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

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.”

Missouri Funeral Trust: Time to Put Up or Shut Up?

Posted in Compliance, Exams/audits, Master Trusts, Missouri - SB1

The Missouri Funeral Trust now faces the predicament we predicted a few months ago (The MFT’s Catch 22). The Court recently granted the State’s motion to dismiss, and dropped the State Board from the lawsuit. The main motivation for the lawsuit was probably to gain leverage in bringing a long and frustrating audit to a conclusion. However, the lawsuit has not only fueled existing concerns, but also raised new issues (such as whether litigation expenses are being paid out of the program’s trust). A week following the dismissal, the master trust program filed motions to protect its documents and client list, and to compel production of documents and information by the remaining defendant. Those pleadings counter CFL Pre-Need’s motions to compel the master trust program to respond to its own requests for documents and information. Meanwhile, the State Board watches on, wondering whether protracted litigation over discovery issues is costing funeral homes and consumers.

Missouri’s Second Round of Exams: The Committee’s Role

Posted in Compliance, Exams/audits, Missouri - SB1

In September we posted about a regulation proposal that sought to define the role of a sub-committee of the Missouri State Board of Embalmers and Funeral Directors (Missouri’s Financial Examination Committee: What Role?).   While the Board eventually gave its staff instructions to revise that proposal, the regulation has yet to resurface.  Instead, the Staff Recommendations include suggested actions that the Examination Committee may take.

The Recommendations contemplate that a seller could submit to the Examination Committee a plan to resolve cited exceptions over a period of up to 18 months.  Or that the Examination Committee could offer direction to the seller on how to resolve the exceptions over a period of up to 18 months, unless special circumstances exist.  All at the Examination Committee’s discretion.   The concern that some industry members raised in September was that the Examination Committee had too much discretion, and that sellers were being pressured into resolutions that were not required by law.  The Recommendations would have the State Board delegate authority to the Examination Committee the authority to define compliance requirements to preneed sellers.

Missouri’s Second Round of Exams: Exit Interviews

Posted in Compliance, Exams/audits, Missouri - SB1

In a prior post we alluded to Missouri preneed sellers’ complaints about the examination process, and that the follow up process to the on-site review has been unnecessarily burdensome.  Subsequent to the examiner’s departure from the funeral home, the seller received an exception list of missing contracts or documents, which the seller can often quickly locate.  However, the examination report will typically request the seller to make copies of the missing documents or contracts, and forward the documents to the State Board office.  As part of the Staff Recommendations, a seller would be required to affirm that it has provided the Board with copies of all requested preneed contracts.  While the Staff Recommendations cite Section 436.420 as authority for requiring the copying of contracts, Section 436.470 is the authority for examinations, and that language requires the seller to provide the examiner access to all preneed books and records.  If the examiner concludes the on-site review without inquiring about contracts or documents that he or she did not find, then the reliance on Section 436.420 is misplaced.  That financial examination handbook referenced by the Staff Recommendations should include an exit interview to avoid the burden of supplying documents and contracts that were in the seller’s records at the time of the on-site exam.

Missouri Second Round of Exams: 100% Reviews

Posted in Compliance, Exams/audits, Missouri - SB1

The Missouri State Board of Embalmers and Funeral Directors and the Board’s staff are engaged in an awkward exercise of establishing audit policies for the state’s preneed industry. The staff, employees of the Division of Professional Registration, must take the lead in making recommendations to the Board. The Board then must approve the recommendations, or instruct the staff on revisions, or make direct the staff to take a different direction.

However, the “Staff Recommendations” for the scope of Missouri’s second round of preneed examinations more resemble a request for an industry confidence vote than the start to a definitive road map for licensee compliance. A crucial regulation proposal that would define the recordkeeping requirements for sellers has been tabled to a later meeting. The Staff Recommendations allude to a procedural examination handbook, but only offer an update as to the status of such a handbook by the “Fall 2016”. As a consequence, the Staff Recommendations offer only a few concrete issues for Board approval.

One issue is whether a seller’s examination should include a review of all preneed contracts sold since the last examination. Some industry representatives, including this author, have suggested that the examination process allow for a sampling of contracts. But, at the Board’s December meeting, the staff included testimony from an examiner with the Missouri Department of Insurance. The testimony was given with the purpose to demonstrate that insurance companies have far more comprehensive filings (than do funeral homes) that assist the regulator to assess the risk of company failure. That testimony elicited questions and comments from industry members regarding the failure of that system to prevent the collapse of Lincoln Memorial Life. We did not find the Department of Insurance testimony persuasive for the fact that SB1 did not make the solvency of the seller funeral home a factor. The intent of the statute is to ensure the consumer funds are available regardless of the fate of the funeral home.

