[Senate Hearing 111-904]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 111-904

                    FINANCIAL SERVICES AND PRODUCTS:
                THE ROLE OF THE FEDERAL TRADE COMMISSION
                    IN PROTECTING CONSUMERS--PART II

=======================================================================

                                HEARING

                               before the

   SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 17, 2010

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
             Ann Begeman, Acting Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel
                                 ------                                

   SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

MARK PRYOR, Arkansas, Chairman       ROGER F. WICKER, Mississippi, 
BYRON L. DORGAN, North Dakota            Ranking
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 JIM DeMINT, South Carolina
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota             JOHNNY ISAKSON, Georgia
TOM UDALL, New Mexico                DAVID VITTER, Louisiana












                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 17, 2010...................................     1
Statement of Senator Pryor.......................................     1
Statement of Senator Wicker......................................     2
    Prepared statement of Hon. William E. Kovacic, Commissioner, 
      Federal Trade Commission submitted by Hon. Roger F. Wicker.     6
Statement of Senator Klobuchar...................................     9
Statement of Senator Udall.......................................    17

                               Witnesses

Rosch, Hon. J. Thomas, Commissioner, Federal Trade Commission....    10
    Prepared statement...........................................    12
Mierzwinski, Edmund, Consumer Program Director, U.S. Public 
  Interest Research Group........................................    20
    Prepared statement...........................................    22
Pridgen, Dee, Associate Dean and Professor of Law, University of 
  Wyoming College of Law.........................................    26
    Prepared statement...........................................    28
Woolley, Linda A., Executive Vice President, Government Affairs, 
  Direct Marketing Association, Inc..............................    34
    Prepared statement...........................................    36
Muris, Hon. Timothy J., Foundation Professor, George Mason 
  University School of Law, and Of Counsel, O'Melveny & Myers LLP    41
    Prepared statement...........................................    42

                                Appendix

Rockefeller IV, Hon. John D., U.S. Senator from West Virginia, 
  prepared statement.............................................    69
Hutchison, Hon. Kay Bailey, U.S. Senator from Texas, prepared 
  statement......................................................    70
Letter, dated March 17, 2010, to Hon. Mark Pryor and Hon. Roger 
  Wicker from Daniel L. Jaffe, Executive Vice President, 
  Association of National Advertisers (ANA)......................    71
Letter, dated November 24, 2009, to Hon. Christopher J. Dodd from 
  J. Thomas Rosch, Commissioner, Federal Trade Commission........    74
Letter, dated July 16, 2009 to Hon. Barney Frank, from J. Thomas 
  Rosch, Commissioner, Federal Trade Commission..................    76
Response to written question submitted to Hon. J. Thomas Rosch 
  by:
    Hon. Tom Udall...............................................    81
    Hon. Roger F. Wicker.........................................    81
    Hon. David Vitter............................................    91
Response to written question submitted by Hon. Tom Udall to 
  Edmund Mierzwinski.............................................    92
Response to written questions submitted by Hon. Roger F. Wicker 
  to Hon. Timothy J. Muris.......................................    93

 
                  FINANCIAL SERVICES AND PRODUCTS: THE
                  ROLE OF THE FEDERAL TRADE COMMISSION
                    IN PROTECTING CONSUMERS--PART II

                              ----------                              


                       WEDNESDAY, MARCH 17, 2010

                               U.S. Senate,
      Subcommittee on Consumer Protection, Product 
                             Safety, and Insurance,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:06 p.m. in 
room SR-253, Russell Senate Office Building, Hon. Mark L. 
Pryor, Chairman of the Subcommittee, presiding.

           OPENING STATEMENT OF HON. MARK L. PRYOR, 
                   U.S. SENATOR FROM ARIZONA

    Senator Pryor. I'd like to call this hearing to order.
    I want to welcome everyone to the Consumer Protection 
Product Safety and Insurance Subcommittee of the Senate 
Commerce Committee. And today our hearing is on Financial 
Services and Products: the Role of the Federal Trade Commission 
in Protecting Consumers, Part 2.
    This is the second in a series of two, and Senator 
Rockefeller was gracious enough to allow us to do this today. 
And we're going to have two panels, and I would like to ask the 
witnesses to please limit their opening statements to 5 minutes 
each, and then I'm sure my colleagues have a series of 
questions.
    Today, we will examine the Federal Trade Commission's role 
in protecting consumers in the context of financial services 
reform. This is the second hearing, as I mentioned before. 
Senator Rockefeller heard the first Commerce Committee hearing 
on the subject on February 4. Today, we continue that dialogue 
and I look forward to robust debate.
    Let's see. As Chairman of the Subcommittee last year, we 
held a series of hearings on deceptive advertising, frauds, and 
scams in the distressed economy; and the Federal Trade 
Commission's actions to protect consumers from unfair and 
deceptive practices in these areas. This is a tough economic 
environment America finds itself in, and unfortunately, our 
citizens are repeatedly targeted for fraudulent and 
unscrupulous actors seeking to exploit their vulnerabilities. 
Consequently, I think it's proper for us to look at what's 
working, look at what's not, talk to the FTC about how things 
could be strengthened or changed to make what they do work 
better and be more effective.
    On Monday, Senator Dodd unveiled financial regulatory 
reform legislation he has been crafting over the past several 
months, and they've spent a lot of time on it in the Banking 
Committee. And I look forward to looking at that legislation as 
it is rolled out. I will be keeping a sharp eye for--as I'm 
sure people on this committee will, for the Federal Trade 
Commission's authority and the Consumer Financial Protection 
Bureau, proposed by Senator Dodd, that will be housed in the 
Federal Reserve.
    As the Committee considers FTC authorities in light of 
proposed Financial Regulatory Reforms, I think it'll be 
important to make sure this agency's core consumer protection 
mission is properly preserved, and also to make sure that we 
don't create any gaps that might occur if we're not careful in 
how we draft that other piece of legislation. It is also very 
important to consider just how the Federal Trade Commission can 
improve on what it's doing.
    And before I turn it over to the Ranking Member, Senator 
Wicker, I'd like to just say that we are scheduled to have a 
vote today, about 3:30. So, I know we have some colleagues 
that'll be coming and going, and I'd like to just do very brief 
opening statements and then turn it over to our first panel. We 
may have to slip out and vote and come back, but we'll try to 
keep the Committee going, if at all possible.
    Senator Wicker?

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. Thank you, Mr. Chairman.
    The FTC plays a key role in ensuring the safety of American 
consumers and financial services. As Chairman Leibowitz said in 
our last hearing, it is the only agency whose sole objective is 
to protect consumers. During the economic recession, when so 
many have taken advantage of vulnerable consumers through 
fraudulent offers of financial assistance, that role has been 
even more important. Beyond just financial services, the FTC 
deals with issues that economically impact every American.
    We want to ensure the FTC has the capabilities and 
resources necessary to keep our consumers safe. However, 
history has shown that even the most well-intentioned 
protectors need boundaries to prevent overreaching and 
negatively impacting the very people they are trying to help. 
To address this concern in the late 1970s, the Congress passed 
laws equipping the FTC with necessary tools to protect 
consumers while building in safeguards that require appropriate 
justification for new rules and additional enforcement 
capabilities. That system has served our people and our economy 
well over 30 years. Yet, some believe there's a need for the 
FTC to be able to react faster, create new rules and 
regulations without the consent of Congress, and have the 
authority to enforce these rules in new ways against 
potentially unknown actors.
    At our last hearing Chairman Leibowitz discussed this issue 
and talked about the expansions of authority he feels the FTC 
needs to conduct its mission better. Now, I appreciate his 
concerns, and believe we should always be willing to consider 
whether change is warranted; however, we must proceed with 
caution, as the Chairman has just said. A significant expansion 
of the FTC's rulemaking and enforcement authority could 
essentially create powerful new policy--a powerful new policy-
setting agency, one that has jurisdiction over nearly the 
entire economy.
    No significant analysis has been conducted on how this 
would impact our economy. Ultimately, we are discussing today 
what many would argue would amount to a direct repeal of 
Congressional action. It concerns me that we are doing so 
without a full understanding of the ramifications for the 
economy and American jobs.
    Today, we'll have the opportunity to hear from other 
stakeholders who are interested in how the FTC fills its 
consumer protection role. It is unfortunate that we're not able 
to hear from others in the business community who would be 
affected, as there was no shortage of willing participants for 
today's hearing. I believe it is particularly relevant to note 
the number and variety of industries who are concerned with 
Chairman Leibowitz' proposals and the impact they could have on 
businesses.
    I have a letter in my hand from a number of these groups, 
and I request, at this point, Mr. Chairman, that this letter be 
entered into the record for this hearing.
    Senator Pryor. Without objection.
    [The information referred to follows:]

                                                   January 19, 2010
U.S. Senate,
Washington, DC.

Dear Senator:

    The undersigned associations write to express our significant 
concerns about the provisions of H.R. 4173, the Wall Street Reform and 
Consumer Protection Act of 2009, that would amend the Federal Trade 
Commission Act (``FTC Act'') by removing existing procedural safeguards 
on the rulemaking and enforcement capabilities of the Federal Trade 
Commission (``FTC'' or ``Commission''). Expecting that the Senate may 
consider these provisions as part of its work on FTC reauthorization, 
we write to highlight the potentially significant and negative impact 
such changes would have on the business community at large.
    The provisions in question would eliminate procedural safeguards 
that were imposed upon FTC rulemaking decades ago, after Congress 
determined the Commission had repeatedly overstepped its regulatory 
authority. The legislation couples this unrestrained rulemaking 
authority with enforcement powers to seek civil penalties for unfair or 
deceptive acts or practices; to seek such penalties without 
coordinating with the Justice Department; and to pursue companies that 
allegedly provide ``substantial assistance'' in an FTC Act violation, 
even without actual knowledge of the violation. Taken together, these 
provisions grant such sweeping powers that the FTC could essentially 
act as an unelected legislature governing industries and sectors across 
the economy.
    There has been remarkably little debate on the consequences of 
reversing the considered decisions of two earlier Congresses. In 
particular, there has been no opportunity for affected industries to 
appear at a hearing to present their concerns about the potential 
effect of these provisions on American commerce and our economic 
future. A proposal for Congress to delegate such sweeping new 
regulatory authority deserves more thorough deliberation.
I. Elimination of Existing Procedural Safeguards
    When the FTC operates under congressional guidance in the form of a 
specific authorizing statute, the Commission may use the notice-and-
comment rulemaking procedures followed in most Federal agency 
proceedings. However, the FTC's consumer protection mandate under the 
FTC Act is exceptionally broad. The Commission's authority extends to 
all ``unfair or deceptive acts or practices in or affecting commerce,'' 
including business-to-business interactions as well as conduct toward 
consumers.\1\ The statute provides scant guidance to channel the FTC's 
exercise of its discretion in executing this mission.
---------------------------------------------------------------------------
    \1\ 15 U.S.C.  45(a).
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    The FTC is also set apart from other Federal agencies by the 
breadth of its jurisdiction. The FTC has authority to regulate across 
the U.S. economy, except for a few sectors that are specifically 
exempted and within the jurisdiction of other agencies. While it is 
true that certain other agencies, such as the Securities and Exchange 
Commission and the Commodity Futures Trading Commission, may issue 
rules using expedited procedures under the Administrative Procedure Act 
(``APA''), these agencies are narrowly focused in both jurisdiction and 
mission. In contrast, the FTC is, by definition, a generalist agency. 
It is therefore appropriate to require robust industry and consumer 
participation when the FTC seeks to issue a rule that would affect a 
broad range of trades or sectors, in order to inform the agency and 
avoid the types of abuses that occurred previously.
    In 1975 and again in 1980, Congress stepped in to stop the FTC's 
abuse of its rulemaking authority. Congress imposed enhanced 
safeguards, including more public input opportunities, when the FTC 
seeks to outlaw specific acts or practices as ``unfair'' or 
``deceptive.'' As the Senate Commerce, Science, and Transportation 
Committee explained in 1979, greater procedural safeguards were 
necessary because the FTC had proposed rules ``[n]otwithstanding the 
intent of Congress'' in areas such as abuses associated with the sale 
of used cars and children's television advertising.\2\
---------------------------------------------------------------------------
    \2\ S. Rept. No. 96-500 (1979), reprinted in 1980 U.S.C.C.A.N. 
1101, 1103.
---------------------------------------------------------------------------
    The procedures that Congress required, and that remain the law 
today, are quite reasonable. In addition to the notice-and-comment 
steps required by the APA, the FTC must afford advance rulemaking 
notice to Congress and the public, must provide an informal hearing so 
that the public may comment orally or in writing on the agency 
proposal, and must provide a Statement of Basis and Purpose for any 
final rule. Robust judicial review ensures that these procedures are 
followed. In addition, existing law requires transparency when 
Commissioners meet with outside parties about regulatory proceedings, 
and prohibits staff from giving Commissioners facts outside the 
regulatory record. These procedures improve the quality of agency 
decision-making and increase public accountability and support.
    Timothy Muris, who served as Chairman of the FTC from 2001 until 
2004, testified before Congress on July 14, 2009, to oppose the removal 
of these longstanding safeguards. As Chairman Muris explained:

        ``The Administration's proposal would do more than just change 
        the procedures used in rulemaking. It also would eliminate the 
        requirement that unfair or deceptive practices must be 
        prevalent, and eliminate the requirement for the Commission's 
        Statement of Basis and Purpose to address the economic effect 
        of the rule. It also changes the standard for judicial review, 
        eliminating the court's ability to strike down rules that are 
        not supported by substantial evidence in the rulemaking record 
        taken as a whole. The current restrictions on Commissioners' 
        meetings with outside parties and the prohibition on ex parse 
        communications with Commissioners also are eliminated. These 
        sensible and important protections should be retained.''

    Jim Miller, another former FTC chairman, has commented that passage 
of the legislation as currently drafted would be ``like putting the FTC 
on steroids.'' \3\ In the past, the existing safeguards have proven an 
essential check on FTC regulation that exceeds congressional intent. 
Congress, then acting under Democratic leadership, established the 
current set of procedural protections after finding ``that in many 
instances the FTC had taken actions beyond the intent of Congress.'' 
\4\ For example, the FTC notoriously considered a total ban on 
children's advertising in a proceeding that the Washington Post 
criticized as ``a preposterous intervention that would turn the FTC 
into a great national nanny.'' \5\ As laid out in H.R. 4173, these 
provisions would give the FTC free rein--and a congressional blessing--
to repeat these abuses. There would be little to restrain the FTC from 
pursuing sweeping new regulations in areas where Congress has not yet 
legislated, or from drastically reshaping regulations in areas where 
Congress has already legislated.
---------------------------------------------------------------------------
    \3\ Brody Mullins and John D. McKinnon, ``FTC's Powers Would Grow 
Under Financial Overhaul,'' Wall Street Journal Online, October 29, 
2009, available at http://online.wsj.com/article/
SB125677809189114853.html (last visited October 30, 2009).
    \4\ S. Rept. No. 96-500 at 2.
    \5\ Editorial, The Washington Post (Mar. 1, 1978).
---------------------------------------------------------------------------
    We share the concerns expressed by these former FTC Chairmen, and 
we agree with current FTC Commissioner William Kovacic, who previously 
served as the agency's Chairman and General Counsel, that it is 
``prudent to retain procedures beyond those encompassed in the APA'' 
when the FTC acts without specific authorization from Congress.\6\ 
Given the extremely broad scope of the FTC's jurisdiction and mandate, 
and the agency's history of regulatory overreaching, the existing 
procedural protections remain necessary and appropriate in those cases 
when the FTC seeks to outlaw certain business acts or practices.
---------------------------------------------------------------------------
    \6\ Prepared Statement of the Federal Trade Commission at 11 n. 25, 
``Proposed Consumer Financial Protection Agency: Implications for 
Consumers and the Federal Trade Commission,'' Hearing Before the House 
Comm. on Energy and Commerce, Subcomm. on Commerce, Trade and Consumer 
Protection, 111th Cong. (July 8, 2009).
---------------------------------------------------------------------------
II. Excessive Enforcement Authorities
    Likewise, removing existing checks on the FTC's enforcement powers 
would not serve the public interest. While we support the FTC's mission 
to prevent and punish unfair and deceptive acts or practices, we 
believe that the current limits on the FTC's discretion are appropriate 
given the significant consequences of any enforcement action for a 
targeted company and its shareholders and employees.
    Civil Penalty Authority: The FTC has ample enforcement tools at its 
disposal, and adding civil penalty authority would produce negative 
unintended consequences. Currently, the FTC primarily proceeds by 
imposing an administrative order to change a company's behavior or 
seeking a court order that may force a company to return ill-gotten 
gains. The FTC may then seek civil penalties if an administrative order 
is violated. This system gives companies an incentive to reach an 
agreement with the FTC to improve their business practices, rather than 
litigating against the FTC. The FTC routinely issues detailed 
administrative orders to correct companies' policies and behavior, and 
other companies look to these orders to understand the FTC's 
expectations and shape their own practices. We therefore agree with 
Commissioner Kovacic that ``routine availability of civil penalties, 
even if subject to a scienter requirement, would . . . risk 
constraining the development of doctrine'' through enforcement actions, 
and should not be adopted.\7\
---------------------------------------------------------------------------
    \7\ Id. at 12 n. 30.
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    ``Substantial Assistance'' Violation: H.R. 4173 would provide that 
any person that ``knowingly or recklessly'' provides ``substantial 
assistance'' to another in committing an unfair or deceptive act or 
practice can be punished as a primary perpetrator, even without actual 
knowledge of the violation. We believe that such an expansion of FTC 
jurisdiction is neither reasonable nor necessary, given that the FTC 
has the ability to pursue a perpetrator of any unfair or deceptive act 
or practice.
    Independent Litigating Authority: As passed by the House, H.R. 4173 
would provide the FTC with independent litigating authority to seek 
civil penalties. This provision would eliminate the current requirement 
that the FTC notify the Department of Justice (DOJ) when the FTC 
intends to seek civil penalties, after which the DOJ has 45 days to 
decide whether to pursue the case on behalf of the FTC. This 
consultation is necessary to allow DOJ to coordinate law enforcement 
activities across agencies, and to provide a critical check on the 
FTC's discretion when a company is exposed to excessive and damaging 
penalties. This approach also provides a more considered and orderly 
access to the Federal courts.
    For the reasons discussed above, the undersigned associations 
strongly oppose the provisions currently set out in H.R. 4173 that 
would remove existing checks on the FTC's discretion. These provisions 
would afford the FTC unprecedented and sweeping powers to execute its 
broad mandate. We urge the Senate Commerce Committee to discard these 
provisions as it progresses in its work toward FTC reauthorization.
            Sincerely,

