Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

On January 14th, Missouri Governor Jay Nixon will be sworn in for his second term, and we are wondering whether the Governor’s plans for 2015 are influencing the direction of Missouri’s preneed reform. With commentary such as that published by the St. Louis Post Dispatch, the Governor may have his eyes on a 2015 campaign for national office. At a minimum, Governor Nixon could be targeting an old rival’s U.S. Senate seat. Either way, the Governor faces a nagging situation with NPS, and may feel compelled to accelerate preneed reform and deflect the criticism that has persisted for almost five years.

When National Prearranged Services collapsed in 2008, NPS funeral providers were especially critical of how then Attorney General Nixon settled the 1991 NPS lawsuit. The Attorney General’s office responded that they did the best possible with the weak enforcement powers provided by Chapter 436. Missouri’s Republican administration countered with a review committee formed for the purpose of finding industry consensus for preneed reform. But, the industry struggled to agree on key issues, and the State’s regulators took the lead in drafting Senate Bill. No. 1. In 2009, a newly elected Governor Nixon inherited the NPS fallout and a prior administration’s effort at preneed reform. Now four years later, the NPS fallout has somewhat abated (but not resolved), and there isn’t much to show in terms of preneed reform.

In contrast to the mortgage crisis or the state budget crisis, the NPS situation will not benefit from the recoveries of the nation’s economy or the financial markets. The Cassitys’ emptied the cupboards, and funeral homes are dependent upon the fixed recoveries negotiated with the state insurance guaranty fund. Most NPS providers are finding ways to cope, but one industry group persistently reminds the Governor and legislators of their discontent. The Governor would like to counter their criticism with evidence that preneed has been made safer under his watch, but it can take years to implement effective reporting and examination procedures.

As we noted in July 2011, a sudden increase in the number of financial examinations suggested that the Division was being pressured to accelerate the process. Shortly thereafter, the Division staff also began to press the State Board to define the insurance assignment as a preneed contract. The State Board and the Division staff disagreed on the insurance assignment issue, and frustration began to develop as the issue was pressed in subsequent meetings. That frustration culminated with a December 12th unanimous vote by the Board members to define insurance beneficiary designations as a preneed contract, but a preneed contract that would be exempt from the $36 preneed fee. Division staff warned that the distinction may not be legal. Within hours of the vote, the Governor’s office announced a Board appointment to replace Todd Mahn, the Chairman who had called for the vote.

The Governor’s website for Missouri’s Boards and Commissions states

"I am always looking for qualified, energetic applicants to serve on Missouri's 200-plus boards and commissions. Please spread the word. I would greatly appreciate it if you would encourage your colleagues and friends to review the vacancies and complete an application."

While this author has disagreed with some of the positions taken by Mr. Mahn, I do not question his commitment to the industry, or to the State Board. Nor did the former Chairman lack for enthusiasm and energy while serving the Board. But, rather than replace a Board member with known health issues that was serving on an expired term, the Governor replaced the younger Chairman.

It may not have been the Governor’s intent, but the appointment could be taken as message to State Board members to ‘get with the program’. But the Governor, and the Division, risk losing the confidence of both the Board and the industry. Someone has lost sight of the first issue discussed at the 2008 legislative meetings: who should have jurisdiction over preneed. Several state agencies attended that meeting, and none expressed any interest in assuming jurisdiction over the preneed transaction. As explained in a 2009 post, financial and insurance regulators often struggle to provide effective preneed oversight because they tend to focus on the ‘backend’ of the transaction (that part of the transaction they are most familiar). The front end of the transaction can take many different forms, which can push the transaction outside the normal scope of the agency’s jurisdiction. (For example, the Nebraska Insurance Department has jurisdiction over preneed sales, which includes trust funding.) When State Board members ‘stepped up’ in 2009 to retain jurisdiction (and demonstrate that the industry could provide meaningful self regulation), a collective sigh could be heard from the Missouri Division of Finance and the Missouri Department of Insurance. The Missouri legislature signed off on State Board jurisdiction, and in doing so made a trade off: reform would rely upon the collective experiences and training of six State Board members instead of an appointed department official. Governance by a board will never be the most efficient or expedient path to action.

In SB1, the State Board was given the task of protecting consumers against another NPS by developing procedures for preneed reporting and auditing. However, the Board is dependent upon the Division of Professional Registration for staffing, legal counsel, funding and reporting administration. Together, the Board and Division crafted a mission statement for the financial examinations that was to be the cornerstone of Missouri preneed reform. From this observer’s perspective, the State Board members never understood how the insurance assignment fit in to that mission statement. Explanations given to the State Board were unpersuasive, leaving an industry to wonder whether the issue was fee driven.

It may have taken the State Board a year to reach an agreement on the insurance assignment issue, but we believe the Chairman made the right call. This issue had a greater importance to the Division than it did the State Board, and there is speculation that the $36 fee, Chapter 208 and the state budget played a factor. Regardless, a resolution was needed so that the Board and the staff could turn to more substantive reform issues, including whether SB1 provides sufficient audit powers and protections. If the Division can look no further than the funeral home’s records, would SB1 have even stopped NPS?
 

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In our prior post, we commented on the lack of detail provided by the Consumer Funeral Assurance group regarding their NPS recovery plan.  We have obtained a copy of the plan, and redacted from the document correspondence that reflect names and/or contact information of recipient organizations or legislators. What is left includes a summary of the group’s proposal, which we find incoherent and difficult to understand. 

The CFA was established when NPS first collapsed and funeral providers faced an information crisis, as well as an economic crisis.  Five years later, funeral homes have a better understanding of what will be paid and when.  While no one is happy about the situation, the immediate crisis of 2008 has been eliminated.  So, today, it is not clear how many funeral homes count themselves as CFA members.  That fact is not provided by the CFA in its NPS recovery plan. 

The day may come when an NPS recovery plan is needed but the current CFA proposal detracts, rather than enhances, the group’s credibility with legislators and the industry.  Accordingly, CFA members (and former members) should request that the plan be withdrawn.    

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On December 12th, a Missouri coalition of NPS preneed providers will have a second opportunity to state their case for legislation to establish a NPS recovery plan. As we noted back in September, that coalition should anticipate a tepid reception from the State Board of Embalmers and Funeral Directors (and much of the Missouri funeral industry). Funeral operators may be sympathetic to the harsh economic realities of the guaranty fund’s ‘fixed recovery’, but few operators perceive how those future financial losses are ‘their problem’. Legislators cannot be as dismissive because the coalition is warning that it is a matter of time before funeral homes start to fail, and when that happens, consumers will ultimately suffer the financial loss. Not knowing whether two funeral homes or twenty funeral homes are at risk, the legislature gave the coalition a hearing to present a plan. The details remain vague, but it has been reported that the plan calls for a “mandated” preneed trust. If those rumors prove accurate, the plan has two major hurdles that could block its takeoff.

In concept, a state wide, cooperative preneed trust could provide financial relief to the NPS provider. A master trust could provide participating funeral homes the economies of scale to reduce administration expenses and increase investment performance. As a collective group, the NPS providers may be able to achieve a return that not only offsets the cost increases of the future preneed business, but also some of the costs of the NPS contracts yet to be performed.

But, any thought of using investment returns of future business to fund old business would have to be closely regulated. The trust cannot take investment returns from Funeral Home A contracts and allocate them to Funeral Home B contracts. Nor can the trust take investment returns from non-guaranteed contract a001 and allocate them to NPS contract b002. With the proper administration, the investment return of Funeral Home A’s new guaranteed contracts (or old Pre-SB1 guaranteed contracts) could be split with Funeral Home A’s NPS contracts. Such a split would occur only after the proper income/expense allocations have been made to originating accounts. Under Missouri law, the consumer of one of those new accounts could chose to designate a new provider, and transfer the entire account value (including the amounts allocated to the NPS contracts) to a new trust. Consequently, the level of administration required for such allocations would be complicated. If the NPS recovery plan should seek to short cut that administration with a fixed rate of return (and using excess investment returns to fund the NPS contracts), then the plan should be rejected.

The other hurdle to takeoff is the plan obtaining the requisite trust assets for economies of scale. The rumor is that the NPS recovery plan would require all Missouri preneed sellers to participate in the trust. (If mandatory participation can be required for the Obama health plan, then it can be required for the NPS recovery plan.) Kansas regulators floated a similar idea a few years ago and quickly withdrew the suggestion after hearing the initial response from operators.
 

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We previously discussed how the funeral home or cemetery assumes most of a preneed trust’s investment risk when selling a guaranteed preneed contract, and therefore should be afforded a role in the trust’s investment decisions (Fund Managers: Is Your O&E Coverage Current?). But in that same post, we were careful to point out that there are no absolutes. More funeral homes are switching to non-guaranteed preneed. And, a certain percentage of guaranteed preneed contracts are also re-written at death when the family switches funeral homes or revises the prearranged funeral (or burial) arrangement. Yet, preneed fiduciaries seem to ignore these facts when relying upon uniform trust code provisions for their authority to exchange investment powers for a hold harmless agreement.

Death care fiduciaries first need to determine whether there are any conflicts between the applicable state death care law and the broader uniform trust code. Fiduciaries in states such as Missouri and Kansas are bound by statutes which require the trustee to retain investment oversight. Such conflicts will be reconciled in favor of the more specific death care law.

If the death care law is silent on investment delegation, the applicable uniform trust code may not necessarily authorize the trustee’s exculpation from investment oversight. Some states’ trust code conditions the fiduciary’s investment exculpation upon 1) the appropriateness of the trustee’s selection of the investment advisor, and 2) upon the notice given to trust beneficiaries. Illinois’ Trusts and Trustees Act is a good example of such a requirement. But too frequently, the fiduciary views the funeral home, or cemetery, as the sole beneficiary of the death care trust for purposes of both requirements.

Assuming notice could be given to each and every preneed contract purchaser, a court would likely evaluate the sufficiency of that notice from the perspective of the elderly preneed contract beneficiary. Would the average preneed purchaser understand the implications of the investment delegation? Or, could that purchaser effectively monitor the investment decisions made pursuant to the delegation? The fiduciary’s reliance on the uniform trust code for authority for exculpation under such circumstances should be deemed unreasonable. The validity of the exculpation may also hinge on the investment advisor’s assumption of applicable death care compliance requirements. If the agency agreement does not properly incorporate a death care law’s investment restrictions (or standard), the fiduciary has not exercised ‘reasonable care, skill and caution’ in establishing the scope and terms of the delegation. Yet, I hesitate to fault the fiduciary for trying. The strategy for seeking the exculpation is often in response to the unreasonable expectations of both the industry and its regulators.

