Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

Missouri Seller Exams: Trustee Recordkeeping and Disbursements

Posted in Exams/audits, Fiduciary, Missouri - SB1, Recordkeeping

The clock is on for the second round of Missouri preneed audits  financial examinations, and the Missouri Division of Professional Registration wants to avoid the slow start that plagued the process 5 years ago.   Although the State Board has yet to approve the Division’s proposals for seller recordkeeping and the scope of the exams, exam notices were sent out to the first group of lucky sellers.   The notice includes a document request that begins with the following item:

A current statement from your state of federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have indentifying the payments, earnings and distributions for each active preneed contract.

What the Board seems to be requesting is a trust record that reflects what each preneed account has received in consumer payments, total trust income and total expense distributions.   In essence, the request anticipates the trustee maintains a running total of income and distributions made from each preneed account.  While fiduciary accounting systems track the tax cost basis (or book value) of the trust as a whole, a trust’s tax cost basis represents the netting of income and expenses.   Federal fiduciary accounting rules do not contemplate a record of the aggregate income and expense incurred over the lifetime of the trust account.  If such a record is not required by the bank’s fiduciary regulator for the trust as a whole, fiduciaries would not perceive the need to maintain such a record for each individual preneed trust account.

Sellers are already complaining that the financial examination process is creating too much of a burden on funeral homes.  This document request would require banks and trust companies to expand their recordkeeping, and perhaps cause some to withdraw from the business.  Instead of expanding the record requirements of preneed fiduciaries, the Division could seek existing records that would document individual account expenditures.  Most, if not all, preneed trusts file a Federal Form 1041QFT, which requires an individual account listing of income and expenses.  It may not constitute the single record that an examiner would prefer, but a trustee should be able to produce tax returns for the seller’s five open audit years.

Missouri Preneed Seller Records: Receipt Journal

Posted in Compliance, Recordkeeping

The first record described in the proposed Missouri recordkeeping regulation could actually require preneed sellers to maintain three, maybe four, sets of journals:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from both preneed trusts and preneed joint accounts, specifically identifying the date, source, and description of each item deposited as well as the date, payee, and purpose of each disbursement;

This section contemplates a journal for consumer payments received by the seller and deposited to trust or joint account, and a journal of disbursements from the preneed trust or joint account to the seller.  With regard to trust funded contracts, Missouri law requires all consumer payments be made to trust.  However, this proved burdensome for sellers with a high volume of payments, and consequently sellers are allowed to administer payments through a commercial clearing account.  When a clearing account is used to process individual consumer payments, a commingled, lump sum deposit is then made to the trust at month end.

When a seller does use a clearing account to administer consumer payments, the regulation may require one receipts journal for the clearing account and another receipts journal for the trust account.  Or, the regulation could be interpreted to require a receipts journal and disbursements journal for the clearing account.  The journals would have to be sufficient to allow an auditor to determine that the consumer payment was deposited to trust within the time required by statute.

When consumers make their payments directly to the trust, the seller may, or may not, actually handle the payment.  Consumer payments may be made by a direct deposit or by checks mailed directly to the trust.  When the seller does not handle the payment, it is not clear whether the seller would be required to document such payments to the receipts journal.

Another question that comes to mind is whether the seller can use a bank transaction report to satisfy the receipts journal requirement.  Some of our bank clients include the consumer’s name when recording a deposit to their system.   However, commingled, lump sum deposits made from a clearing account would not reflect individual consumer names.  With such deposits, supporting detail might have to be provided that reflects a reconciliation of the deposit to the clearing account receipts.

To the extent that bank generated reports are used, sellers will have to be current in their production of such reports because most banks limit the time such data is maintained on line.  The banks we work with limit the availability of such data from 18 months to 24 months.  Sellers are only audited once every 5 years, and if a seller waits until an audit is scheduled to retrieve reports, the first three or so years will not be available.

Sellers should also note that the regulation is also seeking the source of funds, i.e., whether the consumer paid by check or cash.

At one time, it was custom for preneed sellers to book consumer payments to the funeral home’s income records, and defer recognition of the income until performance of the contract.  The funeral home’s tax records would have been a source for the journals, and other records, sought by the proposed regulation.  However, the practice of booking preneed payments to income is no longer encouraged. Consequently, the proposed regulation would require the Missouri preneed seller to maintain financial records that are in addition to their tax and financial records.

