FTC Staff Comment Before the Pennsylvania House Committee on Business and Commerce Concerning H.B. 1140 to Require Sellers of Pre-Need Cemetery or Funeral Goods Services to Deposit Proceeds into a Trust Fund

V890090
aJMMlSS10N AUTHORIZED
PRE-NEED 	FUNERAL TRUST FUND REQUIREMENTS
PREPARED STATEMENT OF
MICHAEL 	D. 	McNEELY
ASSISTANT 	DIRECTOR
BUREAU OF 	COMPETITION
FEDERAL TRADE 	COMMISSION
BEFORE
COMMITTEE 	ON BUSINESS AND COMMERCE
HOUSE 	OF 	REPRESENTATIVES
THE GENERAL ASSEMBLY OF THE COMMONWEALTH OF 	PENNSYLVANIA
AUGUST 	29, 	1989
'.

Good morning 	[afternoon] 	Mr. 	Chairman 	and members 	of 	the
Committee:
My name 	is 	Michael 	McNeely. 	I 	am 	an Assistant 	Director of
the 	Federal 	Trade Commission's 	Bureau 	of 	Competition, 	and am 	in
charge 	of 	the Licensed Occupations 	section. 	I 	thank you 	for 	the
opportunity to 	present 	our views 	on House 	Bill 	No. 	1140, 	which
concerns 	the 	sale 	of 	pre-need 	funeral 	arrangements. 	At 	the
outset, 	I 	should note 	that 	these comments 	represent 	staff 	views.
They 	are 	not 	necessarily 	the 	views 	of 	the 	Federal 	Trade
Commission 	itself 	or of 	any 	individual 	Commissioner.
The 	proposed bill 	would 	require 	sellers 	of 	pre-need cemetery
or 	funeral 	goods 	or 	services 	to 	deposit 	into 	a 	trust 	fund 	100
percent 	of 	the 	proceeds 	of 	any 	such 	sale. 	We 	appreciate 	that
this 	escrow requirement 	aims 	to 	protect 	the 	consumer, 	and we 	are
concerned only 	that 	it may 	deter 	some 	firms 	from 	deciding 	to
offer 	those 	pre-need products, 	and may 	therefore 	reduce
competition and unintentionally 	injure consumers.
We 	have 	a 	long-standing 	interest 	in 	this 	area 	and can
suggest 	an 	alternative way of 	assuring consumer protection. 	The
Federal 	Trade 	Commission 	seeks 	to 	promote competition among
members 	of 	the 	professions 	to 	the 	maximum extent 	compatible 	with
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other 	state and 	federal 	goals. 	For more 	than a 	decade, 	the
Commission's 	staff 	has 	endeavored 	to 	identify 	restrictions 	on 	the
business 	practices 	of 	professionals 	within a 	number 	of
professions, 	including the 	funeral 	services 	profession, 	that
limit 	competition and 	increase costs 	without providing
countervailing benefits 	for 	consumers. 	The 	Commission 	staff 	has
cautioned 	against 	proposed 	statutes 	and 	regulations 	in 	several
states 	that 	would 	have 	unnecessarily 	restrained 	competition and
limited consumer choice 	in 	the purchase 	of 	pre-need 	funeral
plans. l
We 	have 	also 	become 	familiar 	with 	the 	funeral 	industry 	as 	a
result 	of 	our work on certain consumer protection rules. 	As 	you
may know, 	the Commission's 	Trade Regulation Rule 	Concerning
Funeral 	Industry 	Practices 	("Funeral 	Rule"), 	16 	C.F.R. 	Part 	453,
became 	effective on April 	30, 	1984. 	This 	rule 	is 	intended 	to
promote 	increased competition and consumer choice 	in 	the 	funeral
industry by 	facilitating 	informed purchase 	decisions 	by
consumers. 	Among other 	things, 	the 	Funeral 	Rule 	requires 	that
1 	We 	have 	submitted such comments 	to Virginia 	Delegate
Franklin P. 	Hall 	(February 	9, 	1989); 	Oregon State 	Representative
Chuck Sides 	(April 	6, 	1987); 	the 	Illinois 	Department 	of
Registration and 	Education 	(May 	9, 	1986); 	Michigan 	State 	Senator
Kirby 	Holmes 	(April 	7, 	1986); 	Kansas 	State Representative Ginger
Barr 	(February 	14, 	1986); 	Alabama Representative 	Arthur 	Payne
(January 	16, 	1986); 	and 	Illinois 	State 	Senator 	Judy 	Baar Topinka
(May 	31, 	1985).