As witnessed in California, regulators often interpret archaic preneed laws so as to argue that a ‘preneed contract is the equivalent of a savings account’. Those statutes reflect the preneed transaction from a generation ago. By applying that law out of the current context, a fiction is used to establish a standard that all fiduciaries could fail. The regulator’s position seeks to make the fiduciary a guarantor of the purchaser’s deposits to trust. The reality is that every trust investment has risk, even our government’s bonds. This exposure is applicable regardless of whether the preneed contract is guaranteed or non-guaranteed.

On the other side of the table, the industry is coming to demand that the trust offset more than just the costs of performing the preneed contract. Lagging membership revenues are an issue for many state associations. The mortgage crisis hit many preneed trusts, and preneed sellers expect those losses to be recovered without additional risk. Greater trust returns are also needed to offset the cremation trend. Of course, the asset management required for higher returns comes at a greater cost to the trust.

The reality is that the industry will continue to be request better returns from the death care trust. As with other trusts, the circumstances may dictate that as expectations rise, a fiduciary may best discharge its duties by delegating the investment responsibilities to an investment advisor. As discussed in the linked law review article, the model uniform code should be used to support the delegation of investment duties. But, in contrast to the classic trust situation, the death care trust is a creature of statute, which has the consumer’s protection as its purpose. While the preneed seller may be allowed to step into the settlor’s shoes for purpose of authorizing the delegation, the seller cannot override the preneed statute by exculpating the fiduciary from investment liabilities. At a minimum, the fiduciary needs to stand ready to override investments that are unsuitable or clearly imprudent. The two largest preneed scandals involved investments which were clearly unsuitable for the death care trust. Despite what Merrill Lynch may argue, I doubt any corporate fiduciary would have found the key man insurance policy to have been suitable for investment for a preneed trust. And if R.S.Mo. Section 436.031 had been written differently, NPS’ Missouri fiduciaries would have sought more information about the insurance transactions they were directed to make.
 

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Recent document disclosures are reflecting that several factors contributed to the WFDA’s master trust deficiency (and the appointment of a receiver). Certain of those factors relate to the fees paid to fund managers and the association’s sponsorship charges. Those factors are relevant to other association master trusts, and we will explore them in subsequent posts. However, the ‘straw’ that broke this camel’s back came straight from the National Prearranged Services’ playbook.

The Wisconsin State Journal reported that it was the formation of a life insurance company by the WFDA’s Wisconsin Funeral Trust that prompted a regulatory audit by the Office of the Commissioner of Insurance. In 2009, the WFDA used the master trust to set up an insurance company to provide its members a preneed funding alternative to the trust. Wisconsin law requires 100% of the consumer payments to be deposited to trust. In contrast, insurance funding provides funeral homes commissions to offset the costs of a preneed program. This same reality led National Prearranged Services to form a life insurance company. NPS needed an insurance program in order to expand into 100% trusting states. To jumpstart that insurance program, NPS tapped its Missouri and Texas preneed trusts.

NPS exploited a provision of the Missouri law that exculpated the trustee from investment oversight when an independent investment advisor was appointed by the seller. Held harmless by state law, NPS trustees may not have looked further than the statements the seller provided. NPS then appointed an investment advisor that directed the trusts into policies issued by the sister insurance company. In a similar fashion, the WFDA amended its master trust agreement in 2009 to remove the trustee’s investment responsibilities and authorities, and to vest investment control in the fund manager of the WFDA’s choice. And to top that move off, the amendment made information about the trust and parties confidential. If the trustee was unhappy with the situation, it could resign, but it could not make “any public communication that may be reasonably considered derogatory or disparaging to the Association, the Trust, the successor Trustee or any party relating to the Trust.”

There are indications the WFDA funeral trust had been struggling for years to keep up with promised return. But, over the course of three years, the WFDA made radical changes that culminated in the formation of the insurance company. Who was the driving force behind those changes? When advice was sought in 2007 to allow the trust to diversify its assets, the legal opinion was directed to the WFDA executive director Scott Peterson, not the corporate fiduciary.
 

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A short three and a half years ago, the funeral industry reeled from the collapse of National Prearranged Services and the emerging story of the Illinois Master Trust. The NFDA was slow to respond to the crisis, and when it did, this blog joined the criticism. Fast forward to September 2012, and the NFDA responds to the Wisconsin Master Trust controversy with the same guidelines.

Granted: associations are cumbersome organizations that are dependent on volunteer members.

Granted: changing the mindset of a membership that has been historically opposed to preneed will be difficult.

Granted: it is a matter of time before another state association master trust fails.

We need to augment the advice offered the NFDA in 2009: eliminate from your trust evaluation guidelines any suggestions that a guaranteed rate of return is permissible. The days of set rates of return or book/tax cost of account for distributions are over.

The fixed rate of return approach allowed the Wisconsin and Illinois programs to avoid investment transparency and individual account allocations of income and market value. But, providing investment transparency in terms of the investments held by the trust, and the rate of return, can be more complex that the NFDA guidelines suggest. It is not uncommon for three or more investment pools to be offered by a master trust program. Administrators may have different ways to provide transparency at the trust level, in terms of in investments held by the trust and their rates of returns.

Whatever procedure is followed, the end result should be a ‘mark to market’ that will allow an auditor to reconcile each individual preneed contract’s value to the individual funeral home account(s), and in the case of master trusts, each individual funeral home’s account(s) to the aggregate master trust market value.
 

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Per capita, Missouri funeral directors were hit hardest by the collapse of National Prearranged Services.  And those funeral directors who suffered the greatest losses continue to demand help from the State of Missouri.  Although Missouri re-wrote its preneed law just 3 years ago, the Legislature begins hearings today on whether more legislation is needed.

With the economy as it is, the NPS providers may not find a receptive audience in Jefferson City.  Finding a receptive audience among other funeral directors can even be difficult. 

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When news of the indictment of 6 National Prearranged Service officers was reported last November, many newspapers picked up the AP version that included a quote from the Internal Revenue Service criminal investigator. The fact is that the Federal investigation of NPS involves investigators from the IRS, the FBI and the U.S. Postal Inspection Service. An FBI press release regarding the NPS indictments includes comments from investigators with the three Federal agencies. To understand how NPS’ actions triggered the jurisdiction of the three agencies, a 2009 FBI press release concerning the indictment of Randall Sutton provides an explanation of the underlying facts.

The main thrust of the IRS investigation will be to determine whether the NPS officers committed income tax evasion with regard to what they individually received, or with regard to what the company received. The investigation will need to determine how the distributions from insurance, and from trusts, should have been reported by NPS. The investigation will also need to examine how NPS’ sister corporation, Lincoln Memorial Life, reported its income. And, the investigation will look at how the preneed trusts controlled by NPS reported their income.

Shortly after the Federal investigation of NPS was initiated, the Springfield Journal-Register reported that a Federal investigation of the Illinois Funeral Directors Association master trust had been initiated. As with NPS, Federal investigators will look closely at whether the reports mailed to funeral homes, and the statements mailed to consumers, were fraudulent, and thereby, violated mail fraud statutes. However, another line of investigation will be whether the master trust violated the Federal tax code.

What does the IRS’ role in these investigations mean to funeral homes and consumers? If these entities failed to accurately report income, the IRS (and state authorities) will view the unreported income as lost revenue to government. Preneed trust income must either be reported to the consumer or taxed by the trust. NPS trusts may have had annual tax liabilities in the tens of millions of dollars. No small potatoes considering the plight state coffers currently face.

Consequently, consumers and funeral homes may see taxing authorities become more aggressive in the enforcement of preneed income reporting requirements. With fewer agents due to budget constraints, the IRS may begin promoting its whistleblower program. If the situation reported this past weekend is an indicator of the future, non-compliant preneed companies may have more to fear from the disgruntled employee than being selected for a random audit by the IRS or state department of revenue.
 

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Yesterday, the St. Louis Post Dispatch reported on the federal indictments handed down against six NPS officials. The article includes two statements that hint at the legal strategies to be employed by NPS and federal prosecutors.

"We have anticipated this (indictment) for a number of years, and he is looking forward to finally confronting these allegations line by line in court," Rosenblum said.

In 1992, Missouri filed a civil suit against National Prearranged that led to a court agreement on minimum deposits into trust accounts. That deal wasn't followed, and the defendants concealed their transactions from regulators in Missouri and other states, the federal indictment alleges.

The first statement, made by Doug Cassity’s attorney, is a posturing statement that warns of a long public trial. The message is twofold: we’re going to make you spend a lot of money and we’re going to flyspeck the actions of Missouri regulators. Mr. Cassity’s legal team will likely assert that NPS complied with Missouri law, and did nothing to conceal its actions. Earlier this summer, NPS attorneys commented that the company was doing fine until regulators intervened in 2008. (If that were the case, why would Mr. Cassity have been anticipating the indictment for a number of years?)

Basing a defense on any failure of the State Board serves as a subterfuge. However, the federal prosecutor must respond by showing how NPS concealed its actions. With some Missouri funeral homes criticizing the former Attorney General for having let NPS off the 1992 hook, a NPS trial serves as a stark reminder to Governor Nixon of the lax enforcement of Chapter 436.

Missouri funeral directors should anticipate a get tough response from the Attorney General’s Office like that taken recently in Bates County.
 

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Almost a year to the date after SB1 was signed into law, one of the NPS sister companies was forced to close its doors. The recent Kansas City Star article about Mt. Washington Forever Funeral Home and Cemetery describes a situation that confused and disheartened the families who purchased Mt. Washington preneed contracts. The Missouri Attorney General’s subsequent press release offers little hope to the purchasers of preneed funeral contracts. While the press release offers some encouragement to preneed cemetery purchasers, those families also face the prospect of losing the funds paid to the cemetery.

Many consumers will lose some, or all, of the funds they paid Mt. Washington towards preneed contracts, and question why Missouri regulators did not act sooner. While operators and consumers both tend to view death care regulators as the ‘cops’, these state agencies lack both the authority or budget to summarily close businesses that break the law.

Within the next few weeks, both the Office of Endowed Care Cemeteries and the State Board of Embalmers and Funeral Directors will release to their respective industries new reporting requirements. Similar to reporting requirements imposed in Nebraska and Iowa, the Missouri regulators will begin seeking individual contract data from operators, and confirming data from preneed fiduciaries. These new reporting requirements will allow the regulators to begin identifying other potential Mt. Washingtons. But, regulators alone cannot protect every consumer. In the case of Mt. Washington, consumers have complained they were caught completely off guard by the closure.

If operator compliance reports were made available to the public, consumers could also assume a role in policing the preneed industry. In this vein, the OECC has expressed an interest in using the reporting requirements to form a grading system for operators’ compliance with state law requirements.

Such systems already exist in other states, Texas for one. Using a system that ranges from 1 (the highest level of compliance) to 5 (the lowest level of compliance), the operator is graded routinely on a number of issues. Such a system must be fair and equitable, and provide operators the opportunity to address issues. But once the process has been completed, the grades are then made public. Consumers are then able to access an operator’s audit report and grade to assess how safe the operator’s preneed funds are.

