FTC Staff Comment to the Hon. David Wright Concerning Pennsylvania H.B. 2347 to Regulate Sellers of Pre-Need Cemetery or Funeral Goods or Services

UNlTED STATES OF AMERICA 	.
FEDERAL TRADE COMMISSION
CLEVELAND REGIONAL OFFlCE
520-A Atri1All Office Plaza
661 Eladid A_
C1cvclaDd, Obio 44U4-!006
(2J6) m-4210
Fac::ajmil.... m-tt»
March 28, 1994
The Honorable David Wright
Chairman, Consumer Affairs Committee
Pennsylvania House of Representatives
South Office Building
Room 206
Harrisburg, PA 	1712Q.0028
Dear Chairman Wright
V940010
COMMISSION AUTHORIZE
The staff of the Federal Trade Commission 1 is pleased to offer this
comment on House Bill No. 2347. 2 This bill would regulate sellers of pre.need
cemetery or funeral goods or services. 	Among other things, it would require that
pre-need seners deposit into a trust fund all (or nearly all) of the proceeds of such
sales. 	This escrow requirement aims to protect the consumer against the risk that
funds will be unavailable at the time they are needed. 	In assessing how best to
address that concern, however, the risk that funds might be unavailable should be
balanced against the risk that a too-stringent "trusting" requirement could reduce
competition.
1 These comments are the views of the staff of the Federal Trade Commission,
and do not necessarily represent the views of the Commission or any individual
Commissioner.
2 Representative Christopher McNally requested that we submit comments on
this bill 	US. Representative George Gekas has also requested our comments on it.

Hon. David Wright
Page 2
L 	Interest and Experience of the Federal Trade Commission.
The Federal Trade Commission is empowered to prevent unfair methods of
competition and unfair or deceptive acts or practices in or affecting commerce.3
Consistent with this statutory mandate, the Commission and its staff work to
identify restrictions that hinder competition and increase costs without providing
countervailing benefits to consumers.
The Commission and its staff have gained experience with the funeral
industry through an FTC Trade Regulation Rule that is intended to prom.ote
increased competition and consumer choice in the funeral industry by facilitating
informed purchase decisions! 	In addition, the Commission has taken law
enforcement actions against allegedly anticompetitive acquisitions in the funeral
industry.s 	The staff has previously commented on other states' proposed
legislation involving the funeral industry,6 and the staff testified in 1989 before the
Pennsylvania House of Representatives on another bill to regulate pre-need funeral
sales.'
3 15 U.s.e. § 41 ~ RQ,.
4 The FTC rule governing Funeral Industry Practices, 16 CF.R. § 453, became
effective Apri130, 1984. 	Among other things, the rule requires funeral providers to
disclose to consumers detailed information about prices. 	The Commission has
recently approved amendments to this rule, to be effective July 19, 1994, as part of a
mandatOry review procec:1ure. 	59 Fed. Reg. 159L (January 11,lW4).
$ ~ Sc<ryi ce Corporation International, Dkts. C-3372 (consent order, February
25, 19(2), C-3440 (consent order, June 15, 1993~
, ~ comments to Executive Director, L6uisiana Board of Embalmers and
Funeral Directors, January 14, 1994; Wisconsin State Assembly, September 13, 1993;
Virginia Delegate Franklin P. Hall, February 9, 1989; Oregon State Representative
Chuck Sides, Apri16, 1987; Illinois Department of Registration and Education, May
9, 1~ Kansas State Representative Ginger Barr, February 14, 1986; and Alabama
Representative Arthur Payne, January 16, 1986. 	The staff of the Commission has
also testified generally on regulatory issues in this industry; ~ Statement to
California Assembly Committee on Consumer Protection, Governmental Efficiency
and Economic Development, October 17, 1991
7 ~ testimony of Bureau of Competition Assistant Director Michael McNeely
to the Pennsylvania House of Representatives Committee on Business and
Commerce, August 29, 1989.

