Fragmented Oversight of Nonprofits in the United States: Does it Work? Can it Work?

The United States is well known for its distinctive, although not unique, division of political authority between the federal government and the various states. This division is particularly evident when it comes to oversight of nonprofit organizations. The historical focus of federal government oversight has been limited primarily to qualification for tax exemption and other tax benefits, with more plenary power resting with state authorities. Over time, however, the federal government’s role has come to overlap significantly with that of the states, and many nonprofits have become subject to regulation by multiple states as their operations and donor bases expand across state lines. This Article draws on the growing literature addressing fragmentation of oversight in other contexts to identify possible advantages and disadvantages of such fragmentation with respect to nonprofits. It concludes that the current allocation of responsibilities between the states and the federal government, including the limited areas of overlap, results in relatively effective oversight given the resource and other constraints under which these governments operate. It further concludes, however, that there are certain areas where improvement is possible. More specifically, it recommends federal consolidation of information gathering and financing of oversight, increased coordination between the federal government and the states with respect to enforcement actions, and increased coordination among states with respect to regulation of charitable solicitations. It also recommends that the federal government should both halt and consider rolling back its encroachment into the legal requirements for governance of nonprofits as they relate to the primarily state law fiduciary duty of care