Rather than rely wholly upon the regulator, consumers must make inquiries before signing the contract and writing the check. If regulators do not make information available to the public, then consumers should begin asking their funeral home or cemetery whether certain types of information is available, and if so, can copies be provided:

• A copy of the death care operator’s current audit/examination report
• A summary of the annual report filed with the state regulator
• A summary of the current trustee report or insurance statement
• A contact name and email address with whom inquiries can be made of the preneed fiduciary or insurance carrier.

The Missouri Attorney General has advised Mt. Washington consumers to contact the AG’s office to file a complaint. Mt. Washington consumers also need to make inquiries to the Missouri funeral home regulator and/or the Missouri cemetery regulator.
 

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While the reasons are open to debate, it is common knowledge within the funeral industry that a small percentage of consumers cancel their preneed contracts. Consequently, some funeral directors tend to view their preneed block of business with a degree of certainty. Performance of the contracts, and recognition of the revenues, seems to be just a matter of timing. A few state laws reflect the perception that performance of the preneed contract is a ‘lock’. For 37 years, Missouri law allowed preneed sellers to withdraw trust income. Nevada’s law has similar provisions. Preneed trust income became a source of funds that could subsidize funeral home operations.

While the preneed subsidy had long been a source of frustration for certain Missouri officials, they were powerless to stop the practice until the failure of National Prearranged Services. With the 2009 passage of Senate Bill No.1, Missouri officials feel they have a law that they can use to force a new business model upon the funeral industry.

In the case of the California Master Trust, the Department of Consumer Affairs has taken a similar position with regard to an administrative fee that has been paid to participating funeral homes for decades. Consistent with the historic industry view, the CFDA response relies in part upon the preneed guarantee and the risk assumed by the funeral home.

The position becomes tenuous when the administrative fee is judged on terms of whether a necessary service has been rendered to the trust, and whether the amount paid is reasonable for the services received. It is apparent from the documents that the DCA will also apply that analysis to what the CFDA has charged the trust. Depending upon how this controversy is resolved, other states’ regulators may ask whether the administrative fees charged to the master trust are appropriate.

As a recent Funeral Service Insider comment suggests, some industry associations have also become dependent upon the preneed subsidy. The classic guaranteed argument loses traction when facts such as those in Illinois emerge. By one account, non-guaranteed preneed contracts accounted for one third of the contracts administered by the IFDA.

But, in defense of the CMT, preneed trusts are labor-intensive enterprises where the funeral home, administrator and fiduciary have shared responsibilities. In its challenge of a different CMT issue (the maintenance of preneed records within California), the DCA acknowledges this reality while discussing the funeral home’s recordkeeping duties. Effective field examinations will require that certain preneed records be maintained at the funeral home. But, is it reasonable to impose greater administrative requirements on the funeral home without allowing any compensation to be paid to them?

The emerging regulatory challenge to the preneed subsidy is premised on the position that the funeral home’s right to preneed funds does not vest until the contract is performed. That position is consistent with Missouri’s efforts to improve portability. But, regulators must also find a consistent and reasonable position with regard to the services that they mandate from the funeral home. 

(The Funeral Service Insider excerpt was included by special permission from Kates-Boylston Publications and Funeral Service Insider.)

 

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The Wall Street Journal has long been viewed as a leading source of business and investment news. But last weekend, the WSJ ran a short article on preneed, and demonstrated its lack of understanding of the transaction.

The article attempts to characterize preneed as an investment, and then explores issues such as cash surrender charges, cancellation penalties and the NPS failure. This is all very misleading because preneed is not an investment, or a security, but rather the purchase of funeral goods and services.

Those who are considering the purchase of preneed should not view the transaction as an investment. The Securities Exchange Commission determined decades ago that the transaction is a purchase of goods and services, not an investment. While the transaction may be entered as a ‘hedge against rising costs’, there are forms of preneed that do not provide such protections.

The WSJ article ends with advice that also misses the mark. An elder law attorney suggests that a simple trust, costing “a few hundred dollars”, could substitute for the preneed transaction. Unless the attorney is considering individual trustees who serve without compensation, the combined cost of the trust document and the initial corporate fiduciary fee could be several hundred dollars. The corporate fiduciary will then have a minimum annual fee that will be ‘a few hundred dollars’.  With a corporate fiduciary, this rather simple plan could end up costing 'a few thousand dollars'.

The next time the WSJ reports on preneed, it should do its homework, and not use the transaction as weekend filler.
 

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Implementing new regulatory requirements is a difficult and thankless job. Businesses hate change when it comes to government interference, and (most) regulators understand this. Accordingly, regulators typically prefer to implement incremental changes. In contrast to other industries, regulatory changes have been less frequent within the death care industry because legislators and regulators don’t understand the business. This came to an end for Missouri when NPS galvanized a legislature into re-writing the book on preneed, and then saddling the State Board with the task of implementing new mandates for licensure, oversight and enforcement.

There was no question what the State Board’s first priority under SB1 had to be: emergency rules to satisfy the new preneed licensure requirements. Until the law went into effect on August 28, 2009, the State Board lacked the authority to issue preneed licenses. But once the law went into effect, funeral homes were prohibited from selling preneed without a license. Licensing an entire industry at the stroke of midnight was beyond the Board’s limited resources.

As of February 4th, the State Board was five months into the mission, and faced a growing list of SB1 issues. Having addressed the immediate licensure issues (more or less), the Board took a step back to frame a preliminary approach to what may prove to be its top priority: financial examinations.

The State Board approved a plan that would involve an internal unit of 4 to 5 employees that would gather and monitor preneed transactions. The plan would include a period of training to develop the expertise needed to reduce the reliance on independent auditors, and thereby reduce the fees being charged to the industry.  The Board's decision is consistent with Scenario 2 of the Small Business Impact Statement filed with its emergency fees rule.

Determining that “the money is there” has been the priority in Nebraska and Iowa, and now, has also become the priority for Kansas’ cemetery regulator. The challenge for the Missouri and Kansas regulators will be the implementation of an effective, but efficient, system of providing financial oversight to a diverse and fragmented industry.

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Over the next year, Missouri will examine the various flaws of SB1. One of those flaws concerns the independent investment advisor and the ‘fix’ meant to preclude conflicts of interest.

Preneed trusts have a poor track record in terms of investment performance. Trustees often fail to appreciate the key factors that impact investment strategies for preneed. Those factors can vary substantially from trust to trust, making the fund manager’s job more difficult.

Consequently, it is not uncommon to see large trusts delegate investment authority to an independent fund manager. Missouri’s old preneed law took the practice an ill-advised step too far by relieving the trustee of liability for the advisor’s decisions. NPS exploited that provision by appointing investment advisors who handed the keys to the vault to Lincoln Memorial. Believing themselves to be exculpated from investment liabilities, the NPS fiduciaries became bystanders to the largest preneed fraud in history.

Section 436.445 of SB1 appropriately requires the fiduciary to remain responsible for the investment advisor’s actions. However, the statute goes too far in attempting to preclude any relationship between the advisor and the seller. The provision was lifted from Missouri’s Uniform Trust Code without adequate consideration of the relationships of the seller, fiduciary and fund manager.

In contrast to SB1, the Uniform Trust Code does not prohibit relations between the trustor/seller and the investment advisor (or any service provider to the trust). Missouri’s preneed industry would be better served if such relations were allowed if fully disclosed and subjected to a higher level of scrutiny.
 

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One criticism of Missouri’s prior preneed law was that the Attorney General’s office was dependent upon the State Board to refer complaints for legal enforcement. If the State Board didn’t refer a Chapter 436 violation, the AG’s only enforcement alternative was to pursue an action under Missouri’s Merchandising Practices Act (Chapter 407). During the 2008 hearings on Chapter 436 and National Prearranged Services, it was generally recognized that the Attorney General’s office needed independent authorities to pursue Chapter 436 violations. But, the Attorney General also expressed the desire for authority to hold fiduciaries more accountable for their funeral home client’s actions.

The AG’s fiduciary recommendations drew concerns from both funeral homes and the Missouri Division of Finance. The Division of Finance questioned whether the requested powers would make the AG a de facto bank regulator on par with the Division and the bank’s federal regulators. Consequently, the final recommendations for Chapter 436 legislation conditioned the AG’s authority to take action against a fiduciary on having received the consent of the fiduciary’s primary regulator.

However, the Chapter 436 Working Group recommendation regarding this limitation on the Missouri Attorney General did not survive the Senate Bill No. 1 revision process.

Section 436.470.12 of SB1 grants the Attorney General the authority to bring action against a preneed fiduciary whenever an “inspection, investigation, examination or audit” reveals a violation of Chapter 436. A prior subsection provides for information sharing among the relevant Missouri agencies, and arguably, the AG’s authority over preneed fiduciaries could be triggered by the AG’s own investigation or examination.

And, there seems little doubt that the AG may be inclined to apply this new authority with regard to preneed trusts that existed prior to August 28th. Accordingly, Missouri’s preneed fiduciaries should evaluate their accounts with the knowledge that Big Brother may be looking.
 

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The wait for Ms. Garrett’s lawsuit against NPS, the Cassity family (and anyone remotely connected with the Cassity Consortium) ended on August 7th.

If half of the allegations made in the NPS Complaint are true, the misconduct perpetrated on funeral homes and consumers is shocking to say the least. The Complaint provides a bevy of reform issues to explore. However, NOLHIGA and state regulators must be careful in their zeal to recover assets and implement reform.

A search of the Complaint for the term “independent investment advisor” will produce ten hits, with most of the substantive issues addressed on Pages 52 through 57. Chapter 436 of the Missouri statutes authorizes a preneed seller to designate an independent investment advisor to make investment decisions for the trust when it has more than $250,000 of assets. In doing so, the trustee is relieved of all liability regarding the investment decisions by the investment advisor.

As many larger Missouri sellers did, NPS designated an ‘independent’ investment advisor. The Complaint alleges that the investment advisor gave NPS free reign over the various trusts to perpetrate various frauds, including the purchase of the Lincoln Memorial insurance policies.

With regard to the fiduciary duties of the independent investment advisor, Complaint Paragraph 179 hits the nail on the head:

As purportedly “independent” investment advisors, Defendants Wulf and Wulf
Bates owed fiduciary duties to NPS as the entity that settled and funded the NPS pre-need trust accounts, and to the funeral homes and consumers as the beneficiaries of the pre-need trusts. Those fiduciary duties include, without limitation, loyalty, care, good faith, candor, sound business judgment, forthrightness, and fairness, through their direction and control over the trust funds.

In rubberstamping the NPS instructions, this investment advisor neglected his duties to the funeral homes and consumers.

In an effort to hold the NPS trustees accountable under Section 436.031, the Complaint alleges the investment advisor was not ‘independent’. This begs more than one question, but the first one that comes to mind is: independent of whom?
 

