Proposed federal regulations that were designed, in part, to prevent conflicts of interest for financial advisors who work with charities could force some charities to close, according to Andrew M. Grumet, an attorney with Holland & Knight, a multinational law firm headquartered in Tampa, Fla.

The regulations proposed by the Federal Treasury Department and IRS, among other things, would change the definition of a donor-advised fund, making many charitable organizations that are not now considered donor-advised funds fall under the DAF definition. The proposals also add restrictions to what financial advisory firms can do when advising their charity clients, Grumet said in an interview.

The proposals, the first major changes in donor-advised fund regulations in decades, would have unintended consequences that would severely curtail charitable organizations’ activities, he added. Grumet is part of a Holland & Knight multidisciplinary team that advises nonprofits of all sizes around the globe. Holland & Knight filed comments with the IRS.

“Numerous charities that were not donor-advised funds (DAFs) are now going to be treated as DAFs and will therefore be required to meet new reporting standards that will be costly and time consuming,” Grumet said. “Some will not have the resources to meet the new standards.

“A lot of charities are going to be caught off guard by this. If the regulations are adopted, it will be a big wake-up call for charities,” he added.

The regulations have been published and comments have been solicited. Holland & Knight, among other groups that have submitted comments, has asked for a public hearing on the proposals. There is no timeline for a public hearing as yet.

As an example of the proposed regulations, Grumet said, that if a charity hires a financial advisor to manage its charitable funds, the advisor would not be able to advise the charity on other financial matters.

“There also is a huge reporting divide depending on how the advisor gets paid. He or she would be subject to different rules depending on the compensation,” he added.

“I work with a lot of charities and community foundations and they are all worried,” he added.

If the regulations are adopted by the IRS as is, they would be effective retroactive to the beginning of the year in which they are adopted. “This creates an impossible task for advisors and charities to recreate up to a year’s worth of activities. This is contrary to every principle of fairness,” he said.

Holland & Knight has asked for a three-year transition period for charities to meet the requirements after they are adopted.

The proposed regulations also would require charities to determine if their donors are also on the boards of any of the organizations receiving funds, an almost impossible task for a small charity that may deal with hundreds of grants, Grumet said.

“If this enacted, grant-making will come to a grinding halt and charities that need money will not get it,” Grumet said. “I think these regulations were written by people who do not understand how charities work.”

In a comment letter to the IRS, Deborah L. Wilkerson, president and CEO of the Greater Kansas City Community Foundation, laid out some of the foundation’s concerns.

“The law should increase our ability to partner with donors to maximize their philanthropy—getting more dollars to the organizations and communities that need it most. Unfortunately, the proposed regulations fall far short of this, and in many cases will have the exact opposite of any positive intended effect—decreasing philanthropy overall,” Wilkerson said.

“The proposed regulations on investment advisors would be the most damaging to the Community Foundation. It will drive donors to set up isolated private foundations to keep their investment advisor involved. The result will be a reduction, not an increase, in grants to charities,” she added.