Adopted Rules Title 7

TITLE 7. BANKING AND SECURITIES

PART 2. TEXAS DEPARTMENT OF BANKING

CHAPTER 25. PREPAID FUNERAL CONTRACTS

SUBCHAPTER B. REGULATION OF LICENSES

7 TAC §25.25

The Finance Commission of Texas (commission), on behalf of the Department of Banking (department), adopts the repeal of §25.25, concerning conversion from trust to insurance funded benefits, without changes to the proposal as published in the July 4, 2008, issue of the Texas Register (33 TexReg 5172). New §25.25, concerning conversion from trust to insurance funded benefits, is simultaneously adopted in this issue of the Texas Register.

Existing prepaid contracts for trust-funded prepaid funeral benefits may be converted to insurance-funded prepaid funeral benefits under Finance Code, §154.204, if the department finds that the proposed insurance-funded arrangement safeguards the rights and interests of the individuals who purchased the prepaid contracts to substantially the same degree as the trust-funded arrangement proposed to be replaced. Rule §25.25 was designed to specify the required content of an application under Finance Code, §154.204. Developments since the adoption of existing §25.25 in 1996 require these provisions to be updated, as described in the adoption preamble for new §25.25 elsewhere in this issue of the Texas Register. Existing §25.25 must be repealed to permit adoption of new §25.25.

The Department received no comments specifically regarding the proposed repeal of existing §25.25. Comments received regarding proposed new §25.25 are addressed in the adoption preamble for new §25.25, simultaneously published in this issue of the Texas Register.

The repeal is adopted pursuant to Finance Code, §154.204, which provides for department approval of a conversion from trust-funded prepaid funeral benefits to insurance-funded prepaid funeral benefits to safeguard the rights and interests of the individual who purchases a prepaid funeral benefits contract, and pursuant to Finance Code, §154.051, which authorizes the commission to adopt rules relating to the enforcement and administration of Chapter 154.

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 December 19, 2008.

TRD-200806646

A. Kaylene Ray

General Counsel

Texas Department of Banking

Effective date: January 8, 2009

Proposal publication date: July 4, 2008

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

7 TAC §25.25

The Finance Commission of Texas (commission), on behalf of the Department of Banking (department), adopts new §25.25, concerning conversion from trust-funded to insurance-funded benefits under Finance Code, §154.204, with changes to the proposed text as published in the July 4, 2008, issue of the Texas Register (33 TexReg 5172). Existing §25.25, concerning conversion from trust to insurance funded benefits, is simultaneously repealed in this issue of the Texas Register.

Changes made to the proposed rule are in response to public comment received in writing and at a public hearing held on July 30, 2008, as further described in this preamble. Other changes were made for consistency and to correct typographical or grammatical errors.

Finance Code, Chapter 154 (Chapter 154), and rules adopted under Chapter 154, codified in Title 7, Chapter 25 of the Texas Administrative Code (TAC), provide an exclusive regulatory framework that allows a person in this state to arrange and pay for a funeral in advance of need. Chapter 154 imposes a duty upon the department and grants the department the authority to license and regulate sellers of prepaid funeral benefits to ensure that prepaid funeral benefits contracts (prepaid contracts) are performed and funded in accordance with their terms at the time of need.

Existing prepaid contracts for trust-funded prepaid funeral benefits may be converted to insurance-funded prepaid funeral benefits under Finance Code, §154.204, if: (1) the department finds that the proposed insurance-funded arrangement safeguards the rights and interests of the individuals who purchased the prepaid contracts (purchasers) to substantially the same degree as the trust-funded arrangement, and (2) each purchaser is notified in writing of the terms of the proposed conversion and the purchaser's right to decline the conversion.

Section 25.25 was designed to specify the required form of an application for conversion and to nominally address the required notice to purchasers. Developments since the 1996 adoption of existing §25.25 have outpaced its content. The required revisions were extensive enough to warrant repeal and replacement of the old rule with a new rule.

Licensed sellers of insurance-funded prepaid funeral benefits are now either insurance companies or affiliates of insurance companies that sell through designated funeral providers acting as agent, both for the seller with respect to the contract, and for the insurance company with respect to the funding insurance policy. Insurance companies that wish to participate in the Texas preneed market will often form a subsidiary to acquire a license under Chapter 154. A number of these affiliate sellers resist accepting responsibility for verifying that funeral services and merchandise are ultimately delivered in accordance with the contract and for maintaining the records the department requires for examination. In addition, a recent failure of an insurance-funded permit holder and its affiliated insurance company has raised concerns about the financial viability and sustainability of insurance-funded permit holders. Selling insurance-funded prepaid funeral benefits involves incurring long-term regulatory commitments in exchange for immediate, front-loaded compensation. Permit holders that lack the resources to fulfill their responsibilities in the later years of a contract's existence are at risk of failure.

Pursuant to Finance Code, §154.204(a), the department cannot approve a proposed conversion unless it finds that the proposed insurance-funded arrangement will safeguard the rights and interests of purchasers to substantially the same degree as the trust-funded arrangement sought to be replaced. Among other matters, unless the applicant demonstrates to the satisfaction of the department that the insurance-funded contracts will be performed and funded in compliance with their terms and Chapter 154, and that the post-conversion permit holder will maintain or have access to the records the department requires to determine such compliance, the department will not be able to make the required finding, and the application for conversion will not be approved.

As a result of these concerns, new §25.25 specifies information regarding the business plan and financial condition of the post-conversion permit holder that is necessary for the department to make the required determinations. The application for conversion must demonstrate that the post-conversion permit holder has or will have access to the financial and other resources necessary to discharge its contractual and statutory obligations as a permit holder, and that the post-conversion permit holder recognizes its future responsibilities to administer its unmatured contracts until finally performed, to verify that each contract is performed and funded in accordance with its terms and Chapter 154, and to maintain the records required under 7 TAC §25.10. Further, the applicant (the trust-funded permit holder seeking to convert its portfolio of contracts to insurance funding) must be willing to again seek licensure and take over administration and management of the converted contracts that remain outstanding, in the event the post-conversion permit holder were to fail.

Finance Code, §154.204(b), requires that each purchaser be notified in writing of the terms of the proposed conversion and given the opportunity to decline the conversion and remain in the existing trust-funded arrangement. Under former §25.25, the notice text was required to be filed with the application, but the only specific requirement regarding the content of the notice was that it contain a statement that the purchaser has 60 days to file a written request with the department to have the contract converted back to trust-funded benefits. Over time, the notice came more to resemble a sales pitch than a balanced disclosure of information relevant to the decision a purchaser must make: whether to permit the conversion by doing nothing, or decline the conversion by sending a written request to the department. Further, the former rule did not address the method or manner of notice delivery or attempt to verify that a purchaser actually received the notice.