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News of Randy Sutton’s arrest was greeted by honking hearses in Missouri, Texas, Illinois, and a dozen or so other states. But, the question funeral directors are asking: What about the Cassity family?

Federal investigators need for someone to rollover and give up the Cassity crew, and apparently, Mr. Sutton is their choice.

Matt Damon’s new movie, the Informant will be out soon. That movie is about Archie Daniels Midland, a mega-food conglomerate based in Decatur, Illinois, my old hometown. Part of the movie was shot in the little town of Moweaqua, where my wife’s family lives. For weeks, we received photos of Matt Damon obliging the local residents. The story is about an ADM executive who turned informant on his employer’s misdeeds, but took a fall due to his own conduct.

As the Feds put the screws to Mr. Sutton, funeral directors can only hope those investigators can connect the dots. If they do, and the Cassity family is implicated, who will play Mr. Sutton in the movie?
 

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While the settlement negotiated with the National Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) provides funding for the vast majority of NPS preneed contracts, there could be as many as 7,500 NPS preneed contracts that fall outside this coverage. For one of a couple of reasons, NPS never purchased an insurance policy for these preneed contracts. These are the NPS “orphan contracts” that regulators and the NPS Special Deputy must figure out what to do with.

NPS and its sister insurance companies were put into receivership by the Texas Department of Insurance. The special deputy receiver appointed to administer the NPS assets and liabilities negotiated coverage with the National Organization of Life and Health Guaranty Associations (NOLHGA). However, this coverage is dependent upon a policy (or sufficient evidence of the intent to purchase a policy) having been issued for the consumer’s preneed contract. In the absence of a policy, the guaranty association will not honor a claim, and the consumer will be forced to make a claim with the special deputy receiver.

The orphan contract is primarily a Missouri problem because NPS sold insurance funded preneed contracts in most states. For Missouri, NPS sold trust-funded contracts, or rolled a funeral home’s trust into a NPS trust (that subsequently purchased insurance). With regard to Missouri installment contracts, NPS apparently instructed the trustee to defer the insurance purchase until the contract was paid in full. Consequently, the consumers who are making payments on one of NPS’ Missouri contracts may have an orphaned contract.

The Missouri Insurance Guaranty Association is working with funeral homes to identify those NPS preneed contracts that are orphaned. Missouri consumers who are making installment payments on a NPS contract should contact their funeral director for assistance in determining whether their contract is orphaned or not.

With regard to these Missouri consumers, the Special Deputy Receiver and regulators need to consider that it was their recommendation that all consumers continue to pay on their NPS contracts in order to maintain coverage.

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Officially, its called House Committee Substitute for Senate Substitute for Senate Committee Substitute for Senate Bill 1.   Some of the ‘unofficial’ titles given this bill are not fit for publication.

It doesn’t matter who you talk to about Missouri’s current preneed reform bill, everyone has a complaint.  Even the consumer advocates.  Under normal circumstances, this general mood of discontent would ensure the defeat of a legislative proposal.  But these are not normal times, and it is appropriate that the Columbia Daily Tribune would remind the state of that fact by speaking with former Senator Jerry Howard.

In the early 1990’s, Senator Howard took on the problems of Chapter 436 and Chapter 214. While Senator Howard had success in addressing Missouri’s perpetual care law, Chapter 436 reform proved a greater hurdle.  More than a dozen years ago, representatives from the funeral and cemetery industries met with regulators to draft revisions to Chapter 436.  Although National Prearranged Service representatives attended those meetings, and provided tacit approval of the draft amendments, NPS had its own lobbying agenda.

Senator Howard took those amendment proposals to legislature, but could not obtain the necessary support of his fellow legislators.  Key legislators had been prepped for the proposals’ weaknesses.

HCS SS SCS SB1 has some flaws that need to be worked out, but time is running out for the current legislative session.  If the choice comes down to this bill or no bill, this bill should be passed with an understanding that its flaws need to be addressed by regulations and technical corrections in the next legislative session.

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Consumers and funeral directors are asking their state regulators how they let the National Prearranged Services collapse to happen. With the exception of Missouri and Iowa, the NPS preneed contract was generally an insurance-funded transaction, and state insurance regulators are taking most of the heat. It is a very different story in Missouri, as witnessed by two competing reform bills: Senate Bill 1 and House Bill 853. For Missouri, NPS used a trust-funded preneed contact (that was subsequently invested with Lincoln Memorial policies). As a consequence, Missouri legislators have made higher trusting requirements and heightened fiduciary responsibilities their top priorities for both bills.

Missouri’s Chapter 436 was written before Rev. Rul. 87-127, when trusts were king. The law also reflects the historic perception of the guaranteed preneed contract (one that is shared by the Internal Revenue Service and the Securities Exchange Commission): the transaction is a sale of goods and services by the death care company.

Chapter 436 allows the preneed seller to retain the purchaser’s first payments until 20% of the sales price has been collected. A 20% sales expense retention provides smaller funeral homes the funds required to maintain a program to compete with larger operations, including the national companies. All subsequent payments must then be deposited to trust. The law was intended ensure there were sufficient trust funds for the funeral home’s “costs” at the time of performance (in contrast to the amount the consumer would have to pay for the funeral at a future date). Consequently, Chapter 436 allows the seller to also withdraw realized income to the extent the trust’s market value equaled the deposits made to trust.

What distinguishes Chapter 436 from most other permissive preneed state laws (such as Iowa) is the public policy decision to require income accrual. By requiring the trust to accrue income, these states have placed a ‘cap’ on the seller’s recovery of preneed program costs. Their message is that the seller must make do with the front-end retention of payments. These states still view the preneed transaction as a sale of goods and services (allowing the recovery of the sales expense costs), but they will not allow the preneed seller to recover other operating expenses from trust funds intended for future performances. In this respect, SB 1 and HB 853 are similar. While both would require the accrual of trust income, only the Senate bill recognizes the preneed contract as a sale of goods and services.

In an attempt to enhance consumer protection and preserve the funeral home’s ability to offer a trust-funded preneed program, SB 1 would raise Missouri’s trusting percentage from 80% to a hybrid 85%. This trusting change will have the greatest impact on small funeral homes with dedicated salesmen and the larger, proactive independent funeral home/cemetery operations.

As the retention percentage is reduced, economies of scale will make it more difficult for small operators to maintain a separate program. While the larger proactive preneed program may have the volume of sales to offset the loss of 5%, they must contend with SB 1’s ‘pro rata’ recovery of sales expense.

The retention of the sales expense from the first payments simplifies the procedures for compensating a program’s salesmen. Missouri’s SB 1 recognizes this issue in that it authorizes the first 5% of the sales price to be retained. While SB 1 allows the seller to collect an additional 10% of the contract sales price, it must do so pro ratably from each subsequent payment. This pro rata approach imposes a greater administrative burden on the seller, contributing to the costs of the preneed program.

In contrast to SB 1, HB 853 requires 100% of a purchaser’s payments to be trusted. The bill’s advocates claim the preneed funds belong to the purchaser, not the funeral home, and consumer protection will be enhanced. Essentially, the bill’s supporters are re-defining the trust-funded preneed contract as a transaction of accommodation to the preneed purchaser. Funeral homes will be required to provide program administration and tax advantages that the consumer cannot otherwise obtain from a bank.

Deprived of a source of funds to offset preneed program expenses, proactive sellers will be forced to utilize insurance funded programs. While insurance offers cost advantages to the younger consumer, many typical preneed purchasers may not qualify for insurance, or may not be able to afford the required premiums. In the end, HB 853 will reduce the preneed options available to consumers and the industry.

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John Duggan has a point, and that’s what concerns regulators in Illinois, Missouri and Texas. Who will be blamed when the consumer does not get the benefit of their preneed contract?

While the overwhelming majority of NPS’ preneed contracts will be honored by the funeral home named in the contract as the “provider”, it is not because of regulators’ threats. Most funeral directors cannot afford to abandon their preneed families. The same can be said for the IFDA members and their preneed contracts. But there will be some funeral directors who eventually decide that they cannot afford to honor those contracts. To protect the consumer, the regulator will be called on to enforce a contract that should exist between the funeral home provider and the third party preneed seller.

Many funeral homes rely upon third party sales organizations to provide preneed documents, administration, sales forces and economies of scale. While funeral directors typically relate the term “third party preneed seller” to entities such as National Prearranged Services, the term also includes those entities formed by state associations to service member funeral homes that do not want, or cannot afford, to maintain their own preneed operation. While this relationship involves the delegation of crucial responsibilities, regulators have discovered that the seller and provider have done little to document their respective rights and obligations in a formal agreement.

When the Texas Insurance Department took control of NPS and its sister insurance companies in early 2008, the initial press releases advised funeral directors that they were obligated to honor those contracts regardless of the circumstances. Texas authorities subsequently narrowed such statements to their Texas funeral directors because Missouri’s Chapter 436 does not have such a requirement.

NPS was notorious for selling preneed contracts in the absence of an agreement with provider funeral homes. Some funeral directors discovered these sales after the fact. To the extent NPS had authority to represent a provider funeral home, the agreement was often cursory in nature. Consequently, Missouri funeral homes have some justification for challenging the obligation to honor NPS contracts. In response, Missouri’s reform bill includes the following provision:

436.415. 1. Except as otherwise provided in sections 436.400 to 436.520, the provider designated in a preneed contract shall be obligated to provide final disposition, funeral or burial services and facilities, and funeral merchandise as described in the preneed contract.

2. The seller designated in a preneed contract shall be obligated to administer all payments made by, or on behalf of, a purchaser of a preneed contract and ensure the preneed contract is managed and fulfilled, and payments remitted, in compliance with sections 436.400 to 436.520 and as provided by the contract. 

 But what if the seller does not fulfill its obligations to the funeral home provider and the consumer? Is it fair to impose strict liability upon the funeral home provider?

Regulators, such as the Illinois Comptroller’s Office, seem be indicating that preneed regulation is a bigger, more complicated, task than what they are prepared for. In that vein, Missouri is warning funeral homes that they must assume the risks associated with third party sellers. Texas seems to think that consumers would be best served by the prohibition of trust-funded third party preneed contracts (154.1013). I disagree.

Insurance funded preneed is not an option for many elderly consumers. If faced with trust funding or POD/joint accounts, smaller funeral homes will be squeezed out of the trust arrangement by the expense of establishing and maintaining their own trust. Funeral homes will also have to comply with the seller licensing requirements.

Despite the allegations made against the IFDA, the state association trust may represent the only competitive preneed product available to the smaller funeral operator.

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The Missouri Senate Committee assigned the task of preneed funeral reform posted a substitute bill to the Legislature’s website on February 6th: SCS SB1. For those who participated in the Chapter 436 Working Group meetings last summer, this bill may seem vaguely familiar. During those meetings, the Division of Professional Registration circulated a 41-page draft proposal for discussion with industry representatives. However, discussions regarding the proposal bogged down when industry members could not agree over several issues. Eventually, the Working Group issued a “Recommendations” statement.

