TITLE banking-and-securities

Part II. Texas Department of Banking

Chapter 25. Prepaid Funeral Contracts

Subchapter B. Regulation of Licenses

7 TAC §25.31

The Texas Department of Banking (the department) adopts new §25.31, concerning the effect that certain criminal convictions may have on the holder of a permit to sell or accept money for prepaid funeral benefits or on an applicant for a permit. The section is adopted with nonsubstantive changes to the proposed text as published in the May 28, 1999, issue of the Texas Register (24 TexReg 3965).

Texas Civil Statutes, Article 6252-13c and Article 6252-13d, require a licensing authority to adopt rules relating to its exercise of authority to suspend or revoke an existing license, or deny an application for a license, because of a person's conviction of a crime which directly relates to the duties and responsibilities of the licensed profession. Permits to sell or manage prepaid funeral benefits contracts are regulated by the department of banking pursuant to Finance Code, Chapter 154, and are considered to come within the meaning and intent of these articles.

As required by Texas Civil Statutes, Article 6252-13d, §25.31 as adopted defines the crimes that are considered to be directly related to the duties and responsibilities of selling and managing prepaid funeral benefits contracts, the officials whose conviction of such a crime could adversely affect a proposed or existing permit, and specifies the administrative and judicial review available upon the denial of an application for a permit, or the cancellation, suspension, or refusal to renew an existing permit because of such criminal conviction.

No comments were received expressing approval of or objection to the proposed section as a whole. One comment was received which addressed several aspects of the proposed section. As discussed below, the definition of "official" was modified in response to the comment, with the remainder of the requested changes rejected for the reasons indicated. As a general response, the department emphasizes that the purpose of the section is notice of the types of crimes that "may" result in adverse action. The department believes the circumstances of perceived unfairness envisioned by the commentor, assuming that the commissioner is inclined to take an adverse action in such circumstances, can and should be addressed as potential mitigating factors under §25.31(d).

1. The commentor suggested that the definition of "Official" in proposed §25.31(a)(2) was too broad, offering alternative language that, in essence, could remove an owner, director, or officer of an applicant or permit holder from the definition. The suggested change would include only persons that individually control the permit holder or applicant. The department agrees that it is not necessary to include a director in the definition. To the extent that individual directors actually control the entity or deal with the public, they would likely be covered by the rule as officers or principal shareholders. In addition, the department currently does not perform criminal background checks on directors, unless they are officers or principal shareholders. The definition of "official" has been accordingly modified. However, the department rejects the further suggestion that the definition also not include owners and officers. It is necessary to include an "owner" in order to cover a person who controls a non-corporate entity. Officers would typically include those persons who manage the day-to-day affairs of the entity, and deal directly with the public. The department believes that possibility of criminal conduct by individuals that control a non-corporate entity or that manage the day-to-day operations of a permit holder or deal directly with contract purchasers is of equal regulatory concern as that possibility with regard to persons that exercise corporate control. Moreover, the presence of such a person would likely result in a denial of an application pursuant to Finance Code, §154.103(b), on grounds of a lack of necessary character or general fitness.

2. The commentor requested that §25.31(b) be changed to delete the words "or servicer," arguing that servicing a contract is not an activity authorized by a permit, and that a criminal conviction with respect to servicing is therefore not directly related to the official's fitness to engage in the activities for which the permit is obtained. The comment further states that this change would make clear that a seller that is not also the service provider cannot have a permit jeopardized by the criminal conviction of a third-party provider. The department rejects this change. For many permit holders and applicants, selling prepaid funeral benefits contracts is undertaken primarily to promote their principal business of providing funeral services. Certainly the purchaser of a contract from a seller that is also the service provider would view buying the contract and receiving the service as part of the same transaction. It would be inconsistent with the regulatory responsibilities of the department to issue or allow retention of a permit which would provide greater opportunity for a servicer to engage in a type of undesirable activity for which a propensity has already been demonstrated. With respect to the second argument, the department fails to see how the section could lead to adverse action against a permit holder because of a criminal conviction of an unrelated third party provider. The third party is unambiguously not an "official" of the permit holder as defined in §25.31(a)(2).

3. Similarly, the commentor requested that §25.31(c) be changed by eliminating the words "and servicing" and the phrase "and the provision of funeral services" in the first sentence, and by deleting §25.31(c)(5) in its entirety, asserting that crimes arising out of servicing a contract are not directly related to the duties and responsibilities of a permit holder. The department rejects this argument for the reasons discussed in the preceding paragraph.

4. The commentor suggested that the words "or another state" be deleted in §25.31(c)(4), because a crime involving a violation of another state's prepaid funeral benefits laws may be a crime not directly related to the duties and responsibilities of a permit holder under Texas law. The department rejects this suggestion. Given the similarity of prepaid funeral benefits statutes among the states which have them, it is unlikely that an action which results in criminal penalties under the prepaid funeral benefits statutes of another state would be an action unrelated to the duties and responsibilities of a Texas permit holder. More to the point, however, compliance with Texas law relating to the sale of prepaid funeral benefits certainly is among the duties and responsibilities of a Texas permit holder, and an applicant's diligence in complying with the law of another state, whatever the differences or similarities may be when compared to Texas law, is reflective of the diligence that may be anticipated in complying with Texas law.