Because the conversion notice is a key statutory predicate to conversion under Finance Code, §154.204, new §25.25 is designed to enhance notice content as well as the prospect for actually getting the notice to the attention of each purchaser. Content is enhanced by requiring a brief but fair disclosure of the terms of conversion and the impact of conversion on the purchaser and the purchaser's contract. Promotional statements or claims that express subjective rather than objective views of the merits or benefits of conversion are prohibited. In addition, the rule as adopted enhances the prospect that each purchaser will actually receive the notice. First, §25.25(e)(2)(A) requires the notice to be sent by certified mail or by another form of mail that requires or provides proof of delivery to the last known address of the purchaser. A failed delivery will identify those purchasers for whom notification requires additional effort, as provided in §25.25(e)(3)(B). Second, §25.25(e)(2)(B) requires publication of a newspaper notice as a supplemental means of notifying purchasers. Both the proposed notice letter and the proposed newspaper notice must be filed as part of the application.

Two interested groups or associations offered comment on proposed §25.25, the Funeral Consumers Alliance of Texas (FCAT) and the Texas Pre-Need Coalition (TPNC), both of which were against adoption of new §25.25, but for different reasons. Summaries of all comments received and commission responses follow.

FCAT objects generally to the lack of a requirement to obtain the informed consent of each purchaser of a trust-funded contract to be converted. FCAT believes the proposed new section creates what it calls a "force-over" by automatically converting contracts if the consumer fails to respond or fails to act promptly to decline the conversion. Further FCAT speculates that the "force-over" is designed to generate funding to address the cost of resolving a recent insurance company failure that involves thousands of insurance-funded prepaid contracts. The commission disagrees and believes FCAT misunderstands the governing law. The so-called "force-over" is statutory in nature and is not a new creation by rule. Under Finance Code, §154.204(b), the existing contract holder or purchaser has the right to receive notice and the right to decline conversion, and nothing more. As adopted, new §25.25 improves the quality of disclosures in the notice and improves the likelihood that a consumer will actually receive the notice, as compared to the now repealed prior version of §25.25.

TPNC objects generally to requirements that force the permit holder to assume obligations that are not currently required by the law simply in order to perform a conversion, which is permitted by the law. Specifically, TPNC objects to forcing permit holders to assume responsibility for the delivery at need of a pre-need funeral. Another commenter makes the same objection specifically with respect to the standard in §25.25(b)(1)(D), requiring the permit holder to verify that the converted contracts are performed in accordance with their terms, and asserts that the department lacks statutory authority to require verification. The commission disagrees. New §25.25(b) describes the general standards applicable to a determination of whether a proposed conversion will safeguard the rights and interests of the purchasers to substantially the same degree as the trust-funded benefits arrangement sought to be replaced, as required by Finance Code, §154.204. Subsection (b)(1)(D) does not directly impose any obligation to verify contract performance but rather indicates that a proposed conversion cannot be approved if the post-conversion permit holder refuses to acknowledge its acceptance of a seller's regulatory responsibilities under Chapter 154. These responsibilities with respect to each converted contract continue well beyond the date the contract was created and sold, see Finance Code, §154.107. Because of the previously described compliance issues, new §25.25(b)(1)(D) specifically addresses verification of contract performance. A seller is required by 7 TAC §25.10(c)(3)(A)(ii) to verify contract performance by documenting any upgrades or downgrades or discounts or credits given at the time of contract performance, and explaining any cost differences between the prepaid and the at-need contracts. Section 25.10(c)(3)(A)(ii) was adopted pursuant to Finance Code §154.051 and §154.053. This required acknowledgement of continuing seller responsibilities under Chapter 154, responsibilities imposed by statutes or rules other than §25.25, is certainly not equivalent to requiring a permit holder to assume responsibility for actually delivering or performing the funeral itself. Section 25.25(b)(1)(D) does not independently create an affirmative duty to verify or investigate contract performance.

The commenter expressed similar objections to the contractual requirement of §25.25(c)(2)(C)(iii), that the permit holder agree to verify that each prepaid contract is performed by the funeral provider at maturity in accordance with its terms, and §25.25(c)(2)(C)(iv), that the permit holder verify that any additional charges imposed by the funeral provider and collected from the decedent's representatives are for additional services or merchandise not otherwise contemplated by and funded under the prepaid contract and, if not, promptly refund or require the funeral provider to refund any prepaid contract overcharges to the decedent's representatives. The commenter recommends that the rule simply require a statement in the application that the funeral provider is responsible for refunding overcharges to the decedent's representatives. The commission disagrees. The term "overcharges" refers to additional payments to the funeral provider from the family of the deceased for items of funeral merchandise or service that should have been considered prepaid. While primary liability for a refund of overcharges would appear to fall on the funeral provider, the seller, as the only party to the contract that is licensed to sell a prepaid funeral, bears liability if the delivered funeral falls short of the funeral promised by the seller at the time the contract was sold. Liability for refunding overcharges can be clearly placed with the funeral provider through a contract between the permit holder and the funeral provider.

The commenter also points out that a good faith dispute could arise between the funeral provider and consumer over the scope of preneed services, and asserts that the permit holder has no legal or statutory authority to act as judge and impose a resolution on either party. The commission agrees that a good faith dispute could complicate this duty. However, the funeral provider can only act in the capacity of the seller's agent with respect to the sale of a prepaid contract and documentation of its performance. This is because the seller is the only party authorized by law to sell a prepaid funeral. The commission believes that the seller as principal should exercise appropriate control over its agent by means of a separate agreement that defines a continuing relationship intended to span many individual prepaid contracts.

This comment and similar comments from the insurance industry indicate that insurance-funded permit holders believe they have no control over funeral providers designated in their prepaid funeral contracts. The commission views the problem as not one of legality or permissibility, but rather as a lack of contractual control by a prepaid funeral seller over its chosen agents. As part of the conversion application, new §25.25(c)(5) requires submission of written agreements between the post-conversion permit holder and each person designated as the funeral provider under any prepaid contract to be converted, addressing specified matters. Such agreements need not be limited to the specified matters. Other matters addressed in such an agreement could include handling of money received for a prepaid contract, documentation required with respect to prepaid contracts, rules or procedures for access to computer systems or forms, designation of specific employees permitted to act for the permit holder, required training of employees, and indemnification rights, all typical prudential safeguards that can be appropriately incorporated into a principal/agent relationship. These issues are not addressed in the prepaid funeral contract itself.

The commenter also objects to the standard expressed in §25.25(b)(1)(E), that the proposed post-conversion permit holder must possess the organizational and financial capability necessary to discharge the responsibilities it will be assuming in a conversion. The commenter believes that determinations of organizational and financial capacity would be completely subjective, permitting the department to deny any proposed conversion at will. Further, the commenter questions whether any capital requirement beyond a nominal amount can be justified, because funding is secured by the insurance company and performance remains the obligation of the funeral home. The commission disagrees. As previously described, selling insurance-funded prepaid funeral benefits involves incurring long-term regulatory commitments in exchange for immediate, front-loaded compensation. Permit holders that lack the resources to fulfill their responsibilities in the later years of a contract's existence are at risk of failure. Concerns regarding the financial viability and sustainability of insurance-funded permit holders require consideration of the organizational and financial resources possessed by the proposed post-conversion permit holder or to which it has access. The legislature has delegated discretionary responsibility to the department to determine that the organizational and financial adequacy of an applicant is sufficient to warrant the confidence of the public before the applicant can become a permit holder, see Finance Code, §154.103(b). Further, the reasonableness of a determination by the department in this regard is subject to judicial review. Finally, the department has exercised similar authority in other regulated industries for decades, see, e.g., Finance Code, §§32.003(b), 182.003(b), and 182.008(b).

