The last time the Missouri State Board of Embalmers and Funeral Directors took up the issue of preneed seller record keeping requirements, the staff proposal emphasized a contract ledger approach.  The proposal sought to require a contract record that reflected the amount and date of each payment received and the corresponding dates and amounts deposited to trust, joint account or insurance.   The ledger card would have to be maintained manually, and would be very burdensome for the funeral home that allows consumers to pay by installments.   Ostensibly, the funeral home seller would be required to maintain a separate ledger card for each consumer, regardless of the method of funding.

In lieu of the ledger card approach, this author has proposed record keeping requirements to the State Board that would require one set of records documenting the funeral home’s receipt of consumer records by month and another set of monthly records documenting the transmission of consumer funds to the preneed funding agent.   These types of records would serve as the starting point for a financial examination that would employ an audit trail to track consumer funds through the hands of the funeral director to the appropriate funding agent.  The objective would be to determine that all consumer funds are being timely deposited with the funding agent.

This time last year, the hot topic before the Missouri State Board of Embalmers and Funeral Directors was the staff’s proposed regulation to define what constitutes adequate records of a preneed seller.   The proposal was revised more than once during 2016, but it was eventually tabled by the Board before any consensus could be reached.  This blog discussed several of the industry’s concerns about the proposal in a series of posts last year (click here to view those posts).

We still believe those concerns merit an open discussion before the State Board.  Last summer, the State Board did little to facilitate any discussion with licensees.  Having since filed an administrative hearing commission complaint over the inadequacies of one seller’s records, the Board may still be reluctant.  Guidelines are needed, and the Board should be listening to licensees about defining reasonable record requirements.

Prosecutors and investigators have commented to our office about how difficult it can be to prove preneed fraud.   They won’t know whether the consumer has been harmed until the death of the contract beneficiary, and then whether the funeral is provided.  In Missouri, prosecuting a bad apple funeral director got much easier as of January 1, 2017.  We discussed the “Oklahoma Option” in a blog post made almost two years ago.

There remains a significant hurdle to the Oklahoma Option in Missouri: the adequacy of preneed seller records.  The State Board and its staff have gone back and forth for more than a year over a rule to define adequate seller records.  The original rule was vague and confusing.  The industry suggested informal meetings to discuss record options, but ultimately, the staff requested, and received, until the Fall of 2016 to submit a more detailed rule proposal.  But in September, the Board tabled the staff’s record keeping rule as unresponsive to their instructions.  In a series of subsequent blog posts, we addressed the issues we had with the staff’s proposal.

The Oklahoma Option is why we have advocated that seller records include more detail about monthly receipt and deposit records.  (Follow this hyperlink.)  Even if the State Board will not proactively refer cases to local prosecutors for criminal proceedings, they must not handcuff the prosecutor with record keeping requirements that fall short.

The next section of Missouri’s seller records rule proposal seeks the following documents:

D.  For all fulfilled preneed contracts:

(1)   Records showing seller’s performance for fulfilled preneed contracts including:

(a)  Written certificate(s) of performance for each preneed contract fulfilled;

(b)  Requests to the financial institution and/or insurance company for payment;

(c) Evidence of the date the seller received the funds from the financial institution or insurance company;

(d) The account from which the funds were paid to the seller; and

(e)  All other records showing the seller’s performance of the preneed contract.

Missouri funeral directors have questioned the need to maintain records reflecting the performance of preneed contracts.  In the prior post titled “Drilling Deeper”, we discussed that the State Board may eventually seek preneed records that would help auditors find any ‘hidden drawers’.    That euphemism is used for the location where the unscrupulous funeral director hides his unfunded preneed contracts.    The ‘fulfilled preneed contract records’ sought by rule proposal may be intended to discourage the hidden drawer.

The next section of the proposed record keeping rule for Missouri preneed sellers addresses the timely deposit of consumer funds to preneed trusts.  Missouri’s prior preneed law did not specify when consumer deposits were required to be deposited to trust, and National Prearranged Services exploited that omission.  NPS claimed that consumer funds need not be deposited to trust until the consumer had paid their contract in full.  The following language was included when Chapter 436 was re-written in 2009:

 A seller must deposit all payments received on a preneed contract into the designated preneed trust within sixty days of receipt of the funds by the seller, the preneed sales agent or designee.

To be able to confirm compliance with the trust deposit requirement, the State Board staff has proposed the following record requirements:

  1. For trust and joint account funded preneed contracts:

(1)  Records showing the date and amount of the funds received by the seller’s agent;

(2) Records showing the date and amount of funds received by the seller;

(3) Records showing the date and amount of the funds deposited into any account and identifying the institution receiving the deposits and the account into which funds are deposited;

However, Missouri sellers are questioning why records for when the deposit is received by the seller’s agent, and then again when it is received by the seller.  The trust deposit record language could be stated as follows:

  1. For trust and joint account funded preneed contracts:

(1)  Records showing the date and amount of the funds received by the seller or the seller’s agent;

(2) Records showing the date and amount of the funds deposited into any account and identifying the institution receiving the deposits and the account into which funds are deposited;

Both sections of the timely deposit record could easily be met with an Excel worksheet similar to this this form.