    American Association of Advertising Agencies
    American Advertising Federation
    American Business Media
    American Financial Services Association
    Association of National Advertisers
    Consumer Data Industry Association
    Consumer Electronics Association
    Consumer Healthcare Products Association
    Direct Marketing Association
    Direct Selling Association
    Electronic Retailing Association
    Financial Services Institute, Inc.
    Interactive Advertising Bureau
    International Franchise Association
    The Marketing Research Association
    National Association of Manufacturers
    National Association of Mutual Insurance Companies
    National Association of Professional Background Screeners
    National Association of Realtors
    National Association of Wholesaler-Distributors
    National Automobile Dealers Association
    National Business Coalition on E-Commerce and Privacy
    Natural Products Association
    National Retail Federation
    Online Publishers Association
    Shop.org
    Software & Information Industry Association
    U.S. Chamber of Commerce
    United States Organizations for Bankruptcy Alternatives

    Senator Wicker. This letter, sent to all Senators, 
expresses strong opposition to the removal of existing 
safeguards on the rulemaking and enforcement capabilities of 
the FTC. Signed by 29 different associations who represent 
nearly all aspects of our economy, from healthcare and 
manufacturers to telecommunications and financial services, the 
letter warns of the potentially significant and negative impact 
such changes would have on the business community at large. 
It's important to note that these are representatives of the 
very businesses we are relying on to create new jobs and put 
our constituents back to work.
    It is also unfortunate that scheduling conflicts prevented 
FTC Commissioner Kovacic from being with us today. We would 
certainly have benefited from his expertise, as a current 
Commissioner and former General Counsel and Chairman of the 
FTC. However, Commissioner Kovacic has submitted testimony for 
the record, and it is important to point out that the 
Commissioner shares many of the concerns expressed about the 
ramifications of such a large expansion of the FTC's rulemaking 
authority.
    [The information referred to follows:]

     Prepared Statement of Hon. William E. Kovacic, Commissioner, 
                        Federal Trade Commission
    Chairman Pryor, Ranking Member Wicker, and Subcommittee Members, 
thank you for the opportunity to present my views on a number of 
proposals to augment the FTC's authority. They are the following: APA 
rulemaking, civil penalty authority, independent litigating authority 
for civil penalty actions, and aiding and abetting liability. Although 
I was unable to present testimony at your Subcommittee's hearing, I am 
grateful for the opportunity to make my views known by offering this 
statement for the record.
I. APA Rulemaking
    The FTC's strongest policymaking tool, in addition to litigation, 
is rulemaking. In 1975, Congress granted the FTC express authority to 
issue substantive rules under Section 18 of the FTC Act, and authority 
under Section 5(m)(1)(A) of the Act to seek civil penalties for 
violations of those rules.\1\ Magnuson-Moss rulemaking, as this 
authority is known, requires more procedures than those needed for 
rulemaking pursuant to the Administrative Procedure Act (``APA'').\2\ 
These include two notices of proposed rulemaking, prior notification to 
Congress, opportunity for an informal hearing, and, if issues of 
material fact are in dispute, cross-examination of witnesses and 
rebuttal submissions by interested persons.
---------------------------------------------------------------------------
    \1\ Magnuson-Moss Warranty--Federal Trade Commission Improvement 
Act, Pub. L. No. 93-637, 88 Stat. 2183 (1975) (codified at 15 U.S.C.  
57a, 57b).
    \2\ 5 U.S.C.  551.
---------------------------------------------------------------------------
    In addition, over the past 15 years, there have been a number of 
occasions where Congress has identified specific consumer protection 
issues requiring legislative and regulatory action. In those specific 
instances, Congress has given the FTC authority to issue rules using 
APA rulemaking procedures. A significant and recent example of APA 
rulemaking authority that Congress expressly granted to the FTC was the 
authority, under the Telemarketing and Consumer Fraud and Abuse 
Prevention Act, to issue rules proscribing deceptive and abusive acts 
or practices in telemarketing.\3\ Under that authority, the Commission 
issued the Telemarketing Sales Rule,\4\ including provisions that 
created the do-not-call registry, whereby consumers can protect their 
privacy by electing not to receive commercial telemarketing calls.
---------------------------------------------------------------------------
    \3\ 15 U.S.C.  3009(a).
    \4\ 16 C.F.R.  310.1-.9.
---------------------------------------------------------------------------
    My position in the past, and to which I still adhere, is to dissent 
from the FTC's endorsement of authority to use, for promulgating all 
rules respecting unfair or deceptive acts or practices under the FTC 
Act, the notice and comment procedures of the APA.\5\ While many other 
agencies do have the authority to issue rules following notice and 
comment procedures, the Commission's rulemaking is unique due to the 
range of subject matter (unfair or deceptive acts or practices) and 
sectors (reaching broadly across the economy, except for specific 
carve-outs). Except where Congress has given the FTC a more focused 
mandate to address particular problems, beyond the FTC Act's broad 
prohibition of unfair or deceptive acts or practices, I believe that it 
is prudent to retain procedures beyond those encompassed in the APA. As 
a former Bureau of Consumer Protection Assistant Director stated during 
a panel addressing the agency's rulemaking efforts, the Commission 
should wait for Congress to give the agency specific authority to issue 
rules in a given area because that approach results in ``clearer 
direction'' to the agency's audience.\6\ The lack of a more focused 
mandate and direction from Congress, reflected in legislation with 
relatively narrow tailoring, could result in the FTC undertaking 
initiatives that ultimately arouse Congressional ire and lead to 
damaging legislative intervention in the FTC's work. This is precisely 
what occurred toward the end of the Carter administration. Ongoing 
Commission initiatives led Congress to turn against the Commission in 
1979 and 1980, enacting significant legislative constraints (while 
individual members proposed even more significant cutbacks in 
Commission authority). This occurred even though many of the 
Commission's initiatives were undertaken with the urging of 
Congressional Committees, individual Senators and Representatives.\7\ 
Through specific, targeted grants of APA rulemaking authority, Congress 
makes a credible commitment not to attack the Commission when the 
agency exercises such authority.
---------------------------------------------------------------------------
    \5\ See, e.g., Prepared Statement of the Federal Trade Commission 
Describing the Commission's Anti-Fraud Law Enforcement Program and 
Recommending Changes in the Law and Resources To Enhance the 
Commission's Ability to Protect Consumers before the Subcommittee on 
Consumer Protection, Product Safety, and Insurance of the Committee on 
Commerce, Science, and Transportation, U.S. Senate (July 14, 2009), at 
3 n.4, available at www.ftc.gov/os/2009/07/P094402antifraudlawtest.pdf.
    \6\ Paul Luehr, Remarks at FTC at 100: Into Our Second Century 
Roundtable, Northwestern University School of Law, Chicago (Sept. 25, 
2008), at 67-68 (transcript available at http://www.ftc.gov/ftc/
workshops/ftc100/transcripts/chicagotranscript.pdf). For additional 
discussion of FTC rulemaking see A Report by Federal Trade Commission 
Chairman William E. Kovacic, The Federal Trade Commission at 100: Into 
Our 2nd Century, The Continuing Pursuit of Better Practices (Jan. 
2009), at 124-28, available at http://www.ftc.gov/ftc/workshops/ftc100/
docs/ftc100rpt.pdf.
    \7\ See William E. Kovacic, The Federal Trade Commission and 
Congressional Oversight of Antitrust Enforcement, 17 Tulsa L. J. 587, 
630-67 (1982). As the title suggests, my article focused on the 
Commission's antitrust enforcement.
---------------------------------------------------------------------------
    I would be willing to consider whether all the rulemaking 
requirements that are currently required by Magnuson-Moss to 
promulgate, amend, or repeal rules are needed, as they may be 
unnecessarily cumbersome and often lead to rulemaking proceedings that 
can last several years.
II. Civil Penalty Authority
    The FTC has authority to seek civil penalties in some instances. 
For example, the FTC can seek civil penalties against an entity that 
violates an FTC administrative order, to which it is subject, or a 
trade regulation rule promulgated by the FTC. Congress has also 
specifically authorized the FTC to seek civil penalties for violations 
of certain statutes, e.g., CAN-SPAM Act.\8\ The Commission has 
recommended that Congress authorize the FTC to seek civil penalties for 
all violations of the FTC Act and the authority to prosecute civil 
penalty cases in Federal court in its own name \9\--instead of 
referring such cases to the Department of Justice (``DOJ'') to bring 
civil penalty actions on behalf of the Commission, as is discussed in 
part III below.\10\
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    \8\ See 15 U.S.C.  7701 et seq.
    \9\ See, e.g., Prepared Statement of the Federal Trade Commission 
Describing the Commission's Anti-Fraud Law Enforcement Program and 
Recommending Changes in the Law and Resources To Enhance the 
Commission's Ability to Protect Consumers Before the Subcommittee on 
Consumer Protection, Product Safety, and Insurance of the Committee on 
Commerce, Science, and Transportation, U.S. Senate (July 14, 2009), 
available at www.ftc.gov/os/2009/07/P094402antifraudlawtest.pdf.
    \10\ In general, under the FTC Act, the Commission must notify the 
Attorney General of its intention to commence, defend, or intervene in 
any civil penalty action under the Act. See 15 U.S.C.  56(a)(1).
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    In my view, the existing consequences attendant to a finding that 
an act or practice is unfair or deceptive under the FTC Act are 
generally appropriate and are consistent with the goal of developing 
FTC law to establish new doctrine and to reach new and emerging 
problems. These include an administrative order (whose violation would 
then subject the respondent to civil penalties) or a court-issued 
injunction (which can contain such equitable remedies as redress and 
disgorgement). The routine availability of civil penalties, even if 
subject to a scienter requirement, would risk constraining the 
development of doctrine. This is similar to what has happened in the 
antitrust sphere, where judicial concerns about the costs of private 
litigation, and the effect of mandatory treble damages in antitrust 
cases, have led the courts to constrain the development of antitrust 
doctrine in ways that unduly limit the U.S. antitrust system.\11\
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    \11\ See, e.g., NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 136-37 
(1998) (``To apply the per se rule here . . . would transform cases 
involving business behavior that is improper for various reasons, say, 
cases involving nepotism or personal pique, into treble-damages 
antitrust cases.''); III Phillip Areeda & Donald F. Turner, Antitrust 
Law (1978),  625; William E. Kovacic, The Intellectual DNA of Modern 
U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard 
Double Helix, 2007 Colum. Bus. L. Rev. 1, 51-64.
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    Additionally, if the FTC were granted civil penalty authority for 
consumer protection violations, another possibility is that the 
Commission might routinely challenge as unfair acts, under its consumer 
protection authority, conduct which might also be challenged under its 
antitrust authority as unfair methods of competition (as it did in N-
Data \12\). Thus, it might seek (routinely or otherwise) civil 
penalties for competition infringements. Here, also, Judicial fears 
about overdeterrence could induce courts to cramp the sensible 
development of doctrine.
---------------------------------------------------------------------------
    \12\ In the Matter of Negotiated Data Solutions LLC, File No. 
0510094, Complaint, Decision and Order, and other documents, available 
at http://www.ftc.gov/os/caselist/0510094/index.shtm. In my dissent, I 
noted that, if unfair acts coverage extends to the full range of 
business-to-business transactions (as N-Data suggests it might), it 
would seem that the three-factor test prescribed for unfair acts (15 
U.S.C.  45(n)) could capture all actionable conduct within the FTC's 
competition jurisdiction, including conduct within the proscriptions of 
the Sherman and Clayton Acts. See Dissenting Statement of Commissioner 
Kovacic, In the Matter of Negotiated Data Solutions LLC, File No. 
0510094, available at http://www.ftc.gov/os/caselist/0510094/
080122kovacic.pdf.
---------------------------------------------------------------------------
    Given these concerns, instead of across-the-board civil penalty 
authority, Congress may consider more targeted authority to seek civil 
penalties where restitution or disgorgement may not be appropriate or 
sufficient remedies. Categories of cases where civil penalties could 
enable the Commission to better achieve the law enforcement goal of 
deterrence include malware (spyware), data security, and telephone 
records pretexting.\13\ What makes these cases distinguishable is that 
consumers have not simply bought a product or service from the 
defendants following defendant's misrepresentations and it is often 
difficult to calculate consumer losses or connect those losses to the 
violation for the purpose of determining the amount of restitution. In 
addition, disgorgement may be problematic. In data security cases, 
defendants may not have actually profited from their unlawful acts. The 
Commission has also found that in pretexting and spyware cases, the 
defendants' profits are often minor, and disgorgement would accordingly 
be an inadequate deterrent.
---------------------------------------------------------------------------
    \13\ See Prepared Statement of the Federal Trade before the 
Committee on Commerce, Science, and Transportation, U.S. Senate (Apr. 
8, 2008), at 10-12, available at http://www.ftc.gov/os/testimony/
P034101reauth.pdf.
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III. Independent Litigating Authority for Civil Penalty Actions
    As noted above, the Commission must generally refer civil penalty 
actions to the DOJ.\14\ The Commission has recommended to Congress that 
the FTC be able to bring actions for civil penalties in Federal court 
without mandating that DOJ have the option to litigate on the FTC's 
behalf. I support expanding the FTC's independent litigating authority 
when it seeks civil penalties as it would allow the agency with the 
greatest expertise in the FTC Act to litigate more of its own civil 
penalty cases, while still retaining the option to refer matters-where 
appropriate-to the DOJ. This would be in line with the authority 
granted to other agencies, such as the Securities and Exchange 
Commission (``SEC'') and Commodity Futures Trading Commission 
(``CFTC''). The SEC has such independent authority to seek judicial 
civil penalties for any violation of the securities laws,\15\ and may 
even issue administrative penalties against registered entities.\16\ 
The CFTC may also seek judicial civil penalties or assess 
administrative civil penalties.\17\
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    \14\ In general, under the FTC Act, the Commission must notify the 
Attorney General of its intention to commence, defend, or intervene in 
any civil penalty action under the Act. 15 U.S.C.  56(a)(1). DOJ then 
has 45 days to commence, defend, or intervene in the suit. Id. Should 
DOJ not act within the 45-day period, the FTC may file the case in its 
own name, using its own attorneys. Id.
    \15\ 15 U.S.C.  77t.
    \16\ 15 U.S.C.  78u-2.
    \17\ 7 U.S.C.  9; 7 U.S.C.  13a; 7 U.S.C.  13a-1.
---------------------------------------------------------------------------
    Apart from having the efficiency of having the agency with the most 
expertise in the area bringing the civil penalty prosecutions, it will 
also result in more timely actions. Currently, once the FTC makes a 
referral, DOJ has 45 days to commence a civil action. This extra time, 
and the associated delay necessary to brief DOJ attorneys on a case 
already familiar to their FTC counterparts, could be easily avoided if 
the FTC could seek civil penalties directly.
IV. Aiding and Abetting a Violation
    The Supreme Court's ruling in Central Bank of Denver v. First 
Interstate Bank of Denver \18\ threw the Commission's ability to pursue 
those who assist and facilitate unfair or deceptive acts and practices 
into doubt. As the Commission has recommended in the past, I believe 
that Congress should clarify that the Commission is able to challenge 
those who provide knowing and substantial assistance to others who are 
violating Section 5 of the FTC Act.\19\
---------------------------------------------------------------------------
    \18\ 511 U.S. 164 (1994).
    \19\ See Prepared Statement of the Federal Trade before the 
Committee on Commerce, Science, and Transportation, U.S. Senate (Apr. 
8, 2008), at 22-23, available at http://www.ftc.gov/os/testimony/
P034101reauth.pdf.
---------------------------------------------------------------------------
V. Conclusion
    Thank you for the opportunity to submit this statement for the 
record. I hope that my comments will be useful to the Subcommittee.

    I share concerns over the impact a new regulator like the 
Consumer Financial Protection Bureau could have on the FTC's 
role in consumer protection, financial services and products. 
However, those concerns do not create an immediate need to 
address changes to FTC rulemaking authority and enforcement 
over its entire jurisdiction.
    So, I want to thank our Chairman and work with him in any 
efforts to reauthorize the FTC. And I certainly hope that, when 
legislative text is available, we will make every effort to 
have a legislative hearing. That type of process is the best 
way to ensure that changes are thoroughly vetted as we fully 
understand the ramifications of any new FTC authority.
    So, thank you, Mr. Chairman.
    I want to thank our witnesses for joining us today. And we 
welcome your expertise in working through these issues.
    Senator Pryor. Thank you.
    Senator Klobuchar.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Senator Pryor. 
Thank you for holding this important and timely hearing.
    And thanks, Chairman Rockefeller, as well.
    As a former prosecutor, I've seen the devastating effects 
on the lives of those that have been financially victimized, 
and I know how important it is that our law enforcement 
agencies have the tools and resources they need to effectively 
investigate and prosecute those crimes.
    Since coming to the Senate, I have worked closely with the 
FTC, in particular, to help protect consumers from fraud and 
abuse. From working to curb anticompetitive behavior in the 
pharmaceutical industry to protecting consumers from online 
scams, I have found the FTC to be a very strong ally in our 
fight to protect consumers.
    This hearing comes at an important time as we work to 
create a framework for financial regulatory reform. As we look 
at the options available to us, we must carefully examine the 
future role the FTC will play. As we consider various options 
for strengthening enforcement in the financial industry, I want 
to be assured that consumers won't lose out. Moving forward, we 
need to make sure, as Senator Pryor and Senator Wicker 
mentioned, that the FTC has the resources it needs to pursue 
those who perpetrate fraud, and deter those who may even 
consider such crimes.
    Finally, I'd like to add that, as we look at these 
regulatory options and we work together to find common ground, 
we have to remember that the ideas of consumer protection and a 
healthy business environment are not always at odds with each 
other; in fact, sometimes it is quite the opposite. Consumers 
win when competition is strong, and businesses win when 
consumers have confidence in the marketplace.
    I think of two incidences, just in the last year, when we 
worked with retailers who were very concerned about the lead-
in-toy issue and actually wanted a bill to pass that would show 
the people of this country that we were going the extra mile to 
protect the consumers that frequent their stores. Or I think 
about the formaldehyde bill, that I have with Senator Crapo, 
where the timber industry is behind us because they know that 
they want to protect people from wood products that contain 
formaldehyde, and they know that that's not coming from them, 
it's coming from other countries, since they voluntarily agreed 
to some strong consumer standards. So, that's just two 
examples, that I just thought of when I was sitting here, of 
where industry and consumer interests are aligned.
    Thanks again, Senator Pryor and Senator Rockefeller, for 
holding this hearing. And I look forward to hearing from our 
witness.
    Senator Pryor. Thank you.
    Our first witness today is J. Thomas Rosch. He's a 
Commissioner with the Federal Trade Commission. I have a longer 
bio on you, but, in the interest of time, I'll just give that 
very concise introduction.
    But, also I want all the witnesses to know that we'll make 
your statements part of the record, your written statements. 
And we would like to ask each of you to keep your opening 
statements to 5 minutes.
    Mr. Rosch.