New §25.25(c)(2)(C)(v) requires the post-conversion permit holder, on a limited basis, to fund undisclosed contracts which were not converted. This provision is included to ensure that the parties to the conversion use due diligence in determining all contracts in existence at the time of the conversion, and to ensure that all similarly situated contracts have the opportunity for conversion. This rule provision reflects what the practice has been for conversions for several years. The commenter opposes the provision because it requires the post-conversion permit holder to assume responsibility for the wrongful acts of the applicant, specifically the failure to document the sale of a prepaid funeral and deposit the consideration received in trust. The commission recognizes that in the case of wrongdoing by the applicant, the applicant should bear responsibility for funding such contracts, but believes that liability should be contractually addressed in the agreements between the applicant and the post-conversion permit holder. If, for example, the applicant will remain the designated funeral provider under the converted contracts, the agreement required by §25.25(c)(5) or (6) can formalize the funeral provider's obligation to perform such a funeral without compensation or create a specific right of offset against other amounts due to the funeral provider.

The commenter also notes that §25.25(c)(2)(C)(v) imposes a minimum responsibility of $5,000, which could be construed to require $5,000 of funding to correct one omitted contract with a face amount of $2,000. If the intent was to create a minimum threshold for liability, below which no liability exists, the commenter believes the language should be clarified. The commission agrees that clarification is needed. Five percent of the aggregate trust funds transferred in a small conversion could easily be less than the value of one discovered contract, making the obligation meaningless in the event one omitted contract is discovered with a value in excess of the cap of 5.0% of the aggregate trust funds transferred. The subsection has been revised to clarify the amount of maximum responsibility.

New §25.25(c)(3) requires submission of the estimated total commissions and other compensation to be paid by the insurance company in connection with the conversion to each insurance agent that controls, is controlled by, or is under common control with the applicant or a funeral provider under any of the prepaid contracts to be converted. The commenter requests that this provision be deleted as irrelevant and unnecessary to the protection of the purchaser. The commission disagrees and declines to delete this application requirement. The amount of compensation the applicant will realize as a result of conversion is relevant to the department's overall evaluation of the proposed transaction and its proposed distribution of risks and rewards. In addition, the commission notes that this new provision represents a reduction in regulatory burden. Now repealed §25.25(c)(3)(B)(i) and (c)(3)(J) required disclosure in the application of all compensation paid to any party in connection with issuance of the conversion annuities.

New §25.25(c)(5) requires the applicant to submit the written agreement between the post-conversion permit holder and each funeral provider designated under any prepaid contract to be converted. Among other matters, the agreement must obligate the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary. Similarly, if the insurance company is not also the proposed post-conversion permit holder, §25.25(c)(6) requires the applicant to submit a written agreement between the post-conversion permit holder and the insurance company that, among other matters, also obligates the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary. The commenter states that such confidentiality and privacy provisions are unnecessary and superfluous, because trust-funded contract files contain no health information and such information is not required to issue the post-conversion annuities. The commission agrees but declines to delete this requirement. Not all insurance-funded permit holders and insurance companies agree with the commenter. These requirements are intended to address repeated arguments made by several insurance-funded permit holders and insurance companies that regulatory compliance with the recordkeeping requirements of 7 TAC §25.10 is not possible because the parties are prevented by federal law from sharing such information with each other. This concern is addressed by an explicit agreement acknowledging an obligation to protect the privacy of the purchasers.

If the insurance company is not also the proposed post-conversion permit holder, new §25.25(c)(7) requires the insurance company, or its insurance holding company, to commit to the department in writing to take all necessary steps to maintain the existence of the post-conversion permit holder, cause the permit holder to annually renew its permit if renewal is required by Finance Code, §154.107, and provide adequate resources to the post-conversion permit holder to enable it to maintain the financial condition and general fitness necessary to discharge the post-conversion permit holder's responsibilities under Finance Code, Chapter 154. This requirement does not apply if the post-conversion permit holder demonstrates that it independently has the organizational and financial resources to discharge its permit holder responsibilities, and does not intend to rely on the insurance company to provide such resources. The commenter believes this provision is inappropriately broad, in that it would obligate an insurance company or its parent to unconditionally guarantee the existence and financial condition of the permit holder, without the option of securing a successor permit holder in the event the permit holder is no longer viable, which may occur for reasons unrelated to its permit holder activities. The commission agrees and has revised §25.25(c)(7) as adopted to permit an insurance company or its parent to substitute a successor permit holder at its discretion.

New §25.25(c)(10) requires a written summary of the pre-conversion, federal income tax status of the purchasers' trusts as qualified funeral trusts under 16 U.S.C. §685 or grantor trusts. The summary must also include a description of the post-conversion manner in which taxable income arising from the annuities will be reported for federal income tax purposes. The commenter argues that the premise for this requirement, that there is or will be a difference in the amount of taxes paid by the purchaser pre-conversion and post-conversion, is inaccurate. The commenter observes that, under a trust-funded contract, the purchaser will receive a 1099 or K-1 for earnings each year or, if an election under 16 U.S.C. §685 is in effect, the trust will pay the tax liability on behalf of the purchaser annually on a consolidated basis. If the trust pays the tax, the earnings of the trust are reduced by the amount of tax paid, such that each contract account has a pro rata reduction in earnings. In the event of cancellation, the amount a purchaser receives will be net of taxes withheld or, if a §685 election is in effect, there will be no additional tax liability. On the other hand, annuities are tax-deferred investments that are not taxed unless the annuity is cancelled. Upon cancellation of an annuity, the purchaser would be subject to tax on accrued income. In either situation, according to the commenter, the purchaser ultimately pays the tax. For this reason, the commenter asserts that §25.25(c)(10) is unnecessary. The commission declines to delete §25.25(c)(10), in essence a requirement to evaluate and report the potential tax impact of a proposed conversion on the purchasers. If there is no tax impact, the response in the application to §25.25(c)(10) will so indicate.

New §25.25(c)(11) requires submission of information regarding past performance of annuities previously issued by the insurance company that are similar to the form of annuity to be issued in the proposed conversion. The commenter believes this requirement is unnecessary and irrelevant because two percent annual growth on the conversion annuities must be guaranteed pursuant to §25.25(c)(9)(A). The commission declines to delete the requirement. Although the annuities issued in a conversion must guarantee two percent annual growth, actual growth paid on similar annuities issued in the past may reveal previously undiscovered contract limitations or financial difficulties that indicate a need for a more thorough evaluation of the insurance company or the proposed form of annuity.