Missouri Seller Records: The State Board Proposal

Posted in Compliance, Exams/audits, Recordkeeping

At its March meetings, the State Board again received from the Division staff a rule proposal that would define the minimum records that a preneed seller would have to maintain.  The first recordkeeping proposal was offered last July, but was never discussed.  The recordkeeping proposal was subsequently included on the December agenda, but was only discussed briefly.  In prior posts to our blog, we have suggested that a recordkeeping regulation is needed as the foundation to establishing procedures for the second round of preneed financial exams.  With second round exams now being scheduled, we will explore over the next several weeks the recordkeeping proposal in greater detail:

Adequate records for a seller to maintain shall include, at a minimum:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from both preneed trusts and preneed joint accounts, specifically identifying the date, source, and description of each item deposited as well as the date, payee, and purpose of each disbursement;

(2) ledger records for all preneed trust and preneed joint accounts showing, for each separate preneed contract, the source of all funds deposited, the amount of such funds, the descriptions and amounts of withdrawals, and the names of all persons or entities to whom such funds were disbursed;

(3)preneed contracts, trust agreements, trust administration agreements, provider agreements, preneed agent agreements, and all correspondence related to the preneed contract;

(4) accountings showing the disbursement of funds;

(5) records showing disbursements;

(6) the physical or electronic equivalents of all checkbook registers, bank statements, records of   deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;

(7) records of all electronic transfers from preneed trust or preneed joint accounts, including the  name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;

(8) reconciliations of the preneed accounts;

(9) those portions of preneed files that are reasonably related to account transactions;

(10) records of credit card transactions related to any preneed transaction to the extent permitted by law and the payment card industry data security standard;

(11) all information obtained by the seller related to any insurance policy used to fund any preneed contract that may include a copy of the insurance policy, any assignment or beneficiary designations, any statement showing any status of any insurance policy used to fund a preneed contract.

(12) any communications between the seller and the purchaser and/or beneficiary of the preneed contract related to the preneed contract;

(13) any written certificates of performance received by the seller.

A Missouri Mid-Semester Cram: the March agenda

Posted in Compliance, Recordkeeping

The staff for the Missouri State Board of Embalmers and Funeral Directors posted the 779 page agenda for next week’s meetings.  Doesn’t the state have a policy against the waste of natural resources?  Granted the agenda includes minutes and regulation proposals from several prior meetings, but a Cliff’s Notes would be helpful to know what’s going to be on the exam.

Missouri Preneed Seller Records: Trying to Get Everyone on a Similar Page

Posted in Compliance, Exams/audits, Recordkeeping

As reported in several prior posts, the preneed examination process in Missouri has been a work in progress for the past five years. Funeral homes in that state have been selling preneed for more than 30 years without much oversight or recordkeeping guidelines. When the law was re-written in 2009 in response to the NPS collapse, the Missouri State Board of Embalmers and Funeral Directors was given the responsibility of examining each preneed seller at least once every 5 years. Now that each seller has been through an examination, the Board has the task of defining the seller’s record requirements so that the exam process can be streamlined. But streamlining the process will require guidelines that the Missouri industry can follow. Missouri has hundreds of preneed sellers that use joint accounts or trusts or insurance or, sometimes, a combination of all three. The examination process is further complicated when the seller uses different procedures for a single funding mechanism. For example, sellers with trust funded contracts frequently have some consumers making payments directly to the trustee and other consumers making payments to the funeral home.

With that background, one would have to look at the seller’s records proposal to be discussed this Wednesday by the Missouri State Board as a starting point. While the Board’s staff is under some pressure to initiate the next round of preneed examinations, the proposal does not provide sufficient guidance to sellers who want to make the next exam less painful. In our January 3rd post (Missouri Second Round of Exams:100% Reviews), we described the back and forth process that the State Board and its staff must navigate to define the next round of exams. To expedite that process, the State Board and their staff need to include the industry in the process of defining seller record requirements.

Curtailing the Powers of the Industry Board: A Long Time Coming?

Posted in Compliance

As acknowledged by an opinion issued by the California Attorney General’s office, the Supreme Court’s decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission caught state governments by surprise. Most states have allowed their licensing boards to operate under the assumption that industry members were protected from antitrust suits under the state action immunity doctrine. The California Attorney General outlined some dramatic actions that she felt her State would need to consider. In response to warnings given by the Oklahoma Attorney General, Governor Mary Fallin issued an executive order recognizing that her state industry boards lacked active supervision and therefore, all licensure and prohibition actions were to be submitted to the Attorney General for review and written analysis of possible violation of law. But despite the surprise that state officials might express, there are voices advising that industry boards have long done more damage to competition than good for consumer protection. (See the hyperlinks provided below.) Consequently, supporters of open and competitive markets are forecasting a spike in lawsuits brought against industry boards.

