In a motion to convert the Wisconsin Master Trust from a preneed trust to a liquidating trust, the Receiver outlined to the court why the trust cannot keep its promises to consumers and comply with Wisconsin’s preneed law. Section 445.125 restricts preneed funeral trusts to depository accounts, and CD returns won’t even pay the Master Trust’s operating expenses (even after the Receiver has dramatically reduced those expenses). The WMT must diversify its investments just to meet its existing obligations, and to do so the Receiver proposes to transform the trust and take it out from underneath Section 445.125. This could mean that the Association may never regain control of the WMT, and that would deprive Wisconsin’s smaller operators a realistic alternative to insurance funding. Legislation is needed to replace Section 445.125 with the Prudent Investor Rule, but the Association faces a hostile cemetery industry and critical independents. It was only two years ago that the Association relied upon WMT fees to fund the fight to defeat cemetery legislation. With the cemetery industry seeking to re-introduce its legislation, the WFDA faces a situation of playing the spoiler role again while needing to explore all possible avenues to legislation that would preserve their ability to regain control of the WMT.
In a post made June 30th, we discussed how the strategy behind the Wisconsin settlement proposal makes sense. But, a significant percentage of funeral homes have yet to sign on to the settlement. In terms of the Master Trust’s liabilities to consumers, funeral homes with 30% of those contracts are holding out. While both the Receiver and the WFDA’s attorney are putting a positive spin on the situation, the Receiver has gone public through his website to further pressure the dissenting funeral homes. Stressing consumer protection, the Receiver’s website lists the funeral homes that have, and have not, accepted the settlement and explains that:
Under this agreement, funeral homes that sign the settlement will ensure that their customers receive the benefits promised them under their burial agreements and, in exchange, will be protected from possible further court action.
An implicit message that can be taken from this statement is that a dissenting funeral home is not willing to promise that their customers will receive the benefits promised them under the burial contracts. For most funeral directors, it is not a matter of keeping their commitment to the consumers. Accordingly, we can’t help but wonder whether some of the dissenting funeral homes are expressing the same concerns raised by IFDA funeral homes regarding the settlement agreement brokered by Merrill Lynch.
Yes, the funeral homes wanted to recover as much in damages as they could, but they did not trust Merrill Lynch to find a way out of the hole it had created. Merrill Lynch did not want to be trustee of the IFDA master trust, and that was more than apparent to many Illinois funeral homes.
The Wisconsin law that restricts preneed funeral trusts to depository accounts cuts both ways for the Receiver. While it provides a clear standard for holding fund managers and fiduciaries in breach of their duties, the law also restricts the Receiver’s options for improving the WMT’s investment performance. What the Wisconsin Master Trust needs is legislation to expand the permissible investments for preneed trusts, but the Receiver’s job description does not include being a lobbyist for the WMT.
Several factors make it difficult for the WFDA to sponsor such legislation, and as a result, some funeral homes may rather ‘bail’ out of the situation.
Fiduciary Partners, the corporate fiduciary for the Wisconsin and Illinois master trusts, broke its silence this week with a statement to the Funeral Service Insider. The statement was made in response to criticisms previously reported by FSI, and reflects the receiver and fiduciary working together to get their “message” out and avoid the kind of litigation that has hamstrung the IFDA, its membership and the Illinois funeral industry.
FSI commentators used Fiduciary Partners’ link to the two states to drive home with funeral directors various preneed problems* including the management and investment of preneed funds, and the state of the guaranteed preneed contract and its impact on funeral pricing practices. While the issues need to be incorporated into a national dialog, Fiduciary Partners interpreted the FSI report as encouraging Illinois and Wisconsin funeral directors to assign blame to Fiduciary Partners. Consequently, Fiduciary Partners and the receiver felt compelled to respond.
As reported in a prior post, the WFDA leadership had muzzled Fiduciary Partners with a very strict confidentiality provision through an amendment to the master trust. Accordingly, the statement given to FSI has been made with the receiver’s approval, and could be taken as having the WFDA’s endorsement.
To neutralize litigation over the trustee’s role in administering investments, Fiduciary Partners and the receiver sought to clarify that the company had a very limited role that never included the management of investments. The message goes on to reinforce the need for Fiduciary Partners to continue to provide administrative functions related to individual contract accounting and performance payments. The statement also conveys a tacit acknowledgement of the WFDA’s secrecy, with Fiduciary Partner’s commitment to a new transparency.