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consumers 	be 	given detailed 	information about 	prices 	and 	the
legal 	requirements 	applicable 	to 	funerals. 2
It 	is 	my 	understanding 	that 	under 	Pennsylvania's 	current
Funeral 	Director Law, 	63 	P.S. 	S 	479.13(c), 	funeral 	directors 	who
enter 	into contracts 	to 	render 	funeral 	services 	in 	the 	future,
i.e., 	pre-need contracts, 	must 	deposit 	all 	money 	they 	receive
into 	an escrow or 	trust 	account. 	However, 	under 	the 	currently
2
effective 	Future 	Interment 	Law, 	63 	P.S. 	S 	480.2(a), 	other vendors
of 	pre-need contracts, 	such 	as 	cemeteries, 	need deposit 	only 	70
percent 	of 	the money 	received. 	pennsylvania 	Funeral 	Director's
Ass'n v. 	Com. 	State 	Bd. 	of 	Funeral 	Directors, 	494 	A.2d 	67
(Commonw. 	Ct. 	Pa. 	1985), 	aff'd, 	511 	A.2d 	763 	(1986). 	House 	Bill
1140 would eliminate 	this 	disparity. 	It would 	amend 	section 	2(a)
of 	the 	Future 	Interment 	Law by 	increasing 	the 	deposit 	required 	of
those 	other vendors 	to 	100 	percent 	as 	well.
It 	is 	also my understanding 	that 	pre-need 	sales 	of 	funeral
goods 	and 	services 	have 	been 	increasing throughout 	the 	country 	in
response 	to consumer demand. 	Consumers 	are 	able 	to 	shop 	and make
purchase 	decisions 	without 	the 	time 	and emotional 	pressures
generally 	associated with purchases 	made 	at 	the 	time of 	need.
Pre-need purchases 	may 	also 	allow consumers 	to 	obtain a 	hedge
against 	price 	increases 	by 	"locking 	in" 	the 	price 	of 	funeral
The 	Commission 	is 	currently reviewing 	the 	Funeral 	Rule
and will 	decide 	whether 	to 	leave 	the 	rule 	unchanged or 	to 	amend
or 	repeal 	it. 	53 	Fed. 	Reg. 	19864 	(May 	31, 	1988).
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goods 	and 	services 	as 	of 	the 	time 	of 	purchase. 	The 	growth 	in
pre-need 	sales 	has 	increased the 	competitive 	pressure 	faced 	by
funeral 	providers 	that 	sell 	at-need 	services.
One 	purpose 	of 	House 	Bill 	1140 	appears 	to 	be 	to 	"level 	the
playing 	field" 	by 	subjecting 	all 	sel~ers of 	pre-need 	funeral
contracts 	to 	the 	same 	trust 	fund 	requirements. 	Although we
commend 	this 	effort, 	we 	are 	concerned that 	the 	bill, 	if 	enacted,
may also 	have 	the 	effect 	of 	limiting the 	ability of 	pre-need
sellers 	to 	enter or 	compete 	in 	the 	market, 	which could ultimately
reduce 	competition and consumer choice 	in 	that 	market.
Applying different 	regulatory 	standards 	to 	competing 	sellers
of 	the 	same 	goods 	and 	services 	can, 	in 	some 	circumstances, 	have
anti-competitive 	consequences. 	The 	group 	subject 	to 	the 	more
stringent 	standards 	will 	find 	it more 	difficult 	to 	compete.
Depending upon 	the 	disparity 	in compliance costs, 	the 	ultimate
effect may be 	to 	deny consumers 	the 	benefits 	of 	otherwise 	active
competition 	from 	the 	disfavored 	group. 	That 	would only be
warranted 	if 	there 	were 	some 	reason 	to 	believe 	that 	the
disfavored 	group 	posed a 	different 	risk of 	consumer 	harm. 	House
Bill 	1140 	appears 	to 	reflect 	a 	determination 	that 	there 	is 	no
reason 	to 	impose 	such differential 	standards 	in 	the 	case 	of
funeral 	directors.