Turning back to the Division staff, the Senate committee has dusted off that earlier draft proposal and added provisions based on the Chapter 436 Working Group Recommendations. This approach is sure to revive the disagreements that derailed last summer’s meetings.

With the NPS failure as a backdrop, the Missouri legislature will have little patience for the internal bickering that has marred prior reform efforts. While SCS SB1 has some legitimate flaws, the status quo is no longer an option.

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Greed

Funeral directors who rejected NPS’ promises may feel justified in criticizing those who are asking for help. Generally, their criticism is that NPS exploited funeral directors’ greed. With regard to some trust rollovers, that may be true. But, what NPS best exploited was funeral directors’ desire to devote their time to the service of families rather than preneed.

NPS grasped that many funeral directors felt the need for a proactive preneed presence, but did not have the time, resources or inclination to establish their own program. NPS offered to take care of all the details, with at-need prices to boot. Hindsight is 20/20, but funeral directors should have asked questions and requested documents. But what questions?

Perhaps as an acknowledgement that competition is forcing members to use proactive preneed programs, the NFDA has issued guidelines for evaluating preneed insurers and preneed trusts. During the months that followed the Clayton Smart and Robert Nelms arrests, the NFDA drew criticism for its failure to provide leadership in addressing the growing preneed scandal. Some of the more stinging criticism came from the association’s smaller cousins.

These critics rarely address the elephant in the room: our fragmented, state-based approach to preneed regulation. The New York Funeral Directors Association has an excellent consumer protection statute to work with, but you can’t judge other trade associations without looking at their laws. And, the NFDA has to consider all fifty states when it issues policy guidelines.

If the NFDA’s Guidelines For Evaluating Preneed Trusts seems general and vague, it is because those 50 states’ laws differ substantially, many of which are poorly written. Preneed laws are often compromised efforts that include purposeful ambiguities. Those ambiguities can come back to haunt us years later when a new appointee fills the regulator’s chair.

The NFDA’s task is made even more difficult when suggesting questions that will be asked of member’s state association master trust.  But the times demand action.

Taking the NFDA Preneed Trust Evaluation a step further, funeral directors should also request certain documents regarding prospective program sponsors.

From state regulators, determine whether audits are performed of the program. If so, request the most recent audit report. Also inquire whether there have been any disciplinary proceedings during the past three years. Open investigations may be subject to confidentiality requirements, but closed proceedings may be subject to open records requests.

From preneed program sponsors, request the three cornerstone documents: the master trust agreement, the participation/provider agreement and the preneed contract. Determine from the program sponsor whether applicable state law authorizes collective trust investments, and if so, request the sponsor’s guidelines for unit pricing and income/expense allocations. Also request a breakdown of the trustee/administration expenses by: custodial services, fund management, sub-account administration, audit and tax return preparation and reporting. If the master trust utilizes insurance products, request a written explanation of the product’s taxation.

As IFDA members are learning, preneed due diligence is an ongoing obligation. Funeral directors must find the time to periodically review their preneed program by asking the right questions, and getting the answers in writing.

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When its Halloween, the media is naturally attracted to a story that involves horror and a cemetery.  The Belleville News-Democrat found a new type of horror for its seasonal article involving a cemetery: Missing Trust Funds!

For added suspense, the newspaper reports there are two cemeteries, and both were (or are?) owned and operated by Forever Illinois, a sister corporation of National Prearranged Services.  Determining who owns and operates the cemeteries seems to be an issue of confusion for the Illinois regulators.  The cemeteries have turned into a hot potato.

Concerns over the Forever Missouri cemeteries had to have influenced Missouri regulators' efforts to seek new enforcement authorities in Chapter 214.  Unlike their Illinois counterparts, Missouri regulators lack clear authority to involve either the attorney general's office or local prosecutors. 

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During the long and tedious Chapter 436 hearings, some Missouri funeral directors joined consumer advocates in using the NPS failure as reason for recommending that legislators impose 100% trusting on the preneed transaction.  Those funeral directors generally advocated the use of insurance or joint accounts as safer methods of preneed funding.  During regulatory meetings, comments were also made about how the insurance policies or joint accounts were 'guaranteed'.   The realities are that each of these forms of funding has its advantages and disadvantages, and that there are no absolute guarantees.

The AIG failure underscores that even the largest of insurers may be vulnerable to the current financial crisis.   While most life insurers are safe, the only guarantees offered by insurance are the rates of return promised by the policy terms.  As witnessed by the Texas insolvency proceedings for Lincoln Memorial life, the insurer's promises are only as good as the assets held in its reserve accounts.  After that, the policyholder must look to guaranty funds for assistance.  Consequently, funeral directors should periodically review the financial statements of the insurance companies they use for preneed funding.

With regard to keeping those preneed funds at the local bank, the funeral director is assuming risk (and liability?) when he exceeds the FDIC insurance coverage.   By holding the consumer's payments in a joint capacity, the funeral director is also exposing the funds to the claims of the funeral home's creditors.   Losing a lawsuit for damages that exceed the firm's casualty insurance put the consumers at risk. 

In contrast, the funds placed in a preneed trust are not the assets of the bank or the funeral home.   By virtue of the terms of the preneed contract, the funeral director usually has the risk of investment performance (and under the current circumstances, that's more risk than what some funeral directors want).  But in contrast to insurance and joint account contracts, the trust provides the death care operator some say in how investment risk should be handled.

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Concurrent with the hearing held on her Liquidation Plan, the Special Deputy Receiver posted a financial report to the Lincoln Memorial Life/NPS website. As with most financial statements, explanatory notes at the end of the report provide some insights to the failed NPS empire. While prior documents have disclosed that the companies have a deficient of nearly one billion dollars, the SDR report breaks that number down in terms of trust funded contracts and insurance funded contracts. 

Insurance funded preneed contracts account for almost $600 million of the unfunded deficit, twice the number of that for trust-funded contracts ($289 million).   The explanatory notes identify six trusts maintained by NPS. The notes identify Trust VI as that of Iowa, and the size of Trust IV would suggest that it was for Missouri. One of the other trusts may be a special account, and if one were to assume the other three are other ‘state trusts’, that would leave the other 15 NPS states as exclusive insurance funded states. There is no doubt that NPS exploited Missouri’s laws regarding trust funded contracts, but a greater harm was done to consumers through NPS' exploitation of state laws governing insurance funded contracts.

Of the NPS trusts, the Missouri deficit is the largest by far ($248 million). This number has been isolated to Missouri regulators as justification for raising the state’s trusting requirement to 100%. That argument ignores the fact that Iowa also has an 80% trusting requirement, yet only has a deficit of $23.5 million (a tenth of Missouri’s). The difference can be attributed to the difference in oversight and regulatory requirements. The argument also ignores the fact that Kansas, a state with a 100% trusting requirement, has a deficit of approximately $22 million (all of which is based on insurance-funded contracts).

Another explanatory note that may suggest that Missouri’s oversight is lacking is a note payable of $10 million owed by NPS to the Missouri preneed trust.  

Missouri’s Chapter 436 problems will not be fixed by going to a 100% trusting requirement. Oversight should be the state legislature’s top priority, and Missouri preneed sellers need to begin providing ideas and answers.  

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While approval of the SDR’s Liquidation Plan is imperative to providing funds for NPS contracts that are being serviced, and will be serviced during the next few years, funeral directors and consumers are raising valid questions about the Plan.   For the consumer who purchased a trust-funded contract from NPS on installments, the Plan fails to adequately address their situation.

Plan Paragraph 10.4 addresses the consumers who are making periodic payments on an NPS contract. The paragraph states in part:

            (ii) all payments must continue to be paid to the applicable Participating Association or else the coverage provided under the Policy will lapse; and

            (iii) the amount of the payment due to NPS (and, after assignment, to the Participating Association) may be prorated and reduced to the extent that the face amount of the Preneed Funeral Contract exceeds the death benefit face amount of the Covered Obligation.

The problem for consumers with installment contracts is that NPS charged fees that are not reflected in the “face amount of the Preneed Funeral Contract”.   NPS employed an installment plan that incorporated finance charges and a mortality expense, for terms of up to 10 years. Depending upon the age of the consumer and the term of payment, he or she may end up paying thousands of dollars in excess of the contract’s face amount. There is no justification for the additional mortality expense if the NPS trust was purchasing life insurance.

If a consumer purchased a NPS trust-funded contract on installments within the past few years, he/she may want to review the contract with their funeral director to determine whether to continue making payments. For those who have paid in more than the contract’s face amount, consumers may want to seek further guidance from the SDR about the proration language of Paragraph 10.4.

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The Special Deputy Receiver for NPS recently reported the company’s “negative net worth” to be just short of one billion dollars. Rightfully, regulators are looking at the NPS fiduciaries for culpability in the losses that will be sustained by consumers and funeral homes in the years to come. In the meantime, Missouri state officials are working with industry representatives to reform Chapter 436. As they consider how to better safeguard consumers’ funds, regulators and legislators need to appreciate that preneed sellers and fiduciaries have overlapping responsibilities that are affected by a state’s trusting requirements. 

In states with lower trusting requirements, the preneed seller typically assumes responsibility for individual preneed contract accounting. Besides the ability to report to consumers, this function is also crucial to the fiduciary’s income tax reporting. In states with higher trusting percentages, the trust often assumes greater responsibilities for the accounting and reporting functions. 

Historically, preneed laws have restricted preneed trust expenses to the fee that was typically charged by banks or trust companies for estate planning business. Some state laws also restrict the trustee’s ability contract with the preneed seller for administrative services.   While restrictions are needed to avoid a circumvention of the trusting requirements, more latitude should be afforded the fiduciary. In exchange, preneed sellers and fiduciaries should be required to make disclosures about those who provide the trust services, and the fees paid for the various services. 

The Texas Department of Banking and the Texas Funeral Directors Association broached these issues ten years ago.    In Opinion 98-15, the TDOB found that the preneed trustee fees could be used to pay for marketing expenses, outside recordkeeping for preneed contracts, and investment advice. (It is generally recognized that the trustee can incur expenses for trust accounting, legal expenses and tax reporting on behalf of the trust.)

 Eventually, Texas may review its preneed law in light of the fraud committed on its consumers and funeral directors by NPS. I suspect NPS exploited the Texas provisions allowing for a depository.   Before eliminating the authority to use the depository arrangement, the Texas legislature needs to appreciate the difficulty the industry has in attracting quality fiduciary services.   

Allowing the trust to bear the expense of compliance does not come without the risk of abuse. Services must be necessary to the trust, and reasonable in cost. One check against such abuse would be the requirement that services must be performed pursuant to a contract with the fiduciary. Transparency of the relationships among the parties, and the fees paid could serve as another check.   The IRS will likely require such transparency within the next few years as fiduciaries are required to ‘unbundle’ their fees for income tax reporting purposes.

