Minnesota State Bar Association

Governance Committee

Report and Recommendation Regarding MSBA/MCLE Organization

May 5, 2008

No recommendation presented herein represents the policy of the Minnesota State Bar Association until it shall have been approved by the Assembly. Informational reports, comments, and supporting data are not approved by their acceptance for filing and do not become part of the policy of the Minnesota State Bar Association unless specifically approved by the Assembly.

Recommendation

Resolved that the MSBA amend Article 9 of the MSBA Articles of Incorporation by deleting the current language and inserting the language that appears on Attachment 1;

Further Resolved, that the MSBA adopt the implementing resolution that appears on Attachment 2, including the Articles of Incorporation and Bylaws for the newly created subsidiary not-for-profit, Minnesota Continuing Legal Education.

Report

In 1975 Minnesota became the first state in the nation to adopt mandatory continuing legal education.  In the ten years before mandatory CLE, the MSBA operated an educational program in affiliation with the University of Minnesota.  The MSBA subsidized the continuing legal education program, on average, $7,000 year.  In 1975-76 the first partial year of mandatory CLE, the MSBA offered 320 hours of CLE credit with two employees and a budget of $292,000.  Today, thirty-two years later, the MSBA Assembly approved a 2008-09 budget for Minnesota CLE of almost $8.5 million.

In the initial years of mandatory CLE, the MSBA decided the best way to structure the CLE program was to create a separate 501(c)3 fund within the MSBA corporation. In 1977-78, the MSBA Articles of Incorporation were amended to create Article 9 setting forth the corporate structure for Minnesota CLE.  The decision made then was to include two tax funds within the MSBA’s overall corporate structure; a 501(c)6 for the general Association activities, and a 501(c)3 for the educational activities of Minnesota CLE.

To maintain the integrity of a quality educational program, and ensure compliance with tax and other regulations, the MSBA has always maintained a separation in the operations of the MSBA General Fund and Minnesota CLE Fund.  Minnesota CLE staff work at a separate location and report to an independent Board; all of the financial assets of the two funds are separately accounted for in different financial institutions; and the MSBA does not exercise direct control over the educational programming provided by Minnesota CLE.

The MSBA has maintained organizational control over Minnesota CLE.  For example, the Board of Minnesota CLE is appointed by the MSBA President with the advice and consent of the Assembly; the Minnesota CLE budget is subject to approval by the Assembly; and the Minnesota CLE Fund is audited by the MSBA auditors and part of the overall MSBA audit.

The increasing emphasis on transparent governance brought about by Sarbanes Oxley and the best practices identified as a result of that emphasis, has led to the conclusion that the continued operation of the General Fund and CLE Fund within the same corporation is no longer a recommended method of governance.  When originally created, the CLE Fund was a small part of overall MSBA operations.  Today, the CLE Fund’s 2008-09 budget is almost twice that of the General Fund and its financial resources far exceed those of the General Fund.  The financial risk the operations of one fund presents to the other, while small, are of serious consequence because of the almost absolute separation required by the tax code.

Best practices require every entity to have in place certain financial policies and practices.  Internally, the General Fund and CLE Fund have separate policies such as those related to records retention and financial responsibility.  However, to an outside entity, the General Fund and CLE Fund are one in the same. In addition, the MSBA, as a corporate entity, has a single treasurer; however, the treasurer has not been involved in the finances of the CLE Fund which, while fulfilling the function normally assigned to the office of treasurer, operates without a treasurer position.  Finally, the audit committee which has taken on increased responsibility with Sarbanes Oxley is separate for each fund. 

As a result, the Governance Committee was directed to work with the leadership of Minnesota CLE to develop a proposal for separating the two Funds. The guiding principle of the restructuring was to maintain in place the current operational relationship between the two funds.  The purpose of the restructuring was not to conduct a complete reexamination of the relationship and develop recommendations for how to best organize the two funds.  It was to create a legal separation between the two organizations while maintaining the current working relationships.  To accomplish this, the MSBA retained Pat Costello to provide legal representation.  The recommendations that is included with this report proposes the creation of a subsidiary not-for-profit corporation that will operate Minnesota CLE.  The purpose of the new corporation, to carryout the educational and charitable functions and purposes of the MSBA, remains the same.  The Board of Directors of the subsidiary corporation will be appointed in the same manner as the current Board of Minnesota CLE is appointed. Since the new structure creates a separate subsidiary corporation, there is a certain level of independence that must accompany the separateness; however, it is not intended to substantially change the current workings between the two funds.

The recommendations included in this report, which are the product of and which could not have been achieved without the close collaboration amongst the Governance Committee, Pat Costello, and the leadership of Minnesota CLE (whose input and assistance was invaluable), are supported by both the MSBA Governance Committee and the Board of Minnesota CLE.

Respectfully Submitted,

Aaron Biber, Chair
Governance Committee