HoD. David Wright
Page 3
n. 	Description of H.B. 2347.
This bill would enact a comprehensive system of regulation for pre-need
contract&. 	It establishes a regulatory structure, including annual seller registration'
and reports' and a fund for making whole consumers who have suffered defaulted
contracts.tO It requires several disclosures and notifications to consumers about
terms of contracts and disposition of funds.ll By making pre-need contracts
cancelable and transferable l2 and requiring that trust accounts be placed in
federally-insured institutions and that profits on them accrue to the buyer or the
buyer's estate;' the bill makes pre-need contracts similar to personal savings
accounts..
The bill would resolve an inconsistency in the treatment of different kinds
of pre-need sellers. 	Under Pennsylvania's Funeral Director Law,14 funeral
directors that enter into pre-need contracts must deposit 100 percent of the money
received into an escrow or trust account. 	By contrast, under the Future Interment
• HB. 2347, § 4.
, H.B. 2347, § 22(i).
10 HA 2347, § 19.
11 H.B. 2347 § 6(d) (solicitations), § 6(g) (advertisements), § 7(c) (FTC Funeral
Industry Practices Rule disclosures), § 7(d) (investment details, for contracts without
guaranteed prices), I 8 (contract specifications, including itemization of goods and
services and their prices, method of funding, details about trust or insurance
arrangements, procedure for filing complai'nts with the state Bureau of Consumer
.Protection, payment into contract guarantee fund, and 3O-day cancellation and
refund rights), § 10(b) (costs of credit life insurance), § 12(aX2) (amounts removed
from trust, for contracts with guaranteed prices), § 13(e) (details about insurance
arrangements), § 13(g) (advice about cancellation rights if not satisfied with the
policy's projected financial terms), and § 15 (cessation or transfer of seller's
business~
12 liB. 2347, § 9.
13 H.R 2347, § 12(m).
14 Pa Stat. Ann. tit. 63, § 479.13(c).

Hon. David Wright
Page 4
Law,U other vendors of pre-need contracts, such as cemeteries, must deposit only
70 percent 16 H.B. 2347 would eliminate this disparity by requiring pre-need
vendors of all kinds to place proceeds in trust in the same proportions.
The trusting requirement would generally be 100 perccnt17 For contracts in
which prices are guaranteed, the bill would permit pre~need sellers to withdraw up
to 10 percent of the trust amount;11 thus, the effective trusting requirement for
such contracts would be 90 percent. 	For both guaranteed-price and non-guaranteed-
price contracts, the bill would permit funds held in trust to be used to pay trustee
fees, administrative expenses, and taxes}' 	The bill would require disclosure to the
consumer of the amounts put in trust, the amounts retained by the seller,20 and
any amounts later withdrawn from the trust account21
As an alternative to funding a pre-need contract by payment into a trust
fund, the bill would permit payment by means of an insurance policy.~
m 	Possible Competitive Effects of R.B. 2347's "Trusting" Requirements.
Pre-need sales of funeral goods and services respond to a consumer demand
for the opportunity to shop and select funeral goods and services without the
pressures of time and emotion that can attend purchases made at the time of need.
Pre-need purchases may also allow consumers to hedge against price increases by
"locking in w prices at the purchase date. 	Growth of pre-need sales has increased
the competitive pressure on providers that sell at-need services.
15 Pa. Stat Ann. tit. 63, § 4802(a).
II ~ Pennsylvania Fun,ral Director's Ass'n v. Comm. State Bd. of Funer~
Directors,494 A2d 67 (Commonw. Ct Pa 1985), ~ 5U A.2d 763 (1986).
17 H.R 2347, § ll(b); 112(aX3~
l' HB. 2347, § 12(aX2).
It liB. 2347, § 12(k), § 9(b).
20 H.R 2347, § 8(hX3).
21 H.B. 2347, § 12(aX2).
22 H.R 2347, I 13.