STATEMENT OF HON. J. THOMAS ROSCH, COMMISSIONER, FEDERAL TRADE 
                           COMMISSION

    Mr. Rosch. Thank you very much, Chairman Pryor and Ranking 
Member Wicker, and Senator Klobuchar, as well, for this chance 
to speak with you about the proposals to provide the FTC with 
additional tools to protect consumers in the marketplace. And I 
stress that it's consumer protection law enforcement tools that 
we're talking about today, not antitrust law enforcement tools.
    I'd like to briefly discuss each of those proposed tools.
    The first is APA rulemaking. The need for APA rulemaking--
and I'm talking now not about expedited APA rulemaking, but 
about regular notice-and-comment rulemaking--is rooted in the 
fact that our basic organic statute, which is Section 5 of the 
FTC Act, is a very broad statute. On the consumer protection 
side, it prohibits, quote, ``all unfair or deceptive acts or 
practices.'' Rules fleshing out that broad statute are good for 
both consumers and the industry, as the Senator has said.
    They describe with specificity what the rules of the road 
are. Take, for example, the Franchise Rule and the Funeral 
Rule. They inform businesses about the particular information 
they must provide to consumers during their transactions, and 
the ways in which to provide it, in order to prevent deception. 
As such, they've been very helpful in improving competition and 
the marketplace.
    APA rulemaking, I should stress, is not radical. The SEC, 
for example, has the authority to engage in notice- and-comment 
APA rulemaking, and it seeks civil penalties for violation of 
those rules. Nor can any adverse inference be drawn from the 
Commission's existing Magnuson-Moss rulemaking procedures, 
under which rules can be enforced with civil penalties. I know, 
because I was present at the creation. I happened to be at the 
Bureau of Consumer Protection in 1974, when Magnuson-Moss was 
enacted.
    We had rulemaking at the time, but not the authority to 
enforce a rule with civil penalties. We at the Commission 
suggested the current Magnuson-Moss statute to give us both. 
That statute has turned out to be enormously burdensome and 
expensive, involving lengthy hearings and cross-examination--in 
essence, a trial. But nobody knew that then. In fact, there 
have not been any Magnuson-Moss rules since 1978. That's 32 
years.
    Both we and the Congress just felt, as I say, that rules 
that had teeth in them were a good thing for both consumers and 
good corporate citizens. That's what Magnuson-Moss was about.
    The second tool is enhanced new civil penalty authority. 
Let me be clear about what I don't support and what I do 
support. I don't support a scenario where the FTC, ourselves, 
can order civil penalties for violations of Section 5. I think 
Commissioner Kovacic is correct that coupling that kind of 
civil penalty authority with a statute that is as expansive as 
Section 5 is needs some checks and balances. But I do support a 
grant of authority to enable us to seek civil penalties for 
Section 5 violations in Federal district court, where a Federal 
judge would ultimately decide whether, and how much of, a civil 
penalty would be obtained. Settlements involving civil 
penalties also would be filed in Federal district court and be 
subject to court review. As I say, that wouldn't be radical.
    The third tool is independent litigating authority. As 
matters now stand, we don't have authority to file and litigate 
civil penalty cases in our own name, though we can do that when 
we seek other remedies. Instead, any cases seeking civil 
penalties must be referred to the Department of Justice, which 
has 45 days within which to file a civil penalty action on our 
behalf. As a result, we've often had to make a choice, even 
before the facts of the case have been thoroughly investigated, 
between seeking immediate relief and pursuing consumer redress, 
or instead seeking civil penalties by referring the case to 
Justice and forgoing the ability to pursue relief, such as a 
TRO or asset freeze. That makes no sense. We should have the 
authority to pursue the most appropriate remedy in order to 
protect consumers. Again, as you probably know, other agencies, 
such as the SEC, routinely file such cases on their own behalf.
    And the fourth tool is clarification of our aiding and 
abetting authority. Historically, we operated with the 
understanding that there was an implied cause of action for 
aiding and abetting under Section 5. Unfortunately, the 
decision in Central Bank of Denver threw that into doubt, and 
I'd encourage you to clarify the law to make sure that we have 
that aiding and abetting authority.
    Thank you, Mr. Chairman. And I'll be glad to answer any 
questions that any member of this committee might have with 
respect to any of these four tools, as well as the Dodd Act.
    [The prepared statement of Mr. Rosch follows:]

       Prepared Statement of Hon. J. Thomas Rosch, Commissioner, 
                        Federal Trade Commission
    Thank you, Chairman Pryor, Ranking Member Wicker, and distinguished 
members for this chance to speak about proposals to provide the Federal 
Trade Commission with additional tools to protect consumers in the 
marketplace. I'd like to briefly discuss each of these proposed tools.
    APA Rulemaking: The first is APA rulemaking. The need for APA 
rulemaking is rooted in the fact that our basic organic statute--
Section 5--is a very broad statute. On the consumer protection side, it 
prohibits ``all unfair or deceptive acts or practices.''
    Rules fleshing out this broad statute are good for both consumers 
and the industry. They describe with specificity what the ``rules of 
the road'' are. Take for example, the Franchise Rule and the Funeral 
Rule. They inform businesses about the particular information they must 
provide to consumers during their transactions, and the ways in which 
to provide it, in order to prevent deception. As such, they've been 
very helpful in improving the marketplace.
    APA rulemaking isn't radical. The SEC, for example, has the 
authority to engage in ``notice and comment'' APA rulemaking; and it 
seeks civil penalties for violations of those rules.
    Nor can any adverse inference be drawn from the Commission's 
existing Magnuson-Moss rulemaking procedures, under which rules can be 
enforced with civil penalties. I know because I was ``Present at the 
Creation'' in 1974 when the Magnuson-Moss Act was enacted. We had 
rulemaking authority at the time, but not the authority to enforce a 
rule with civil penalties. We at the Commission suggested the current 
Magnuson-Moss statute to give us both. That statute has turned out to 
be enormously burdensome and expensive, involving lengthy hearings and 
cross-examination (in essence a trial), but nobody knew that then. Both 
we and the Congress just felt, as I say, that rules that had teeth in 
them were a good thing for both consumers and good corporate citizens.
    Civil Penalty Authority: The second tool is enhanced new civil 
penalty authority. Let me make clear what I don't support and what I do 
support.
    I don't support a scenario where the FTC ourselves can order civil 
penalties for violations of Section 5. I think Commissioner Kovacic is 
right that coupling that kind of civil penalty authority with a statute 
that is as expansive as Section 5 needs some checks and balances.
    However, I do support a grant of authority to enable us to seek 
civil penalties for Section 5 violations in Federal district court, 
where a Federal judge would ultimately decide whether and how much of a 
civil penalty would be obtained. Settlements involving civil penalties 
also would be filed in Federal district court and be subject to court 
review. As I say, that wouldn't be radical.
    Independent Litigating Authority: The third tool is independent 
litigating authority. As matters now stand, we don't have authority to 
file and litigate civil penalty cases in our own name (although we can 
do this when we seek other remedies). Instead, any cases seeking civil 
penalties must be referred to the Department of Justice, which has 45 
days within which to file a civil penalty action on our behalf. As a 
result, we often have to make a choice--even before the facts of a case 
have been thoroughly investigated--between seeking immediate relief and 
pursuing consumer redress, or instead seeking civil penalties by 
referring the case to Justice (and foregoing the ability to pursue 
relief such as a TRO or asset freeze). That makes no sense. We should 
have the authority to pursue the most appropriate remedy in order to 
protect consumers. Again, as you probably know, other agencies, such as 
the SEC, routinely file such cases on their own behalf.
    Aiding and Abetting: The fourth tool is clarification of our aiding 
and abetting authority. Historically we operated with the understanding 
that there was an implied cause of action for aiding and abetting under 
Section 5 of the FTC Act. Unfortunately, the 1994 decision in Central 
Bank of Denver threw this into doubt. I'd encourage you to clarify the 
law and provide us with explicit authority to take law enforcement 
action against those who provide substantial assistance to another 
while knowing, or consciously avoiding knowing, that the person is 
engaged in unfair or deceptive acts or practices in violation of 
Section 5 of the FTC Act.

    Senator Pryor. Thank you very much.
    Mr. Rosch. Or Dodd bill, rather.
    Senator Pryor. Yes. I'll go ahead and start us today.
    Let me dig in, if I can, on the Magnuson-Moss issue, which 
was your first point. You talk about ``APA rulemaking isn't 
radical,'' you talk about the SEC, and so, it sounds like you 
definitely support the changeover from the current Magnuson-
Moss to the APA--the regular APA rulemaking authority.
    Mr. Rosch. That's correct, Mr. Chairman. I will say that, 
as somebody who tried cases for more than 40 years, I never, 
ever participated in a trial that lasted as long as a Magnuson-
Moss hearing did, and I never had the misfortune to participate 
in a case that lasted as long as some of these Magnuson-Moss 
proceedings do.
    Senator Pryor. And how long do they last?
    Mr. Rosch. They last, on average--the hearing lasts, on 
average, 38 days. The proceeding lasts, on average, for 7 
years. That's an average. We have not proposed any Magnuson-
Moss rules since 1978, unless one wants to count our recent 
attempt to carve out business opportunities from the Franchise 
Rule. That was proposed 4 years ago, and it didn't involve a 
hearing.
    Senator Pryor. And what is it about Magnuson-Moss that 
takes so long?
    Mr. Rosch. I beg your pardon?
    Senator Pryor. What is it about the statute that takes so 
long? Why is it so cumbersome?
    Mr. Rosch. A large part of the cumbersome aspect of 
Magnuson-Moss is attributable to the hearing process. But, it 
is by no means the only part of it that's cumbersome.
    Senator Pryor. Well, one reason I ask is, you know, you 
compared it to a trial; most trials don't take 7 years to get 
to a conclusion, or don't take--however--38 days, or whatever 
you said. So, what is it about the hearing process that just 
makes it go on and on?
    Mr. Rosch. Well, the hearing process involves a number of 
things. First of all, it involves every participant being able 
to suggest disputed issues of fact to the Presiding Officer at 
the hearing trial. And sometimes there are dozens and dozens of 
these participants in the process. So, that takes quite a 
while.
    Second, there is cross-examination, just as there is in a 
regular trial, as well as direct examination. There are closing 
arguments. It is presided over by a hearing officer. The whole 
proceeding is presided over by a hearing officer. I don't know 
that there's any way to shorten the process, if one assumes 
that this process was supposed to hamstring us, which it was 
not.
    Senator Pryor. And if you could change--let's just say that 
the Congress decides not to repeal Magnuson-Moss, but decides 
to--let's just say one major change. Let's say the Congress 
decides to do one major change. What would you recommend that 
that one change be?
    Mr. Rosch. Well, there have been four, actually that have 
been proposed. Let me briefly recount what those are.
    Senator Pryor. Sure.
    Mr. Rosch. One is that we would retain the prevalence 
requirement--namely that an act or practice be prevalent in an 
industry before a rule could be enunciated. That was a 
requirement which the District of Columbia Court of Appeals 
upheld in the Katharine Gibbs case some time ago. And we take 
that quite seriously. That is part of the statute. What does 
``prevalence'' mean? That's one problem with retaining the 
requirement.
    The other problem I've got with that particular suggestion 
is that, frankly, the adage is correct that one bad apple, or a 
number of bad apples, can spoil the whole barrel. I believe 
that to be true. I think we hurt businesses if we impose too 
strict a prevalence rule--the legitimate businesses that are 
the good apples in the bunch.
    Senator Pryor. So, prevalence is----
    Mr. Rosch. Prevalence is one.
    Second is to eliminate the hearing process. As I say, that 
would help, but it certainly did not shorten considerably our 
recent experience with the Business Opportunities Rule.
    Third is, allow oral submissions. We already do that, to 
some extent, by allowing voluntary oral submissions. We also do 
it, frankly, by outreach, which I myself have participated in.
    The fourth is to have a statement of economic effects. 
That's required right now with respect to the costs of a rule. 
So we do spell out what the costs of every rule will be, APA or 
otherwise. So, we're already doing that.
    And the fifth is a standard of judicial review, which for 
Magnuson-Moss is substantial evidence, and for APA rulemaking 
is arbitrary and capricious. The problem with that is, the 
standard of review is already the same, according to, now, 
Justice Scalia's decision in the 1986 case, Consumer Union's 
case.
    Senator Pryor. Thank you.
    Senator Wicker.
    Senator Wicker. Thank you very much, Mr. Rosch. Appreciate 
your testimony.
    The Magnuson-Moss Act resulted from a feeling that, because 
of the sweeping powers the FTC has, there was a need for 
protections against overzealous regulation. And apparently that 
argument carried the day and resulted in Magnuson-Moss. Do you 
believe that basic finding was in error at that time, in the 
early 1970s?
    Mr. Rosch. Absolutely, Senator. And I'm a Republican, I 
should add. But, that was my view then, and it is my view now.
    Senator Wicker. So, actually, Magnuson-Moss was a mistake 
from the get-go.
    Mr. Rosch. Magnuson-Moss, the way it has turned out--the 
way it has turned out was a prescription for doing nothing with 
respect to rulemaking.
    Senator Wicker. Well----
    Mr. Rosch. It brought rulemaking to a halt. And there was 
no reason for that, because at the time that it was enacted, we 
had enacted very few rules, and they were not abusive rules. 
The Funeral Rule was not an abusive rule. The Holder-in-Due-
Course Rule was not an abusive rule. These were some of the 
rules that were enacted before the end of 1974, when Magnuson-
Moss was enacted.
    Senator Wicker. OK. Well, you compared this to trials in 
court. It seemed to me that perhaps the Commission could bring 
in some Federal judges and Federal administrators and get some 
advice from Federal courts, if they do things so much faster. 
For example, evidential hearings, with direct and cross-
examination, you argue, is an unnecessary step. I think many 
Americans might think that, ``Well, in the case of an agency 
with powers like this, we should keep that.''
    The 38 days for testimony, surely there's a way to shorten 
that, short of adopting the APA. The proceedings lasting 7 
years--of course, we know that, once a case is tried in Federal 
court, sometimes the appeals and various levels of the district 
court, the circuit court, and the Supreme Court might last that 
long. Might it be that, if we provided the FTC with more 
resources, this 7-year average proceedings--or the proceedings 
lasting as long as 7 years could be shortened if we provided 
FTC with additional resources? Might that be another approach 
to this?
    Mr. Rosch. I think not, Senator. And let me tell you why I 
think that's so. The reason I think that is so is because the 
hearing process is not by any means the only resource-intensive 
part of this entire process. There are, by my count, 29 
sequential steps in Magnuson-Moss rulemaking.
    Senator Wicker. And you're going to supply that for us on 
the record? OK.
    Mr. Rosch. We have already, Senator. That is part of the 
submission that was sent up earlier this week.
    But, in any event, I will say this. I was an antitrust 
lawyer. Those are the cases that I tried, and they were 
complex. You are quite correct that sometimes the appellate 
process lasted as long as some of these proceedings did. When 
you include the appellate process, that is correct. However, 
what I'm talking about in terms of the average length here--7 
years--is just the rulemaking process. It does not involve 
appellate process at all. So, I don't think, frankly, giving 
the Commission a whole lot of resources is going to solve the 
problem, not when you have that many sequential steps in the 
entire process.
    Senator Wicker. All right. Now let me ask about prevalence. 
Would it help if we better defined the term ``prevalence''? We 
could do that without adopting the Administrative Procedures 
Act for the FTC, couldn't we?
    Mr. Rosch. I think that that would be--that would be 
useful, Senator. I don't think it would be--it doesn't cure the 
bad-apple-in-the-barrel problem, but it certainly would cure 
the problem of ambiguity.
    Senator Wicker. OK.
    Thank you, Mr. Chairman.
    Senator Pryor. Thank you.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Mr. Chairman.
    You know, whenever we talk about enhancing the authority of 
the FTC--and I believe that we should do everything we can to 
give you to the tools that you need--but, there are always 
concerns about due process and--for all affected parties. Could 
you talk about how we could do this in a way that makes sure 
that we are giving you the tools that you need and, at the same 
time, making sure that due process is there for the parties 
that are affected?
    Mr. Rosch. Yes. Thank you, Senator. I think that the answer 
to that lies in what other agencies have, the authority that 
they have. They have notice-and-comment APA rulemaking 
authority. Their rulemaking has not been successfully 
challenged on the grounds that it violates due process. They 
have been able to make rules just fine with this process. And 
so, frankly, have we. On the five occasions when we've come to 
this committee and we've asked, specifically with respect to 
special statutes, that we be given APA rulemaking authority, we 
have acted responsibly in each and every one of those cases. 
And it has not--the process has not lasted for 7 years. So, we 
can do it. Other agencies can do it, consistent with due 
process. I think that that's the answer.
    Senator Klobuchar. OK. The aiding-and-abetting enforcement 
authority that you talked about earlier, some people talk about 
how the Commission's unfairness jurisdiction would provide 
adequate authority to the FTC to pursue third parties who 
facilitate fraud. What is the response to that?
    Mr. Rosch. I think we have proceeded under the unfairness 
prong of Section 5 from time to time. We've also proceeded 
under various other theories since the Central Bank case, but 
nothing is as good as clarification with respect to our aiding-
and-abetting authority. That--I believe, in my heart of hearts, 
that that is true. I just don't think it's a substitute. We can 
use these other tools, if you wish, but I think both you and we 
would be accused of pounding a round peg into a square hole. It 
just doesn't fit.
    Senator Klobuchar. When Chairman Leibowitz was here, I 
talked to him. I know he's getting these examples together, 
examples of how your ability has been hampered in recent years 
to protect consumers, by lack of the rulemaking authority. Do 
you have some examples of that?
    Mr. Rosch. Well, all I can say is that when I came back to 
the Commission in 2006, it was a completely different ball game 
than it was when I left in 1975. Practices that we never 
dreamed of occurring then are occurring now. And frequently, 
they cannot be the subject of consumer redress because while 
they hurt consumers, they don't hurt their pocketbooks.
    Now, what am I referring to? I'm referring, for example, 
first of all, to the situation where there's foreclosure 
relief. That doesn't necessarily hurt every consumer, though it 
certainly does sometimes. Data security, identity theft, those 
are practices which hurt consumers, but they may not hurt them 
in the pocketbook.
    Similarly, with respect to a lot of online practices, where 
we see spam, we see malware that isn't so prevalent that it 
fouls up your computer and makes it impossible for you to use 
it. That hurts consumers, but it doesn't necessarily cause them 
injury in their pocketbooks. So, we can't effectively get 
consumer redress for those practices. What we can do to stop 
them, though, is to seek civil penalties. And that's our only 
alternative, and that's what we try to do. That's why we want 
civil penalty authority that is enhanced.
    Senator Klobuchar. Thank you. One last question. I know, 
from my days as a prosecutor, that financial scams are 
incredibly difficult to investigate; they take a lot of 
resources and know-how. You need sophisticated employees. I 
can't tell you the number of times we had police, with good 
meaning, go into a house that had a computer on, maybe it was a 
child porn case, and they'd turn it on and just start--and it 
would--automatically, because the perpetrator would have put 
something in there that it meant it was all erased and--or that 
somehow the evidence got ruined. So, computer specialists, 
other skilled professionals, do you feel that you have the 
professionals on staff and the know-how to investigate these 
financial frauds? And what could we do to help?
    Mr. Rosch. We are facing a huge financial crisis, still, I 
think. The fact of the matter is, there are mortgage frauds 
today. There are still, as I indicated before, foreclosure 
relief issues. There are debt settlement issues. And all of 
those are very complicated. They do require the kinds of tools 
that you're talking about. I'm convinced that we at the FTC, 
have the best professionals that are available. But we could 
always use more, particularly in an environment like this.
    Senator Klobuchar. Thank you very much.
    Senator Pryor. Thank you, Senator Klobuchar.
    And we have about 5 or 6 minutes left in the vote, so I 
assume you're going to hustle over there and cast your vote. 
And Senator Wicker's on his way back.
    And before I bring up the next panel, I would like to say 
that I have----