Eventually, we may see death care fiduciary fees being broken down by the following services:

Asset management (investment)

Sub account administration

Tax reporting

Legal (contracts/compliance)

Legal (liability/litigation)

Custodial services

Regulatory and consumer reporting

Marketing

Ten years later, the TDOB opinion may be dated in terms of what constitutes a reasonable fee. Sub account administration can run as high as 85 basis points. Asset management fees will differ on the manager’s expertise, and 50 basis points is a fairly common fee. Tax reporting expenses can differ substantially based on the diversification of the trust assets.   Distribution oversight may require periodic examinations, and the expense that accompanies on-site reviews. Periodic statements to consumers and regulators will require administrative enhancements. However, economies of scale are crucial to minimizing these costs, and pooled administration will be key to providing the requisite economies of scale. Several years ago, the Office of the Comptroller of Currency recognized the role national banks could play in meeting the needs of the death care industry.

The death care trust is a different breed of animal from a bank’s staple trust business of estate planning.   Consequently, legislators need to allow fiduciaries to contract for those services crucial to enhancing the compliance that the preneed transaction so desperately needs.

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So why is it so tough to provide preneed portability?   Because the transaction has been defined by state law as a contract between a consumer and a death care company, and federal regulators tend to agree.   When the issue has arisen in the context of federal preemption, the interests of the state regulator have prevailed on the grounds the transaction is ‘local’ in nature, and the state has an overriding interest in policing the transaction. This perception permeates federal oversight of the preneed transaction, including that provided by the Internal Revenue Service and the Securities Exchange Commission. So long as preneed is defined as a guaranteed contract for goods and services, complete portability will be difficult to achieve.

Consumer advocates view the preneed transaction as a savings account to be safeguarded until the death, and some state laws accommodate that perception. Kansas requires 100% trusting, an accrual of income and assures portability by granting the purchaser the right to designate a different funeral home to perform the contract.

However, if the Kansas contract was written by a funeral home with its own preneed trust, there has to be a trust agreement between the original funeral home and the fiduciary. Despite what the law states, the new funeral home is not bound to that trust agreement. In the absence of a trust agreement, the fiduciary does not want the responsibility of ensuring the new funeral home performs the preneed contract according to its terms. If the new funeral home seeks to have the funds transferred to its own bank, what responsibilities does the trustee have to ensure the receiving institution will accept the funds in a fiduciary capacity? (Is anyone familiar with Bremen Bank?) 

So long as the new funeral home is within the state of Kansas, the state’s preneed law could be revised to afford the fiduciary some protections. However, state law will not remedy the situation where the consumer has moved to another state. 

When faced with this situation, insurance companies protect themselves by adopting policies that restrict policy assignments. It is not that uncommon to encounter insurance companies that prohibit policy ownership by funeral homes. Insurance companies will be more lenient with funeral homes with whom they have an agency relationship.

For states like Missouri, portability faces the challenges of the seller/provider distinction and lower trusting requirements. Missouri allows preneed sold by third party entities, and requires the seller to have a contract with the funeral home or cemetery prior to marketing to consumers. In keeping with this requirement, regulators recently looked at language to improve portability. However, that result was confusing, and did not consider the fiduciary issues. The Pennsylvania State Board of Funeral Directors had similar experiences with a recent effort to address portability. 

If a Missouri contract has been trusted using the minimum requirements, the contract becomes less attractive to other funeral homes as time passes from its sales date. There may come a time when the contract becomes a liability.  Under that circumstance, the consumer will have difficulty finding a funeral home willing to accept the contract. 

The irony of the NPS failure is that the company’s program offered the consumer interstate portability that only the national death care companies could match.   But the NPS customers have not only lost the portability of their contracts, some face the prospect of their named provider going out of business. 

Steps can be taken to improve portability, but it will not be as simple as mandating a result. Increasing funding requirements and assuring insurance assignment rights will help. To overcome resistance by funeral directors, protections against ‘twisting’ could be offered. 

However, if the consumer wants complete portability, he or she will need to consider the non-guaranteed preneed contract. 

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On June 8^th, Donna Garrett, the Special Deputy Receiver for the NPS affiliates, filed with the Texas Travis County Court an application for fees. The application includes a schedule of fees that will be charged by the subcontractors to be utilized by the SDR. The filing would seem to indicate the law firm of Polsinelli Shalton Flanigan Suelthaus, PC. will be serving as the SDR’s main counsel.  

Proceedings such as last week’s lawsuit brought by James & Gahr Mortuary will contribute to the expense that must be borne by the SDR.   The $250,000 sought for fees and expense in the June 8^th Application is only the beginning.  

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The class action lawsuit brought against the NPS affiliates on Friday, June 20^th reflects the despair that some funeral directors are experiencing over the situation. Although litigation to recover assets from the Cassity Empire was inevitable, this lawsuit has flaws that need to be corrected through an organized effort brought by the states’ regulators.

Funeral homes have a legal claim for damages against NPS to the extent they have serviced NPS contracts and failed to receive the compensation promised them by NPS. Consequently, I anticipated finding this provider’s associate agreement as an exhibit to the pleading. However, the filing omitted documentation that would evidence the funeral home’s rights and obligations with regard to the performed contracts and the contracts that remain to be performed. As evidenced by the June 9^th Funeral Service Insider, NPS played by fast and loose rules when it came to their relationships with provider funeral homes. So, what are funeral homes entitled to?

The lawsuit also fails to include the consumer as a member of the plaintiff class. With regard to executory preneed contracts, the consumer has superior rights to the funeral home. Ignoring the rollover contracts, the funeral home has an expectation of performing the preneed contract when the death occurs. However, the consumer could always move to another state, or cancel the contract. Until the funeral is provided, it is the consumer who has the greater claim of damages from NPS. His/her NPS contract has no cancellation value or portability. 

The lawsuit is also troubling in the sense it presumes that whole life insurance policies were appropriate trust investments under Missouri’s preneed law. Chapter 436 is a bit ambiguous about insurance funded contracts, but with regard to trust funding, the law permits the preneed seller to retain 20% of the contract’s purchase price, and to trust the remaining 80%. Unless the purchaser makes the contract irrevocable to qualify for public assistance, the contract can be cancelled and the seller must refund the amount that went into trust. So, if the seller trusts only 80%, how can the trustee purchase a whole life policy and have the liquidity required for Chapter 436 compliance?  

This funeral home points an accusing finger at the fiduciaries, but the pleading reflects the funeral home’s acceptance of the trust holding whole life insurance. A question regulators might ask is whether the funeral home received any compensation for the insurance purchased by the trust. 

Regulators have valid excuses for distancing themselves from this lawsuit, but consumers need an independent authority pursuing their (and funeral directors’) claims against NPS.   If regulators do not recover sufficient assets, funeral homes will fail and consumers will lose their funeral promises.  

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In what may prove to be a lengthy legal proceeding, Missouri Attorney General Jay Nixon filed suit against Forever Network, Inc., an affiliate of National Prearranged Services (NPS).  While the suit may duplicate the injunctions effected by the Agreed Order obtained by the Texas Department of Insurance, consumers should take comfort by the fact Mr. Nixon has begun taking action.  

While it may be days before a copy of the petition can be obtained for review, I anticipate the pleading may share some of the same assertions and requests made by Texas.  While this duplication may be confusing to funeral directors, the difficulty regulators face in bringing proceedings against NPS is that each regulator must establish the requisite authority for the remedies sought.   For Jay Nixon and the Missouri State Board of Embalmers and Funeral Directors, Chapter 436 is full of ambiguities, making their case against NPS challenging (but not impossible). 

The Missouri regulators have a stated goal of ensuring that consumers receive the services they have paid for.  While Chapter 436 has its many faults, regulators should keep in mind Section 436.007.2, which provides:

If a preneed contract does not comply with the provisions of sections 436.005 to 436.071, all payments made under such contract shall be recoverable by the purchaser, his heirs, or legal representative, from the contract seller or other payee thereof, together with interest at the rate of ten percent per annum and all reasonable costs of collection, including attorneys' fees.

NPS aggressively marketed preneed contracts on an installment basis that incorporated vague finance charges and “premature death discount fees”.  These charges often drove the price of the preneed contract up by thousands of dollars.  Justice would taste sweet if the Cassitys' had to give it all back.   

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It is not a good sign when our regulators communicate by letter.  Friday's Post Dispatch story underscores the friction that exists among some of the regulatory agencies caught in the NPS fiasco. 

In one aspect, the letter is intended to demonstrate that the Missouri Attorney General's Office is dependent upon the State Board of Embalmers and Funeral Directors and the Missouri Department of Insurance to refer matters for investigation.   However, the letter also demonstrates the defensive posture being taken by the regulators as they prepare for the worst.

The article also underscores the inconsistent information being provided by regulators.  While the Post Dispatch indicates that NPS has a billion dollars of outstanding preneed contracts, regulators have not been willing to confirm the preneed liability or the amount of assets under their control.

With this Fall's elections, the posturing is understandable.   But, let's hope that the Missouri Attorney General has initiated discussions with the US Attorneys Office about the pursuit of the Cassitys' "suspect business practices".

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I will preface this blog entry by stating that I do not fault the Texas Department of Insurance for the Rule 11 Agreement if giving up litigation against NPS/Lincoln Memorial (and the various individuals) was the price extracted for gaining control of the companies and the preneed records.  Someone needed to take action, and I commend Texas for taking the lead. 

However, the Texas Department of Insurance has requested that I clarify my May 27th (Texas Hold'em) blog entry.   Here is their statement:

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Funeral directors will attempt to leverage the Funeral Service Insider’s report about the NPS contributions to state politicians, but they should do so with caution.

The story does not paint the entire picture of NPS’ efforts to influence the politics that controlled Missouri’s preneed industry. The amount attributed to the Missouri efforts ($168,000) seems low. Granted it does not reflect contributions made during the past two years, or those made prior to 1999, but the seven years in question cover the period when NPS’ sales seemed to have leaped (within Missouri and to other states). 

If NPS providers are going to point an accusing finger at Jay Nixon, they need to consider two issues: their need for Nixon’s help and cooperation, and the complicity of some funeral directors in the NPS impropriety. 

NPS made political contributions for a number of reasons, including the opportunity to have NPS providers appointed to the Missouri State Board of Embalmers and Funeral Directors. The funeral homes demanding action from the regulators may, for the most part, be innocent.  But when a group is found to have one or more pots calling the kettle black, the credibility of the group as a whole is undermined.