It is inevitable that comparisons will be made between Wisconsin and Illinois, and to conclude that litigation may also be inevitable. However, one stark difference exists between the two situations: Illinois funeral directors faced a recalcitrant board that refused to acknowledge and correct its mistakes. That leaves the question whether Wisconsin funeral directors will bring litigation to recover damages. As one FSI commentator points out, damages will be difficult to measure when the association reported inflated numbers (through the guaranteed rate of return). And as the other commentator points out, member funeral directors need to take responsibility for hiring executives and fund managers that are competent and professional. It was their hire of an inexperienced executive that ultimately directed the use of trust funds to establish an insurance company.
The multi-million dollar question to be asked is what if Fiduciary Partners had responsibility for investment oversight? Would the trustee have been able to check Mr. Peterson’s actions? In our next post, we will look at the hold harmless provisions so popular in the preneed trust agreement.
*Reprinted from the Funeral Service Insider – October 29, 2012
**Reprinted from the Funeral Service Insider – November 5, 2012
To obtain a full copy of the Funeral Service Insider, contact www.funeralserviceinsider.com to subscribe.
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.
When news of the Wisconsin receivership was made public, I anticipated some signs of support from other state associations. The strength of a professional relationship can be measured by the support given subsequent to a public indictment. But, when that support comes in the form of hackneyed advice, the accused is left to wonder about the relationship. It should not come as a surprise if the Wisconsin Funeral Directors Association leadership was frustrated or angered with the National Funeral Directors Association or the New York Funeral Directors Association over the ‘advice’ given through trade journals.
When asked by the Funeral Service Insider for a response to the Wisconsin ‘scandal’, the NFDA recommended its model preneed law and referred members to its “Guidelines for Evaluating Preneed Trusts”. How would the model laws have avoided the Wisconsin scandal? Does the NFDA advocate investment standards that would permit diversification and the prudent investor rule? Would those model laws make the Wisconsin program more competitive with insurance companies?
If one were to review the NFDA’s Guidelines for Evaluating Preneed Trusts, you would find a section titled Rate of Return. That section includes questions about whether the preneed program provides guarantees about the rate of return on investments. It would be reasonable for the WFDA leadership to infer from the Guidelines that fixed or guaranteed rates of return are an acceptable method of master trust administration. So, that leadership has to be asking itself why they are facing a securities investigation by including that same guaranteed rate of return in preneed contract forms and consumer marketing materials. The WFDA leadership could have corrected its program and avoided the securities issues if those Guidelines had been revised years ago to recommend market value administration and the limitation, and disclosure, of the association fees charged to the trust.
The NYFDA association advises the funeral industry that state associations are uniquely well-positioned to deliver on preneed safety and security, and argues that competent executive directors and educated volunteer leaders can deliver what no other entity can. The NYFDA goes on to assert that return of principal is more important than return on principal, and that trust programs start to go off the rails when too much authority and oversight is handed over to third parties (that want to make money on the backs of funeral firms and consumers). What is the WFDA preneed committee (or other associations) to make of that advice? Are they to direct the trustee in making investments? Are they to ignore the demands of trust participants for higher returns? Are they to ignore the fact that New York is the only state to have laws that require 100% trusting and that bans insurance funded preneed? The reality is that state association preneed programs are under increasing pressure to improve investment returns. Unfortunately, associations are contributing to that pressure with the fees they are charging the trust.
During the past six years, four state sponsored programs have “crashed” due to fiscal problems and noncompliance. Minnesota, Illinois, California and Wisconsin all seemed to have respected executive directors and educated volunteer leaders. What roles did internal fees and outdated laws play in each situation? Would these associations have lost program participants (and the accompanying sponsorship fees) if they had provided more transparency regarding investments and internal fees?
I agree with Ms. McCullough that association sponsored master trusts are uniquely well-positioned to deliver on preneed safety and security. The problem is that too many have not delivered either safety or security. How many of these programs adhere too closely to Ms. McCullough’s advice? The affidavit that served as the tipping point for the appointment of the Wisconsin receiver paints a picture of a dominant association executive and an active and engaged volunteer board. Where were the compliance attorneys and the corporate fiduciary during the preneed committee meetings? Were they even invited? While there will be more pieces to the Wisconsin puzzle, what is available today suggests that the WFDA should have sought the input of “experts” instead of excluding them.
On June 8th, 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 8th Application is only the beginning.