With our next few posts we will dive deeper into SB32, the Missouri preneed legislation intended to provide the State Board a new audit direction and some new enforcement tools. Our first issue will be the change in course on preneed audits.
The bill would amend section 436.470 by adding the following new section:
3. The board’s financial examination guidelines shall include processes and procedures for determining adequacy of funding of sellers’ preneed obligations, compliance of seller’s handling of consumer funds with this chapter, and compliance of trustees’ administration of preneed trusts with this chapter.
The preneed seller shall provide the following items for each financial examination:
(1) A listing of all preneed contracts sold during the requested period;
(2) A listing of all outstanding preneed contracts;
(3) A listing of all preneed contracts cancelled or transferred during the requested period;
(4) A report from each financial institution and insurance company utilized by the seller that shows as of the examination date each active consumer name, account number, start date, contract purchase price, amount received, amount on deposit, the account fair market value or insurance death benefit;
(5) Copies of preneed contract forms currently being used;
(6) A copy of the trust agreement(s) with the trustee(s);
(7) A copy of all agreements with providers or preneed agents;
(8) Trustee transaction statements for periods designated by the board’s financial examiners or department of commerce and insurance designee; and
(9) Any other report or document related to the administration of the seller’s preneed trust that may be requested
The introductory paragraph establishes that State Board audit procedures are to focus on three things: 1) the adequacy of the seller’s preneed funding, 2) the seller’s handling of consumer funds, and 3) the trustee’s administration of seller trusts.
With regard to the adequacy of the seller’s preneed funding, the State Board will need either trust statements or insurance in force statements. This will involve a comparison of the trust assets’ fair market value to the cost to perform the seller’s outstanding preneed contracts. None of that argument about comparing trust cost basis to the refund obligation if all contracts canceled on the same day.
With regard to the seller’s handling of consumer funds, the State Board needs either trust transaction statements or insurance company reports that reflect when the seller deposited consumer funds. The State Board needs to confirm sellers are depositing all consumer funds within 60 days of their receipt.
Third, the State Board will need trustee statements to determine fiduciary compliance with the distribution of origination fees, sales expense fees, trust expenses, cancellation distributions, performance distributions and any other seller distributions. When trustees make excess income distributions under the prior law, is there documentation to confirm the compliance of that distribution? Are trust expense distributions for administrative services provided by a firm independent of the seller? How are performance and cancellation distributions computed? How are sales expense and origination fees computed?
We already know the objections that will be raised against this pivot in direction because they were raised in 2017 when the State Board’s exam committee made recommendations to begin tracking the consumers’ funds. No, requiring supporting documentation from banks and insurance companies will not be burdensome when the State Board employs sampling when testing for compliance by sellers and trustees. What we wrote in November 2017 remains true today (Missouri’s Preneed Examination Process: A New Focus)