We agree with the staff’s comments that some sellers have too few preneed transactions to make a sampling review statistically reliable. But the question some sellers ask is what does the 100% review entail. If the seller’s first examination did not result in any exceptions for contract form compliance or completion issues (proper signatures and service descriptions), then why must all contracts be reviewed for those same issues. Why not a sampling as to those areas of review?

The Staff Recommendations do provide for a sampling review of ‘other active and fulfilled preneed contracts’. While some industry representatives will complain about any review of fulfilled contracts, we see the need for a review of at least a sampling of such contracts. But, the sampling review of fulfilled contracts is one example of where an exam procedures handbook could help alleviate industry concerns. Missouri funeral homes might be more receptive to the financial examination if the staff first defined the procedures.

Missouri Preneed Examinations: Round 2

Posted in Compliance, Exams/audits, Missouri - SB1

When the Missouri State Board of Embalmers and Funeral Directors meet on January 6th, the main topic of discussion will be the scope of the next round of preneed financial examinations.   With the passage of Senate Bill No. 1 in 2009, the State Board was given the responsibility of conducting a preneed examination of each preneed seller once every five years.  With an exception or two, the first round of examinations has been completed.  The examination process was a work in progress for both the Board staff and preneed sellers, and not without controversy.

The staff recommendation to the State Board for Round 2 can be found at the end of the January 6th agenda.  We will explore some of the staff recommendations over the next few days.

New Missouri Preneed Recordkeeping Requirements: base records and uniformity

Posted in Administration, Compliance, Exams/audits, Recordkeeping, Reporting

The Missouri State Board of Embalmers and Funeral Directors will meet December 9th, and their agenda includes a proposed regulation for new preneed recordkeeping requirements. Borrowing perhaps from other states’ preneed audit manuals, the regulation sets out a list of journals, ledgers, documents that a preneed seller would be required to maintain. For an industry that has been selling preneed decades without much oversight, the recordkeeping requirements may look rather intimidating.

The regulation would require the following books and records:

• Receipt Journal
• Disbursement Journal
• Trust ledger or joint account ledger
• Individual contract ledger
• Copies of all related agreements
• Correspondence related to preneed contracts
• Accountings of disbursements
• Checkbook registers, bank statements and canceled checks
• Records of electronic transfers
• Reconciliations
• Preneed files that relate to an account transaction
• Credit card transaction records

Looking to audit manuals from states such as Texas , one might be able to glean the nature of the records sought, and their purpose. However, the Missouri preneed law differs from Texas (most other states) in that all consumer payments must be deposited directly to trust. This caused problems for larger sellers, and the State Board allowed sellers to use clearing accounts that were maintained solely for preneed payments. Some of the records set out by the regulation do seem directed at the use of clearing accounts.

For sellers that have all consumer payments made directly to the trustee, the proposal raises questions about how they can comply. Will the trustee’s accounting records suffice for receipt and disbursement journals?

The individual contract ledger requirement will also be a concern for some sellers. The Texas audit manual sets out a sample ledger, and this may seem burdensome to Missouri funeral homes. But, other states’ audit programs (Florida, for example) will look at the seller’s administrative programming to determine if it complies with the preneed law, and accurately administers payments. So, Missouri sellers will have to see what their regulators have in mind.

The Missouri Fund Manager: What was Grandfathered?

Posted in Associations, Master Trusts, Missouri - SB1

There seems to be some confusion in Missouri over the permissible contractual relationships among the preneed seller, the preneed trustee and the independent investment advisor. Prior to the collapse of NPS, and the subsequent amendment of Missouri’s preneed law, Chapter 436 allowed the preneed seller to incorporate provisions in its preneed trust agreement to instruct the trustee to hire the independent investment advisor designated by the seller. As discussed in a prior post [Investment Advisors: How Independent?], this provision, and the authority to establish a third party seller, was sought by the Missouri Funeral Directors Association for a new master preneed program. With Senate Bill No. 1, the Missouri Legislature sought to close the 436.031 loop hole that NPS exploited. With Section 436.445, the Legislature prohibited the preneed trustee from delegating investment decisions to any agent of a seller other than an authorized external investment advisor in compliance with Section 436.440. With Section 436.440.2, the Legislature set out the duty of care owed by the trustee when delegating duties and powers. With Section 436.440.5, the Legislature overrode Uniform Trust Code provisions which would allow the trust agreement to relieve the trustee from liabilities arising from delegated duties. The last paragraph of Section 436.440 grandfathered trusts in existence on August 28, 2009 that were using an independent financial advisor.