Provisions governing the proposed newspaper notice and proposed notification letters to be sent to purchasers are contained in §25.25(c)(15). Because the notification letter from the applicant is a key statutory predicate to conversion under Finance Code, §154.204(b), the proposed version of §25.25(c)(15) would require "full and fair disclosure of all material information necessary for the purchaser to make an informed decision." In general, the commenter recommends revisions to simply require a brief and fair disclosure, made in a manner that would not be confusing to the purchaser. In general, the commission agrees and has revised §25.25(c)(15)(A) accordingly. Comments regarding specific components of proposed §25.25(c)(15) and the commission's responses to those comments are addressed in the following paragraphs.

The commenter is critical of the requirement to include a preprinted declination form with the notification letter to purchasers, proposed as §25.25(c)(15)(A)(iii), and argues that inclusion of such a form would serve only to encourage purchasers to opt out and is unnecessary for purchasers to exercise their right to opt out of the conversion. The commission agrees and has deleted the provision. As an alternative to this declination form, a requirement for conspicuous disclosure of the purchaser's right to decline the conversion has been added to adopted §25.25(c)(15)(B).

The proposed rule included, in §25.25(c)(15)(A)(iv), a requirement that the notification letter must inform the purchaser that a copy of the specifications page of the funding annuity is available upon request. One commenter expresses the belief that this statement would more appropriately be contained in the letter from the insurance company rather than in the letter from the applicant. The commenter requests that the rule be revised to provide that this statement must appear in one of the notification letters to the purchasers but is not specifically required to appear in the letter from the applicant. The rule as proposed treats the notification letter from the applicant as the notice in writing of the terms of the proposed conversion and the purchaser's right to decline the conversion that is specifically required by Finance Code, §154.204(b). However, the commission believes the notification letter from the insurance company can contain a complete statement regarding how to obtain a copy of the specifications page of the annuity, and the required statement in the notification letter from the applicant can be drafted to refer to the insurance company as the source of the specifications page. Therefore, language has been added to adopted §25.25(c)(15)(C) to clarify that this notification of availability of the annuity specifications page can be provided by the insurance company.

As proposed, §25.25(c)(15)(A)(v) required a statement that questions or complaints regarding the prepaid contract or the proposed conversion may be directed to the department. The commenter requests that the provision be amended to include, at a minimum, the applicant and the post-conversion permit holder as additional points of contact for questions relating to the proposed conversion. The commission declines to revise the requirement, adopted as §25.25(c)(15)(D), but observes that the rule would not prohibit the voluntary inclusion of additional contacts if the addition does not obscure or minimize the required content.

The prepaid funeral guaranty fund, Finance Code, §154.351, was established to guarantee performance of the obligations of sellers to purchasers of trust-funded contracts. As implemented by 7 TAC §§25.17 - 25.20, the guaranty fund finds a successor funeral provider if a trust-funded permit holder is unable to fulfill its prepaid contracts. In appropriate cases, the guaranty fund may pay a funeral provider an additional amount in excess of the trust funds underlying the prepaid contracts in exchange for honoring the contracts as originally written, with no extra charges to the purchasers. This guarantee of contract performance does not apply to insurance-funded contracts and, as proposed, §25.25(c)(15)(B)(i) required disclosure of this lapse in coverage.

Although payment of an annuity issued in a conversion is guaranteed by an insurance guaranty fund (the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association) under the provisions of Insurance Code, Chapter 463, the seller's performance of the contract is not guaranteed by the insurance guaranty fund. Therefore, if the designated funeral provider in a converted contract should cease to do business for any reason after conversion but before performance of the contract, neither the post-conversion permit holder, the insurance company, nor the insurance guaranty fund will be legally obligated to find a substitute funeral provider. The purchaser will ultimately be responsible for establishing a new prepaid contract with another funeral provider and arranging for the annuity proceeds to be paid to the new funeral provider. Further, the new funeral provider would not be obligated to provide the previously selected funeral services and merchandise for the same price that was specified in the original prepaid contract. This scenario illustrates the distinction between guaranteed "payment" of the annuity underlying an insurance-funded contract and guaranteed "performance" of a trust-funded contract and, as proposed, §25.25(c)(15)(B)(i) also required disclosure of this distinction. However, the proposed disclosure did not specifically mention the insurance guaranty fund.

Two commenters argue that disclosing the loss of prepaid funeral guaranty fund coverage would be misleading if the coverage of the annuity by the insurance guaranty fund is not disclosed. One of the commenters requested that the provision be amended to permit mentioning insurance guaranty fund coverage. The commenter also observed that mentioning insurance guaranty fund coverage could be construed as using the existence or function of the guaranty fund in advertising or marketing to sell, solicit, or induce the purchase of insurance, a practice prohibited by Insurance Code, §463.451. If mentioning insurance guaranty fund coverage will be permitted, the commenter requested that the provision be further amended to explicitly provide that the disclosure in the notification letter is not an act contemplated by or a violation of Insurance Code, §463.451. Although the commission notes that the proposed rule required certain disclosures but did not prohibit other disclosures, the commission understands the concern and agrees to make revisions. The revised requirement to disclose the change of guaranty fund coverage and the effect of such change now appears as adopted §25.25(c)(15)(E).

In addition, one commenter argues that the required illustration of the distinction between guaranteed performance and guaranteed payment may be theoretically accurate but is actually misleading because funeral providers throughout Texas routinely advertise that they will gladly service any prepaid contract of a competing funeral provider on the same terms and conditions. The commission in response has simplified and shortened this part of the required disclosure in adopted §25.25(c)(15)(E) to inform the contract purchaser of the possibility that a successor funeral provider may not agree to provide the previously selected funeral services and merchandise for the same price specified in the prepaid contract with the original funeral provider.

The commenter further contends that fairness would demand disclosure of a number of possible but unlikely negative scenarios relating to trust-funded contracts, in order to counterbalance the required description of an unlikely scenario involving insurance-funded contracts. The commission responds that responsibility for making a fair disclosure of the terms of conversion ultimately belongs to the applicant for conversion. Adopted §25.25(c)(15) specifies certain required disclosures but does not prohibit other disclosures that the applicant considers to be material and necessary to best prepare the purchaser to make an informed decision regarding the conversion.

Proposed §25.25(c)(15)(B)(ii) was intended to discourage the use of puffery in the notification letter, a practice that had become increasingly common over the last several years, e.g., "this is a great deal for you." Proposed §25.25(c)(15)(B)(ii) would have required disclosure of the estimated compensation to be paid in connection with the conversion to all persons affiliated with the applicant or with a funeral provider designated in any of the prepaid contracts proposed to be converted, in a situation where the notification letter contained promotional statements or claims that express subjective rather than objective views of the merits or benefits of conversion. No such disclosure would have been required in a situation where the notification letter contained only objective information. One commenter was critical of this technique for discouraging promotional claims, pointing out that what constitutes a subjective versus an objective statement can itself be a highly subjective determination. The commenter suggests that factual statements should not be limited, but that the department already possesses ample authority to prohibit untruthful statements. The commission agrees and has revised the provision to contain a direct prohibition. The department will exercise its discretion to determine what constitutes an inappropriate promotional statement or claim that expresses subjective rather than objective views of the merits or benefits of conversion. As revised, the provision appears as adopted §25.25(c)(15)(F).

