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 Missouri record keeping proposal addresses funeral homes that handle insurance premium payments.  For funeral homes that rely upon insurance funding for their preneed program, the initial payment is typically handled by the funeral director or preneed agent, and then subsequent premium payments are made directly to the insurance company.  However, some funeral homes also handle the monthly premium payments.   For these two situations, Missouri funeral homes would be required to satisfy the following record requirements:

  1. For insurance funded preneed contracts, if the seller or the seller’s agent receives payment from the consumer for the insurance:

(1) Records that show the date, the name of the person paid, a description of any consumer payments received, and records showing any account into which those funds are deposited; and

(2) Records showing the date, the name of the person or entity paid, and description of payments to any insurance company.

The first question that arises about this section concerns the phrase “the name of the person paid”.   That phrase is open to different interpretations.  And then, what kind of “description of any consumer payment” is the rule contemplating?  Source of funds?   The next second subparagraph then again seeks “the name of the person or entity paid”.   How is that “person paid” different from the person paid referenced in the prior paragraph?

But, what is perplexing about this section of the proposal is what records are not required: receipts and disbursements made by the insurance company.  In our prior post we discussed the rule’s provisions requiring trust disbursement records, and how those records would have allowed regulators to track disbursements made from NPS trusts.  But, the NPS abuses that brought down the Ponzi scheme were made by the insurance company Lincoln Memorial.  NPS used white-out to change single premium contract purchases to installment payments, and then policy loans were used to obtain funds before the contract was serviced.  If the misconduct of NPS is the basis for requiring additional trust records, then the rule proposal should also address the abuses perpetrated by the insurance company.   Borrowing from the prior section of the rule proposal, the following records would also be required:

(3) If funds for a preneed contract are paid by the consumer directly to the insurance company, the seller shall maintain, or be able to access, records from the insurance company showing the dates and amounts of each premium and the name of the preneed contract beneficiary for each premium received; and

(4) Records showing any disbursement from an insurance policy for any purpose other than cancellation or fulfillment of a preneed contract with a description of the purpose for the disbursement, and the date, amount and to whom the payment was made.

We also question why different types of records are required based on the type of funding used.  In response to this issue, we had suggested the following record to the State Board:

With regard to consumer funds received by the Seller or the Seller’s agent, the Seller shall create and maintain a consumer receipts record for each calendar month that reflects the following:

  1. The purchaser’s name;
  2. The payor name if different than the purchaser;
  3. The preneed contract number;
  4. The date received;
  5. The source of funds (cash, check, money order, etc)
  6. The date the funds were submitted or forwarded to the funding agent;
  7. The funding agent (if the consumer receipts journal is maintained for more than one funding agent);

A Seller shall create a consumer receipts record for every month including those months in which no payments were received, until all contracts are paid in full or have lapsed according to the terms of the preneed contract.

The seller may, but is not required, to maintain a separate consumer receipts record for each funding agent used.

 

The next section of Missouri’s preneed record keeping proposal  targets trust disbursements made for purposes other than preneed contract performances or cancellations:

(5)          Records showing any disbursement from a preneed trust or joint account for any purpose other than cancellation or fulfillment of a preneed contract with a description of the purpose for the disbursement, and the date, amount and to whom the payment was made.

This section is in response to the misconduct of the National Prearrangement Service trustees that permitted unfettered disbursements by NPS.  Trustees may not have an issue with this requirement if the seller can comply with a copy of the trust’s tax ledger statement or an annual disbursement report.   (As discussed in our prior post, some banks may be limited in what they can provide in the way of a disbursement journal.)  However, if the State Board is seeking records that reflect the fees disbursed from each consumer account, then sellers would have to be advised if the trust’s QFT attachment would suffice.   Depending on what the proposal is ultimately seeking, Missouri sellers would need to discuss with their trustee whether existing records can be used to comply.

Sellers that rely upon joint accounts for preneed funding may need to seek clarification that a bank certification (that no funds have been disbursed) would suffice.

Many Missouri preneed sellers have become dependent upon their trustee for the individual contract accounting required by law changes implemented in 2009.  Some of those same funeral homes also have consumers make their preneed contract payments directly to the trustee.  As a consequence, the seller does not handle consumer funds, and is unable to document preneed contract payments.   The next section of the Missouri seller record keeping proposal is directed at that situation:

  1. For trust and joint account funded preneed contracts:

(4) If funds for a preneed contract are paid by the consumer directly to the financial institution, the seller shall maintain, or be able to access, records from the financial institution showing the dates and amounts of each deposit and the name of the preneed contract beneficiary for each deposit made; and

This record keeping requirement could prove problematic for Missouri’s preneed sellers in a couple of different ways.