The suppression of preneed by industry boards was once very pervasive, and the fruit of those actions still exist in the form of rules and ‘informal positions’. It has been more than a decade since this author appeared before one of those industry boards on behalf of a client challenging a position regarding proceeds from a guaranteed preneed contract. The board’s position had a very detrimental impact on the sale of preneed contracts, and nothing could be done to change the board’s collective minds. However the board and the client agreed to submit the issue for an independent review by the Attorney General’s office. The board was advised by an associate Attorney General, who framed the board position in a request to her boss. This author then presented the arguments for how the position was arbitrary and a restraint of trade. However, the Attorney General’s office applied a rather unique interpretation of ‘independent review’, and assigned the opinion request to the same attorney that represented the board. The FTC would not tolerate such behavior under the new active supervision guidelines. And, any board action taken in reliance on such a rule or position will be just as suspect.

(Boards Behaving Badly; Cartels By Another Name; The Antitrust Implications of Licensed Occupations; and Prepared Statement of the Federal Trade Commission)

Triggering the Active Supervision Requirement: Harm to a Business Model

Posted in Compliance

The Supreme Court’s recent decision in North Carolina Board of Dental Examiners v. Federal Trade Commission left states with a number of unanswered questions, including when a proposed regulation or discipline action would trigger a restraint of trade claim.  In December 2015, the US District Court in Texas addressed that issue in Teladoc, Inc. v. Texas Medical Board. The Court faced the question of whether actions taken by the Texas Medical Board violated the antitrust laws.

The Texas court focused on two types of evidence – lower costs and additional benefits- to analyze whether the actions of the Texas Medical Board to exclude Teladoc from providing services in Texas would likely harm competition.  The court did not require Teladoc to perform a detailed analysis of the actual impact of the Board’s actions on the market.  The court issued an injunction on Teladoc showing that it offered lower prices and greater convenience, and that the Board’s actions would destroy a business model.  Antitrust experts see the court’s ruling as an indication that courts are already beginning to follow the Supreme Court’s reasoning to encourage competition by making industry licensing boards more accountable for their actions.  (See the Antitrust Attorney Blog)

FTC’s Active Supervision Guidelines: A Regulatory Board Exercising Adjudicatory Powers

Posted in Preneed

In its Active Supervision Guidelines, the Federal Trade Commission staff discusses how regulatory boards frequently act in an adjudicatory capacity by seeking to impose discipline on a licensee or by seeking to enjoin an unlicensed individual. While such actions may have an anti-competitive effect, those actions will not necessarily expose the board members to personal anti-trust liability if the Board’s actions are ministerial in nature, are expressly authorized by statute, or involve a reasonable restraint of competition. As an example of reasonable competition restraint, the FTC staff described how regulatory boards can sue to prohibit deceptive advertising. As an example of a ministerial proceeding, the FTC staff described how a board might revoke a license because the licensee failed to provide documentation required by statute. For another example, the Guidelines reference where a state statute defines functions that require a license, and also authorize the regulatory board to enjoin an unlicensed individual from performing those functions.

When the members of the Missouri State Board of Embalmers and Funeral Directors ran afoul of the Federal Trade Commission ten years ago, the Board sought to enjoin an unlicensed individual from selling caskets. The Board relied upon a regulation, rather than a statute, as the authority for the functions that could not be performed by an unlicensed individual. Putting aside the “clear articulation” prong required by California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Missouri State Board would have been required to demonstrate the following actions were taken by the either the Division of Professional Registration or the Missouri Attorney General’s Office before the lawsuit was filed:

(i) reviewed the evidentiary record created by the regulatory board;
(ii) supplemented the evidentiary record if and as appropriate;
(iii) undertook a de novo review of the substantive merits of the proposed disciplinary action, assessing whether the proposed disciplinary action comports with the policies and standards established by the state legislature; and
(iv) issued a written decision that approved, modified, or disapproved the disciplinary action proposed by the regulatory board.

In the case of a proceeding to discipline a licensee, the FTC staff suggests that that a disciplinary action taken by a regulatory board affecting a single licensee will typically have only a de minimis effect on competition. However, a pattern or program of disciplinary actions by a regulatory board affecting multiple licensees could have a substantial effect on competition.

Active Supervision of An Industry Board: Let’s Start with What it Ain’t.