In general, an insurance policy funding a prepaid contract will insure the life of the person intended to receive the funeral, the contract beneficiary. In such a case, the designation of the insured as the contract beneficiary under the prepaid contract could not be changed without fully unwinding the arrangement. However, trust-funded contracts typically allow the contract beneficiary to be changed. Accordingly, proposed §25.25(c)(15)(B)(iii) provided that, if the prepaid contract allowed the contract beneficiary to be changed, the notification letter must advise the purchaser that the prepaid contract beneficiary could no longer be changed after the funding annuity is issued. One commenter classifies as erroneous the assumption that a post-conversion annuity would not allow the designated annuitant (the insured) to be changed when in fact such a change can be possible if the annuity so provides. The commenter urges that this disclosure be deleted from the notification letter and that the rule be amended to require that the post-conversion annuity, either expressly or through a rider, allow for a change in annuitant if the underlying prepaid contract permits the contract beneficiary to be changed. The commission agrees that the disclosure as proposed rests upon an erroneous assumption, and has revised the provision, now located in adopted §25.25(c)(15)(G), to require the disclosure only if the prepaid contract allows the contract beneficiary to be changed and the annuity contract does not allow the annuitant to be changed.

Proposed §25.25(c)(15)(B)(iv) would require the notification letter to explain the anticipated change in tax treatment if the conversion has potential tax implications for the purchaser. The proposed text was premised upon a situation presumed to commonly occur. One commenter described the provision as inaccurate, misleading, and a fundamental misrepresentation of the meaning of 16 U.S.C. §685 and trust taxation. As an alternative, the commenter suggests that the provision simply require the notification letter to explain any change in federal income taxation resulting from the conversion that is anticipated to affect the purchaser. The commission agrees and has revised the subsection as comment suggests.

New §25.25 is adopted pursuant to Finance Code, §154.204, which provides for department approval of a conversion from trust-funded prepaid funeral benefits to insurance-funded prepaid funeral benefits to safeguard the rights and interests of the individual who purchases a prepaid funeral benefits contract, and pursuant to Finance Code, §154.051, which authorizes the commission to adopt rules relating to the enforcement and administration of Chapter 154.

§25.25.Conversion from Trust-Funded to Insurance-Funded Benefits.

(a) Definitions. Definitions of words and terms in Finance Code, §154.002, are incorporated in this section by reference. The following words and terms have the following meanings when used in this section, unless the context clearly indicates otherwise.

(1) Aggregate trust funds--The trust funds to be transferred with respect to an individual prepaid contract as of the transfer date, comprised of the paid-in principal plus the earnings attributable to that prepaid contract. As the context may require, the term also refers to the sum of the aggregate trust funds for all prepaid contracts subject to conversion.

(2) Applicant--A permit holder under Finance Code, Chapter 154, who files an application under this section.

(3) Contract beneficiary--The person named in a prepaid contract as the intended recipient of contracted funeral merchandise and services.

(4) Conversion--A transaction under Finance Code, §154.204, and this section, to convert all outstanding trust-funded prepaid funeral benefits under existing prepaid contracts administered by the applicant to insurance-funded prepaid funeral benefits to be administered by the post-conversion permit holder after conversion.

(5) Insurance company--The insurance company designated in an application filed under this section to issue the annuities required for the conversion. The insurance company may also be the post-conversion permit holder if permitted under applicable insurance law and regulations.

(6) Paid-in principal--The amount required to be deposited in trust by the applicant with respect to an individual prepaid contract pursuant to Finance Code, §154.253. As the context requires, the term may also refer to the total amount deposited in trust by the applicant for all prepaid contracts.

(7) Post-conversion permit holder--The permit holder designated in an application filed under this section to hold and administer the prepaid contracts after conversion. The post-conversion permit holder may also be the insurance company if permitted under applicable insurance law and regulations.

(8) Prepaid contract--A contract for prepaid funeral benefits under Finance Code, Chapter 154.

(9) Purchaser--An individual who purchased a trust-funded prepaid contract that is the subject of an application filed under this section. The purchaser may also be the contract beneficiary. If permitted by the context, the term includes the purchaser's authorized agent.

(10) TDI--Texas Department of Insurance.

(11) Unpaid principal balance--The unpaid portion of the purchase price of a prepaid contract.

(b) Standards for approval and eligibility. The department will not approve a proposed conversion unless the following general requirements have been met.

(1) Standards for approval. The proposed insurance-funded benefits arrangement must safeguard the rights and interests of the purchasers to substantially the same degree as the trust-funded benefits arrangement sought to be replaced, as provided by Finance Code, §154.204, and this section. An application may be approved or denied without the necessity of a hearing, subject to the right of the applicant or the post-conversion permit holder to request a hearing. Without limiting its ability to consider any matter relevant to the determination of substantial equivalency, the department will not approve a proposed conversion unless:

(A) the form(s) of insurance policy proposed for use in the conversion is a single or flexible premium deferred fixed (not variable) annuity that is structured to protect and preserve the existing rights and interests of the purchaser, including the amount of funds the purchaser would be entitled to receive upon cancellation of the prepaid contract and the amount of funds payable upon maturity of the prepaid contract;

(B) the post-conversion permit holder directly or indirectly controls, is controlled by, or is under common control with the insurance company;

(C) neither the applicant nor the post-conversion permit holder have a record of noncompliance with respect to the requirements of Finance Code, Chapter 154, and this chapter, as evidenced by paragraph (2) of this subsection;

(D) the post-conversion permit holder accepts responsibility for verifying that the prepaid contracts proposed for conversion are performed in accordance with their terms, and undertakes to maintain the records the department requires to determine compliance with Finance Code, Chapter 154, and this chapter; and

(E) the post-conversion permit holder demonstrates the organizational and financial capability to discharge its accepted responsibilities.

(2) Eligibility. At the time the application is filed, processed and approved, the applicant and the post-conversion permit holder must each be in good standing with the department. To be in good standing with the department, the department's most recent report of examination of either permit holder must not cite any violation of applicable laws and regulations or other material deficiencies that have not been remedied or corrected to the satisfaction of the department, and the permit holder must not be delinquent with respect to any fees or filings due to the department. Within 45 days after an application for conversion is filed with the department, the department may conduct an examination of the applicant or the post-conversion permit holder or both before approving or denying the application if an examination has not been conducted within the preceding 12 months or for the purpose of verifying that previously cited violations or other deficiencies have been satisfactorily eliminated or corrected.

(c) Contents of application. An application for conversion must respond to each paragraph of this subsection by number. Overlapping or duplicate responses may be cross-referenced for brevity.