When the Missouri State Board of Embalmers and Funeral Directors met June 30th to discuss a proposed rule defining new record keeping requirements for preneed sellers, one Board member spoke a sentiment that many funeral directors share: keep it simple, stupid.   The Board member suggested that consumer receipt records could be as simple as copying the check and the trust deposit slip and retaining those copies in the consumer contract folder.   In contrast, the staff proposal, and this author’s proposal, describe receipts and disbursement journals.   The reason for requiring a receipt journal is to allow an auditor to identify which consumer accounts have received payments, and then to pull those files for review.  The same would be true for disbursements.   For accounts that have no activity (receipts or disbursements), the auditor may not even need to review.   One purpose for the new record keeping is to expedite the exam process.

At its March meetings, the State Board again received from the Division staff a rule proposal that would define the minimum records that a preneed seller would have to maintain.  The first recordkeeping proposal was offered last July, but was never discussed.  The recordkeeping proposal was subsequently included on the December agenda, but was only discussed briefly.  In prior posts to our blog, we have suggested that a recordkeeping regulation is needed as the foundation to establishing procedures for the second round of preneed financial exams.  With second round exams now being scheduled, we will explore over the next several weeks the recordkeeping proposal in greater detail:

Adequate records for a seller to maintain shall include, at a minimum:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from both preneed trusts and preneed joint accounts, specifically identifying the date, source, and description of each item deposited as well as the date, payee, and purpose of each disbursement;

(2) ledger records for all preneed trust and preneed joint accounts showing, for each separate preneed contract, the source of all funds deposited, the amount of such funds, the descriptions and amounts of withdrawals, and the names of all persons or entities to whom such funds were disbursed;

(3)preneed contracts, trust agreements, trust administration agreements, provider agreements, preneed agent agreements, and all correspondence related to the preneed contract;

(4) accountings showing the disbursement of funds;

(5) records showing disbursements;

(6) the physical or electronic equivalents of all checkbook registers, bank statements, records of   deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;

(7) records of all electronic transfers from preneed trust or preneed joint accounts, including the  name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;

(8) reconciliations of the preneed accounts;

(9) those portions of preneed files that are reasonably related to account transactions;

(10) records of credit card transactions related to any preneed transaction to the extent permitted by law and the payment card industry data security standard;

(11) all information obtained by the seller related to any insurance policy used to fund any preneed contract that may include a copy of the insurance policy, any assignment or beneficiary designations, any statement showing any status of any insurance policy used to fund a preneed contract.

(12) any communications between the seller and the purchaser and/or beneficiary of the preneed contract related to the preneed contract;

(13) any written certificates of performance received by the seller.

The final section of the Missouri preneed seller record rule will likely draw criticism from the industry:

The standards set forth in this rule are stated only as minimum standards.  Each seller may maintain any records in addition to those set forth in this rule.  In addition, if the board determines that it is unable to fulfill its statutory duties from the records maintained by any seller, the board may request records in addition to those listed in this rule so as to complete its statutory duties.

The section seems to be acknowledging that sellers, and their funding agents, will likely create and maintain preneed records that go beyond the regulation’s requirements.  And, if the Board cannot determine compliance with Chapter 436 based on the ‘adequate records’ required by the rule, the Board may request  the records that go beyond the rule’s requirements.  The challenge that may be made is whether this section is an attempt to empower the Board to require a seller to create and maintain records that have yet to be defined.  It is foreseeable that the Board may need records regarding trust allocations or insurance payouts on non-guaranteed contracts.   Whether this section could be an overreach by the Board will depend on the facts and circumstances.

The next section of the Missouri preneed records rule provides the funeral home latitude to maintain records in either a hard paper copy or an electronic format, but so long as the records are provided to the State Board in a timely manner:

All records required to be maintained by a seller may be maintained in paper or electronic or a combination of paper and electronic formats, but shall be maintained in a manner such that the required information may be retrieved and provided to the board in a timely manner, upon request in accordance with the statutes and regulations governing the board.

Some funeral homes have not yet adopted the paperless office concept.  We have such clients, who struggle with Excel spreadsheets and PDF documents.  The proposed regulation is acknowledging those types of sellers, but warning that reliance on paper reports will still require that they be able to find, copy and deliver those reports to the State Board within a timely manner (generally within 30 days of request).

Missouri’s preneed seller records proposal would require preneed sellers to retain all communications that relate to their preneed contracts:

Any written (including electronic) communications between the seller and any preneed agent, provider, trustee, investment advisor, insurance company, purchaser and/or beneficiary of the preneed contract and any other person related to preneed contracts and the funding of those preneed contracts;

Communications will often flag potential problems to an auditor, and accordingly this provision represents a crucial record.   The potential problem with this provision will regard how the State Board expects communications to be organized and stored.   Some communications might need to be stored based on their source.  However, communications that are specific to a particular contract, should be stored with that consumer file.   Funeral directors are bound to ask if this provision is going to require a redundant set of records.