If it is not apparent, there is some finger pointing being done within the regulators’ closed circle. A potential issue in the rift among the regulators maybe the political dispute between Missouri Governor Matt Blunt and Missouri Attorney General Jay Nixon that prompted the AG’s Office to pull its staff attorneys from their day to day representation of the various state boards and agencies. This forced the Missouri State Board of Embalmers and Funeral Directors to look to the legal staff of the Division of Professional Registration, a staff that was already stretched. In reality, the NPS situation existed long before the AG pulled its attorneys, and the posturing has already begun for that issue.  

The NPS meltdown has regulators scrambling for their respective excuses. Some of those excuses will appropriately lay the blame back on the death care industry. However, NPS was an equal opportunist when it came to exploiting politicians and funeral directors. Eventually many individuals may be called upon to provide an explanation, but funeral directors and regulators would be better served channeling their current energies towards the recovery of consumers’ funds and the formulation of a program to administer those funds.  

In five months, consumers will be voting.  Will they be more receptive to excuses or explanations about the efforts already implemented to provide their funerals?

Everyone has an excuse. Write them down and put them away for another day.  

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Everyone complains about continuing education, but occasionally the concept is reinforced when a timely program provides needed insight. Such should be the case when the Missouri Funeral Directors and Embalmers Association sponsors a class on the tax consequences of servicing an NPS contract. 

Funeral directors need to understand that they do not necessarily incur a tax loss when they honor an NPS that pays less than their at-need prices. Incurring an IRS audit by improperly reporting NPS revenues would be salt to those wounds.

The MFDEA convention starts June 1^st, with a slate of classes scheduled for Monday, June 2^nd.   Continuing education is not required for Missouri licensees, but it should be. Regardless, NPS providers from Missouri have ample reason to consider attending the convention. Hearing the Missouri Attorney General’s Office address the NPS situation may be worth the price of admission.

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The Cassitys have a rearguard strategy after all.

The Texas Department of Insurance paid a price for gaining control of NPS and its sister insurance companies: A Rule 11 Agreement.   Texas has agreed to not bring litigation against the companies, or various individuals and firms related to NPS.  A very steep price, but one Texas may have felt it had to pay in order to gain control of the NPS/Lincoln records. 

The $640 million question is who will pursue the Cassitys if the NPS cupboard turns out to be bare? 

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As news of the NPS meltdown began to leak last month, several proposals to reform Missouri's preneed law were hastily drafted.  Not knowing the extent of NPS' problems, some reform advocates felt the need to strike while the iron was hot. 

Even as the legislative session ended on May 16th, it was not clear whether any reform would be enacted.  However, when the dust settled in Jefferson City, the only preneed reform enacted will prove the most prudent.

By virtue of an amendment made to Senate Bill 788 on the Senate Floor, the "Joint Committee on Preneed Funeral Contracts" was given birth.  The committee will be formed with seven members from each of the House and the Senate. 

The Joint Committee's tasks are to:

(1) Make a comprehensive study and analysis of the consumer and economic impact on the preneed funeral contract industry in the state of Missouri;

(2) Determine from its study and analysis the need for changes in statutory law; and

(3) Make any other recommendation to the general assembly relating to its findings.

By the time the Committee members are appointed, and hearings are scheduled in September, a great deal more will be known about NPS' business practices.  However, the hearings are bound to put Missouri's entire preneed industry under the microscope.  The death care industry has the summer to prepare.

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One positive aspect of Texas appointing a “Rehabilitator” for NPS and its sister insurance companies is the emergence of a single authority over the NPS empire, a godfather so to speak. Rather, a Godmother.

Funeral directors have been chasing legislators, regulators, government officials, and judges for help. This is quite understandable when your entire preneed program was with NPS. However, the Agreed Order Appointing Rehabilitator and Permanent Injunction (“Agreed Order”) will stay all lawsuits like that brought by the Broussard’s Mortuary, a long established Texas company. 

The Agreed Order could also bring much needed focus for groups like the “Consumers Funeral Assurance”, a Missouri outfit that is soliciting support from former NPS providers. (Have you spoken with Josh about the similarities in your names? )

One valid grievance funeral directors have with the regulators’ current status quo is the payment of claims based on the contract’s sales price.   For NPS contracts sold within the past few years, the contract face does not represent much of a hardship. It will be quite a different story for the twelve year-old contract.   Now we can appreciate why NPS was offering those Triad casket coupons.  

Rather than pursue geese like the “formation of a quasi-state agency that will assist with the payment of claims”, funeral homes (or the entities that form to represent them) should channel their energies and resources towards the inclusion of their issues in the plan of rehabilitation required by Texas law.   (See ¶2.11 of the Agreed Order.) 

While funeral directors may be tempted to seek an appointment with Ms. Garrett, they would be better served by briefing the issues for her consideration. Funeral directors should be objective and honest in how they present their issues. Ms. Garrett will be taking possession of all NPS records, and ostensibly, will discover which funeral homes received loans or special commission payments. The emperor has no clothes.  

It would also be advisable to tone down the rhetoric. Regulators are probably beginning to appreciate their responsibilities for the NPS failure, but are the funeral directors? 

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The dominoes are beginning to fall.  The Texas Department of Insurance has disclosed that Lincoln Memorial and its sister Memorial Service Life have been put into receivership.  The Department's website provides a copy of the order appointing a Donna J. Garrett as the companies' rehabilitator, and a Q&A for consumers. 

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Yesterday, the St. Louis Post-Dispatch ran an article that examined the history of NPS, and raised some of the questions that need to be explored in depth in the months to come.   The system failed in several states, for both consumers and funeral homes.   While most funeral homes will try to make good on the NPS promises to consumers, regulators must share in the responsibilities for what went wrong and what has to be done.

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The Missouri preneed industry faces a long and stormy summer. 

The Missouri legislature seems to be listening to regulators' requests for much needed authorities for examinations, audits and rulemaking.  A draft bill providing emergency powers to the Division of Professional Registration has emerged as legislation that may be signed into law before the current session ends next week.  In contrast to most bills enacted into law, this one is rumored to have an immediate effective date.

If the bill is signed into law, the Missouri State Board of Embalmers and Funeral Directors will begin to study methods for implementing the preneed inspection powers to determine whether the state's preneed problems extend beyond the NPS failure.  Though meant to demonstrate the industry's overall compliance with Chapter 436, recent testimony at legislative hearings may have undermined regulators' confidence in the industry's past efforts to comply with current law.

One approach the State Board will consider is a comprehensive desk top examination of each seller's fundamental compliance with Chapter 436.   Approximately 12 years ago, the State Board contemplated a broad based review process that  would have sought basic information about the three methods of funding: trust, insurance and joint accounts.   However, the initiative could not be pursued because the State Board lacked the authority to require compliance by licensees. 

I could not attend recent  a hearing where industry members testified before legislators to provide assurances that most funeral directors do comply with Chapter 436.  If the description provided to me about the testimony of one well intended funeral director was accurate,  funeral homes need to take a refresher on the requirements of Chapter 436.  I have heard similar misstatements by funeral directors at recent State Board meetings.

I anticipate that The Missouri Funeral Directors and Embalmers Association is already working on Chapter 436 compliance courses to provide its members.  Association members would be well advised to take such a course before assuming their funeral home is in compliance.

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On Wednesday, April 30^th, the Missouri Department of Insurance fired off the first salvo in the legal proceedings to recover funds from Lincoln Memorial Life Insurance Company. In an effort to prepare those affected by the NPS meltdown, the Missouri State Board of Embalmers and Funeral Directors and the Division of Professional Registration have issued press releases that explain critical issues related to this situation. The tenor of these press releases is substantially different from those previously released by other states’ regulators. Consumers and funeral directors need to review these releases carefully.   

If it hasn’t been apparent to funeral directors before now, Missouri’s filings against Lincoln Memorial Life reflect that the NPS trusts are full of term insurance policies. Some reports indicate that the policies may be lapsing soon. While Missouri Department of Insurance has filed its actions against Lincoln Memorial Life, the eventual target will be the NPS/Lincoln corporate officers and directors. Because regulators must pursue their claims through the authorities granted by the statutes governing insurance and preneed, funeral homes need to consider banding together in an action that focuses on the authorities granted to the replacement management team installed by the Texas regulators. 

The Missouri regulators and their legal staffs have been overwhelmed by the situation.   These offices were understaffed to begin with, and the magnitude of the investigation, legal proceedings and inquiries has stretched their resources to the limits. This all may make for good campaign rhetoric in the upcoming fall elections, but the industry needs to take actions to help recover improperly diverted funds. 

The rumors of law firms offering to initiate class action lawsuits have already begun to circulate. But, most funeral directors probably appreciate that building a coalition to preserve the NPS assets and working towards an equitable division of the proceeds would better serve their interests.   To be fair, consumers need an explanation about the third party preneed transaction and their exposure for the NPS failure. 

The majority of preneed contracts are between the funeral home/cemetery and the purchaser, wherein the funeral home/cemetery is the primary obligor. The essence of the contract is two promises: the purchaser to pay a specific amount of money and the funeral home/cemetery to provide certain described services and goods when the purchaser (beneficiary) dies.   

NPS is (was) a third party preneed seller. Funeral homes and cemeteries use third party sellers for a handful of valid purposes. Often, smaller death care companies may not have the volume of preneed sales to justify the expense of contracts, administration and compliance and so they contract with third party preneed sellers. Some states require the death care company to be the obligor of the preneed contract, but many do not. In states where law requires the death care company to be the obligor, the third party seller acts in an agency capacity to the funeral home and cemetery. It that situation, the death care company has an obligation to honor the contract regardless of most circumstances (like the failure of the trust). 

However, states such as Missouri and Texas, allow the third party seller to be the obligor of the preneed contract. In these types of preneed transactions, there are four sets of promises: the purchaser to pay money to the third party seller, the third party seller to cause the funeral home to provide a funeral by paying it money, the funeral home to provide the funeral, and the third party seller to pay money to the funeral home. However, the terms of the payment between the third party seller and the funeral home are not generally disclosed in the preneed contract, but rather in a separate agreement between the third party seller and the funeral home/cemetery (called an associate agreement or provider agreement). 

NPS used a multitude of different preneed contract forms and associate agreements (most of which were infamous for their ambiguity or brevity). NPS relied upon these ambiguities to transfer preneed contracts from one funeral home to another funeral home if the circumstances benefited NPS. Consequently, the agreements were intended to be difficult to enforce, which cuts two ways.

Regulators did not seem to appreciate this fact when early press releases were issued to calm consumers. Those press releases suggested that funeral homes would have to honor their NPS contract “pursuant to their terms”.   While funeral directors cannot afford to walk away from their families, regulators need to follow the lead taken by Missouri’s State Board of Embalmers and Funeral Directors by being more forthright with consumers.   If the NPS/Lincoln proceedings take years to resolve (instead of months), the parties will need an understanding of their respective rights and obligations in reaching fair and equitable settlements.