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If 	the 	legislature decides 	to 	subject 	all 	pre-need 	sellers
to 	the 	same 	regulatory 	standards, 	it must 	still 	decide 	what
uniform 	regulatory approach 	to 	adopt. 	The 	trust 	fund
requirements 	now 	in 	force 	suggest 	that 	the 	legislature 	once
determined 	that 	consumers 	need more 	protection against 	pre-need
sellers' 	fraud 	and 	insolvency than the 	unregulated market 	would
afford. 	If 	the 	legislature continues 	to 	believe 	that 	regulatory
protection 	is 	necessary, 	one 	possible 	response 	is 	to 	impose 	a 	100
percent 	trust 	fund 	requirement 	on 	all 	pre-need 	sellers, 	as 	House
Bill 	1140 	would 	in effect 	do.
Although that 	approach would eliminate 	the 	disparity, 	we
believe 	that 	it may 	risk 	doing other 	harm 	to 	consumers. 	A 100
percent 	trust 	requirement may 	have 	the 	unintended effect 	of
retarding 	the 	introduction and development 	of 	innovative 	forms 	of
competition and 	lower 	cost 	alternatives 	in 	the 	market 	for 	funeral
products 	and 	services. 	Under 	such 	a 	provision, 	all 	funds 	paid by
the 	consumer remain 	in 	the 	trust 	fund 	until 	death 	occurs. 	The
seller cannot 	recover 	its 	financial 	outlay 	for 	overhead, 	selling,
or 	administrative 	expenses 	until 	an uncertain 	and 	possibly
distant 	future 	date. 	Some 	potential 	sellers 	may 	lack 	the 	capital
or 	financing 	to 	cover 	this 	hiatus. 	As 	a 	result, 	the 	100 	percent
trust 	requirement may discourage 	some 	competitors 	from 	entering
the 	pre-need market. 	The 	presence 	of 	fewer 	sellers 	may 	in 	turn
result 	in reduced competition, 	and 	this 	could cause 	injury 	to
consumers 	by depriving 	them 	of 	the 	lowest 	prices 	for 	the 	goods
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and 	services 	they wish 	to 	purchase, 	and of 	the 	full 	array 	of 	pre-
need 	alternatives 	and pricing options 	that 	would otherwise 	be
available.
A trust 	requirement 	of 	less 	than 	100 	percent 	is 	not
necessarily the 	perfect 	solution either. 	Such a 	requirement may
still 	raise 	concerns 	for 	consumers. 	Even a 	somewhat 	reduced
trust 	requirement may 	still 	be 	buying consumers 	more 	protection
than 	they would 	actually prefer. 	Since 	such protection costs
money 	in 	the 	form 	of 	tied-up capital, 	it will 	have 	the 	effect 	of
raising 	the price 	for 	pre-need goods 	and 	services. 	As 	a 	result,
some 	consumers 	will 	be 	turned away 	from 	a 	product 	that 	they
otherwise would 	have 	bought.
Ideally, 	if 	a 	trust 	requirement 	is 	to 	be 	imposed, 	it 	should
be 	set 	at 	a 	level 	that 	will 	provide 	the 	appropriate 	protection 	at
the 	least 	possible 	cost. 	However, 	a 	legislative 	determination of
that 	level 	is 	difficult 	and uncertain, 	particularly 	since 	the
appropriate 	terms 	may change 	as 	market 	conditions 	change.
As 	an 	alternative 	to 	attempting 	to 	determine 	legislatively
an 	exact 	level 	of 	trust 	funding, 	the 	legislature may wish 	to
consider a 	solution 	that 	relies 	in part 	on 	the 	play of
competitive 	forces. 	In 	lieu of 	the 	trust 	requirement, 	you 	may
wish 	to 	allow pre-need 	sellers 	to 	provide 	a 	performance 	bond 	in
an 	amount 	up 	to 	the 	sale 	price 	of 	the 	contract. 	Under 	this
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arrangement 	a 	third-party guarantor would agree 	to 	pay 	the 	pre-
need purchaser 	an amount designed 	to 	make 	him whole 	in 	the 	event
of 	non-performance 	by 	the 	seller. 	This 	alternative may provide 	a
means 	of 	protecting consumers 	from 	seller default, 	but 	it 	does
not 	involve 	the 	same 	inflexibility as 	trust 	fund 	requirements.