(1) Letter requesting conversion. The applicant shall submit a letter to the commissioner, signed by a duly authorized officer, that:

(A) requests approval of the conversion of the applicant's prepaid contracts;

(B) requests authorization to transfer the applicant's responsibility for the prepaid contracts to the post-conversion permit holder;

(C) summarizes the amount of aggregate trust funds by depository and account number and the component amounts of paid-in principal and earnings, and requests authorization to transfer the aggregate trust funds from the currently approved depository or trustee to the insurance company;

(D) represents that the applicant is in compliance with Finance Code, §154.301, regarding prepaid contracts presumed to be abandoned, and has filed the reports and delivered funds as required by Finance Code, §154.304; and

(E) if the applicant is not an individual, includes a certified resolution of the applicant's board authorizing the conversion, the application, and the execution of related documents by the submitting officer.

(2) Agreement regarding conversion. The applicant must submit an original, signed copy of the agreement among the applicant, the post-conversion permit holder, and the insurance company regarding the transfer, receipt, and application of trust funds upon conversion that, among other matters, contains the following provisions:

(A) agreement of the parties that all prepaid contracts of the applicant in existence as of the date of the application will be subject to conversion, excluding prepaid contracts that are presumed abandoned under Finance Code, §154.301;

(B) agreement of the insurance company that:

(i) the formula for determining the cash surrender value or cancellation benefit of each annuity to be issued in the conversion will be at least as generous to the purchaser as the formula that would have applied under Finance Code, §154.155, had the prepaid contract not been converted from trust-funded to insurance-funded;

(ii) the face amount of the annuity to be issued with respect to each prepaid contract will not be less than the amount of aggregate trust funds transferred for that prepaid contract;

(iii) for any prepaid contract which is not fully paid and the balance due not included in the annuity described in clause (ii) of this subparagraph, the face amount of the supplemental annuity to be issued may not be less than the unpaid principal balance, and no credit or reduction will be applied to the unpaid principal balance for earnings attributable to paid-in principal under the prepaid contract;

(iv) upon request, a copy of the specifications page of the funding annuity or annuities will be furnished to the purchaser of the prepaid contract to be funded; and

(v) no commissions or other compensation will be paid out of or deducted from the aggregate trust funds to be transferred in the proposed conversion.

(i) maintain all records required by §25.10 of this title (relating to Recordkeeping Requirements for Insurance-Funded Contracts);

(ii) verify that each death or cancellation benefit claim under a converted prepaid contract is paid in accordance with Finance Code, Chapter 154, and this chapter;

(iii) verify that each prepaid contract is performed by the funeral provider at maturity in accordance with its terms;

(iv) verify that any additional charges imposed by the funeral provider and collected from the decedent's representatives are for additional services or merchandise not otherwise contemplated by and funded under the prepaid contract and, if not, promptly refund or require the funeral provider to refund any prepaid contract overcharges to the decedent's representatives; and

(v) if within the five-year period following approval of the conversion a purchaser presents a fully executed prepaid contract that was not listed in the applicant's pre-conversion or post-conversion summaries and provides proof of payments made on the contract, take action to cause the insurance company to issue one or more annuities with respect to the previously omitted prepaid contract as if it had originally been included in the conversion or, if cancellation is requested by the purchaser, pay or take action to cause the purchaser to be paid the cancellation benefit due. The maximum potential responsibility imposed by this clause is 5.0% of the aggregate trust funds transferred, except that if 5.0% of the aggregate trust funds is:

(I) less than $5000, the maximum potential responsibility imposed by this clause is $5,000;

(II) greater than $20,000, the maximum potential responsibility imposed by this clause is $20,000.

(3) Compensation to insiders. The applicant must submit a written disclosure of the estimated total commissions and other compensation to be paid by the insurance company in connection with the conversion to each insurance agent that controls, is controlled by, or is under common control with the applicant or a funeral provider under any of the prepaid contracts to be converted, expressed as a percentage, dollar amount, or both, and the identity of each such agent.

(4) Agreement of post-conversion permit holder and applicant. The applicant must submit a written agreement between the post-conversion permit holder and the applicant that, at a minimum, requires the applicant to relinquish the individual prepaid contract ledgers formerly maintained by the applicant under §25.11 of this title (relating to Record Keeping Requirements for Trust-Funded Contracts) and obligates the post-conversion permit holder to maintain such ledgers to reflect the paid-in principal and the unpaid principal balance under each converted prepaid contract.

(5) Agreements between post-conversion permit holder and funeral providers. The applicant must submit the written agreement between the post-conversion permit holder and each person designated as the funeral provider under any prepaid contract to be converted that, at a minimum:

(A) sets forth the nature and scope of the relationship between the permit holder and the funeral provider and the respective rights and responsibilities of the parties with respect to the prepaid contracts of that funeral provider, including allocation of responsibilities for refunding any prepaid contract overcharges identified by the permit holder or the department;

(B) requires the funeral provider to perform and deliver the funeral benefits under each converted prepaid contract of that funeral provider in accordance with its terms;

(C) requires the funeral provider to provide the post-conversion permit holder with the documentation necessary to enable the permit holder to maintain the records required by Finance Code, Chapter 154, and §25.10 of this title; and

(D) obligates the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary under the prepaid contract in compliance with applicable law.

(6) Agreement of post-conversion permit holder and insurance company. If the proposed post-conversion permit holder is not the insurance company, the applicant must submit a written agreement between the post-conversion permit holder and the insurance company that, at a minimum, requires the insurance company to provide the post-conversion permit holder with the documentation necessary to enable the permit holder to maintain the records required by §25.10 of this title. The agreement must also obligate the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary under each converted prepaid contract and the owner and insured under each annuity issued in the proposed conversion in compliance with applicable law.

(7) Commitment of insurance company. If the post-conversion permit holder is not the insurance company and is unable to independently demonstrate that it has the organizational and financial resources to discharge its permit holder responsibilities, or otherwise intends to rely on the insurance company to provide such resources, the insurance company or its insurance holding company must commit to the department in writing to take all necessary steps to maintain the existence of the current or a successor post-conversion permit holder, cause such permit holder to annually renew its permit if renewal is required by Finance Code, §154.107, and provide adequate resources to such post-conversion permit holder to enable it to maintain the financial condition and general fitness necessary to discharge the post-conversion permit holder's responsibilities under Finance Code, Chapter 154, and this chapter.

(8) Commitment of applicant. The applicant must commit to the department in writing to obtain and annually renew a permit under Chapter 154 and assume the post-conversion permit holder's responsibilities with respect to each converted contract for any year in which any converted contract remains outstanding and the post-conversion permit holder or a duly licensed successor fails to renew its permit as required with respect to the converted contracts, as evidenced by a final order revoking the permit. The commitment must obligate the applicant to submit its completed application with all required fees not later than the 31st day after the date the department notifies the applicant in writing of the facts that require licensure under the commitment.