                 STATEMENT OF HON. TOM UDALL, 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Udall. Senator Pryor, could I just----
    Senator Pryor. Oh. I'm----
    Senator Udall. Yes.
    Senator Pryor.--I'm sorry.
    Senator Udall. I was----
    Senator Pryor. I am so sorry. You snuck in on me.
    Senator Udall. I'm just sitting over here silently----
    Senator Pryor. Thank you.
    Senator Udall.--but, I wish to----
    Senator Pryor. Yes.
    Senator Udall.--to participate----
    Senator Pryor. I apologize.
    Senator Udall.--a little bit here.
    Senator Pryor. I apologize. Well, I may go vote----
    Senator Udall. No problem.
    Senator Pryor.--I may go vote----
    Senator Udall. OK.
    Senator Pryor.--then. Thank you.
    Senator Udall. OK. Thank you.
    Senator Pryor. Have you voted?
    Senator Udall. I haven't voted.
    Senator Pryor. OK. OK. OK.
    Senator Udall. I haven't voted for----
    [Laughter.]
    Senator Udall. Let me just be very quick. And I want to 
agree with what I've heard earlier, that we have to give you 
the tools. And I know as a State Attorney General, when we were 
doing a lot of this work, protecting the public, that if you 
don't have the tools, it can take a long time to get them. And 
so, the question I really want to ask you is, it seems like 
you're advocating for a lesser authority than the APA. And so, 
if you compare these two--you have the lesser authority and you 
have the APA--what's the time difference to get something in 
place to protect the public? I've had the figure given to me, 
here, you know, that it takes 7 years under Magnuson-Moss. And 
I think what I'm advocating, and I others here are advocating--
How do we get it to the point where you can more quickly 
protect the public, than that kind of timeline? And what do you 
see as a timeline?
    Mr. Rosch. First of all, let me make it clear, Senator 
Udall, that as far as I'm concerned, we can handle APA 
rulemaking. We have done it responsibly; I think we can do it.
    Senator Udall. You can handle it.
    Mr. Rosch. Absolutely.
    Senator Udall. Yes.
    Mr. Rosch. I don't know that anything in between is 
necessary, or even desirable.
    Senator Udall. And you would like it. You----
    Mr. Rosch. I----
    Senator Udall. As Commissioner, you would like that 
authority.
    Mr. Rosch. I'd like APA rulemaking authority.
    Senator Udall. Yes.
    Mr. Rosch. I've mentioned five suggestions for an in-
between solution, and I've tried to identify the problems with 
each of them. I don't know of any suggestion that's been made 
for an in-between solution that doesn't have some problems 
attached to it.
    Senator Udall. Great. So, that's good to have on the 
record. You're an advocate for the Commission having APA.
    Mr. Rosch. That's correct.
    Senator Udall. Yes.
    Mr. Rosch. But, let me make it clear, Senator, that I speak 
for myself, and not necessarily for the Commission on that 
regard.
    Senator Udall. No. No, we all understand that.
    Knowing we have a vote on, Mr. Chairman, I would yield back 
any time. Thank you very much.
    Senator Pryor. Thank you, Senator.
    Senator Udall. And thank you for your leadership on these 
issues.
    Senator Pryor. Thank you, Senator Udall. And I'm sorry I 
almost skipped over you. I just didn't see you slip in. I 
apologize for that.
    I have two last questions. One is the question of 
independent litigating authority.
    Mr. Rosch. Yes.
    Senator Pryor. And could you just give us your thoughts 
and--very concisely on that? You mentioned it in your opening 
statement, but I just want to make sure I'm clear on where you 
stand on that.
    Mr. Rosch. OK. With respect to independent litigating 
authority, as far as, I know we are the only agency that has to 
have Justice do it for us. And we can go to the Federal 
district court, as it is right now, and seek a TRO, or 
preliminary injunction, and consumer redress. We can do that. 
But, when it comes to civil penalties, we can't do that. It's 
got to be done for us by Justice.
    First of all, I think that's anomalous. It's particularly 
anomalous because the Dodd bill would give that independent 
authority to a new bureau--brand new bureau, completely 
untested as to how they would use it.
    Senator Pryor. That was actually--my second question is a 
very succinct, if possible, analysis of the Dodd bill. I'm 
going to have to go vote, here, in just a minute or so, but--
I'll tell you what I may do is, I may--because I do want the 
Committee to have this answer, and I would like to get your 
thoughts on that. So, I'll go ahead and ask it, and I'll let 
Senator Wicker, then, take the gavel at that point. But, go 
ahead--if you don't mind, give the subcommittee your thoughts 
on the Dodd legislation and how it might impact the Federal 
Trade Commission.
    Mr. Rosch. OK. I think the first thing to be said is that 
it's a very lengthy bill, and we have not completely analyzed 
it yet. But we've done our best to review it, to identify those 
problems that are in it. And we will do our best to get a fix 
to those problems up to you, Senator, and as well as to the 
entire committee, as quickly as possible, hopefully by the end 
of the week.
    Frankly, at this point, I think that the heart is in the 
right place. I see the intent of the Dodd bill to protect the 
FTC, just as the House bill does. But, I'm not clear that that 
intent is reflected in its sometimes warring provisions.
    For example, sometimes the Dodd bill seems to take away all 
of our consumer protection authority, and at other times it 
talks about us having concurrent authority with this new 
bureau. Now, those can't coexist. There's not a savings clause 
that gives us back what's been taken away, as there is in the 
House bill. That's one of the major fundamental problems with 
the Dodd bill, and that's one of the things that we'll be 
sending up as a fix to you in the next couple of days.
    It is vital, in our opinion, that these problems be fixed, 
because I'm afraid that some of these powers may fall betwixt 
and between the two agencies, or between the bureau, on the one 
hand, and the FTC, on the other hand. What is a financial 
practice or a financial institution versus a nonfinancial 
practice or a nonfinancial institution? It's very much in the 
eye of the beholder. And unless there are clear demarcations, 
I'm afraid that things are going to fall between the cracks. 
Unless our authority is really beefed up the way that we 
suggest that it should be, I'm concerned that consumers and 
businesses are not going to be protected the way that they 
ought to be.
    Now, my first choice, frankly--and I'm speaking, again, for 
myself, Senator Wicker--my first choice is that the FTC be 
given all of the authority over consumer protection law 
enforcement--with the exception of safety and soundness. We 
have no core competency in that area, and I see a tension 
between that and consumer protection law enforcement in some 
instances.
    But, my second choice is, frankly, that we have concurrent 
jurisdiction with a bureau or agency, whatever it happens to be 
called. We've cooperated with sister agencies in the past, 
we'll continue to do so in the future.
    Senator Wicker [presiding]. Well, thank you very much, Mr. 
Rosch. And I know that if the Chairman were not away at a vote, 
he would also thank you.
    We very much appreciate your testimony and those items that 
you will add to the record. So, we very much appreciate it.
    And we--it now is time to bring forward panel number two.
    Mr. Rosch. Thank you, Senator.
    Senator Wicker. Thank you so much.
    Panel number two consists of Mr. Edmund Mierzwinski, 
Director of Consumer Program, Federation of State Public 
Interest Research Groups; The Honorable Timothy Muris, former 
Chairman of the Federal Trade Commission, now at the George 
Mason University Law School; Ms. Dee Pridgen, Associate Dean 
and Professor of Law at the University of Wyoming, College of 
Law; and Ms. Linda A. Woolley, Executive Vice President for 
Government Affairs at the Direct Marketing Association in 
Washington, D.C.
    We very much appreciate these witnesses being here, also. 
It's such a pretty day outside that, in absence of the 
Chairman, I'm tempted to suggest that we have class outdoors.
    [Laughter.]
    Senator Wicker. But, I'll not----
    Voice. Sounds good.
    Senator Wicker.--I'll not abuse my temporary privileges.
    But, we're glad to have all four of you, as we appreciate 
Commissioner Rosch, also.
    So, again, we're asking witnesses to limit testimony to 5 
minutes each. And we'll begin, from my left to right, with 
Director Mierzwinski.
    And if I need to be corrected on the pronunciation of your 
name, now would be a good time for that, so we won't do it all 
afternoon.

                STATEMENT OF EDMUND MIERZWINSKI,

                   CONSUMER PROGRAM DIRECTOR,

              U.S. PUBLIC INTEREST RESEARCH GROUP

    Mr. Mierzwinski. Thank you, Senator Wicker and members of 
the Committee. I'm Ed Mierzwinski, consumer program director of 
the Public Interest Research Groups.
    That was a very good pronunciation. The----
    Senator Wicker. I left out the ``z.''
    Mr. Mierzwinski. Right.
    Well, the State Public Interest Research Groups are a 
federation of nonprofit, nonpartisan consumer and public 
interest advocacy groups. We are here--and we have been long 
supporters of the Federal Trade Commission. We also support 
Congress enacting and establishing a new consumer financial 
protection agency that has broad power over regulation of all 
consumer financial products, whether you purchase them at a 
bank or at a nonbank. Nevertheless, we also support 
strengthening the authorities of the Federal Trade Commission, 
as well.
    Over the last several years, the collapse of the economy 
was precipitated by a number of practices in the financial 
industry. The housing bubble was not recognized by the Federal 
Reserve Board; large financial institutions, not under the 
jurisdiction of the Federal Trade Commission, used exotic 
financial instruments as a match that lit the economy on fire. 
But, there was an accelerant to that fire in the economy, and 
that accelerant was the rise of predatory lending.
    We believe that if the FTC had had broader authority and 
broader ability to take action, that the problem would not have 
been as great as it ended up to be in the end. We believe that 
it's time to modernize the FTC's authority so it can address 
new threats to consumers and communities, and in particular, to 
address the aftermath of this problem, as other witnesses have 
discussed, or will discuss.
    Every time you have a financial crisis you have new scams 
and new schemes to take what money is left in consumers' 
wallets. So, we've already heard from the Commissioner about 
foreclosure relief scams and other scams that the Federal Trade 
Commission needs to be able to go after.
    We also support returning to a system where Federal law 
returns to a floor, not a ceiling, of protection, and that 
states can go further, and their attorneys general can go 
further, in protecting the public.
    Well, we have four recommendations to strengthen the 
Federal Trade Commission:
    First, we also support, as was in--by the way, all of our 
recommendations, but one, are in the Obama-proposed legislation 
that the House enacted as H.R. 4173, the Wall Street Reform and 
Consumer Protection Act, on December 11.
    First, the Obama proposal is enacted, in the House bill, to 
return the FTC to the more prevalent Administrative Procedures 
Act rulemaking that is used by virtually every other agency. As 
Chairman Leibowitz testified last month in this committee, 
``Magnuson-Moss rulemaking is both draconian and medieval.'' 
And I don't think he was being redundant. This committee, last 
year, already gave the Federal Trade Commission, in Section 626 
of the omnibus appropriations bill, the--some of this 
authority, and we would encourage you to give it to the entire 
Commission's jurisdiction.
    Second, the Obama proposal is enacted in the bill that 
gives the Federal Trade Commission the right to sanction 
professionals who are aiding and abetting unfair practices. 
There is no question that, behind every scammer's scheme, there 
could be a banker, there could be a lawyer, there could be an 
accountant who could have stopped the scheme. We're not looking 
for deep pockets, we are looking to hold people involved in 
schemes accountable.
    Third, we believe that a fundamental flaw in the FTC's 
authorities are its lack of ability to impose civil penalties, 
except in limited circumstances and except when it goes to the 
Justice Department. You have to have previously violated an 
order of the Commission, or in some cases it--some of the 
companies under its jurisdiction are, in fact, under trade 
rules that do have civil penalty authority for a first offense.
    Commissioner Rosch talked about practices that harm 
consumers that are new, that weren't envisioned when the 
original Magnuson-Moss Act was passed and the original FTC Act 
was passed. And the rise of the Internet is certainly one of 
them, the practices on the Internet--identify theft, data 
security, the spamming, and the other problems that consumers 
face.
    In the first 20 or so cases that I looked at--and I don't 
have the complete list with me, but I know that other groups 
have compiled it--concerning Internet privacy violations, the 
only time a company was sanctioned with a civil penalty was the 
company, Choice Point, that, in fact, had also violated the 
Fair Credit Reporting Act. And had it not been for the fact 
that it had violated the Fair Credit Reporting Act, even though 
it sold--it essentially sold credit reports to identity 
thieves--is the only reason it was sanctioned for $15 million.
    Finally, one thing that is not in either the House bill or 
the Senate proposal--we strongly support that consumers gain a 
private right of action under Section 5 of the Federal Trade 
Commission Act. We believe there should be three prongs of 
consumer protection in any law: Federal enforcement, state 
attorney general enforcement, and private enforcement.
    Thank you, sir.
    [The prepared statement of Mr. Mierzwinski follows:]

 Prepared Statement of Edmund Mierzwinski, Consumer Program Director, 
                  U.S. Public Interest Research Group
    Chairman Rockefeller, Senator Hutchison, members of the Committee. 
My name is Edmund Mierzwinski and I am Consumer Program Director for 
the Federation of State Public Interest Research Groups, or U.S. PIRG. 
The state PIRGs are non-partisan, non-profit public interest advocacy 
organizations that take on powerful interests on behalf of their 
members.
    Among the key issues that the organization has focused on over the 
years is fairness in the financial services marketplace. We have 
published reports on skyrocketing bank fees, on inaccuracies in credit 
reports and other privacy threats, on credit card marketing to college 
students, on predatory payday loan and rent-to-own stores that seek 
self-serving exceptions from consumer protection and lending laws and 
on the need for strong reinvestment laws to ensure that heavily 
subsidized financial firms serve the interests of the local community. 
Throughout all these efforts we have urged Congress and Federal 
regulators to enact and enforce strong Federal laws but as a floor not 
ceiling of consumer protection so that states and their attorneys 
general can react quickly to new threats to their citizens and 
communities. We have also sought to preserve and enhance the rights of 
consumers to enforce those laws themselves.
Summary
    U.S. PIRG strongly supports the proposed Consumer Financial 
Protection Agency (CFPA). We also support a robust Federal Trade 
Commission (FTC). The Obama administration's proposed Wall Street 
reform legislation, as enacted by the House in December,\1\ effectively 
provides for both.
---------------------------------------------------------------------------
    \1\ The original administration CFPA and FTC improvement language 
was released on 30 June 2009 and is available at http://
www.financialstability.gov/latest/tg189.html (last visited 15 March 
2010). The Wall Street Reform and Consumer Protection Act, H.R. 4173, 
passed the House on 11 December 2009. See Section 4901. This week, 
Senator Chris Dodd, Chairman of the Senate Banking Committee, released 
his own comprehensive reform proposal, which does not appear, as filed, 
to address issues of expanding FTC authorities as discussed herein.
---------------------------------------------------------------------------
    U.S. PIRG supports establishment of a new, independent Federal 
Consumer Financial Protection Agency (CFPA) to protect consumers from 
unfair credit, banking, payment and debt management products, no matter 
what company--bank or non-bank--sells them and no matter what agency 
may serve as the primary prudential regulator for that company or bank. 
Having one agency for all financial products will prevent regulatory 
arbitrage, promote efficient rulemaking and give consumers one-stop 
shopping for their financial complaints.
    U.S. PIRG also supports enhancement of the authorities of the 
Federal Trade Commission (FTC). Even after Congress establishes a CFPA, 
the Federal Trade Commission will still maintain broad authority over 
important parts of the marketplace and will also act as the CFPA's 
enforcement partner in many areas. Its efforts to protect consumers 
will be enhanced if it is given greater ability to impose civil 
penalties, the ability to seek redress for aiding and abetting 
violations and modernized, more efficient rulemaking authority under 
the Administrative Procedures Act.\2\
---------------------------------------------------------------------------
    \2\ With assistance from this committee, Congress has recently 
given the FTC expedited rulemaking authority in the areas of unfair 
practices related to mortgage loans. See Omnibus Appropriations Act of 
2009, Pub. L. No. 111-8,  626, 123 Stat. 524 (Mar. 11, 2009) as 
modified by the Credit CARD Act of 2009, Pub. L. No. 111-24,  
511(a)(1)&(2), 123 Stat. 1734 (May 22, 2009).
---------------------------------------------------------------------------
    It is time to modernize the FTC's authorities so that it can 
respond to new threats to consumers and communities. Some of these 
threats--foreclosure relief and debt settlement scams and other 
frauds--are on the rise because the Federal bank regulators allowed 
unsafe and unsustainable practices that led first to the failure of the 
financial system and then to the collapse of the economy. The FTC can 
play a critical role in protecting consumers from its aftermath and 
ensuring that it won't happen again.
    We also support return to a system where Federal financial 
protection law serves as a floor not as a ceiling and where consumers 
are again protected by the three-legged stool of baseline Federal 
protection, strong state enforcement and private enforcement.
Discussion
    In our view, while the current economic crisis may have been 
directly caused by Federal Reserve inattention to the housing bubble 
that grew and then burst into flames--as it was lit by the match of 
exotic, risky financial instruments used by reckless Wall Street firms 
deemed too big or too interconnected to fail--the unregulated urge by 
banks, other lenders, and mortgage companies to extract even greater 
profits by selling predatory financial products acted as an accelerant 
to that fire. Those predatory products harmed consumers, families, 
neighborhoods and communities and helped make the mortgage meltdown 
into an economic catastrophe for consumers on Main Streets here and 
around the world.
    Unfortunately, over the years the Congress in some cases and, in 
particular, the Federal banking regulators in nearly all cases have 
opposed our views that consumers needed to be protected from unfair or 
predatory financial practices. For at least the last fifteen-twenty 
years, Federal bank regulator disdain for consumer protection and 
antipathy toward state attorney general authority has contributed to an 
atmosphere that led to a spectacular rise in those predatory lending 
practices by banks, credit card firms and mortgage companies. At the 
same time, the resources and authorities of the FTC to act in the areas 
it was allowed to act in were constrained.
    That rise in predatory lending was also fueled by regulatory 
arbitrage at the Federal level that allowed banks to pick and choose 
the most pliant bank regulator for themselves and also their non-bank 
affiliates. That contributed to a regulatory race to the bottom. As the 
report of the House Energy and Commerce Committee on its passage of 
CFPA legislation explained:

        Consumer protection in the financial arena is governed by 
        various agencies with different jurisdictions and regulatory 
        approaches. This disparate regulatory system has been blamed in 
        part for the lack of aggressive enforcement against abusive and 
        predatory loan products that contributed to the financial 
        crisis, such as subprime and nontraditional mortgages.