Hon. David Wright
PageS
One effect of RR 2347 would be to "level the playing field" by subjecting all
seHen of pre-need funeral contracts to the same requirements. 	When different
regulatory standards apply to competing sellers of the same goods and services, the
result can sometimes be anticompetitive. 	The sellers held to the more stringent
standards may incur higher costs and find competing more difficult, so consumers
may lose the benefits of the disadvantaged sellers' otherwise active competition.
The stiffer requirements could nonetheless be warranted, despite that loss, if the
sellers subject to them threatened a greater risk of consumer harm. 	By treating all
pre-need providers alike, H.B. 2347 would imply a determination that the likely
difference in risk of consumer harm is insufficient to justify different rules for
funeral directors than for cemeteries.
If all pre-need sellers must conform to the same regulatory standards, it
remains to be determined what those uniform standards should be. 	That the
trusting requirements now differ suggest that the legislature has, at different times,
made different judgments about the appropriate degree of protection. 	We do not
know what Pennsylvania's experience with the two different trusting levels may
have taught about their relative effed on the risk of consumer harm.
We are concerned, though, that a l00-percent trusting approach may
unintentionally retard the introduction and development of innovative forms of
competition and lower cost alternatives. 	If all funds must remain in trust, the
seller cannot recover its overhead, selling, or administrative expenses and make a
profit until an unknown and possibly distant future date. 	Some sellers and
potential sellers may choose not to offer pre-need contracts because of the higher
costs that those contracts would entail 	If a lQl}.percent trust requirement increased
the costs of serving the pre-need market, consumers could be denied the lowest
prices and full array of pre-need alternatives and pricing options.
H.B.2347 would reduce the risk of such side effects by allowing for 90
percent trusting in some circumstances and by permitting the deduction from trust
proceeds of "reasonable" administrative fees and expenses. 	But reducing the trust
requirement by 10 percent may not necessarily be the best solution, for that trust
requirement could still buy more protection than consumers would actually prefer.
The bill's alternative funding method, insurance contracts, also fails to correct the
problem that 100 percent trusting could present. 	Insurance contracts, like escrow
accounts, could assure consumers that the necessary funds would be available at the
time of need 	But the pre-need seller anticipating eventual payment from an
insurance contract, just like the seHer holding all funds in trust, would still be
unable to recover overhead, selling, and administrative expenses and make a profit
until the time of death when the services are provided.

Hon. David Wright
Page 6
The provisions of RR 2347 that permit retention of fees and expenses may
help resolve these problems.. 	Sellers might be able to include in their prices certain
separate, identified amounts that would not be subject to the trusting requirements
or could be deducted from the trust in the event of cancellation and refund"
Neither of the Pennsylvania statutes that now govern trusting clearly permits
deducting or excluding fees and expenses from trust amounts. 	It is unclear how
these two provisions of HB.2347 would apply in practice. 	But providing explicitly
for amounts to cover expenses could overcome the problems described above.
As an alternative to the difficult task of determining in advance an
appropriate level of trust funding for the entire industry, the legislature may wish
to consider a solution that relies in part on market forces to provide protection in
individual cases. 	The law might permit pre-need sellers to provide a performance
bond under which a third party guarantor would agree to pay the contract amount
if the seller did not deliver at the time of need 	Competition among guarantors
could lead to bond prices and other terms that would be set by market forces and
that could change in response to changes in market conditions. 	Moreover, bonding
would mean that the appropriate level of protection could be determined for each
seller individually. 	One seller may be a better risk than another, perhaps because
its fixed-asset base is larger. 	If the guarantor charged the lower-risk seller a lower
premium or subjected it to other terms that were less stringent and hence less
costly, the seller could pass the savings along to consumers.:l4 	At least one state
permits pre-need sellers of funeral goods and services to use performance bonds in
2' H.B. 2347, § 8(1')(4) requires contract disclosure, by dollar amount or
percentage, ot any amount that "is not placed in trust," and cross-references to
i 9(b), which permits "reasonable trustee fees, administrative expenses and taxes" to
be deducted before refunding trust funds in ..the event of cancellation. 	It is unclear
whether the amount that § 8(1')(4) requires the contract to disclose is identical to the
items that f 9(b) permits the provider to retain. 	If so, what § 8(j)(4) permits as "not
placed in trust" might be limited to these three categories, subject to a requirement
that the amounts be "reasonable." 	Whether the amounts would be included in the
trust but might be deducted from the refund in the event of cancellation, or
whether they would not be placed in trust at all, could affect how much interest
the consumer earns on trusted funds.
~ To the extent that bonding risk depended on capitalization or
creditworthiness, the performance bond alternative might have about the same
effect as a trusting requirement on the competitive prospects of new or less well-
capitalized firms.

