.”
  • Social Fraternities and Sororities – “Title IX does not apply to the membership practices of social fraternities and sororities.” “Those organizations, therefore, are permitted under Title IX to set their own policies regarding the sex, including gender identity, of their members.”
  • Housing and Overnight Accommodations – “[A] school must allow transgender students to access housing consistent with their gender identity and may not require transgender students to stay in single-occupancy accommodations or to disclose personal information when not required of other students.”
The DCL also addresses gender identity-related issues dealing with athletics, other sex-specific activities and rules, privacy and education records, disclosure of personally identifiable information from education records, disclosure of directory information, and amendment or correction of education records. Both the Education Department and Department of Justice consider the DCL to constitute “significant guidance” and – although it purportedly does not add requirements to existing law – provide information and examples to inform schools about how the Departments evaluate whether covered entities are complying with their legal obligations. Thus, schools must be sure to carefully review the DCL and familiarize themselves with these requirements in addressing issues related to transgender students.

Fourth Circuit Decides Case on Transgender Students’ Rights

May 5, 2016

By E. Katherine Hajjar

On April 19, 2016, the Fourth Circuit Court of Appeals issued a decision addressing transgender and gender nonconforming students. In G.G. v. Gloucester County School Board the Fourth Court was presented with the question of whether Title IX requires that schools allow transgender students to have access to restrooms consistent with their gender identities. The Fourth Circuit’s Decision In 2015, Virginia’s Gloucester County School Board passed a resolution endorsing a policy that provided male and female restrooms and locker rooms in its schools, but limited their use to those of the corresponding biological gender. The policy also provided that “students with gender identity issues shall be provided an alternative appropriate facility.” The School Board took this step in the face of community opposition to the fact that the high school permitted G.G., a transgendered boy, to use the boys’ restroom for seven weeks. Members of the community appeared at two different public hearings to express opposition to the practice of allowing G.G. to use the boys’ restroom and to express concerns about the privacy of other students and the potential for sexual assaults in restrooms. The American Civil Liberties Union of Virginia brought this case on behalf of G.G. seeking an injunction of the School Board’s policy arguing that the policy violated both Title IX and the Equal Protection Clause. Title IX of the Education Amendments of 1972 states that “no person shall on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving federal financial assistance.” 20 U.S.C. § 1681(a). The U.S. Department of Education’s regulations implementing Title IX add that the practice of maintaining separate bathroom and locker room facilities on the basis of sex is not discriminatory as long as facilities are comparable. While Title IX and the regulations have been in place since 1972 and 1980, respectively, the question of how they apply to transgender individuals was not explicitly addressed until recently; in a January 7, 2015 opinion letter the Department’s Office for Civil Rights (OCR) advised that the regulations require that any school receiving federal funding treat transgender students consistent with their gender identities. In its April 19th decision, the Fourth Circuit reversed the District Court’s dismissal of G.G.’s Title IX claim, and held that the United States Department of Education’s “interpretation of its own regulation…is entitled todeference and is to be accorded controlling weight in this case.”  The case was remanded to the District Court for further proceedings. While the Fourth Circuit stopped short of ruling that transgender students have a Title IX right to use restroom facilities consistent with their gender identities, the Circuit’s deference to the Department of Education’s position strongly suggests that Title IX applies to transgender students. Some interested parties, including the ACLU, interpret the Fourth Circuit’s decision as a mandate that all states in its jurisdiction fall in line with the Department of Education’s position; and it is noteworthy that the Fourth Circuit includes North Carolina, which passed a law in March 2016 limiting bathroom access in government buildings (including public schools) to the facility that corresponds to the individual’s physical birth gender. However, while this is a possible result, the implications of the Fourth Circuit decision remain to be fully realized. Implications for Schools in New York It is possible that other federal jurisdictions, including the Second Circuit, will follow the Fourth Circuit’s lead and defer to the Department of Education regulations. It is also possible that some courts will go a step further and on their own find that, independent of the Department’s regulations, Title IX requires that schools permit transgender individuals access to the facilities consistent with their gender identities. In July of 2015 the New York State Education Department (NYSED) published a guidance document consistent with the U.S. Department of Education’s position. It sets forth an expectation that schools in New York ensure that the transgender and gender nonconforming members of their community are not subject to discrimination or harassment. The NYSED guidance document specifically addresses how to handle restroom and locker room access, names and pronouns, and student records. Transgender students’ rights remain an evolving area, but the Fourth Circuit’s April 19th decision indicates that the Department of Education’s interpretation is the standard to which secondary schools and colleges and universities will be held. It is also very possible that the Department of Education Office for Civil Rights (OCR) will focus on transgender and gender nonconformity issues in schools with heightened interest. We encourage clients to reach out to us with questions about this decision and the Department of Education’s expectations.