        FTC has broad authority to protect consumers from unfair, 
        deceptive, and unlawful practices with respect to credit and 
        debt. The authority of the FTC is limited, however, to those 
        functions conducted by non-depository institutions. Depository 
        institutions are overseen by the Office of the Comptroller of 
        the Currency, the Office of Thrift Supervision, the Federal 
        Reserve, the National Credit Union Administration, and the 
        Federal Deposit Insurance Corporation.\3\

    \3\ 111th Congress, Rept. 111-367, House of Representatives, at 
page 91, 9 December 2009.

    Consumer financial products which compete directly against one 
another are often covered by different laws and thus provide different 
rights and obligations to the consumer and to the provider. Although 
many new products are emerging every day, no agency has the single job 
of evaluating whether or how existing laws and rules should be changed 
to address emerging financial products. Worse, those bank regulatory 
agencies have a different, primary job--protecting the safety of the 
financial system. The new CFPA will have the single job of protecting 
financial consumers. Even the FTC, a strong consumer protector, has 
many other jobs.
    The idea of a new Federal consumer protection agency focused on 
credit and payment products has gained broad and high-profile support 
because it targets the most significant underlying causes of the 
massive regulatory failures that occurred. First, Federal agencies did 
not make protecting consumers their top priority and, in fact, seemed 
to compete against each other to keep standards low, ignoring many 
festering problems that grew worse over time. If agencies did act to 
protect consumers (and they often did not), the process was cumbersome 
and time-consuming. As a result, agencies did not act to stop some 
abusive lending practices until it was too late. Finally, regulators 
were not truly independent of the influence of the financial 
institutions they regulated.
The New CFPA Needs a Stronger FTC As A Partner
    Congress can eliminate these weaknesses and inefficiencies in the 
Federal Government by creating a single Federal agency--the CFPA--with 
exclusive authority in all consumer protection areas except 
enforcement. In the area of enforcement, the CFPA should be assisted by 
a bolstered FTC. The FTC also needs the strengthened authorities to 
continue its efforts in areas where it remains the primary enforcer in 
the consumer marketplace.
    Establishing a new CFPA--while also enhancing the FTC's enforcement 
authority--will remedy many of the inherent flaws in the current 
system. We believe that as enacted by the House, the Wall Street Reform 
and Consumer Protection Act, H.R. 4173, offers an approach that the 
Senate should consider taking.
    It establishes a new CFPA as an independent agency \4\ to write 
rules for all financial products (subject to a few carved-out 
exceptions) over the entire financial sector, so that no matter where a 
consumer buys a financial product, at a bank or a non-bank, she has 
equal protection. But the House bill also improved the Obama proposal 
because it carefully preserves the FTC as an enforcement partner of the 
CFPA while eliminating some of the original bill's consultative and 
procedural impediments that may have hampered both agencies. At the 
same time, the House-passed bill significantly improves FTC's existing 
authorities. It also retains FTC authority under the FTC Act and the 
FTC's enforcement authority under the enumerated statutes, concurrently 
and in coordination with the CFPA.
---------------------------------------------------------------------------
    \4\ The final Senate CFPA proposal may be weaker, however. Senator 
Dodd's draft this week places the CFPA inside the Federal Reserve Board 
as a bureau--although maintaining some independence through firewalls--
and subjects its rules to a veto of 2/3rd of the proposed new Systemic 
Risk Council. Although the Senate proposal as introduced places all 
four corners of the financial sector--big banks, small banks, mortgage 
companies and other non-bank lenders--under CFPA's rules, the CFPA does 
not have full enforcement authority over non-mortgage, non-banks, 
making it even more imperative that FTC authorities be bolstered, since 
the non-bank lenders not fully covered will include predatory payday 
lenders, rent-to-own stores, auto title pawn loan firms and their ilk.
---------------------------------------------------------------------------
    As Professor Prentiss Cox has explained, it makes sense to 
consolidate rulemaking in the new agency but to allow for broad 
enforcement authority under an ``open'' model, with the FTC--and state 
Attorneys General--as partners.

        Enforcement of consumer protection laws and rule-making for 
        consumer protection are different activities that require 
        different models to be effective. Unified rule-making authority 
        in an agency dedicated to consumer protection goals presents an 
        extraordinary opportunity to reform the consumer finance system 
        to ensure products and sales practices that meet minimum 
        standards of fairness for consumers. Public enforcement, on the 
        other hand, is best accomplished in an open model; a system 
        that allows multiple public entities the opportunity to gauge 
        compliance.\5\
---------------------------------------------------------------------------
    \5\ Testimony of Prentiss Cox, University of Minnesota Law School, 
``The Proposed Consumer Financial Protection Agency: Implications for 
Consumers and the FTC,'' Hearing of the Subcommittee on Commerce, Trade 
and Consumer Protection, U.S. House of Representatives, 08 July 2009.

    But in addition, as this committee recognized when it recently used 
the Appropriations process to enact reforms championed by Senator 
Dorgan and Chairman Rockefeller to the FTC's rulewriting authority over 
mortgage loans, \6\ the FTC has had only limited weapons in its arsenal 
against corporate wrongdoing. These shackles and constraints--most 
enacted in the 1970s--must be removed if the FTC is to be expected to 
do its job in the 21st century.
---------------------------------------------------------------------------
    \6\ See Omnibus Appropriations Act of 2009, Pub. L. No. 111-8,  
626, 123 Stat. 524 (Mar. 11, 2009) as modified by the Credit CARD Act 
of 2009, Pub. L. No. 111-24,  511(a)(1)&(2), 123 Stat. 1734 (May 22, 
2009).
---------------------------------------------------------------------------
Recommendations for the Committee to Improve the FTC's Authorities
    The House-passed bill, H.R. 4173, the Wall Street Reform and 
Consumer Protection Act, makes the following changes to strengthen FTC 
authorities as recommended by President Obama's blueprint for financial 
reform. We support the House approach and urge the Committee to work 
with Chairman Dodd and Senator Shelby, at an appropriate time, to add 
these provisions to the Wall Street reform package before it is 
finalized.
    First, the Obama proposal as enacted in the House passed bill 
changes the FTC's cumbersome Magnuson Moss rulemaking process to the 
more prevalent Administrative Procedures Act (APA) rulemaking process 
used by other agencies. In his recent testimony to this committee, FTC 
Chairman Jon Leibowitz called Magnuson-Moss rulemaking both 
``draconian'' and ``medieval.'' He was not being redundant.\7\ As many 
have noted, the FTC's inability to swiftly enact predatory mortgage 
lending rules was a contributor to the mortgage meltdown. From 
testimony before the committee by a leading expert, Kathleen Keest, a 
former state assistant attorney general:

    \7\ Testimony of FTC Chairman Jon Leibowitz, ``Financial Services 
and Products: The Role of the Federal Trade Commission in Protecting 
Consumers,'' Hearings of the Senate Committee on Commerce, Science and 
Transportation, (oral statement), 4 February 2010.

        Though the FTC has authority to enforce the Truth in Lending 
        Act and the Equal Credit Opportunity Act, among others, the 
        nature of the recent abuses were such that its UDAP authority 
        was the primary weapon available to it. However, the FTC's 
        ability to wield that weapon is governed by rules of engagement 
        which make it difficult to prevent abuses. [. . .] Rule-making: 
        The FTC's ``Mag-Moss'' Albatross. . .\8\
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    \8\ Testimony of Center for Responsible Lending, by Kathleen E. 
Keest, Hearing Before the Senate Committee on Commerce, Science and 
Transportation, Subcommittee on Interstate Commerce, Trade and Tourism 
on ``Improving Consumer Protections in Subprime Home Lending'' April 
29, 2008.

    Those UDAP (Unfair and Deceptive Acts and Practices) authorities 
were limited, as noted, by the ``albatross'' of the Magnuson-Moss 
rulemaking provisions. As noted above, the Congress has already 
extended APA rulemaking authority for ``unfair or deceptive acts or 
practices regarding mortgage loans, which may include unfair or 
deceptive acts or practices involving loan modification and foreclosure 
rescue services.'' We recommend, however, that the APA rule-making be 
granted to the FTC in all its consumer protection roles, as provided by 
the House bill.
    Second, the Obama proposal as enacted in the House passed bill 
gives the FTC the right to sanction professionals aiding and abetting 
illegal schemes by others. U.S. PIRG has long supported improving 
aiding and abetting statutes to better protect consumers. It is highly 
likely that many schemes designed to extract wealth from consumer 
pocketbooks involve lawyers, accountants, bankers and others advising 
the seller. Clarifying aiding and abetting liability will help assure 
that all those involved in the scheme or the scam can be reached by the 
law.\9\ Our goal is not to reach deep pockets, as opponents will 
assert, it is to deter fraud by requiring well-compensated 
professionals to pay attention and to be held accountable when they do 
not.
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    \9\ In 1994, the Supreme Court eliminated the Securities and 
Exchange Commission's aiding and abetting authority under the Exchange 
Act in Central Bank of Denver v. First Interstate Bank of Denver, 511 
U.S. 164. U.S. PIRG was an (unsuccessful) friend of the court in the 
case. It had been the widely held view that the FTC had a similar cause 
of action under Section 5 of the FTC Act for aiding and abetting unfair 
or deceptive acts and practices. While the Congress in the (otherwise 
dreadful for small investors) 1995 Private Securities Litigation Reform 
Act (Public Law 104-369) reinstated the SEC's aiding and abetting 
authority for knowing violations it has not reinstated the FTC's 
implied authority. Regrettably PSLRA also did not reinstate a similar 
previous implied private right of action for aggrieved investors under 
the Exchange Act. See also: Prepared statement of the Federal Trade 
Commission on ``Financial Services and Products: The Role of the 
Federal Trade Commission in Protecting Consumers,'' Hearing of the 
Senate Committee on Commerce, Science and Transportation, 4 February 
2010, at footnote 43.
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    Third, the Obama proposal as enacted in the House passed bill give 
the FTC the authority to impose civil penalties for violations of the 
FTC Act. Currently, a firm that violates the FTC's core enforcement 
mechanism--Section 5's prohibition on unfair and deceptive acts and 
practices--gets a free bite of the apple. The inability of the FTC to 
impose civil penalties for first offenses limits its ability to police 
the marketplace. Unless a firm violates a trade rule that the FTC 
enforces, such as the Fair Credit Reporting Act, or violates an 
existing consent decree or order, the FTC cannot impose civil 
penalties. This lack of a credible threat of punishment is an 
inadequate deterrent against wrongdoing. The proposals also wisely 
eliminate onerous requirements requiring the FTC to ask permission of 
the Department of Justice--and to give it a 45-day right of first 
refusal--before bringing a civil case involving civil penalties.
    Finally, we would also support establishing a private enforcement 
right for consumers under Section 5 of the FTC Act and also under the 
new CFPA Act. Congress should provide a private right of action to 
enable consumers to enforce their own right to be free of unfair and 
deceptive acts and practices, for neither the FTC's nor the CFPA's 
resources will ever be adequate to police the entire market, and public 
enforcement will never move fast enough to protect them.
Conclusion
    We appreciate the opportunity to testify before you today on the 
important matter of reinvigorating the FTC's authorities to protect the 
public and police the marketplace at the same time as the Congress 
establishes a new, Consumer Financial Protection Agency.

    Senator Pryor [presiding]. Thank you very much.
    Ms. Pridgen.

                   STATEMENT OF DEE PRIDGEN,

              ASSOCIATE DEAN AND PROFESSOR OF LAW,

              UNIVERSITY OF WYOMING COLLEGE OF LAW

    Ms. Pridgen. Senator Wicker and members of the Committee, 
thank you for inviting me to testify today.
    My name is Dee Pridgen. I'm the Associate Dean and a 
Professor of Law at the University of Wyoming College of Law.
    And I just need to say, at the outset, that the testimony 
that I'm giving today expresses my own private views and is not 
on behalf of the University of Wyoming or the College of Law.
    The main thing that I would like to address today is the 
proposal to provide the FTC with workable APA rulemaking 
procedures to replace the unworkable Magnuson-Moss Act 
procedures from the mid-1970s. I believe this change will 
benefit consumers, and it will not be dangerous or radical or 
bad for business.
    Let me just tell you why I say that. Magnuson-Moss is a 
hybrid kind of rulemaking. It's adjudicatory, it's adversarial, 
it's very time-consuming and unwieldy, and, as a result, the 
FTC has not used their rulemaking power that they were granted 
under Magnuson-Moss for many years, as the Commissioner noted. 
The FTC now basically issues industry guides, which are 
nonbinding, such as the environmental advertising guides, which 
they issued in the 1990s. And then, also the FTC engages in 
rulemaking at the specific request of Congress, on a case-by-
case basis.
    Now, it's been mentioned that the Law of Unfair and 
Deceptive Trade Practices is very broad. And that may have been 
one of the reasons why it was thought special safeguards were 
needed in the Magnuson-Moss procedures. But, I would just like 
to point out that, since Magnuson-Moss was passed in the mid-
1970s, a lot has changed at the Commission, and in other 
statutes, as well.
    First of all, the FTC, in the early 1980s, passed a couple 
of policy statements, by which they restrained--constrained 
their own authority under unfairness-and-deception authority. 
The unfairness policy, which is now part of the statute, 
requires the FTC to find significant consumer injury, and to 
engage in a type of cost-benefit analysis before finding an 
unfair trade practice. And then, in the deception area, the FTC 
uses a standard involving misleading substantial numbers of--
``misleading reasonable consumers under the circumstances'' 
before they'll find deception. And this replaced some of the 
older FTC jurisdiction on deception.
    The other thing I'd like to say is, the APA rulemaking is 
not going to be resulting in regulatory excess by the FTC or 
any other agency. The APA has notice requirements, comment 
requirements, judicial review, and it does allow the FTC and 
other agencies to engage in a more informal type of hearing--
roundtable fact-finding hearings, without having adversarial 
hearings. There's also in place now, since 1975, the Regulatory 
Flexibility Act, which requires a statement of impact on small 
businesses. There's the Congressional Review Act. All 
regulations by any agency, including the FTC, have to be 
reviewed by the Office of Information and Regulatory Affairs. 
So, there are a lot of safe guards that are--would be in place 
without Magnuson-Moss procedures.
    I would also like to say that the civil penalties that the 
FTC Act currently provides for only comes into play when 
there's already an order against a party, or when there's 
already a rule. And so, the FTC could use a better deterrent, 
in terms of having the opportunity to go to court and get civil 
penalties directly for a violation of the FTC Act. That would 
increase the deterrent effect of the civil penalties, and it 
would supplement their current jurisdiction to go into court 
and seek injunctions.
    And then, finally--and I would also say that I support the 
aiding-and-abetting provisions, making that specific. The FTC 
is a law enforcement agency. They have always tried to go 
after, not just the direct violator, but also other parties 
that are providing financing or other kinds of assistance to a 
violator. And any prosecutor knows that, if you don't wipe out 
the whole--all the direct and indirect violators, you're not 
going to get rid of the problem.
    So, in sum, I just would like to say, I do support these 
reforms for the FTC Act. And I know they're part of the 
Consumer Financial Protection Agency, which I'm not prepared to 
comment on, but I think these reforms are so important that the 
Senate and the Congress ought to consider amending the FTC Act, 
regardless of what happens with the rest of the legislation.
    Thank you.
    [The prepared statement of Ms. Pridgen follows:]