(9) Form of annuity. The applicant must submit a copy of the form(s) of annuity proposed to be issued as part of the conversion. The submitted form(s) must be accompanied by a copy of the TDI notice of action approval letter. The applicant and not TDI is responsible for ensuring that the form of annuity complies with this section. Among other matters, the annuity must:

(A) provide guaranteed growth of the death benefit of no less than 2.0% compounded annually on gross premiums paid beginning in the first year of the policy;

(B) provide a formula for determining cash surrender value or cancellation benefit that will be at least as generous to the purchaser as the formula that would have applied under Finance Code, §154.155, had the prepaid contract not been converted from trust-funded to insurance-funded;

(C) provide a death benefit for the duration of the prepaid contract that equals the sum of the aggregate trust funds transferred at conversion, all future premiums paid, and accumulated growth thereon as provided by subparagraph (A) of this paragraph, provided that the death benefit can never be less than the amount that would have been available under the prepaid contract on the date of conversion had the prepaid contract not been converted from trust-funded to insurance-funded; and

(D) not include any provision that allows for contesting coverage or limiting death benefits, refers to or requires a physical examination, or otherwise operates as an exclusion, limitation, or condition on payment of death benefits other than provisions requiring submission of proof of death or surrender of the annuity at the time the annuity matures or is canceled.

(10) Federal income tax treatment. The applicant must submit a written summary describing the pre-conversion, federal income tax status of the purchasers' trusts, in the aggregate, as either qualified funeral trusts under 16 U.S.C. §685 or grantor trusts, for the preceding taxable year. Disclosure of differing treatment of individual purchaser trusts is not required if the summary identifies and quantifies the percentage of purchaser trusts treated as grantor trusts and qualified funeral trusts. The applicant must also describe the post-conversion manner in which taxable income arising from the annuities will be reported for federal income tax purposes, including taxable income arising from payment of cash surrender value.

(11) Past performance. The applicant must submit an historical yield table or graph reflecting the annual rate of growth in the death benefit under previously issued annuities similar to the form of annuity proposed to be issued by the insurance company in the proposed conversion, expressed as a percentage for each year of the most recent five-year period, to the extent such annuities were in existence in those periods. For purposes of this paragraph, the annual growth under the annuity equals the growth rate credited by the insurance company to the death benefit for the year.

(12) Form of assignment. The applicant must submit a copy of the form of assignment, if any, to be used in assigning annuity rights or proceeds to the post-conversion permit holder.

(13) Qualifications of post-conversion permit holder. With respect to the post-conversion permit holder, the applicant must submit:

(A) if the proposed post-conversion permit holder is not also the insurance company, a copy of the post-conversion permit holder's most recent annual financial statements and the most current year-to-date financial statements;

(B) a list of all previous conversions in this state accepted by the post-conversion permit holder and, with respect to each conversion, the date of the order approving the conversion and the date that the converted prepaid contracts were formally transferred to the post-conversion permit holder;

(C) a summary of the number and aggregate purchase price of all prepaid contracts administered by the post-conversion permit holder as of the end of the immediately preceding calendar year;

(D) a description of how the prepaid contracts to be converted will be administered by the post-conversion permit holder, including a description of activities or functions, other than delivery of funeral services and merchandise by the designated funeral provider, that will be outsourced and the contractor that will perform such activities or functions; and

(E) if any contractor named in response to subparagraph (D) of this paragraph directly or indirectly controls, is controlled by, or is under common control with the post-conversion permit holder, a summary of the contracting relationship for each of the preceding three fiscal years that includes a description of the services performed and the compensation paid by the post-conversion permit holder.

(14) Qualifications of insurance company. With respect to the insurance company, the applicant must submit:

(A) a letter from the insurance company addressed to the department, dated not more than 60 days prior to the date the application is filed, representing that the insurance company is in good standing and currently authorized to conduct the business of insurance in this state;

(B) to the extent available, a list of the current financial strength ratings of the insurance company determined by A.M. Best Company, Standard & Poor's, Wiess Research, Duff & Phelps, and Moody's Investors Service; and

(C) a list of all previous conversions in this state that were funded by the insurance company and, with respect to each conversion, the date of the order approving the conversion and the date that trust funds were formally transferred to the insurance company.

(15) Notice to purchasers. The applicant must submit the proposed form of public notice required by subsection (e)(2) of this section and each proposed letter regarding the proposed conversion to be sent to purchasers from the applicant, the post-conversion permit holder, or the insurance company, for approval by the department. The proposed form of notification letter from the applicant must:

(A) briefly and fairly disclose the terms of the proposed conversion in a manner that is not misleading and that enables the purchaser to understand the terms of the proposed conversion and the impact on the purchaser and the purchaser's contract;

(B) conspicuously disclose, by means of bolded type within a bordered text box or another method acceptable to the department, the purchaser's right under Finance Code, §154.204(b), to decline the conversion and remain in the existing trust-funded funeral benefit arrangement by filing a written request with the department within 60 days;

(C) inform the purchaser that a copy of the specifications page of the funding annuity is available upon request, if such notice is not contemporaneously provided by the insurance company in a separate letter;

(D) advise the purchaser that questions or complaints regarding the prepaid contract or the proposed conversion may be directed to the Texas Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705; 1-877-276-5554 (toll free);

(E) disclose that the prepaid funeral guaranty fund will no longer guarantee performance of the prepaid contract after conversion, that a successor funeral provider may not agree to provide the previously selected funeral services and merchandise for the same price specified in the prepaid contract with the original funeral provider, and at the option of the applicant, disclose as an aid for comparison that payment of the funding annuity, but not performance of the contract itself, will be guaranteed by the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association after conversion (provided that, if approved by the department, such disclosure will not be deemed a violation of Insurance Code, §463.451);

(F) not contain promotional statements or claims that express subjective rather than objective views of the merits or benefits of conversion;

(G) if the prepaid contract allows the contract beneficiary to be changed and the annuity contract does not allow the annuitant to be changed, disclose that the prepaid contract beneficiary may no longer be changed after the funding annuity is issued; and

(H) explain any change in federal income taxation related to cancellation and maturity resulting from the conversion that is anticipated to affect the purchaser.

(16) Pre-conversion summary. The applicant must submit a pre-conversion summary pertaining to each prepaid contract to be converted, determined as of a date no earlier than 30 days prior to the date the application is filed, with totals for all prepaid contracts to be converted, if applicable, addressing each of the following categories:

(A) name and, if available, date of birth of the purchaser;

(B) date of contract;

(D) paid-in principal;

(E) unpaid principal balance, if any;

(F) accumulated earnings;

(G) cancellation benefit due to the purchaser, assuming cancellation were to occur on the calculation date;

(H) amount eligible to be withdrawn from the trust fund by the applicant upon death of the contract beneficiary, assuming death were to occur on the calculation date; and

(I) amount retained by the applicant under Finance Code, §154.252.