O’Bannon Plaintiffs Seek U.S. Supreme Court Review

March 16, 2016

By Paul J. Avery
On March 15, 2016, plaintiffs in the O’Bannon case sought U.S. Supreme Court review of the United States Court of Appeals for the Ninth Circuit’s decision issued in September 2015.  In that decision, the Ninth Circuit sided with the NCAA by vacating that portion of the District Court’s ruling that would have required the NCAA to allow member institutions to pay limited deferred compensation to student-athletes for the use of their names, images and likenesses. The Ninth Circuit’s decision did not wholly favor the NCAA, however, as it also upheld that part of the District Court’s ruling that enjoined the NCAA from enforcing its rules precluding member institutions from providing athletic scholarships up to the full cost of attendance. Reports indicate that the NCAA had earlier requested an extension of time to file its own petition to seek U.S. Supreme Court review and that it continues to consider this option following the O’Bannon plaintiffs’ request.

2015 Amendments to New York’s Nonprofit Revitalization Act

February 4, 2016

By Frank J. Patyi

In December of 2013, New York enacted the Nonprofit Revitalization Act (the NPRA) which impacted all New York not-for-profit corporations as it sought to not only update New York’s Not-for-Profit Corporation Law (NPCL) but it also enacted several measures intended to strengthen the internal controls of nonprofits. The enactment of the NPRA impacted all New York nonprofits, with the majority of not-for-profit corporations taking action to update their by-laws and adopt new conflict of interest and whistleblower policies to comply with the changes to the NPCL.

While the NPRA was heralded as a much needed reform to the NPCL, there have been a number of issues created by the practical application of the NPRA’s measures. These issues have resulted in multiple clarifications to the NPRA, with the most recent being amendments adopted on December 11, 2015, when Governor Andrew Cuomo signed into law three changes to the NPRA (the December Amendments, found at: A. 7641, S. 5870, S. 5868 – A) which became effective immediately.

Among the changes made to the NPCL by the December Amendments, the revisions to several key definitions and provisions related to the conflict of interest and related party transaction rules are likely to have the greatest impact on the regular operations of nonprofits (the text of these revisions can be found in Senate Bill S. 5868-A).

First, the December Amendments broadened the scope of the conflict of interest and related party transaction rules by amending the definitions of "independent director", "relative" and "related party", and at the same time slightly narrowed the scope of these rules with revisions to the definitions of "affiliate" and "key employee". The changes to the definition of "independent director" further expand the classifications of individuals that do not qualify as independent directors to include certain individuals related to the corporation’s outside auditor. In short, any individual who serves as a director of a nonprofit and is, or has a relative who is, "a current owner, whether wholly or partially, director, officer or employee of the corporation’s outside auditor or who has worked on the corporation’s audit at any time during the past three years" is not an independent director.

The definition of "relative" was amended to clarify that domestic partners of a person’s children, grandchildren and great-grandchildren are relatives for purposes of the NPCL, where, prior to the December Amendments, only the domestic partners of the individual in question were included as relatives for purposes of the NPCL. Finally, the definition of "related party" was expanded to include "any other person who exercises the powers of directors, officers or key employees over the affairs of the corporation or any affiliate of the corporation" and such person’s relatives and controlled entities, in addition to the directors, officers and key employees, their relatives and controlled entities, of a corporation and its affiliates.

The scope of the conflict of interest and related party transaction rules were narrowed slightly with the revision to the definition of "affiliate" that eliminated entities under common control of a corporation from this definition. Following the December Amendments, affiliates are limited to "any entity controlled by or in control of" a corporation. Also, the definition of "key employee" was revised to provide that a key employee means any person in a position to exercise substantial influence over the affairs of a corporation as provided under the Internal Revenue Code (IRC) rules and regulations related to excess benefit transactions under IRC Section 4958 "to the extent such provisions are applicable." Many organizations will find this clarifying language helpful because the excess benefit transaction regulations include several classifications of individuals that could be considered as key employees that often have no application to an organization. For example, the IRC regulations include substantial contributors as potential "key employees" and this often has no application to organizations in the context of the NPCL’s conflict of interest and related party transaction rules.