Prepared Statement of Dee Pridgen, Associate Dean and Professor of Law, 
                  University of Wyoming College of Law
I. Introduction
    Chairman Pryor, Ranking Member Wicker, and members of the 
Subcommittee, I am Dee Pridgen, and I am the Associate Dean and a 
Professor of Law at the University of Wyoming College of Law.\1\ I 
appreciate the opportunity to appear before you today to discuss the 
efforts of the Federal Trade Commission to regulate and enforce against 
``unfair or deceptive acts or practices'' with regard to financial 
products and services; and on the sufficiency of the FTC's current 
enforcement and regulatory authority; and whether an enhancement of 
that authority would benefit consumers. At the outset let me note that 
the views I express today are my own personal and professional views 
and do not represent the views of either the University of Wyoming or 
the College of Law.
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    \1\ A brief biography is attached to this testimony as an appendix.
---------------------------------------------------------------------------
II. FTC Activities Against Unfair and Deceptive Practices in Financial 
        Products and Services
    The Federal Trade Commission (FTC or Commission) has a long history 
of acting to protect the public from unfair and deceptive practices 
with regard to certain financial products and services. The 
Commission's law enforcement responsibilities across broad sectors of 
the economy do include the financial sector to some extent. However, 
certain entities such as banks, are exempt from the FTC Act.\2\ The FTC 
routinely partners with state consumer protection offices (typically 
state attorneys general) to conduct enforcement sweeps in the financial 
sector and other problem areas as they arise. The FTC also works with 
bank regulatory agencies to enforce certain consumer credit statutes 
and regulations, such as the Truth in Lending Act. The FTC is 
responsible for enforcing various consumer credit statutes with regard 
to the non-bank entities under its jurisdiction.\3\ It does this by 
bringing cases against potential violators, and in some cases, by 
issuing regulations. For example, the Commission promulgated a rule on 
the advertising and marketing of free annual credit reports on March 3, 
2010, addressed to the prevention of deceptive marketing of free credit 
reports.\4\ The FTC has been particularly active in the financial 
sector recently given the rise of bad actors attempting to exploit 
vulnerable consumers in desperate financial straits.\5\ In another 
example, the FTC recently was tasked by Congress to promulgate a rule 
on Mortgage Assistance Relief Services (foreclosure rescue) and has 
just this month published a proposed rule on that subject.\6\ The FTC 
was able to speedily address these consumer issues in the area of 
residential mortgages in part because Congress authorized that these 
rules be promulgated using APA notice-and-comment rulemaking, rather 
than the FTC's traditional Magnuson-Moss rulemaking procedure.
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    \2\ 15 U.S.C.  45(a)(2).
    \3\ 15 U.S.C.  1607(c) (Truth in Lending; 16 U.S.C.  1681s(a) 
(Fair Credit Reporting Act); 15 U.S.C.  1691c(c) (Equal Credit 
Opportunity Act; and 15 U.S.C.  16921(a) (Fair Debt Collection 
Practices Act).
    \4\ 75 Fed. Reg. 9726 (March 3, 2010) to be codified at 16 C.F.R. 
Part 610.
    \5\ See Prepared Statement of the Federal Trade Commission before 
this subcommittee, dated July 14, 2009, for a detailed discussion of 
the FTC's recent activities regarding unfair and deceptive trade 
practices in the financial sector.
    \6\ 75 Fed. Reg. 10707 (March 9, 2010), to be codified as 16 C.F.R. 
Part 322. Another proposed rule on Mortgage Acts and Practices is still 
pending. Advance Notice of Proposed Rulemaking, 74 Fed. Reg. 26,118 
(June 1, 2009).
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III. Magnuson-Moss Versus APA Rulemaking
    The Federal Trade Commission's work to protect consumers in the 
marketplace could be significantly enhanced if Congress were to grant 
the Commission the authority to use APA informal rulemaking procedures 
in all cases under its general authority. The FTC is the Nation's 
preeminent and the oldest Federal consumer protection agency in the 
United States. The Commission has various tools for enforcing its 
legislative mandate to protect the citizens from unfair and deceptive 
trade practices, which include administrative proceedings generally 
resulting in cease and desist orders; \7\ injunctions in Federal court; 
\8\ policy statements and ``guides''; \9\ and regulations defining with 
specificity acts or practices which are considered unfair or 
deceptive.\10\ The Commission's rulemaking authority was established by 
statute by the Magnuson-Moss Warranty--Federal Trade Commission 
Improvement Act of 1975, and will be referred to herein as Magnuson-
Moss rulemaking. Prior to 1975, the Commission utilized industry-wide 
``trade practice conferences'' to provide guidance to business on how 
to comply with the FTC Act. In the mid-1960s, the Commission first 
asserted the power to issue binding substantive rules, pursuant to 
then-Section 6(g) of the FTC Act which provided that the Commission may 
``make rules and regulations for the purpose of carrying out the 
provisions of this Act.'' \11\ This rulemaking authority was upheld in 
the D.C. Circuit Court in a 1973 case,\12\ but Congress at that time 
apparently felt it was prudent to provide the FTC with specific 
rulemaking authority. The result was the Magnuson-Moss rulemaking 
provisions,\13\ which are still the governing law today.
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    \7\ 15 U.S.C.  45(b).
    \8\ 15 U.S.C.  53(b).
    \9\ 15 U.S.C.  57a(a)(1)(A).
    \10\ 15 U.S.C.  57a(a)(1)(B).
    \11\ 15 U.S.C.  46(g).
    \12\ National Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 (D.C. 
Cir. 1973).
    \13\ Supra n. 10.
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    The Magnuson-Moss rules were to be conducted using a ``hybrid'' 
type of rulemaking procedure, providing more due process safeguards 
than would be applicable under the Administrative Procedure Act, yet 
somewhat less than would govern in an adjudicatory context. The 
Commission proposed an array of regulations shortly after the 
legislation was passed, but the effort proved to be much more time-
consuming, costly and controversial than may have been initially 
foreseen.\14\ In response to the controversies over the Commission's 
proposed children's advertising rule and the funeral rule, among other 
things, Congress acted again to amend the FTC Act in 1980. This law 
added further limitations on the FTC's rulemaking process.\15\ 
Consequently, many of the rules proposed after the 1975 legislation 
were abandoned in the 1980s, with the exception of the credit practices 
rule,\16\ the used car rule \17\ and the funeral practices rule.\18\ By 
1990, the FTC's use of its formal consumer protection rulemaking 
authority had come to a virtual standstill.\19\
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    \14\ See generally Dee Pridgen & Richard Alderman, Consumer 
Protection and the Law,  12:10-12:14 (West 2009-2010 edition).
    \15\ Pub. L. No. 96-252, 94 Stat. 374 (1980), codified at 15 U.S.C. 
 57b-3.
    \16\ 16 C.F.R.  444.
    \17\ 16 C.F.R.  455.
    \18\ 16 C.F.R.  453.
    \19\ Report of the American Bar Association Section of Antitrust 
Law Special Committee to Study the Role of the Federal Trade 
Commission, reprinted in 56 Antitrust & Trade Reg. Rep. (BNA, April 6, 
1989), at S-20, and Graph 17, Appendix C at S-44.
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    In the 1990s the Commission did increase the pace of rulemaking but 
not through the now-defunct Magnuson-Moss rulemaking procedures. 
Instead the Commission either reverted to the old-style Industry Guides 
or launched rulemaking proceedings under specific mandates from 
Congress. For instance, in 1992 the Commission issued an Industry Guide 
regarding environmental marketing claims, rather than attempting to 
promulgate a trade regulation rule, in order to address expeditiously 
the issue of deceptive ``green marketing'' claims.\20\ Another emerging 
trend during this period was for the FTC to engage in Congressionally-
mandated rulemaking. For instance, the FTC was directed to promulgate 
regulations governing the marketing of pay-per-call telephone services 
under the Telephone Disclosure and Dispute Resolution Act of 1992.\21\ 
The Telemarketing Act of 1994 also contained a legislative mandate for 
FTC rules, which ultimately resulted in the establishment of the ``Do 
Not Call Registry,'' one of the most popular Federal regulations in 
history.\22\ The Commission has also been charged with promulgating 
regulations under the Fair and Accurate Credit Transactions Act,\23\ 
the CAN-SPAM Act \24\ and several other acts as well. Most recently, 
Congress authorized the Commission to promulgate rules with respect to 
mortgage loans, using APA notice and comment rulemaking procedures.\25\ 
These Rules are currently pending.\26\
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    \20\ FTC Guides for the Use of Environmental Marketing Claims, 16 
C.F.R.  260. These Guides are currently being reviewed by the 
Commission for possible updating.
    \21\ 15 U.S.C.  5711 et seq.
    \22\ 15 U.S.C.  6101 to 6108. The FTC regulation is codified at 
16 C.F.R.  310. Rule was upheld against a constitutional challenge in 
Mainstream Marketing Services v. FTC, 358 F.3d 1228, cert. denied, 543 
U.S. 812 (2004).
    \23\ FACT Act, Pub. L. No. 108-140, 117 Stat. 1952 (2003), amending 
various sections of the Fair Credit Reporting Act.
    \24\ CAN-SPAM Act, Pub. L. No. 108-187, 117 Stat 2699 (2003), 
codified at 15 U.S.C.  7704. FTC regulations are codified at 16 C.F.R. 
 316.
    \25\ Credit CARD Act of 2009, Pub. L. No. 111-24,  511(a)(1) & 
(2), 123 Stat. 1734 (May 22, 2009).
    \26\ 74 Fed. Reg. 26,118 (June 1, 2009); 74 Fed. Reg. 26,130 (June 
1, 2009).
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    In sum, the Magnuson-Moss rulemaking procedures, which started as a 
clarification of the FTC's general rulemaking authority, have become a 
dead letter and are not being used to protect consumers. Instead, the 
Commission either uses the ``soft'' non-binding industry guides, or 
waits for Congress to provide specific direction. A change to the more 
commonly used notice-and-comment rulemaking under Section 553 of the 
Administrative Procedures Act would allow the FTC to proceed more 
flexibly and more effectively. At the same time, however, the APA 
rulemaking procedures, along with other currently applicable regulatory 
safeguards, will provide ample due process and judicial review for all 
affected parties.
    One issue with regard to notice-and-comment rulemaking by the FTC 
is the fact that its governing statute uses the rather broad standard 
of ``unfair and deceptive'' trade practices, which applies across a 
wide variety of business sectors. Thus, when Congress originally passed 
the Magnuson-Moss Act in 1975, a legislative committee noted that 
``[b]ecause of the potentially pervasive and deep effect of rules 
defining what constitutes unfair or deceptive acts or practices and the 
broad standards which are set by the words `unfair and deceptive acts 
or practices,' the Committee believes greater procedural safeguards are 
necessary.'' \27\ In this regard, it should be noted that since the 
Magnuson-Moss Act was passed in 1975, the Commission has taken steps to 
define and constrain its unfairness and deception jurisdiction through 
the use of policy statements that have become either codified into its 
own statute or have been incorporated into Commission adjudicatory 
opinions. For instance, the Commission's policy statement on 
unfairness, which defines an unfair act or practice as one which 
``causes or is likely to cause substantial injury to consumers which is 
not reasonably avoidable by consumers themselves and not outweighed by 
countervailing benefits to consumers or to competition,'' is now a part 
of the FTC authorizing statute.\28\ This statement of policy provided a 
focus on consumer sovereignty and cost/benefit analysis that was 
lacking in the older interpretations of FTC unfairness.\29\ Prior to 
the issuance of the unfairness policy statement, the Commission's 
unfairness criteria included an inquiry into whether the practice 
offended public policy or was immoral, unethical, oppressive, or 
unscrupulous.\30\
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    \27\ House Report No. 93-1107, reprinted in 1974 U.S.C.C.A.N. 7702, 
7727.
    \28\ 15 U.S.C.  45(n).
    \29\ See In re International Harvester, 1984 WL 565290, 104 FTC 
949, 1061 (1984) (``The Commission [in applying its unfairness 
authority] . . . seeks to ensure that markets operate freely, so that 
consumers can make their own decisions''). See also Neil Averitt, The 
Meaning of ``Unfair Acts or Practices'' in Section 5 of the Federal 
Trade Commission Act, 70 Geo. L.J. 225, 229-36 (1981).
    \30\ Proposed Rule on Cigarette Advertising, 29 Fed. Reg. 8324, 
8355 (1964), known as the ``the Cigarette Rule'' test. The rule was 
later superseded by legislation requiring a warning label in ads and on 
packages for cigarettes, Cigarette Labeling and Advertising Act of 
1965, codified at 15 U.S.C.  1331-40.
---------------------------------------------------------------------------
    The FTC also reigned in the standard for defining consumer 
deception in a 1983 policy statement, which basically says that ``the 
Commission will find an act or practice deceptive if, first, there is a 
representation, omission, or practice that, second, is likely to 
mislead consumers acting reasonably under the circumstances, and third, 
the representation, omission, or practice is material.\31\ Prior to 
that development, the FTC's deception standard was used to protect the 
ignorant and the unwary, not the ``consumer acting reasonably under the 
circumstances'' as required under current policy. Indeed, critics of 
the pre-policy statement approach to deception, such as Howard Beales, 
former Bureau of Consumer Protection Director, have called this the 
``fools test.'' \32\ The Deception Policy Statement has effectively 
eliminated any such ``fools test'' at the modern FTC. Thus, the 
concepts of unfairness and deception have become more defined by policy 
statements and other precedents since 1975.
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    \31\ In re Cliffdale Associates, 103 FTC 110 (1984).
    \32\ J. Howard Beales, III, Brightening the Lines: the Use of 
Policy Statements at the Federal Trade Commission, 72 Antitrust L.J. 
1057, 1068 (2005).
---------------------------------------------------------------------------
    The FTC Act also contains a ``public interest'' standard \33\ that 
could serve to constrain the FTC from engaging in activities that are 
trivial, insignificant, or are not prevalent in a particular business 
sector.
---------------------------------------------------------------------------
    \33\ 15 U.S.C.  45(b).
---------------------------------------------------------------------------
    In addition to the agency's own self-restraints embodied in the 
unfairness and deception policy statements, there are other safeguards 
applicable to the FTC now that were not in effect when the Magnuson-
Moss procedures were passed. Thus a change from Magnuson-Moss 
rulemaking to APA notice-and-comment rulemaking procedures at the FTC 
would by no means result in a free-for-all of regulatory excess. There 
are checks and balances in the APA process and elsewhere that should be 
sufficient to protect the interests of all parties while providing the 
FTC with the tools it needs to protect consumers. For instance, the APA 
requires prior notice of rulemaking, provides a mechanism for all 
interested parties to submit comments, requires a statement of basis 
and purpose, and also provides for judicial review of the final 
rule.\34\ Judicial review includes a determination of whether the rule 
is arbitrary or capricious, unconstitutional, or outside the bounds of 
the authorizing statutes, among other things.\35\ Indeed over the years 
the level of judicial scrutiny of APA-based rules has increased and is 
not overly deferential to any government agency. As one scholar has put 
it:
---------------------------------------------------------------------------
    \34\ 5 U.S.C.  553 and 706.
    \35\ 5 U.S.C. 706(2), allows the court to overturn an agency rule 
if it is:

    (A) arbitrary, capricious, an abuse of discretion, or otherwise not 
in accordance with law;

    (B) contrary to constitutional right, power, privilege, or 
immunity;

    (C) in excess of statutory jurisdiction, authority, or limitations, 
or short of statutory right;

    (D) without observance of procedure required by law; . . .

        Although informal rulemaking is still an exceedingly effective 
        tool for eliciting public participation in administrative 
        policymaking, it has not evolved into the flexible and 
        efficient process that its early supporters originally 
        envisioned. During the last fifteen years the rulemaking 
        process has become increasingly rigid and burdensome. An 
        assortment of analytical requirements have been imposed on the 
        simple rulemaking model, and evolving judicial doctrines have 
        obliged agencies to take greater pains to ensure that the 
        technical bases for rules are capable of withstanding judicial 
        scrutiny.\36\
---------------------------------------------------------------------------
    \36\ Thomas O. McGarity, Some Thoughts on ``Deossifying'' the 
Rulemaking Process, 41 Duke L. J. 1385 (1992). See also Mark 
Seidenfeld, Why Agencies Act: A Reassessment of the Ossification 
Critique of Judicial Review, 70 Ohio St. L. J. 251 (2009).

---------------------------------------------------------------------------
    Other safeguards in place on all agency rulemaking include:

   the Regulatory Flexibility Act,\37\ requiring an analysis of 
        the impact on small entities, the publication of a regulatory 
        agenda, and periodic review of rules;
---------------------------------------------------------------------------
    \37\ 5 U.S.C.  601.

   the Congressional Review Act,\38\ requiring submission of 
        rules to Congress along with a cost/benefit analysis and a 
        Congressional ``disapproval'' process; and
---------------------------------------------------------------------------
    \38\ 5 U.S.C.  801

   cost/benefit review by the Office of Information and 
        Regulatory Affairs.\39\
---------------------------------------------------------------------------
    \39\ This office is within the Office of Management and Budget and 
was established by Congress as part of the 1980 Paperwork Reduction 
Act, 44 U.S.C.A.  3501.

