Step Out of the Box: a California request

Posted on November 30, 2010 by Bill Stalter

According to Wikipedia,

Regulation is "controlling human or societal behavior by rules or restrictions." Regulation can take many forms including legal restrictions promulgated by a government authority…….

So, regulators are charged with the task of interpreting “legal restrictions” and determining what businesses can or cannot do. When the applicable law is well drafted, and further defined by regulations, a business has the means to research compliance and develop appropriate practices and procedures. A business may only need to seek regulatory approval when implementing a novel practice. In the context of Securities regulation or ERISA, procedures exist for businesses to seek written guidance before implementing a new practice. But, as California funeral directors have found out, that is not the case with preneed regulation.

The dispute between the California Funeral Directors Association and the DCA’s Cemetery and Funeral Bureau was widely reported when allegations of mismanagement and lost funds were made. In typical fashion, the Bureau set out its findings regarding the Master Trust. The Association’s administrative subsidiary (the “FDSC”) responded. The Bureau was not satisfied, and a war of written responses ensued. Frustrated with the Bureau, the FDSC has now filed for an injunction. (For a detailed explanation of the situation, click here for a recent Memorial Business Journal article.*)

The FDSC would seem to be asking the Bureau to step out of the traditional regulator’s box, and discuss some practical approaches to the issues. We’ve heard your positions and criticism, but tell us how to reconcile these dated, and somewhat disjunctive, code sections, and apply that to today’s facts and circumstances.

History has a way of repeating itself. In 1988, after years of audits, the IRS decided to force a universal method of income reporting on preneed trusts by issuing Rev. Rul. 87-127. Other than terminating reporting methods that it found objectionable, the Service hadn’t given much thought to whether the industry could comply with the new reporting requirements. Nor did the Service think to provide compliance procedures. For more than eight years, the industry struggled to find a way to comply with the grantor reporting requirements. (Some funeral directors are still struggling today.)

If effective preneed reform is the goal, death care regulators need to do more than inform operators what they cannot do. These laws tend to be ambiguous, and regulators need to participate in the process of finding workable solutions.

*Reprinted with permission from the November 18, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

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California Master Trust: serious missteps, but not another IFDA

Posted on July 18, 2010 by Bill Stalter

In contrast to how the IFDA situation was handled, the California Department of Consumer Affairs has taken a public approach to disclosing its issues with the CFDA’s master trust by posting its website an audit report and the Association’s reply.

The DCA is unhappy with the Association, and the master trust fiduciary, with regard to (among other things) the fees that have been charged to the trust, the authorities that have been delegated by the fiduciary, and their refusals to respond to certain audit inquiries and document requests.

The audit report reflects a very literal interpretation of the applicable California laws. A close reading of the report should leave one scratching his/her head on a few of the issues (hint: corpus issues). But, auditors have no choice but to apply the laws that are applicable to the entity under examination, and unfortunately, the California preneed law and rules are dated and disjunctive.

For those who summarily advise that the audit report and the DCA actions reflect yet another example of a preneed program gone bad, that is not the case.

The DCA website includes the April 29th response from the law firm representing the Association. I doubt the attorneys knew that the letter would end up on the DCA website, but the reply is very illustrative of the issues that exist with a dated, and ambiguous, law. While the Association has made some serious missteps with regard to some of the law’s ambiguities, the auditor’s interpretations of the law and its requirements are inconsistent or unreasonable in some respects. Accordingly, the DCA would be well advised to accept the offer extended in the “Conclusions” on page 46 of the reply.

The crucial issues raised by this dispute are relevant to all master trusts, and will be addressed in future posts. Hopefully, the DCA will continue to make the discussions and eventual resolutions public so that death care regulators and preneed program administrators can take note.
 

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