Other changes enacted by the December Amendments that impact the application of the new conflict of interest and related party transaction rules relate to quorum requirements and the ability of an interested director to provide information related to a potential conflict of interest transaction. First, the December Amendments revise the quorum requirements found at NPCL §708(d) to clarify that if a quorum is present for a meeting the quorum will not be broken if a director is required to leave the meeting due to a conflict of interest or related party transaction. Second, the December Amendments revise provisions related to the operations of a corporation’s audit committee (NPCL §712-a(e)) and a corporation’s conflict of interest policy (NPCL §715-a(b)(3)) to provide that, although interested directors cannot participate in deliberations or voting on an interested matter, the Board or audit committee may request "that a person with an interest in the matter present information as background or answer questions at a committee or board meeting prior to the commencement of deliberations or voting related thereto." Finally, the December Amendments revised the annual conflict of interest disclosure statement requirements to provide that these disclosures may be submitted to a designated compliance officer, instead of the corporation’s Secretary.

Similar to the changes impacting the conflict of interest and related party transaction rules, the December Amendments made clarifications to NPCL provisions related to the compensation of directors. The NPRA amended NPCL §514(b) regarding compensation of members, directors or officers, to provide that reasonable compensation may be paid to these individuals but that no person who may benefit from such compensation may be present at or otherwise participate in any board or committee deliberation or vote concerning such person’s compensation. This provision created problems in its practical application with respect to the compensation of directors because if the board of a not-for-profit intended to set a uniform rate for director compensation, under the terms of NPCL §514(b) no director would be able to participate in the decision making process because each person would benefit from the compensation. The December Amendments, amend NPCL §514(b) to clarify that although an individual who may benefit from a compensation decision cannot be present or participate in a deliberation or vote on a compensation award, nothing in NPCL Sections 514(b) or 715(h) [related party transactions] shall be construed to prohibit "a director from deliberating or voting concerning compensation for service on the board that is to be made available or provided to all directors of the corporation on the same or substantially similar terms."

In addition to making numerous changes impacting the conflict of interest, related party transaction and director compensation rules, the December Amendments made several other important changes.

First, the NPRA had changed the traditional committee structure under the NPCL from "standing" and "special" committees, to new classifications of "committees of the board" and "committees of the corporation." The NPRA clearly provided that committees of the corporation did not have any authority to bind the corporation’s board but left ambiguity as to whether non-directors could be elected or appointed to such committees. The December Amendments clarify that non-directors may be elected to committees of the corporation in accordance with a corporation’s by-laws or, if the by-laws are silent, in the same manner as officers of a corporation are elected.

Second, the NPRA created a new requirement that certain corporations must adopt a whistleblower policy and that the whistleblower policy must be distributed to all of the corporation’s directors, officers, employees and volunteers who provide substantial services. Numerous clients have inquired as to whether posting the corporation’s whistleblower policy on their website or in their offices would satisfy this requirement. Fortunately the December Amendments included clarifying language directly addressing these concerns providing that, for purposes of satisfying the distribution requirement, a whistleblower policy may be posted on a corporation’s website or at the corporation’s offices in a conspicuous location that is accessible to employees and volunteers.

Third, the December Amendments extend the effective date of the provision added to the NPCL by the NPRA prohibiting the chair of a not-for-profit from also being an employee of the not-for-profit from January 1, 2016 to January 1, 2017, giving all not-for-profits an additional year to make any necessary changes related to this new prohibition.

In sum, the December Amendments provide a number of helpful clarifications to the changes to the NPCL enacted by the NPRA in addition to several substantive amendments impacting the conflict of interest and related party transaction rules affecting all New York not-for-profit corporations. While most corporations that updated their governing documents to comply with the changes enacted by the NPRA will not require significant, if any, further revisions to these documents; these documents should be reviewed to understand the impact of the December Amendments and whether any updates are required. The December Amendments also serve as a reminder for corporations that have not taken steps to comply with the NPRA that action should be taken as soon as possible to comply with the NPRA’s requirements as more provisions will continue to become effective in the near future.