5. Finally, the commentor requested that in §25.31(c)(6), the words "the Texas Department of Banking under Chapter 154 of the Texas Finance Code" be substituted for "other governmental body." The department rejects this suggestion. Submitting reports to a governmental agency is an important duty and responsibility of a permit holder. The department believes that a lack of diligence in submitting reports required by any governmental body, when sufficiently severe to result in a criminal conviction, is directly relevant to an applicant's probable diligence in submitting reports required under Finance Code, Chapter 154, and is proper grounds for denial of a permit, absent mitigating circumstances.

The department is making nonsubstantive, stylistic edits to improve readability based on internal comments. No edit changes the meaning, intent, or effect of the section with regard to an affected person.

The section is adopted pursuant to Texas Civil Statutes, Article 6252-13d, which requires a licensing authority to issue guidelines relating to the suspension, revocation, or denial of a license because of a conviction of a crime which directly relates to the licensed occupation, and Finance Code, §154.051(b), which authorizes the department to adopt rules on any matter relating to the enforcement and administration of Finance Code, Chapter 154.

§25.31.Effect of Criminal Convictions on Permits.

(a)

Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise:

(1)

Commissioner--The banking commissioner of Texas.

(2)

Official--An individual applying for or holding a permit, or an owner, officer, or holder of more than 25 percent of the outstanding shares of an applicant for or holder of a permit that is an entity.

(3)

Permit--The authorization issued by the commissioner pursuant to Finance Code, Chapter 154, Subchapter C, to sell or accept money for prepaid funeral benefits, or solicit an individual's designation of prepaid funeral benefits to be paid out of a fund, investment, security, or contract.

(b)

Effect of criminal conviction on proposed or existing permit. The commissioner may deny an application for a permit, or cancel, suspend, or refuse to renew a permit if an official has been convicted of a crime which directly relates to the duties and responsibilities of a seller or servicer of prepaid funeral benefits contracts. Adverse action by the commissioner in response to a conviction of a crime specified in subsection (c) of this section is subject to mitigating circumstances and rights of the applicant or permit holder as specified in subsections (d)-(h) of this section.

(c)

Crimes directly related to fitness for permit. The sale and servicing of prepaid funeral benefits involves or may involve representations to prospective plan purchasers, collection and investment of money paid by purchasers of prepaid funeral benefits, payment of premiums on insurance policies to fund the benefits, provision of funeral services on matured contracts, and compliance with reporting requirements to governmental agencies. Consequently, a crime involving the misrepresentation of costs or benefits of a product or service, the improper handling of money or property entrusted to the person for the future benefit of another, or the failure to file a governmental report or the filing of a false report is a crime directly related to the duties and responsibilities of a permit holder, including a crime involving:

(1)

fraud, misrepresentation, deception, or forgery;

(2)

breach of trust or other fiduciary duty;

(3)

dishonesty or theft;

(4)

violation of a statute of this or another state governing prepaid funeral benefits plans;

(5)

violation of a statute of this or another state governing the provision of funeral services;

(6)

failure to file a required report with a governmental body, or filing of a false report; or

(7)

attempt, preparation, or conspiracy to commit one of the preceding crimes.

(d)

Mitigating considerations. In determining whether a conviction for a crime specified in Subsection (d) of this section renders an official presently unfit to be a permit holder, the commissioner shall consider:

(1)

the extent and nature of the official's past criminal activity;

(2)

the age of the official at the time of the commission of the crime;

(3)

the time elapsed since the official's last criminal activity;

(4)

the conduct and work activity of the official prior to and following the criminal activity;

(5)

the official's rehabilitation or rehabilitative effort while incarcerated or following release; and

(6)

the official's present fitness for a permit, evidence of which may include letters of recommendation from prosecution, law enforcement, and correctional officers who prosecuted, arrested, or had custodial responsibility for the official, the sheriff and chief of police in the community where the official resides, and other persons in contact with the convicted official.

(e)

Required documentation. The applicant must, to the extent possible, secure and provide to the commissioner reliable documents and/or testimony evidencing the information required to make a determination under subsection (d) of this section, including the recommendations of the prosecution, law enforcement, and correctional authorities. The applicant must also furnish proof in such form as may be required by the commissioner that the official has maintained a record of steady employment, has supported such official's dependents, has otherwise maintained a record of good conduct, and has paid all outstanding court costs, supervision fees, fines, and restitution as may have been ordered in all criminal cases in which the official has been convicted.

(f)

Notification of adverse action. If a permit application is denied, or if a permit is canceled, suspended, or not renewed because of the criminal conviction of an official, the commissioner will so notify the applicant or permit holder in writing. The notification must include a statement of the reasons for the action and a description of the procedure for administrative or judicial review of the action.

(g)

Administrative hearing. An applicant whose permit application is denied, or a permit holder whose permit is suspended, canceled, or not renewed may request a hearing. A hearing on an order of suspension, cancellation, or non-renewal must be requested not later than the 15th day after the date the order is mailed. A hearing is subject to the provisions of the Administrative Procedure Act, Chapter 2001, Government Code and the provisions of Chapter 9, Subchapter B of this title (relating to Contested Case Hearings).

(h)

Judicial review. An applicant whose permit application has been denied, or a permit holder whose permit has been suspended, canceled or not renewed because of the criminal conviction of an official may appeal a final order as set forth in Government Code, Chapter 2001, Subchapter G.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on August 5, 1999.

TRD-9904825

Everette D. Jobe

General Counsel

Texas Department of Banking

Effective date: August 25, 1999

Proposal publication date: May 28, 1999

For further information, please call: (512) 475-1300