When news that the Wisconsin Funeral Directors Association and its master trust had been put into receivership, I anticipated that the association may have fallen victim to a perfect storm: when an antiquated preneed law collides with a volatile investment market. But, subsequent news accounts are painting a bleak picture of poor planning and poor oversight.

The Wisconsin preneed funeral law alludes to trusts, but contemplates depository accounts. That is very consistent with the approach taken by most states. Accordingly, many original preneed laws provide very little statutory authority to the preneed fiduciary. Fiduciaries are forced to turn to general trust laws for guidance. If the fiduciary is not knowledgeable about the purpose of preneed contracts, crucial decisions are often deferred to the program sponsor.

Somewhere along the line, the WFDA program added a guaranteed return to its preneed contract. For a state that has a depository based law, that type of promise might seem appropriate enough. But, that promise of a return changed the consumer contract from a purchase of funeral goods and services to an investment contract. The WFDA program crossed a line established by the Securities Exchange Commission in “no action letters” issued to other sponsors of preneed programs (including various state associations).

Besting a certificate of deposit return may not have seemed to be too much of a risk to the fund managers, but they may not have foreseen the 2009 mortgage crisis. “Trapped” by the guaranteed return, the fund managers may have felt that they had little choice but to implement a more aggressive investment portfolio. But, if the program always had an aggressive investment policy, the fiduciary could have exposure for the oversight provided that policy.

If the firm employing the master trust’s fund manager seems familiar (Morgan Stanley Smith Barney), it could be from the litigation swirling around Mark Singer and Clayton Smart.