Rather than increase the burden on state and federal regulators, the proposed federal legislation is an anti-abuse measure designed to prevent and detect the “noncompliance” to which is referred to:

• First, the draft federal legislation creates a new oversight and approval process at the IRS that enables entities seeking to receive PRIs (such as L³C's) to request an IRS determination that foundation investments in the entity will qualify as PRIs. Once an entity has received an IRS determination that it qualifies as a PRI recipient, foundations would be entitled to rely on the determination when making PRIs. Although the proposed determination process, like the current private letter ruling process, is not mandatory, we believe that L³C's and other PRI-seeking entities will voluntarily seek IRS review and approval because foundations will be more likely to make PRIs in entities that have been approved by the IRS as PRI-qualified.
• Second, the draft federal legislation creates a mandatory reporting requirement for entities that receive PRIs where none currently exists.
• Finally, the federal legislation does not relieve foundations from their existing obligation to exercise due diligence and expenditure responsibility when making PRIs that have not been reviewed in advance by the IRS.

Additionally, the proposed federal legislation should assist state regulators in exercising their oversight function. State< regulators, if they desired, could require L³Cs to submit copies of their IRS determination and information return, much as some states require charities to provide copies of their IRS determination letters and Forms 990. Thus, rather than increasing the burden on state regulators, the federal legislation should increase the transparency of the PRI process and the accountability of organizations that receive charitable funding, thereby facilitating regulatory oversight.

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