    Another reason why the FTC should be authorized to use APA notice-
and-comment rulemaking is that it is more appropriate for industry-wide 
rulemaking involving many conflicting interests. The Magnuson-Moss 
rulemaking process became unworkable in part because it is not suitable 
for large rulemaking initiatives that have multiple stakeholders. By 
using a quasi-judicial model, these procedures require rulemaking 
procedures tantamount to an individual adjudication but with multiple 
attorneys representing multiple parties, all of whom would seek to 
examine and cross-examine witnesses, etc. The APA notice-and-comment 
procedure is much better suited to modern-day industry-wide rulemaking 
in that it allows all parties to provide as much comment and as many 
submissions as needed, without the expense and unwieldiness of 
adjudicatory hearings.
    APA notice-and-comment rulemaking will also allow the FTC to work 
with business more effectively. The FTC has traditionally used 
voluntary industry self-regulation as an alternative to formal 
regulation or adjudication. One example of voluntary self-regulation 
has occurred in the privacy area, where the FTC has encouraged website 
operators to publish a privacy policies. The FTC can then, if 
necessary, use individual enforcement actions against website owners 
who do not abide by their own policies on the basis that they have thus 
committed a deceptive trade practice.\40\ The availability of a 
workable rulemaking process would enhance the FTC's ability to 
encourage industry self-regulation because that option lurking in the 
background would provide a more powerful incentive for industry 
participants to self-regulate if they wish to avoid more formalized 
rules.
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    \40\ See, e.g., FTC v. Toysmart.com, LLC, consent agreement (D. 
Mass. 7/21/00), available at www.ftc.gov.; In re National Research 
Center for College & University Admissions, Consent Decree (FTC 10/2/
02), available at 222.ftc.gov.
---------------------------------------------------------------------------
    The FTC has also been very active in certain situations in bringing 
individual injunction and administrative cases against multiple 
companies aimed at addressing an industry-wide problem. When the 
Commission puts together a group of similar cases with similar orders, 
it can become tantamount to a regulation by adjudication. For instance, 
the FTC brought a series of cases against companies that failed to take 
appropriate measures to secure consumers' personal data they had stored 
in their data bases.\41\ The resulting orders specified certain 
security procedures in each case. Having notice-and-comment rulemaking 
procedures available would give the FTC the ability to bring all 
parties to the table to consider an industry-wide rule, rather than 
establishing de facto rules by adjudication against selected individual 
companies.
---------------------------------------------------------------------------
    \41\ See, e.g., In re B.J.'s Wholesale Club, Inc., 2005 WL 2395788 
(FTC 2005). Pursuant to the Gramm-Leach-Bliley Act, the FTC and other 
Federal agencies also issued regulations imposing obligations on 
financial institutions to protect consumer information. 16 C.F.R.  
314.
---------------------------------------------------------------------------
    Finally, providing the FTC with APA rulemaking power under their 
general unfair and deceptive practices authority will not replace the 
duty to respond to Congressional mandates for particular rules under 
specific statutes. But having the availability of notice-and-comment 
rulemaking could provide the FTC with the ability to identify and 
respond to particular unfair and deceptive trade practices more 
quickly. One of the benefits of the broad statutory mandate of the FTC 
Act, which covers all ``unfair and deceptive acts or practices,'' is 
that this statute has the potential to adjust to ongoing changes in the 
marketplace. Statutes that are very specific soon become outmoded as 
the technology and/or the marketplace move on to other ways of doing 
business, some of which may raise consumer protection issues. By 
authorizing the FTC to engage in APA informal rulemaking to combat 
unfair and deceptive trade practices under their general statutory 
authority, as defined by policy statements and precedents, Congress 
will empower the Commission to protect the public interest in a more 
timely fashion.
IV. Civil Penalties for FTC Act Violations
    Civil penalty authority for violations of the FTC Act is needed to 
strengthen the Commission's law enforcement activities to protect the 
public from unfair or deceptive trade practices. Under current law, the 
FTC only has authority to seek civil penalties in court for violations 
of rules or prior orders.\42\ It does not have the authority to obtain 
civil penalties directly for FTC Act violations. Also the FTC refers 
all civil penalty cases to the Department of Justice, which then has 45 
days to determine whether to file the case itself or return it to the 
Commission. In the fast-moving world of financial and Internet fraud, 
such delays can be devastating to the consumers who could have been 
protected by swifter government action. While the Commission does have 
the authority to go to court to seek injunctive relief in situations 
where it has reason to believe that there is a current or imminent 
violation of any provision of law enforced by the FTC,\43\ such actions 
may not be sufficient to deter certain types of fraud, where the harm 
to a potentially large number of consumers is difficult to quantify or 
to stop by injunction once the damage has been done. Expanded civil 
penalty authority would provide more meaningful deterrence against 
unfair and deceptive practices under the FTC Act.
---------------------------------------------------------------------------
    \42\ 15 U.S.C.  45(1) and 45(m). The Commission can issue ``cease 
and desist'' orders in its own administrative proceedings under 15 
U.S.C.  45(b). Some would say this approach is tantamount to ``every 
dog gets one bite.''
    \43\ 15 U.S.C.  53(b).
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V. Aiding and Abetting Authority
    The FTC is not only an independent regulatory agency, it is also a 
law enforcement agency, and as such, needs to be able to use its 
limited resources effectively to stamp out fraudulent practices by 
reaching not only direct violators, but also those who knowingly assist 
the direct violators. Thus, former Bureau of Consumer Protection 
Director Barry Cutler said in the early 1990s that the FTC must cutoff 
not only the tops of the dandelions of unfair and deceptive practices, 
but also to get at the root of the problem, lest the weeds just spring 
up again.\44\ Thus, in a telemarketing scam using so-called ``boiler 
rooms,'' for instance, the Commission could put a halt to the phone 
room, but without also being able to go behind the scenes and stop 
entities that were aiding and abetting by laundering money or putting 
together phony travel packages, the FTC would be in effect cutting off 
the heads of the dandelions, without getting to the roots.
---------------------------------------------------------------------------
    \44\ Barry Cutler, former director of the FTC's Bureau of Consumer 
Protection, as stated in earlier Congressional testimony.
---------------------------------------------------------------------------
    Unfortunately, the ability of agencies like the FTC to go after 
persons or companies who knowingly support or enable direct 
participants in unfair or deceptive practices was called into question 
in 1994 by the U.S. Supreme Court ruling in Central Bank of Denver v. 
First Interstate Bank of Denver.\45\ In that case, the Court ruled 
there was no civil liability in private suits under the Securities and 
Exchange Act against secondary participants in certain fraudulent 
practices prohibited by that statute, basically because the statute did 
not specifically state that. Later, Congress amended the Securities and 
Exchange Act to provide the SEC with direct authority to pursue persons 
knowingly aiding and abetting such violations.\46\ In the mid-nineties, 
the FTC also received direct authority to sue persons ``assisting and 
facilitating'' violations of the Telemarketing Sales Act and its 
regulations.\47\ At this point in time, it would enhance the FTC's 
ability to protect the public if it could rely on explicit statutory 
authority to pursue aiders and abettors in all aspects of their 
jurisdiction, not just for telemarketing violations. For instance, in 
today's world of Internet based consumer issues, such as fraudulent 
business opportunity or job placement sites, certain unfair or 
deceptive practices are supported by a complicated network of entities 
who knowingly receive some financial benefits, and should be held 
responsible. Also, despite the improvements in global enforcement 
initiated by the U.S. SAFE WEB Act,\48\ sometimes it is not possible 
for the FTC to go after a foreign-based perpetrator, but could stop the 
damage to consumers by pursuing U.S. based affiliates who knowingly 
provide support to unlawful activities. ``Aiding and abetting'' 
liability could be coupled with safe harbor provisions for Internet 
providers and similar entities who are mere conduits and do not 
knowingly participate as aiders and abettors.
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    \45\ 511 U.S. 164 (1994).
    \46\ 15 U.S.C.  78t(e).
    \47\ 15 U.S.C.  6101-6108; 16 C.F.R. Part 310.
    \48\ Pub. L. No. 109-455, 120 Stat. 3372 (2006).
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VI. Conclusion
    In conclusion, I fully support what the FTC and Congress are doing 
to help protect vulnerable consumers during this time of financial 
trouble for the average person. However, I also support the idea that 
Congress should take this opportunity to enhance the FTC's enforcement 
tools so that they can do an even better job of protecting the public 
interest. This includes giving the FTC across-the-board authority to 
issue regulations using APA informal rulemaking procedures. Such a 
change is needed because the current Magnuson-Moss rulemaking 
procedures are so unwieldy that they have effectively become a dead-
letter. And while the cumbersome procedures under Magnuson-Moss may 
have become unneeded and outmoded, other developments in the law can 
ensure that any renewed FTC rulemaking activities using APA procedures 
would not be excessive. APA rules are subject to judicial review and 
other Congressional safeguards that have been put in place over the 
last 30 years. Also, the FTC has itself engaged in major policy reforms 
since the Magnuson-Moss Act was passed in 1975, and now has a more 
solid doctrinal basis for any rules it might promulgate based on 
unfairness or deception.
    In addition to the changes in rulemaking procedures described 
above, I also support the use of civil penalties for FTC violations 
because they would provide a stronger deterrent against fraudulent, 
unfair or deceptive activities than the current practice of seeking 
civil penalties only after a company is under order or rule. Similarly, 
the ability to pursue not only direct violators but also the aiders and 
abettors of FTC violations will be of significant help to the FTC in 
its pursuit of protecting the public.
    Thank you for allowing me this opportunity to appear before the 
Committee to give my views on this important matter.
                                Appendix
    Dee Pridgen is Associate Dean and the Carl M. Williams Professor of 
Law and Social Responsibility, at the University of Wyoming's College 
of Law, where she has taught since 1982. Her subjects include Consumer 
Protection, Contracts, Antitrust, Communications Law, Constitutional 
Law, and Internet Law. She received her Juris Doctorate in 1974, from 
New York University, and a B.A. in 1971, from Cornell University. She 
is a member of the Order of the Coif and Phi Beta Kappa. Pridgen has 
been a Fulbright Scholar/Lecturer at Tokyo University in Japan and a 
Visiting Professor of Law at the University of Baltimore School of Law, 
the University of Maryland School of Law, and the Catholic University 
of America, Columbus School of Law. She also served as a Staff 
Attorney, for the Federal Trade Commission, Bureau of Consumer 
Protection, Washington, D.C. from 1978-82. Pridgen's publications 
include two treatises aimed at practicing Attorneys, Consumer 
Protection and the Law, and Consumer Credit and the Law, co-authored 
with Richard Alderman, both published by Thomson/West, and updated 
yearly. She is also a coauthor of a law school casebook Entitled 
Consumer Law: Cases and Materials (Thomson/West 3d ed. 2007). She has 
written articles and reports on consumer law, and has given 
presentations at international consumer law meetings in Helsinki, 
Finland and Auckland, New Zealand. She has also presented at and been 
the co-chair of the Consumer Issues Conference held yearly at the 
University of Wyoming since 2001. She has been on the faculty for 
Teaching Consumer Law, a biennial conference sponsored by the Consumer 
Law Center at the University of Houston since 2002. Pridgen was elected 
to the American Law Institute in 2003.

    Senator Wicker. Thank you very much.
    Ms. Woolley.

                 STATEMENT OF LINDA A. WOOLLEY,

         EXECUTIVE VICE PRESIDENT, GOVERNMENT AFFAIRS,

               DIRECT MARKETING ASSOCIATION, INC.

    Ms. Woolley. Thank you, Senator Wicker.
    I am Linda Woolley, Executive Vice President of Government 
Affairs for the Direct Marketing Association. Thank you for the 
opportunity to be here today.
    The Direct Marketing Association, or DMA, is the leading 
global trade association, representing more than 3,100 
businesses and nonprofit associations. About 50 percent of our 
member companies are businesses that facilitate direct 
marketing; the other 50 percent are companies that actually 
market products and services directly to consumers, and most of 
those companies are household names.
    DMA considers consumer protection to be one of our core 
functions. We have a Corporate and Social Responsibility 
Department that develops industry standards and--industry 
standards for ethical marketing practices. And those standards 
are enforced through a very robust self-regulatory program 
that's been in existence for over 30 years.
    Let me begin by emphasizing that DMA and its member 
companies hold the FTC in extremely high regard. We have a long 
history of working with FTC on public education publications, 
the development of industry self-regulation, and on enforcement 
matters in order to protect consumers. While we may not agree 
with FTC on every policy or legal matter affecting the 
marketing community, the DMA views FTC as an essential partner 
in promoting reputable business practices, and in protecting 
consumers from a small minority of companies that deceives 
consumers and ultimately negatively affect the image of 
responsible businesses.
    Senator Wicker, you introduced for the record a letter that 
DMA and nearly 30 other trade associations sent to this 
committee about the far-reaching and unintended consequences 
that would result from the FTC's expanding authority, as 
currently proposed. You have the record--the letter in the 
record, but let me note some of those signatories here in order 
to exemplify the breadth of the industry concern over these 
proposals.
    Signing that letter were the American Business Media 
Consumer Electronics Association, Consumer Healthcare Products 
Association, International Franchise Association, National 
Association of Manufacturers, the National Association of 
Realtors, the National Association of Wholesalers and 
Distributors, National Automobile Dealers Association, the 
National Retail Federation, Software and Information Industry 
Association, and the U.S. Chamber of Commerce.
    We very much believe that safeguards and protections 
required by Magnuson-Moss continue to serve a valuable and 
useful purpose, and should not be repealed. The Magnuson-Moss 
safeguards were enacted incrementally--not all in one fell 
swoop, but incrementally--throughout the early 1980s, 
specifically as a result of the FTC abuse of APA rulemaking 
authority in the 1970s, when the FTC ventured into regulating 
children's advertising, gas additives, anticompetitive gasoline 
prices, eyeglasses, distributors of paperback books and 
newspapers, lawyer's fees, doctor's ads, ready-to-eat cereals--
breakfast cereals, automobile manufactures, hearing aids, 
mobile homes, over-the-counter drugs, and products that long-
haul truckers could carry.
    The Commission indicated that all other agencies have APA 
rulemaking authority. First, let me say that that--not every 
agency has APA authority. Second, the agencies currently having 
APA rulemaking authority have mandates that are much narrower 
in scope than that of the FTC. Third, the FTC already has APA 
rulemaking authority under many different statutes, because 
Congress has granted it that authority. And the DMA has 
supported every instance that the Congress has granted specific 
grants of APA rulemaking authority.
    It's only in this expansive area of unfair or deceptive 
practices, where the standards and jurisdiction are very broad, 
that the FTC must follow the protections and safeguards of the 
Magnuson-Moss Act. And, given the FTC's very unique and broad 
mandate in this area, we believe that the Magnuson-Moss--the 
safeguards of the Magnuson-Moss Act should be retained.
    DMA is particularly concerned that the Commission would use 
its expanding rulemaking authority to venture into areas that 
it's been most actively involved in, in public-policy 
discussion, and that particularly involves Internet commerce. 
Currently, we believe that the Commission has a very good track 
record of working with business to encourage the establishment 
of meaningful and effective self-regulatory standards in the 
marketplace.
    Just last year, following the proposed standards by FTC, 
DMA partnered with all of the other advertising agency--
advertising associations, effectively representing the entire 
advertising industry, to develop self-regulatory principles for 
online advertising practices. And we very much believe that 
such a context--that the context for such a collaborative 
effort between industry and FTC would change significantly if 
the regulatory--if the rulemaking safeguards were repealed.
    There are other--I'm watching the time, and I realize that 
there are other aspects that my panel--fellow panelists have 
spoken about, including aiding and abetting, civil penalty 
authority, and independent litigation authority, that we are 
prepared to discuss, but, since I'm almost out of time, I would 
entertain your questions on those subjects.
    In summary, DMA very much believes that the FTC has done a 
commendable job in protecting consumers from unfair and 
deceptive practices through its existing enforcement and 
regulatory authorities. And I look forward to your questions.
    Thank you.
    [The prepared statement of Ms. Woolley follows:]

   Prepared Statement of Linda A. Woolley, Executive Vice President, 
         Government Affairs, Direct Marketing Association, Inc.
I. Introduction and Summary
    Good afternoon, Mr. Chairman and members of the Subcommittee. I am 
Linda Woolley, Executive Vice President of Government Affairs for the 
Direct Marketing Association. Thank you for the opportunity to appear 
before the Subcommittee and provide insight from industry's perspective 
regarding the regulatory powers of the Federal Trade Commission 
(``FTC'' or ``Commission'').
    The Direct Marketing Association, Inc. (``DMA'') is the leading 
global trade association of more than 3,100 businesses and nonprofit 
organizations using and supporting multi-channel direct marketing tools 
and techniques. About fifty percent of our member companies are in the 
business of facilitating direct marketing, including analytics firms, 
list compilers, sellers of lists, printers, mailers, and Internet 
Service Providers. The other fifty percent of our members are those 
actually marketing products and services directly to consumers. Many of 
those companies are household names.\1\ In addition to its education, 
research and advocacy roles, DMA has a Corporate and Social 
Responsibility Department that develops industry standards for ethical 
marketing practices. Those standards are published as ``Guidelines for 
Ethical Business Practice'' and enforced through a robust self-
regulatory program.\2\ DMA has an antitrust exemption from the FTC that 
enables us to prosecute ethics cases that involve business-to-business 
complaints.\3\
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    \1\ Founded in 1917, DMA today represents more than 3,100 members 
across dozens of vertical industries in the U.S. and 50 other nations, 
including a majority of the Fortune 100 companies, as well as nonprofit 
organizations. Included are cataloguers, financial services, book and 
magazine publishers, retail stores, industrial manufacturers, Internet-
based businesses, and a host of other segments, as well as the service 
industries that support them. DMA and our members appreciate the 
Subcommittee's continued outreach to the business community on 
significant issues such as FTC authority.
    \2\ The full text of DMA's Guidelines for Ethical Business 
Practice, as well as additional information regarding our robust self-
regulatory program are available at http://www.dmaresponsibility.org/.
    \3\ DMA releases an annual Ethics Case Report summarizing the 
findings of the DMA Committee on Ethical Business Practice. The most 
recent report, covering the period between February 2009 and February 
2010 is available online at http://www.the-dma.org/guidelines/
DMAEthicsCaseReport2-09-2-10-Final.pdf.
---------------------------------------------------------------------------
    Let me begin by emphasizing that the DMA and its member companies 
hold the FTC and its staff in very high regard. DMA regularly works 
with the FTC on public education campaigns, the development of industry 
self-regulation, and enforcement matters in order to protect consumers 
in a wide variety of areas.\4\ While we may not agree on every policy 
or legal matter affecting the marketing community, the DMA views the 
FTC as an essential partner in promoting reputable business practices 
and in protecting consumers from a small minority of companies that 
deceive consumers and, thus, negatively impact the image of responsible 
businesses. Through the work of its Corporate and Social Responsibility 
Department, DMA demonstrates the belief that consumer protection is one 
of its core functions.
---------------------------------------------------------------------------
    \4\ For example, we have worked with the Commission in the 
following areas, among others: (1) Telemarketing Sales Rule (Complying 
with the Telemarketing Sales Rule, available at http://www.ftc.gov/bcp/
edu/pubs/business/marketing/bus27.shtm); (2) Children's Online Privacy 
Protection (How to Comply with the Children's Online Privacy Protection 
Rule: A Guide from the Federal Trade Commission, the DMA, and the 
Internet Alliance, available at http://www.ftc.gov/bcp/edu/pubs/
business/idtheft/bus45.shtm); and (3) Onguard Online, available at 
http://www.onguardonline.gov/about-us/overview.aspx.
---------------------------------------------------------------------------
    Today, we wish to discuss the Commission's current authority, as 
well as the proposed grant of additional powers to the FTC in financial 
regulatory reform legislation. We do not believe providing the FTC with 
broad new authority of the type included in the ``Wall Street Reform 
and Consumer Protection Act''--and as requested by the Commission--is a 
necessary or relevant response to the causes of the current financial 
crisis. The kind of additional authority that the FTC seeks is in no 
way related to ``credit default swaps'' or ``subprime mortgages,'' and 
would have far-reaching effects on a multitude of businesses outside of 
the financial services area.
    DMA and nearly thirty other associations recently wrote to this 
committee about the far-reaching and unintended consequences that would 
result from expanding the FTC's authority. With your permission, I 
would like to submit that letter for the record, but let me also note 
some of those signatories here in order to exemplify the breadth of 
industry concern over these proposed changes to the FTC's authority: 
American Business Media, Consumer Electronics Association, Consumer 
Healthcare Products Association, International Franchise Association, 
National Association of Manufacturers, National Association of 
Realtors, National Association of Wholesaler-Distributors, National 
Automobile Dealers Association, National Retail Federation, Software & 
Information Industry Association, and the U.S. Chamber of Commerce.
    Further, we believe that the safeguards and protections required by 
Magnuson-Moss--enacted in the early 1980s as a result of FTC abuse of 
APA rulemaking in the 1970s--continue to serve a valuable and useful 
purpose, and should not be repealed. These protections were established 
to achieve balance in government policymaking, limit regulatory 
overreaching, and to maintain Congress' authority to legislate on 
policy issues. We do not believe that a complete elimination of 
important procedural safeguards is necessary, or that it will 
ultimately be in the best interest of businesses and consumers.
    My remarks today will focus on the following four areas, which have 
been the subject of recent discussion surrounding FTC reauthorization: 
(1) Rulemaking under the Administrative Procedure Act (``APA''); (2) 
Authority to assess civil penalties; (3) Authority to pursue aiding and 
abetting; and, (4) Authority for independent litigation.
II. The Procedural Safeguards Currently Governing the FTC's ``Unfair or 
        Deceptive'' Authority Should Remain Intact
A. Procedural Safeguards Are Necessary Given the FTC's Broad 
        Jurisdiction
    As I mentioned earlier, DMA has joined with nearly thirty major 
trade associations--representing virtually every industry--in 
expressing concerns about the proposed repeal of statutory protections 
that currently govern the FTC's rulemaking ability. These statutory 
protections were enacted precisely to ensure appropriate checks and 
balances on FTC rulemaking under its ``unfair or deceptive'' authority, 
which gives the Commission sweeping jurisdiction over all but a few 
sectors of the American economy. The legislation currently under 
consideration would give the FTC streamlined APA authority to 
promulgate rules regarding any ``unfair or deceptive'' acts or 
practices across dozens of industries and countless marketing 
practices. Such a sweeping allocation of power would mitigate the need 
for congressional oversight and specific grants of authority to 
regulate on particular issues.
    DMA believes that the potential economic impact of such broad, new 
authority should be fully evaluated by Congress in the process of 
considering such a dramatic change. Many DMA member companies were 
severely impacted by the current economic downturn. Our most recent 
Quarterly Business Review suggests that marketing spending--the 
principle measure of economic productivity--is ``finally reversing the 
endemic downward spiral that began, for many, as early as mid-2007,'' 
\5\ but that economic recovery in the marketing community remains very 
slow in gaining steam. We strongly believe that the addition of new 
regulatory burdens at this time would limit market innovation and 
reduce the number of new jobs that the business community is able to 
create.
---------------------------------------------------------------------------
    \5\ DMA/Winterberry Group Quarterly Business Review: Fourth Quarter 
of 2009. Pg. 6. New York: Direct Marketing Association. March 2010.
---------------------------------------------------------------------------
B. The FTC Already Has APA Rulemaking Authority in Many Significant 
        Areas and Congress Has the Power to Grant Additional Authority 
        as Is Appropriate and Necessary
    Let me address several items that must be clarified with regard to 
the FTC's current rulemaking authority. The Commission has indicated 
that all other agencies have APA rulemaking authority. First, not every 
other agency has APA rulemaking authority. Second, the agencies 
currently using APA rulemaking have mandates that are very different 
from that of the FTC. Third, the FTC already has APA rulemaking 
authority under many different statutes,\6\ and DMA supports those 
specific grants of APA authority. It is only in the expansive area of 
``unfair and deceptive'' practices--where the standards and 
jurisdiction are very broad--that the FTC must follow the protections 
and safeguards of the Magnuson-Moss Act.
---------------------------------------------------------------------------
    \6\ See e.g., Controlling the Assault of Non-Solicited Pornography 
and Marketing Act, Children's Online Privacy Protection Act, Fair 
Credit Reporting Act, Gramm-Leach-Bliley Act, American Recovery and 
Reinvestment Act (i.e., health data security breach notification), 
Energy Policy and Conservation Act (i.e., appliance labeling, testing 
procedures and labeling for recycled oil), Fair Debt Collection 
Practices Act, Fairness to Contact Lens Consumers Act, Telemarketing 
and Consumer Fraud and Abuse Prevention Act, Omnibus Appropriations Act 
of 2009 as clarified by the Credit CARD Act of 2009 (i.e., mortgage 
loans).
---------------------------------------------------------------------------
    Prior to the implementation of the Magnuson-Moss safeguards in 1975 
and 1980, the FTC followed APA rulemaking procedures to fulfill its 
exceptionally broad mandate. The Commission exercised little restraint 
and began conducting rulemakings on a wide range of subjects, including 
a proposal to completely ban children's advertising. The Washington 
Post viewed such rulemakings as ``preposterous intervention[s] that 
would turn the agency into a great national nanny.'' \7\ As a result, 
Congress took steps to curb such FTC overreaching by enacting the 
Magnuson-Moss Act.
---------------------------------------------------------------------------
    \7\ Editorial, The FTC as National Nanny, Washington Post. Mar. 1, 
1978, at A22.
---------------------------------------------------------------------------
    The FTC's extremely broad authority spans innumerable industries 
and, therefore, is quite different in nature from that of other Federal 
agencies, whose powers tend to be more industry-specific. When a 
Federal agency has authority over particular industry, such as 
pharmaceuticals or education, its staff can become expert in that area. 
Even in the case of the Environmental Protection Agency, whose 
regulatory powers span many industries, its rulemaking authority is 
limited to particular areas by congressionally-approved and narrowly 
focused statutes, such as the Clean Air Act that limits air pollutants. 
By contrast, the FTC has authority to determine on its own what 
constitutes an ``unfair or deceptive'' practice, and to regulate such a 
practice wherever it occurs. Based on the Commission's record of past 
overreaching, we are concerned that providing the FTC with 
comprehensive APA rulemaking authority would once again lead the agency 
to overstep its bounds. Given the FTC's broad mandate and the 
historical need for the imposition of safeguards, we believe that the 
Magnuson-Moss provisions should not be repealed.
C. There Is No Need for Comprehensive APA Rulemaking Authority and 
        Specific Shortcomings of Magnuson-Moss Have Not Been 
        Demonstrated
    We question the Commission's claims that it needs APA rulemaking 
authority in order to properly protect consumers, and strongly believe 
that the FTC has done a superb job heretofore without such broad 
authority. Just last month, FTC Chairman Jon Leibowitz testified before 
this committee that, ``. . . in 2009 alone, the FTC and the states, 
working in close coordination, brought more than 200 cases against 
firms that peddled phone mortgage modification and foreclosure rescue 
scams.'' \8\ He went on to say,
---------------------------------------------------------------------------
    \8\ ``Prepared Statement of the Federal Trade Commission on 
Financial Services and Products: The Role of the Federal Trade 
Commission in Protecting Consumers, before the Senate Committee on 
Commerce, Science, and Transportation.'' Pg. 1. February 4, 2010.