To the extent that banks and trust companies provide on line access to trust clients, transaction records are typically archived after a couple of years.  After transactions have been archived, the preneed seller can no longer access the records via the internet portal.   Consequently, the staff’s proposals would require preneed sellers to down load transaction records on a regular basis.

Banks and trust companies use a variety of different trust accounting platforms, and some of those platforms offer limited options for reporting transactions.  To minimize account inputting, trustees may aggregate consumer payments prior to inputting deposits to their accounting system.   Consequently, the trustee may not have a record that shows the date and amount of each consumer deposit.   The best record the bank may be able to provide would be a monthly or annual summary of trust deposits.

Another problem with this section is that individual consumer accounts are typically set up in the purchaser’s name.   Payments are matched up to the purchaser (who has written the check to the bank).

 

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.

In our continuing review of the Missouri Seller Record Keeping proposal, the rule next addresses what a preneed seller must retain with regard to its consumer contracts.  However, the proposal actually contains two sections requiring the retention of contracts and agreements (Section 2.A and Section 2.F). Of the two, Section 2.F is the more detailed:

  1. Copies of any agreements or contracts related to the practice of a preneed seller including, but not limited to, the following:

(1) Preneed contracts;

(2) Trust agreements;

(3) trust administration agreements;

(4) Provider agreements;

(5) Preneed agent agreements,

(6) Insurance agreements,

(7) Insurance assignments;

(8) Insurance beneficiary designations;

(9) Investment advisors; and

(9) Any other contracts or other agreements between purchasers, beneficiaries, providers, sellers, agents, financial institutions, insurance companies, investment advisors and trustees related to preneed contracts or the holding of preneed funds;

The language from this section that concerns funeral homes are the phrases “including, but not limited to,” and “Any other contracts and other agreements…”

Both phrases suggest that the staff wants open ended authority to seek funding source related agreements that they may not now be aware.  But, the last subparagraph is worded so broadly that it would define the compensation arrangements of preneed salesmen, fund managers, and insurance agency brokers as records to be maintained for the preneed examination.

Section 2.A of the proposed rule reads:

  1. For all preneed contracts:

(1)  A copy of the executed preneed contract;

(2) A copy of all terms of the preneed contract;

(3) A copy of any attachments, additions, or documents supplemental to the preneed contract;

(4) Records related to the funding source for the preneed contracts, and

(4) All other records required by law to be maintained.

It is probably understood by preneed sellers that the retention of an executed preneed contract includes all documents supplemental to the agreement, such as the description of goods and services.  But, if such language is needed, it could be added to Section 2.F.1.  That would eliminate the first three subsections of the 2.A.

The last two subsections of 2.A ( both numbered as (4)) are both vague and ambiguous.  Later sections of the rule proposal cover both of those subsections in greater detail.  Accordingly, Section 2.A should be omitted completely and Section 2.F should then be revised to address the two phrases that are causing funeral directors concern.

The purpose for a record keeping rule is to inform licensees what reports and documents that they must either maintain, or create, to enable the preneed examiner to determine compliance with state law requirements.  But, the opening paragraph of the proposal given the Missouri State Board puts the cart in front of the horse:

A seller shall maintain a copy of each fully executed preneed contract and all records with regard to all preneed contracts related to the receipt, the deposit, the disbursement of preneed funds, and the performance of the preneed contract and to comply with applicable statutes and regulations.

Funeral directors have complained that this provision (and similar language included in prior proposals) would render every document, report, letter, communication or piece of paper that relates in any manner to their preneed program as a “record” that must be retained for examination purposes.  And, those funeral directors have a valid objection.  The proposal’s first course of action should be to describe or define what constitutes a record for purposes of compliance.

Funeral directors are also questioning the purpose for requiring records regarding the disbursement of preneed funds or the performance of preneed contracts.  We could support a requirement for disbursement and performance records if the State Board were proactive in prosecuting sellers that divert consumer funds to their operating accounts.  But, that has not been case.  Disbursement records could also be relevant to determining if fiduciaries are discharging their duties, but does the State Board have jurisdiction over fiduciaries?