Hon. David Wright
Page 7
lieu of trust funds. 2S Some states permit performance bonds in the sales of
cemetery goods and services.26 In other industries, performance bonds have been
used to protect consumers' investments, where delivery of goods or services is
deferred or occurs over an extended time?' 	Permitting pre-need sellers to obtain
performance bonds, in lieu of requiring them to put funds in trus~ could be a
viable and procompetitive alternative that the legislature may wish to consider.
In addition, several sections of H.B. 2347 require that pre-need sellers itemize
goods and services covered by pre-need contracts and that their prices conform to
prices in the providers' price lists.lI These requirements, taken together, might
have the effect of prohibiting any pre-need sales of goods and services at a total
price below the sum of their itemized individual prices. 	To prohibit this practice
completely may result in increased costs and thus might harm consumers.
Accordingly, the prohibition's possible costs should be weighed against its
anticipated benefits. 	The Commission's Funeral Industry Practices Rule 29 and
federal antitrust laws, such as the prohibition against "tying,·30 already deal with
situations where the practice could raise concerns. 	This possible effect of the bill
might be avoided by providing that prices for separate items in pre-need contracts
2S Iowa Code Ann. § 523A.7 (1988).
~ E.l., s.c. Code Ann. § 39-55-225(d) (1976~ 111. Camp. Stat. Ch. 815, Art. 390, § 15(e)
(1992).
n For example, the Commission has obtained performance bond requirements
in orders against health spa operators charged with, among other things, failing to
fulfill their contracts with customers. 	ErC v. Lady Venus Center, Inc" No. 3-84-0158
(M.D. Tenn., Feb. 16, 1984~ FTC v. Tyler-Radcliff Co, Inc" No. 3-84-0159 (M.D. Tenn,
Feb. 16, 1984~ Ere v. Thor Enterprises .. Inc" No. 84-2121-MA (W.o. Tenn.., Feb. 16,
1984).
21 H.B. 2347, § S(d), § 8(c), § 12(1~
29 The Commission's Funeral Industry Practices Rule considers it an unfair or
deceptive act or practice to condition the furnishing of a funeral good or service on
the purchase of some other funeral good or service, except as required by law or
otherwise specifically permitted 16 C.F.R § 453.4(bXl). 	The revised rule, to become
effective this summer, also prohibits charging a fee as a condition of furnishing any
funeral good or service, except as specifically permitted 	16 C.F.R § 453.4(bXIXii).
30 ~ Jefferson Parish Hasp. Dis1. No.2 v. Hyde, 466 U.S. 2 (1984).

Hon. David Wright
Page 8
must be no greater than (instead of identical to) the prices on the providers' price
lists.
IV. 	Condusion.
Setting the same trusting and other standards for all sellers of pre-need
funeral arrangements could eliminate existing statutory anomalies and improve
competition, which could in turn benefit consumers. 	If the trusting requirements
are too stringent, however, they may unnecessarily restrict the sale of pre-need
goods and services. 	In assessing how to balance the protection of consumers from
supplier default against the risks of impeding competition and injuring consumers
indirectly, the legislature may wish to consider allowing pre-need sellers to post
performance bonds as an alternative to maintaining trust funds.
,/
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// 	./
L-.,," 	Phillip L 	Broy
Director