(17) Pro forma post-conversion summary. The applicant must submit a pro forma post-conversion summary pertaining to each prepaid contract as if converted, determined as of the same date as the pre-conversion summary, with totals for all prepaid contracts, if applicable, addressing each of the following categories:

(A) name of annuitant;

(B) contract purchase price;

(D) unpaid principal balance, if any;

(E) the amount of transferred trust funds applied to the premium for the annuity;

(F) amount retained by the applicant under Finance Code, §154.252;

(G) cash surrender value of each annuity, assuming the annuity were to be surrendered on the calculation date; and

(H) death benefit under each annuity, assuming death were to occur on the calculation date.

(18) Voluntary cancellation of permit. If the applicant will not sell trust-funded prepaid contracts or administer previously sold trust-funded prepaid contracts after the conversion, the applicant must submit a completed form to voluntarily cancel its trust-funded permit. The applicant's voluntary cancellation will not be processed unless the conversion is approved, and will not be effective until the department completes the close-out examination of the applicant.

(19) Application fee. In connection with an application submitted under this section, the applicant must submit the conversion application fee required by §25.23 of this title (relating to Application Fees).

(20) Side agreements. To the extent not otherwise required by this subsection, the applicant must submit copies of any other agreements between or among the applicant, a funeral provider, the post-conversion permit holder, and/or the insurance company that contain contractual provisions or informal understandings or undertakings addressing any aspect of the proposed conversion or the future relationship among the applicant, a funeral provider, the post-conversion permit holder, and/or the insurance company with respect to any converted prepaid contract.

(d) Consideration of application; hearing. If the application is deficient, the department may require any person connected with the proposed conversion to submit additional information. An application may be approved or denied without the necessity of a hearing, subject to the right of the applicant or the post-conversion permit holder to request a hearing.

(1) Conditions in order approving conversion. An order approving conversion will impose certain conditions that are not subject to objection, as described in subsection (e) of this section. The order may also impose other, nonstandard conditions specific to the conversion at issue. The applicant or the post-conversion permit holder must submit a written request for hearing pursuant to paragraph (2) of this subsection if any nonstandard condition in the order is objectionable, in which case the order is deemed to be a denial. Consummation of the conversion transaction constitutes confirmation of acceptance by the applicant, the post-conversion permit holder, and the insurance company of any conditions imposed by the order and is considered for all purposes an agreement with the department enforceable against the applicant, the post-conversion permit holder, and the insurance company.

(2) Hearing. The applicant or the post-conversion permit holder may file a written request for hearing with the commissioner on or before the 30th day after the date of the order denying the application, or an order imposing nonstandard conditions objectionable to the applicant or the post-conversion permit holder, stating with specificity the reasons the applicant alleges that the decision of the department is in error. The request for hearing will be forwarded to the administrative law judge who must enter appropriate orders and conduct the hearing on or before the 60th day after the date the request for hearing was received, or as soon as is otherwise reasonably possible, under Chapter 9 of this title (relating to Rules of Procedure for Contested Case Hearings, Appeals, and Rulemakings) and Government Code, Chapter 2001. The applicant or the post-conversion permit holder has the burden of proof to demonstrate that the proposed insurance-funded prepaid funeral benefits safeguards the rights and interests of each affected purchaser to substantially the same degree as the existing trust-funded prepaid funeral benefits sought to be replaced. A denial of an application may not be appealed until a final order is issued.

(e) Standard conditions in order approving conversion. An order approving conversion will impose six required conditions that are not subject to objection. Failure to satisfy any of these conditions constitutes a violation of an order of the commissioner subject to possible enforcement action under Finance Code, Chapter 154.

(1) The order approving conversion will prohibit issuance of the annuities prior to the expiration of the time period for a purchaser to decline conversion, including any extended time period required by paragraph (4) of this subsection, except that the annuities may be issued prior to that date if expiration of the time period will occur during the free look period or if a purchaser electing to decline conversion will not be required to pay an early withdrawal penalty for cancellation of the annuity.

(2) Pursuant to Finance Code, §154.204(b), the order approving conversion will require the applicant to notify purchasers of the proposed conversion by the following means:

(A) The notification letter from the applicant described by subsection (c)(15) of this section must be sent to purchasers by certified mail or another form of mail that requires or provides proof of delivery to the last known address of the purchaser.

(B) The applicant must publish a one-time public notice in a newspaper of general circulation in the county in which the applicant is located, or in another publication or location as directed by the department, as evidenced by a publisher's affidavit attesting to the date of publication, advising purchasers of trust-funded prepaid contracts from applicant of the pending conversion, the right of a purchaser to decline conversion, and the manner in which a purchaser may obtain more information about the purchaser's rights and options regarding the conversion.

(3) The order approving conversion will provide that a prepaid contract for which the notification letter is returned unclaimed may not be converted to the insurance-funded funeral benefit arrangement approved in the order unless the requirements of this paragraph are met.

(A) With respect to each notification letter returned unclaimed because the address is incorrect, the addressee is unknown or has moved without leaving a forwarding address, or the addressee's forwarding order has expired, the applicant must search for a new address for the purchaser using available non-fee based resources. If a new address is located, the applicant must resend the notification letter one time in the manner required by subsection (e)(2)(A) of this section.

(B) With respect to each unclaimed notification letter for which a new address is not located and with respect to each re-mailed notification letter that is returned unclaimed, the applicant must review the related contract file in light of the returned letter to verify or change its prior determination that the contract should not be presumed abandoned under Finance Code, §154.301, and must retain documentation evidencing its review for examination by the department. A prepaid contract subject to this paragraph may be converted to the insurance-funded funeral benefit arrangement approved in the order only if the applicant makes a new affirmative finding that the contract should not be presumed abandoned. On or before the 120th day after the date of the order, the applicant must submit a report to the department summarizing its activities under this subparagraph and reporting the basis for findings made.

(4) The order approving conversion will require the post-conversion permit holder, on or before the 120th day after the date of the order, to submit to the department a notarized statement attesting that the annuities have been issued and funded on behalf of the purchasers listed in the pro forma post-conversion summary included in the conversion application and disclosing the date that the notification letters included in the conversion application were mailed to the purchasers.

(5) The order approving conversion will require the post-conversion permit holder, on or before the 120th day after the date the trust funds are transferred as authorized by the order, to submit to the department a final post-conversion summary pertaining to each converted prepaid contract, determined as of the conversion date, with totals for all prepaid contracts, if applicable, addressing each of the following categories:

(A) name of annuitant;

(B) policy number of the annuity issued to the annuitant, or of each annuity if a supplemental annuity is also issued;

(D) paid-in principal;

(E) unpaid principal balance, if any;

(F) the amount of transferred trust funds applied to the premium for each annuity;

(G) amount retained by the applicant under Finance Code, §154.252;

(H) cash surrender value of each annuity, assuming the annuity were to be surrendered on the conversion date; and

(I) death benefit under each annuity, assuming death were to occur on the conversion date.

(6) The order approving conversion will require the conversion transaction to be fully implemented and completed on or before the 150th day after the date of the conversion order.