It’s been fifteen months and counting, but the Missouri State Board of Embalmers and Directors and their Division staff are still at odds over a rule for defining minimum record keeping requirements for preneed sellers.  The Division staff first floated an “Adequate Records” rule in July 2015, but the draft was not formally submitted to the Board for discussion until the following December.  That proposal was criticized as ambiguous and overreaching, and a special January meeting was scheduled for further discussion.  (In our January 3rd post, we reported on the outcome of that meeting.)  The staff submitted a revised rule to the State Board in June, and again the State Board tabled the proposal.  So last month, the Division staff submitted a third recordkeeping rule.  But, the Board and staff quickly became frustrated with each other, and the proposal was tabled with a warning from the Board attorney that licensees will suffer the consequences if no rule is adopted.  That warning suggests that the Division staff will continue to direct the preneed examiners to seek the types of records described in the rule proposal.  Some sellers will not be able to produce the requested records, and those ‘missing records’ will be cited as exceptions on the examination report.  It will then be the licensees’ turn to become frustrate when summoned by the staff to appear before the Board regarding the “adequacy” of their seller records.

The reluctance of the Board members to approve the record keeping proposals stems in part from their own uncertainty about what records are being sought, and the purposes for requiring such records.  The mantra expressed by the industry, and echoed by some Board members, is that the staff is attempting to go beyond the mandate of SB1 (to ensure all consumer funds are deposited with the preneed funding agent).

Over the following weeks, we will explore the staff’s third proposal and the examination handbook in detail.

As discussed in our prior post, funeral homes are becoming increasingly dependent upon their preneed trustee for individual account administration.  Many trustees that provide account administration rely upon programs that use tax cost basis accounting.  (For a prior discussion of tax cost basis see “Consumer Options and Administrative Hurdles: Market Value Allocations”.)    Tax cost accounting programs require the trust to realize income and capital gains before preneed contracts can reap any investment return.  Prior to the 2008 mortgage crisis, most preneed trusts were invested primarily in long term bonds, and thus, were income return trusts.

Ten years’ of declining bond yields have forced many preneed trustees to diversify investment portfolios into equity holdings.  However, tax cost accounting has had a countering force on the fund manager.  The fund manager must sell assets in order for the trust to reap an investment return.  As a consequence, this year’s investment market surge has not necessarily translated into higher contract distributions for those preneed trusts with a tax cost accounting system.

When a fund manager seeks to harvest growth on a regular basis, he must then find new growth opportunities to provide a consistent return.  The fund manager will be forced to ‘ride the crest’, increasing the trust exposure to market volatility.

A Missouri funeral home client recently had a consumer with a trust funded contract cancel their prearranged funeral and request a refund. The contract was sold subsequent to the 2009 law change, which provides the consumer a refund equal to all payments in excess of a 5% origination fee. Missouri law allows sellers to withdraw a sales expense of 10% of the sales price, but that amount must be refunded if the consumer cancels the contract. Trust income can be used to fund the 10% sales expense owed by the seller. However, this particular contract had not been in trust long enough to earn the sales expense amount. When advised of the amount that the funeral home would owe the consumer, the funeral home questioned why the trust could not refund the entire amount. In the absence of a Missouri law provision that entitles the funeral home to the trust income, a nationally chartered fiduciary is bound by the Office of the Comptroller of the Currency rules governing common trust funds. In prior posts we have discussed Regulation Part 9, and how funeral preneed trusts are a form of common trust fund. (Strength in Numbers) Each consumer account is a separate trust, and should be administered accordingly. The OCC would frown upon a trustee withdrawing funds from one consumer trust to fund a distribution owed to the beneficiary of another trust.

Prior to the 2009 law change, Missouri preneed sellers were entitled to trust income, and trustees were exempted out of the OCC rules regarding income administration. It was fairly common for state preneed laws to vest trust income in the seller (as a way to ensure taxation of trust income to the seller instead of the consumer). Missouri’s prior law was an example. Accordingly, trustees could appropriately transfer or distribute income from consumer accounts. The concept that each consumer account is its own separate trust is not only foreign to Missouri funeral homes, but also to Missouri’s State Board of Embalmers and Funeral Directors.

A preneed trustee must look to trust income to fund trust administrative expenses. Similar to the client with the contract cancellation, preneed contracts that are serviced within a few months of sale do not earn sufficient income to offset the cost of creating the consumer account. One Board member’s comment was that the seller should bear that cost. However, the reality is that more and more sellers are dependent upon the trustee for individual consumer contract accounting.