3.3.5 Securities Charitable Gift Annuity Disclosure

Nonprofits that issue gift annuities must understand both the federal and state CGA regulations. As a result of litigation in the mid-1990s, two important pieces of federal legislation were passed with respect to gift annuities. The Charitable Gift Annuity Antitrust Relief Act of 1995 and the Charitable Donation and Antitrust Immunity Act of 1997 enabled charities to offer the same rates as other charities that do gift annuities.

The Charitable Gift Annuity Antitrust Relief Act of 1995 is a very simple statute that has as its primary purpose exempting gift annuity rates from antitrust laws. Sec. 2(a) states that two or more persons described in Sec. 501(c)(3) shall be permitted to "use, or to agree to use, the same annuity rate for the purpose of issuing one or more charitable gift annuities."

Simply stated, this statute enables the American Council on Gift Annuities (ACGA) to publish recommended rates and enables the 1,500-plus charities that follow these same rates to continue the historic practice of uniform rates. In surveys by the ACGA, over 90% of charities surveyed were following the recommended rates. For half a century, the argument has been made that it is desirable from both the perspective of charitable intent and the security of annuity payments for charities to follow standard rates.

The Philanthropy Protection Act of 1995 is a fairly comprehensive statute. It deals specifically with securities regulation issues.

A multitude of organizations and institutions in our society issue securities of many different types. These stocks, bonds, annuities, insurance products and other securities are regulated by federal and state statutes designed to protect the consumer. The basic goals of these laws are to provide consumers with a full and fair representation of the value underlying the security and an explanation of the individuals and entities conducting the business activities represented by the securities.

The purpose of the Philanthropy Protection Act provisions is to exempt charitable common funds from the full requirements of the Investment Company Act of 1940, and to require a level of disclosure that is appropriate for these common funds. Section 2(a) of the Philanthropy Protection Act exempts from Section 3(c)(10) of the Investment Company Act of 1940 pooled income funds, funds set aside as reserves for charitable gift annuities, common remainder trust or lead trust funds, and other irrevocable charitable trust funds. This means that charitable funds are no longer "investment companies" for purposes of the act. However, Subsection (e) of the same statute requires that, in exchange for exemption, each fund shall provide "to each donor to such fund, at the time of the donation or within 90 days after the enactment of this sub-section, whichever is later, written information describing the material terms of the operation of such funds."

Gift annuities are specifically mentioned in Section 2(a)(B)(iii) of the Philanthropy Protection Act. Thus, the act requires a reasonable level of disclosure for gift annuities. However, since the annuity contract is a general obligation of the charity, in a broad sense, the security behind the gift annuity is different from and the risk dramatically different from an investment fund.

The Philanthropy Protection Act of 1995 is silent as to the specific requirements that must be included in a disclosure. Your counsel should determine the appropriate information for inclusion as a material fact. For a gift annuity, it seems probable that disclosure should include notice (i) of the existence of the contractual relationship, (ii) that the obligation of the charity is a general claim on all assets of the charity, and, (iii) of the existence of a reserve fund that complies with the investment requirements of applicable state law. In addition, the gift annuity proposal should illustrate all of the various tax benefits and rules applicable to the annuity. The first three requirements can be included in both promotional materials and a cover letter to the donor. Most software illustrations would comply with the reasonable disclosure requirements for the tax and payout benefits. To reduce securities concerns, common investment language should be removed from proposals. For example, words such as "guaranteed interest" should be replaced with "fixed payments" or other less commercial-sounding terms.

It is important to comply with both the letter and spirit of securities law. Where the meaning is not particularly specific (in this case the "material facts" disclosure is not clearly specified by the statute), one should attempt to make a full and fair, but reasonable, disclosure. This disclosure should enable the donor to know the name and business structure of the charity. There is no specific mandated form for this information, but common sense and good faith efforts to provide this information should be received favorably by the Securities and Exchange Commission.

While the exact format of any disclosure statement should be reviewed by counsel for each individual charity, it could be possible to use a disclosure statement similar to the following in appropriate circumstances. This example of a disclosure statement is offered for educational purposes. This is an area of the law with a wide range of views from attorneys who advise charities. All organizations must have a thorough review by their own corporate counselors.

For a gift annuity, the proposal should include the common explanation of all the various tax implications. In addition, the letter to a donor could include an explanation similar to the following:

First, review the securities compliance issues for your organization. If your charity issues gift annuities or invests trusts in common investment funds, take appropriate action to modify and expand the above language as deemed appropriate by your legal counsel.

Second, review potential liability issues with counsel. These risks should be carefully evaluated. Liability issues may require charities to make a more complete disclosure than would otherwise be necessary under the securities laws.

Third, most success in planned giving is a result of marketing. After decisions are made on the securities and liability issues, your marketing director is the key person for a successful charitable gift annuity program.

Reasonable regulation is generally positive for charities. These disclosure rules have been created for valid reasons. All participants in the field of philanthropy can adjust to these statutes and proceed to serve organizations and donors successfully.