Posted in Consumer Advocates, Funeral, Missouri - SB1

Last week we posted the Federal Trade Commission’s Active Supervision Guidelines for industry boards. The Guidelines set some substantial standards for the independent state agency or attorney general that provides supervision over an industry board. When that agency or attorney fails to satisfy the supervision requirements, the industry members are exposed to personal liability when they pass regulations or pursue litigation that restrains trade regardless of whether the actions are consistent with a statue or a clearly articulated state policy. Until the North Carolina Dental Board decision, states felt that so long as the board action was consistent with restraints authorized by a state law or a clearly articulated state policy, a low level of supervision would suffice to provide their industry members the exemption from anti-trust litigation. In preparing the Guidelines, the FTC staff addressed those ‘low levels of supervision’ as a warning to states of what would fail to constitute active supervision:

The following do not constitute active supervision of a state regulatory board that is controlled by active market participants:

 The entity responsible for supervising the regulatory board is itself controlled by active market participants in the occupation that the board regulates. See N.C. Dental, 135 S. Ct. at 1113-14.
 A state official monitors the actions of the regulatory board and participates in deliberations, but lacks the authority to disapprove anticompetitive acts that fail to accord with state policy. See Patrick v. Burget, 486 U.S. 94, 101 (1988).
 A state official (e.g., the secretary of health) serves ex officio as a member of the regulatory board with full voting rights. However, this state official is one of several members of the regulatory board and lacks the authority to disapprove anticompetitive acts that fail to accord with state policy.
 The state attorney general or another state official provides advice to the regulatory board on an ongoing basis.
 An independent state agency is staffed, funded, and empowered by law to evaluate, and then to veto or modify, particular recommendations of the regulatory board. However, in practice such recommendations are subject to only cursory review by the independent state agency. The independent state agency perfunctorily approves the recommendations of the regulatory board. See Ticor, 504 U.S. at 638.
 An independent state agency reviews the actions of the regulatory board and approves all actions that comply with the procedural requirements of the state administrative procedure act, without undertaking a substantive review of the actions of the regulatory board. See Patrick, 486 U.S. at 104-05.

Ten years ago, the members of the Missouri State Board of Embalmers and Funeral Directors were defendants in anti-trust litigation brought first by the Institute for Justice and then by the Federal Trade Commission. That state board sought to enforce their funeral directing licensure regulation against an individual selling caskets. At that time, the State Board was accountable to the Division of Professional Registration, and was advised by the Missouri Attorney General’s office on an on-going basis. However, the State of Missouri failed the State Board on both prongs of the Active Supervision Guidelines. The Board was allowed to pursue trade restraining actions which were not defined by statute or articulated state policy, and the supervising entity/individual failed to provide, and document, a substantive review.

State Funeral Boards and Oversight Standards: Meaningful Supervision

Posted in Funeral, Preneed

In this past week’s Memorial Business Journal, the NFDA’s general counsel offered insight on the FTC’s guidelines to state supervision of industry regulatory boards.  In a decision that rocked state boards comprised of industry members, the United States Supreme Court affirmed a decision that had held members of the North Carolina Dental Board subject to antitrust liability.  The eventual impact of that decision was difficult to predict because the North Carolina Dental Board argued that it had sovereign immunity without addressing the supervision provided by the State of North Carolina.  In response to requests from states, the Federal Trade Commission issued supervision guidelines last October (FTC Staff Guidelines on Active Supervision of State Regulatory Boards Controlled by Market Participants).

The NFDA general counsel suggests that the FTC Active Supervision guidelines would leave states three courses of action to protect industry boards from antitrust liability: 1) change the composition of the industry board; 2) convert the regulatory board to an advisory board; or 3) create a regulatory oversight body or person.  But, an attorney for a regulatory watchdog organization recently provided our office suggestions and information that shed light on how industry boards already have ‘supervisory bodies’ that are simply failing to meet the FTC’s guidelines.  A board’s supervisory body need not satisfy the guidelines with regard to each regulation or decision, but rather with regard to actions that involve credible assertions of anti-competitive or antitrust consequences.  Taking the Missouri State Board of Embalmers and Funeral Directors as an example, the Board is staffed and ‘supervised’ by the Division of Professional Registration.   The Division personnel would not have to ‘rise’ to the FTC Active Supervision guidelines on every rule proposed or discipline proceeding instituted, but rather only on actions where there has been a credible assertion of antitrust implications.

To illustrate that suggestion, we wrote last year regarding the Missouri Funeral Directors Association raising the North Carolina Dental Board decision in the context of the State Board’s examination procedures.  It was never explained how the examination procedures or the proposals for future audits suppress competition in favor of all or part of the funeral industry.  Assume instead that the Association made a credible claim that the exam procedures had antitrust implications.   If the State Board then proceeded to promulgate the examination rule without the Division staff satisfying the FTC Active Supervision guidelines, the State Board members would then open themselves up to personal liability for an antitrust violation.

If there is a current context that may be ripe for the application of the FTC Active Supervision guidelines, it may be the restriction of insurance funded products by state funeral boards.  We will explore that issue in further detail in a future post.

*”Reprinted with permission from the February 4, 2016 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.”