Because 	guarantors 	compete 	among 	themselves 	for 	the 	performance
bond business, 	the 	price 	and 	other terms 	of 	such bonds 	(for
example, 	escrow arrangements) 	will 	be 	set 	in 	an efficient manner
by 	the market. 	Guarantors 	should be 	able 	to 	determine
requirements 	individually 	for 	each 	seller, 	thus 	providing
adequate 	protection 	at 	the 	lowest 	cost. 3
Other 	legislatures 	and courts 	have 	adopted 	this 	approach 	in
similar 	settings. 	At 	least 	one 	state permits 	pre-need 	sellers 	of
funeral 	goods 	and 	services 	to 	use 	performance bonds 	in 	lieu 	of
trust 	funds. 4 Several 	other 	states 	permit 	bonds 	in 	the 	closely
3
analogous 	area 	of 	sales 	of 	cemetery goods 	and 	services. 5
Moreover, 	in other 	industries 	where 	delivery 	is 	deferred or
occurs 	over 	an extended 	time, 	performance bonds 	have 	been
One 	seller may be 	a 	better 	risk 	than 	another, 	for
example, 	because of 	a 	large 	fixed-asset 	base. 	If 	the 	guarantor
charges 	the 	lower-risk 	seller a 	lower premium 	for 	a 	performance
bond, 	the 	seller can pass 	that 	savings 	along 	to 	consumers. 	In
addition, 	it 	may be 	reasonable 	to 	put 	fewer 	restrictions 	on 	the
lower-risk 	seller, 	for 	example, 	a 	lower escrow 	requirement. 	This
can only be done 	by dealing with 	sellers 	individually.
4 Iowa 	Code Ann. 	S 523A.7 	(1988).
5 ~, 	South Carolina Code Ann. 	S 	39-55-225(d) 	(1976);
Illinois 	Stat. 	Ann. 	Title 	21 	! 	215 	S 	15(e) 	(Supp. 	1989).
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6
regarded 	as 	an effective means 	of 	protecting 	the consumer's
investment. 	For example, 	in 	three 	cases 	the 	Commission charged
health 	spa 	operators 	with, 	among 	others 	things, 	failing 	to
fulfill 	their contracts 	with customers. 6 	The 	judgments 	in 	those
cases 	prohibit 	the 	spa operators 	from 	accepting 	any payment 	for
future 	membership 	services 	unless 	the 	operators 	have 	obtained
performance bonds. 	The 	bond amount must 	be 	sufficient 	to 	provide
refunds 	to 	all 	members 	in 	the 	event 	that 	the 	spa 	fails 	to 	open or
closes 	before 	rendering 	all 	services 	due 	to 	customers.
Thus, 	we 	believe 	that 	permitting pre-need 	sellers 	to 	obtain
performance bonds 	in 	lieu of 	a 	trust 	fund 	arrangement 	is 	a 	viable
and procompetitive 	alternative 	that 	the 	legislature may wish 	to
consider.
In conclusion, 	we 	believe 	that 	consumers 	can best 	be 	served
if 	all 	sellers 	of 	pre-need 	funeral 	arrangements 	are 	required 	to
meet 	the 	same 	regulatory 	standards. 	However, 	we 	also 	believe
that 	the 	trust 	fund 	requirement 	in 	the 	proposed 	bill 	may 	restrict
the 	sale 	of 	pre-need 	goods 	and 	services 	without 	providing
sufficient 	countervailing consumer benefits. 	If 	this 	bill 	were
adopted, 	consumers' 	ability 	to 	choose between purchasing pre-need
or 	at-need 	funeral 	goods 	and 	services 	would be 	substantially
F.T.C. 	v. 	Lady Venus 	Center, 	Inc., 	No. 	3-84-0158 	(M.D.
Tenn. 	Feb. 	16, 	1984); 	F.T.C. 	v. 	Tyler-Radcliffe 	Co., 	Inc., 	No. 	3-
84-0159 	(M.D. 	Tenn. 	Feb. 	16, 	1984); 	F.T.C. 	v. 	Thor 	Enterprises,
Inc., 	No. 	84-2121-MA 	(W.O. 	Tenn. 	Feb. 	16, 	1984).
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restricted. 	If 	the 	legislature believes 	that 	regulatory
protection 	is 	necessary, 	it may wish 	to 	consider 	allowing 	pre-
need 	sellers 	to 	post performance 	bonds 	as 	an 	alternative 	to
maintaining trust 	funds.
We 	hope 	that our comments 	concerning 	the 	competitive and
consumer protection 	aspects 	of 	certain 	tyPes 	of 	pre-need 	trust
requirements 	will 	assist 	you 	in your deliberations 	on House 	Bill
1140. 	Thank you 	again 	for 	this 	opportunity to 	present 	the
Commission 	staff's 	views. 	I 	would be 	happy 	to 	attempt 	answers 	to
any 	questions 	you may 	have.
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