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With two reform bills (HB 2469 and HB 2594) already introduced into the legislature, and two substitute proposals in the works, Missouri legislators and regulators are committed to fixing a law that allowed NPS to exploit consumers and funeral homes. However, consumers and the death care industry are both having difficulty analyzing the specifics of the various proposals. The haste with which legislation is being pressed suggests that regulators know more about the gravity of the NPS situation than what has been disclosed to the public.

Chapter 436 has some obvious problems:

• The combination of a low trusting percentage (the last 80% of payments) and the right to withdraw income currently

• Restrictions on the state board to order inspections or audits

• Minimal reporting requirements

• Ambiguity regarding deposit requirements

• Ambiguity regarding insurance funded preneed

• A lack of rulemaking authority

• An underlying assumption that all preneed contracts will be price guaranteed, and most would be trust funded

• Inadequate provisions for consumer protections when sellers or providers go out of business or are sold

• A general lack of independent oversight

What may not be apparent to legislators, and to consumers, are the many competing economic interests that exist under the “death care” umbrella. There is little doubt that legislators are getting a crash course on those interests. The various proposals already reflect certain interests of regulators, funeral homes and preneed sellers. But if legislators are only now learning the issues, how will they know which proposals are in the best interests of the consumer?

If it were not for the NPS meltdown, Chapter 436 would not be a topic of discussion in Jefferson City. Last year, Representative Meadows proposed a reform bill that was blocked before it could even be discussed. The year before, the State Board of Embalmers and Funeral Directors put preneed reform on its agenda, but the chairman, Ken McGhee, received very little support, or interest.  The sudden interest to fix Chapter 436 is being driven by the NPS failure.

Preneed is a complex issue, and Chapter 436 has more faults than most states’ preneed laws. But, the NPS situation cannot be fixed if we do not know the extent of the damage. It is too late to close this barn door. Rather, the legislature must bring structure to a situation that has many competing interests. The NPS meltdown is unprecedented, and a public forum is needed so that all can understand what went wrong, and where should we go from here. 

With regard to drafting preneed reform, the Missouri death care industry has historically relied upon representatives from the State Board, the funeral directors association, the cemetery association, preneed sellers and the consolidators to forge a consensus bill to submit to the legislature. This group has been referred to as the Allied Council. It has been 13 years since the Allied Council forwarded a Chapter 436 proposal to legislators. Ironically, that Allied Council effort was subverted by NPS. 

Chapter 436 will be revised. However it should be done with the input of an Allied Council that includes consumers, insurance companies and the attorney general’s office. 

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Certainty? In this world nothing is certain but death and taxes.

Benjamin Franklin

The “collapse” of National Prearrangement Services comes as a shock to both the company’s clients and competitors. For the seventeen states in which NPS transacted business, regulators are scrambling to get their arms around the magnitude of the problem. NPS’ adversarial reputation will cause many regulators to move cautiously. However the capitulation by NPS to the termination of its marketing operations should cause regulators to consider whether the individuals that control NPS and its related sibling corporations have employed a rearguard strategy.

Missouri and Texas will figure prominently in regulators’ efforts to protect consumers. NPS maintains its corporate headquarters in St. Louis, Missouri.   The insurance company to which NPS funnels its preneed sales, Lincoln Memorial Life, is a Texas company located in Austin. Accordingly, records of NPS’ preneed sales should be in St. Louis and the funds received by NPS should (hopefully) have made their way to Austin, and subject to the jurisdiction of the Texas Department of Insurance (TDI).  

However, the news from TDI has been a bit confusing. On April 9^th, TDI issued a press release that disclosed that an Agreed Order had been entered into with NPS. The press release states:

The TDI-issued Hazardous Financial Condition Order requires the companies to establish a plan to pay policyholder claims and to address existing contracts.

"While every effort was made to secure the companies and return them to normal operations, the decision was made to take this regulatory action," said Texas Insurance Commissioner Mike Geeslin. "As we move forward, our goal is to use every law on the books to protect consumers, coordinate with other regulators and states and - most importantly - keep all parties informed as issues develop."

"It is imperative that we work closely with NPS and the funeral providers to ensure all Texas consumers receive their prepaid funeral goods and services as originally promised," said Texas Banking Commissioner Randall James.

For years, these companies have been dependent upon new sales (and trust transfers) for revenues to meet promises made to funeral homes. Consequently, TDI’s assurances about returning these companies to ‘normal operations’ rang hollow when news of NPS’ termination of its sales personnel was leaked. A day later, the Kansas City Star reported that a Kansas lawyer had taken “control of the company Tuesday as action manager of behalf of Texas,…”    So, what is going on? 

The lawyer referenced by the Kansas City Star article has experience with insolvent insurance companies, and so one explanation could be that Texas is preparing to take control of Lincoln Memorial Life. 

With NPS being deprived future sales, the Lincoln Memorial assets may be the only source of payment for hundreds of thousands of consumers. Texas reported 39,000 policyholders, and Missouri reported 46,000, and while these two states may account for a substantial portion of NPS’ business, there are 15 other states with NPS sales.

 With information in such short supply, one must be careful not to read too much into these press releases. But each seems to place emphasis on “Policies” and “Policyholders”. There seems to be an assumption (or at least a hope) that each NPS sale ended in a Lincoln Memorial policy. Yet, many of us know that NPS aggressively pursued trust rollovers that included questionable records for the preneed contracts involved. With regard to those transactions, it is unlikely that purchasers were ever contacted. The question then becomes what NPS/Lincoln did with the funds from their trust rollovers? 

To know just how deep the NPS waters are, Missouri is key to obtaining NPS and its corporate records. On April 9^th, the Division of Professional Registration issued a press release that advised:

Funeral directors are cautioned to ensure they maintain adequate records and evaluate any preneed arrangement sold on behalf of their funeral establishment.

On April 11^th, The Kansas City Star reported the following comments:

“We want people to know we are working to safeguard their interest,” ……….. “We’ve stopped the flow of business to look at what’s going on. Our concern is that they get what they paid for.”

While terminating NPS’ authority to enter new transactions had to be its first priority, Missouri must now determine how it can best protect all consumers, not just those from Missouri. If there is any doubt about the trust rollover transactions, Missouri needs to take prompt action to secure NPS’ corporate records. 

Which brings this post back to its introductory muse: has NPS been sacrificed as some sort of rearguard maneuver?  

We can hope that NPS will take all actions necessary to provide assurances to its policyholders, including cooperation with Missouri’s regulators. But if push comes to shove over records that document the company’s money trails, NPS may resort to its true colors when responding to Missouri’s requests. Funeral directors must prepare for that potential conflict.

All funeral homes that have NPS contracts should begin an inventory of their paperwork.   For funeral directors that participated in an NPS trust rollover, the inventory should include documentation regarding the application of the trust funds. If their records do not include such documentation, funeral directors need to consider making an immediate written request to NPS. An even tougher (but necessary) decision may be whether to copy that request to your state preneed regulator. 

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A bank client recently asked that I provide some standard of accountability for administration provided to a master preneed trust. As I struggle to provide the client a concise answer, I can’t help but to think that the issue will also become a crucial concern to consumers and funeral directors alike. As news reports reach consumers about the regulatory actions taken against the preneed programs maintained by NPS and by the Illinois Funeral Directors Association, families will begin to contact their funeral directors for reassurances about their preneed payments. Unfortunately, many state associations have not made accountability a priority, and their members may be ill prepared to respond to consumers’ concerns. 

For the independent funeral home, the state association can be a valuable resource to understanding the requirements imposed upon the profession by federal and state laws. As the preneed transaction grew in acceptance, most state associations formed master trusts to serve their member funeral homes.   These master trusts came to reflect not only the respective state’s preneed law, but also the attitudes and values of the association leadership.

Consumers need to appreciate that master preneed trusts are an important source of income to the sponsoring association. Because there are costs to providing contracts, administration, compliance, and asset management, the master trust provides the smaller funeral home the economies of scale necessary to reducing costs that would otherwise be prohibitive. However, the Illinois situation suggests that former association leadership may have exploited both members and consumers. While the association’s website is finally acknowledging the issue, the response lacks in terms of accountability. 

Getting back to my client’s question, how should accountability be measured for preneed administration from state to state? The diversity in the approaches taken by the state legislatures in regulating the preneed transaction is the single greatest hurdle to a comprehensive, national evaluation of preneed accountability. But perhaps transparency in terms of disclosures to both members and consumers would be one measure of accountability. On this standard, I would give kudos to the New Jersey Funeral Directors Association. It may be a sad reflection on the industry, but many funeral directors do not know what they are being charged for preneed services. The NJFDA provides this information for all to see.

If consumers do call for reassurances, funeral directors should have some basic information available to provide:

• How the preneed contract is funded (insurance vs. trust).
• The name of the insurance company or trustee.
• If the contract is trust funded, whether the trust holds deposit accounts, investments dictated by statute, diversified investments or insurance.
• Contact information for the person who can provide more information about the account.

When funeral directors begin to call for reassurances, association leadership should be prepared to provide the following information:

• The name and address of the trustee.
• The costs and expenses of the master trust.
• The master trust’s written investment policy.
• The fees paid to the trustee and account administrator.
• The taxes paid by the trust.
• A summary report of the trust’s performance and asset description.
• A disclosure of related party transactions (loans, discounts, service agreements, etc.)
• A summary of all trust expenses (excluding distributions for preneed contract performances and cancellations).
• The sponsorship fee paid the association. 

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NPS, beleaguered by state regulatory proceedings in Kentucky, Illinois, Ohio, Texas and Iowa, has called it quits. 

NO MAS! 

ENOUGH! 

Much to the surprise of industry leaders, NPS has suggested it will do what's in the best interests of the consumers.  Could this mean a refund to everyone?

April Fools Day!  

If anything, NPS is a fighter, and will battle each of these states.  Does NPS have problems?  Sure.  The insurance in the trust scheme has had competitors mad for years, and for good reason.  Does NPS' problems make it vulnerable to the funeral homes it contracts with?  Better go read those associate agreements.   The Funeral Service Insider suggests funeral homes could be taking the hit if NPS fails.  That may not be the case.  Nor is FSI's source on point when suggesting that the purchaser money that NPS collects is also the funeral home's money.   Funeral directors need to start reading those NPS contracts to determine if they are an 'obligor'.   Frequently, NPS associates are agreeing to provide the described funeral when they are paid pursuant to the terms of the agreements (note: plural..... agreements, you need to read more than the preneed contract). 

The consumer is the one most exposed by a possible NPS failure.  And if that were to happen, it would also be catastrophic to the industry's integrity, and the arguments against federal regulation.

But, it is a little early to be giving NPS any final rites.  Industry leaders need to take a calm approach to the situation, and avoid contributing to the rumor mill.  Consumers need to contact their state regulators to obtain more information about the safety of their funds.  Funeral directors need to get out those associate agreements, and begin to read.

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