The confusion stems from whether the grandfather clause of Section 436.440 exempts pre-SB1 preneed trusts from the duties set out in the prior paragraphs of that section. When the State Board staff sought the Board’s approval of proposed regulation 20 CSR 2120-3.525, the Missouri Funeral Directors and Embalmers Association objected on the basis that the regulation exceeded the Board’s statutory authorities. The Association’s executive director asserted that the regulation would override the grandfather clause of Section 436.440.6. What the Association seems to be saying is that the grandfather clause allows a pre-SB1 trust to continue to treat the seller as the sole beneficiary, and thereby limit the duties owed by the trustee and the independent investment advisor to funeral homes and preneed contract purchasers. That is a very extreme reading of a very vague paragraph.

Contrary to what the Association’s executive director has asserted, the proposed regulation would not override the grandfather clause. The regulation would allow the master trust program to continue to use its investment advisor so long as the advisor remains qualified and the agency agreement between the trustee and the fund manager complies with the regulation. The grandfather clause cannot be read as giving the master trust program carte blanch to define the duties owed to provider funeral homes and preneed consumers.

Federal Trade Commission: Cemeteries and Constructive Delivery

Posted in Cemeteries

Preneed planning often begins with the purchase of a cemetery plot or cremation niche.  If that purchase includes a marker or monument, the cemetery will typically seek to deliver the marker so that it may avoid cost increases incurred with regard to granite and bronze.  But, many of us do not like to be reminded of mortality, and a grave marker with our name tends to bring home that issue.  Consequently, cemeteries and monument companies typically offer constructive delivery options.   If the concept of constructive delivery is foreign to consumers, the Federal Trade Commission outlined different constructive delivery options in a recent letter to the Pennsylvania legislature.   The description of construction delivery begins on Page 5.   The constructive delivery issue in dispute in Pennsylvania is whether grave vault deliveries should be deferred until the interment is made.  Pennsylvania funeral directors are asserting that vaults could be damaged by years of exposure.

Preneed Turf War: Pennsylvania Funeral Directors and StoneMor

Posted in Cemeteries, Cemetery Development, Legislation, Preneed, Preneed Development, Trust Funded

In an unusual move for a death care regulator, the Federal Trade Commission weighed in on the preneed turf war that has erupted between Pennsylvania funeral directors and StoneMor Partners.   At the request of the chairman for a Pennsylvania legislative committee, the FTC responded with a detailed letter warning against various bill proposals aimed at curtailing preneed sales by cemeteries.   The FTC letter addressed preneed trusting and delivery procedures by cemeteries, and concluded that proposed legislation could lessen competition between cemeteries and funeral homes, and cause higher prices to consumers without providing any countervailing consumer benefits.

The Commission acknowledged that raising the trusting requirement for cemetery preneed sales from 70% to 100% would preclude the cemetery from recovering overhead, selling and administrative expenses associated with preneed sales.   This would discourage cemeteries from using trust funded preneed, and that would likely increase the costs of serving the pre-need market, and deny the consumer the lowest possible price and a full array of pre-need alternatives and pricing options.  The FTC went on to recommend that the General Assembly consider alternatives to raising the trusting requirement for cemeteries.  What the FTC should have suggested, but failed to, would be to lower the trusting requirement imposed on Pennsylvania funeral homes so that they could offer more preneed alternatives to their families.  Pennsylvania’s 100% trusting requirement for funeral contracts limits the proactive preneed programs to using insurance that pays sufficient commissions to fund preneed overhead, marketing and selling expenses.

But, the environment in Pennsylvania is far more complicated than just the trusting requirement.  For the background of those issues we would refer readers to two articles published by the Daily Times News: Voices Raised About Catholic Cemeteries and Funeral Directors Cry Foul Over StoneMor.   We will take a look at the constructive delivery issues in a future blog post.