        ``The FTC is primarily a law enforcement agency, and it has 
        used its authority proactively to protect financially 
        distressed consumers. In many of these cases, the Commission 
        has used its powers to seek temporary restraining orders, asset 
        freeze orders, and other immediate relief to stop financial 
        scams in their tracks and preserve money for ultimate return to 
        consumers. Even prior to the economic downturn, the Commission 
        acted aggressively to stop financial fraud and assist consumer 
        victims. For example, the agency brought a series of cases 
        against a number of the Nation's subprime mortgage lenders and 
        services challenging a variety of unfair and deceptive 
        practices. Over the past 5 years, the FTC has filed over 100 
        actions against providers of financial services, and in the 
        past 10 years, the Commission has obtained nearly half a 
        billion in redress for consumers of financial services.'' \9\
---------------------------------------------------------------------------
    \9\ ``Prepared Statement of the Federal Trade Commission on 
Financial Services and Products: The Role of the Federal Trade 
Commission in Protecting Consumers, before the Senate Committee on 
Commerce, Science, and Transportation.'' Pg. 4. February 4, 2010.

    Over the past fifteen years, there is no record of the FTC 
requesting broad APA rulemaking authority from Congress. Further, if 
such rulemaking authority is critical, the Commission should be able to 
specifically enumerate the areas in which it would use such authority. 
Instead, during last month's hearing, in response to a request from 
Senator Johanns that he enumerate areas in which APA rulemaking 
authority would be helpful, Chairman Leibowitz indicated ``. . . we'd 
really want to [. . .] think for a while if we got this authority about 
what we wanted to do and what we wouldn't want to do . . .'' \10\
---------------------------------------------------------------------------
    \10\ ``Senate Commerce, Science and Transportation Committee Holds 
Hearing on the Role of the Federal Trade Commission Concerning 
Financial Services and Products As it Relates to Consumers.'' CQ 
Congressional Transcripts. February 4, 2010.
---------------------------------------------------------------------------
    If there are specific areas in which such streamlined rulemaking 
authority is necessary, then we believe that Congress should consider 
and pass legislation detailing those areas. In general, DMA supports 
granting APA rulemaking authority to the FTC in order to address very 
specific problems. For example, the Commission was appropriately given 
APA rulemaking authority when implementing rules regarding children's 
privacy, commercial e-mail, telemarketing, and (jointly with other 
financial regulators) financial privacy. Just last year, Congress 
provided APA rulemaking authority to the FTC in order to address 
specific problems in the mortgage industry.
    Similarly, while it has been suggested that the Magnuson-Moss 
safeguards make it impossible to promulgate a rule in less than 8 to 10 
years, the Commission has not shown any specific evidence to support 
this assertion, or to show that a particular procedure under Magnuson-
Moss results in an unduly lengthy rulemaking process. In the absence of 
such evidence, Congress should not change the Magnuson-Moss procedures. 
If the FTC were to make such a specific showing, then we believe that 
Congress should evaluate the particular aspects of Magnuson-Moss that 
the Commission finds problematic, and it should seek to identify a 
targeted solution in order to preserve the policy goals behind these 
important and longstanding safeguards.
    We are particularly concerned about the unintended consequences of 
repealing the ``prevalence'' requirement under Magnuson-Moss. This 
provision requires the FTC to issue a finding that an ``unfair or 
deceptive'' practice has become ``prevalent'' in the marketplace before 
proceeding with a rule. Requiring that the Commission show prevalence 
of an ``unfair or deceptive'' practice by industry ensures that 
responsible businesses across the country are not burdened with 
regulations that stifle innovation or legitimate commerce as a result 
of the bad practices of a few actors. The FTC has asserted that it has 
had difficulty making a showing of prevalence, and that such a 
requirement is burdensome, since the Commission is required to amass a 
body of evidence before a rulemaking can proceed.
    Currently, the FTC independently decides to expend considerable 
resources on enforcement actions, workshops, and other educational and 
information-gathering activities in order to establish weighty hearing 
records on a particular issue for the purpose of commencing a 
rulemaking. We are not aware that the FTC has documented any difficulty 
in establishing a finding under the ``prevalence'' standard, and we do 
not believe that Congress should repeal it until or unless the FTC can 
document evidence to support such a claim.
    Likewise, there has been no evidence to suggest that the Commission 
has experienced difficulty in demonstrating ``prevalence'' in our 
Nation's courts, or that the courts are incapable making such an 
interpretation. Both business and consumers will benefit if Congress 
continues to require the FTC to produce evidence of ``prevalence'' that 
will survive independent legal scrutiny. Business will not have to bear 
the expense of unnecessary litigation, which is sure to arise if a 
lesser standard of proof were to be created. Consumers will be sure 
that the FTC was focusing its attention and resources on the most 
prevalent and egregious problems in the marketplace.
D. Magnuson-Moss Protections Should Remain in Place to Avoid Limiting 
        Innovation in Critical Areas of the Economy Such as the 
        Internet
    The DMA is particularly concerned that the Commission would use its 
expanded rulemaking authority to regulate in the areas where it has 
been most actively involved in policy discussion and enforcement 
activity, and that its involvement in those areas would hinder new and 
emerging business practices, such as mobile and interactive marketing. 
Currently, the Commission has an especially good track record of 
working with business to encourage the establishment of meaningful and 
effective self-regulatory standards in the marketplace. Just this year, 
following proposed standards by the FTC, DMA partnered with the 
American Association of Advertising Agencies (4A's), Association of 
National Advertisers (ANA), Interactive Advertising Bureau (IAB) and 
Better Business Bureau (BBB)--collectively representing the entire 
advertising industry--to develop self-regulatory standards for online 
advertising practices. We believe that the context for such 
collaborative efforts would change significantly if the rulemaking 
safeguards were repealed.
    Specifically, we are concerned that over time regulations could 
emerge without affording Congress the opportunity to exercise its 
important oversight function to ensure that the appropriate checks and 
balances are in place. Such unchecked regulation might occur in areas 
such as information-sharing, privacy, Internet advertising and 
marketing, mobile marketing, affiliate marketing, targeted marketing, 
online behavioral marketing, marketing to children and teenagers, and 
numerous other topics where the best-intentioned rulemaking almost 
certainly cannot anticipate innovation and change, and may not be able 
to achieve its intended purpose without significant unintended 
consequences.
    For example, regulation could limit Internet development--one of 
the continued key economic drivers and areas of job growth. DMA 
recently forecast that the Internet marketing workforce has the 
potential to grow 6.1 percent over the next 5 years--with 11 percent 
growth in the social networking medium alone--generating more than 2.6 
million new jobs. Growth of the mobile marketing workforce was 
projected at more than 30 percent by 2014.\11\ Instead, such rules 
could limit market innovation, and jeopardize the corresponding jobs 
and products that flow from such innovation.
---------------------------------------------------------------------------
    \11\ The Power of Direct Marketing 2009-2010. Produced by IHS 
Global Insight for DMA. 13th Edition. Pg. 184-185. New York: Direct 
Marketing Association. October 2009.
---------------------------------------------------------------------------
III. The Commission Already Has Sufficient Enforcement Powers to Deter 
        and Punish Bad Actors
    We are also concerned with proposals to remove checks on the FTC's 
enforcement powers, including the proposal to grant the agency civil 
penalty authority. DMA believes that the FTC's existing enforcement 
tools are sufficient to protect consumers. Currently, the FTC can 
impose settlement orders on companies and seek the disgorgement of ill-
gotten gains. If a company subsequently violates the order, then the 
FTC can also seek to obtain civil penalties. Based on feedback from 
DMA's members, this system provides very strong and effective 
incentives for companies to work cooperatively with the Commission in 
reaching settlements, which in turn provide industry with valuable 
guidance on the scope of acceptable practices in a timely fashion. We, 
therefore, strongly recommend against granting the FTC new authorities 
that could have significant unintended consequences, such as disrupting 
and even discouraging the cooperative spirit in negotiating 
settlements, and unduly lengthening the settlement process, thus 
leaving more time when consumers are unprotected.
IV. Additional Authority to Pursue Aiding and Abetting Is Unnecessary
    Likewise, DMA is concerned with the proposals to grant the FTC 
authority to treat persons that ``knowingly or recklessly'' provide 
``substantial assistance'' to others in committing ``unfair or 
deceptive'' acts or practices as primary wrongdoers even when they lack 
actual knowledge of a violation. The FTC already has authority to 
pursue those who commit ``unfair or deceptive'' acts or practices. We 
also caution that granting authority specifically over aiders and 
abettors in this manner would be unworkable because it would put a wide 
range of service providers in the position of policing the actions of 
clients over which they exercise no control. Examples of service 
providers who would be put in the position of having to police the 
actions of their clients--were the FTC to have authority over aiders 
and abettors--include agencies involved in the creation of a campaign 
advertising a product that was later found to be faulty, printers of 
catalogues, web hosting companies, or publishers who place 
advertisements in their newspapers or on their websites.
V. Current Litigating Authority That Is Coordinated Through the 
        Department of Justice Is Effective
    Finally, we oppose proposals to grant the FTC independent 
litigating authority to seek civil penalties. Such proposals would 
remove the current requirement that the FTC provide the Department of 
Justice (``DOJ'') with 45 days to determine whether it will take a case 
on behalf of the FTC, and instead permit the agency to bring suits 
immediately on its own. We believe that inclusion of the DOJ in this 
process is necessary to provide a check on agency discretion and that 
it has the added benefits of promoting orderly access to the Federal 
courts, as well as providing for consistent and coordinated Federal 
litigation.
VI. Conclusion
    In summary, DMA believes that the FTC does a commendable job in 
protecting consumers against unfair or deceptive acts or practices 
through its existing enforcement actions under the more than twenty 
statutes that it currently administers. Given the broad organic 
jurisdiction of the FTC, however, we oppose the repeal of important 
safeguards provided by the Magnuson-Moss Act over ``unfair and 
deceptive'' practices. Similarly, we believe that the current 
enforcement regime provides effective tools to both combat bad 
practices and to deter wrongdoers.
    I thank you for your time and for the opportunity to speak before 
your Subcommittee. I look forward to your questions.

    Senator Pryor. Thank you.
    Mr. Muris.

        STATEMENT OF HON. TIMOTHY J. MURIS, FOUNDATION 
   PROFESSOR, GEORGE MASON UNIVERSITY SCHOOL OF LAW, AND OF 
                 COUNSEL, O'MELVENY & MYERS LLP

    Mr. Muris. Thank you, Mr. Chairman.
    I've held four positions at the FTC. I was Chairman from 
2001 through 2004, and am the only person ever to direct both 
of the agency's enforcement bureaus. While at the Commission I 
worked on each issue I discuss today. I've also worked on most 
as an academic and consultant.
    I believe strongly in the mission of the Commission. 
Serving as Chairman was the greatest honor of my professional 
career, and I'm especially proud of our accomplishments. As 
just one example, we protected the privacy of Americans, 
including creating the National Do Not Call Registry.
    My testimony makes seven points:
    First, Americans use markets to organize the economy. The 
FTC has an important, albeit limited, role. The Commission 
works best as a referee, not the star player.
    Second, using its existing authority over vast parts of our 
economy, the prestigious Global Competition Review already 
gives the Commission its highest rating, praising the agency's 
performance in both areas.
    Third, again using its existing authority, the Commission 
has embraced new initiatives that would greatly expand its 
impact on the economy. As one example, the Commission, together 
with three other agencies, recently proposed guides to ban 
advertising of many breakfast cereals, soups, yogurts, and 
other products from thousands of TV shows and other media.
    The agency has been down this road before. Thirty years 
ago, after 3 years of work, an editorial in the Post, scolding 
the Commission for acting like the National Nanny, and an 
increasingly exasperated Congress, the Commission abandoned the 
children's advertising rulemaking. Today's proposal should fare 
no better.
    Obesity is a major problem, but these guides would be 
ineffective, because the ads kids see do not make them obese. 
Although American children see many food ads each year, they 
have done so for decades, since long before the dramatic 
upswing in obesity.
    Today's kids actually watch less television than previous 
generations, and have many more commercial-free choices. They 
see fewer food ads, but they weigh more. Even our dogs and cats 
are fat, and it's not because they're watching too much 
advertising.
    [Laughter.]
    Mr. Muris. My fourth point is that, coupled with almost 
certain Congressional requests for new rules, lowering the 
barriers to agency rulemaking will transform the FTC. It would 
be a major mistake for formal rulemaking to be a substantial 
component of FTC consumer protection.
    The agency tried this in the 1970s, with disastrous 
consequences. Over 15 months, the Commission proposed 16 rules 
to transform entire industries, usually without a clear theory 
of why there was a law violation, and, at best, a shaky 
empirical foundation. Of course, such rules took a long time. 
Nevertheless, at least 15 rules got to the Commission under 
Magnuson-Moss procedures, some in only a few years.
    The procedures currently required for rules force the 
Commission to be clear about its theories and focus its 
evidence on the key questions. As in the 1970s, the FTC will 
fail in its mission to protect consumers if it seeks to become 
the second most powerful legislature in Washington. The ability 
of rulemaking participants to designate disputed factual issues 
and cross-examine witnesses is very useful to test the 
Commission's theories. Properly focused, the procedures are 
workable, and, in many rules, they were done in just a few 
years.
    My fifth point is that the FTC already can obtain civil 
penalties in many cases. Further, the FTC currently can obtain 
all the monetary relief possible in fraud cases, already, 
through its existing 13(b) authority. Automatic civil penalty 
authority in every case would result in over deterrence 
sometimes, and unnecessarily complicate FTC efforts to expand 
the law in new areas. Moreover, because there is no sure way to 
limit the expansion of FTC authority to consumer protection 
cases, it would create an additional arbitrary and unfair 
distinction between the two Federal antitrust agencies, the 
Department of Justice being the other. Those firms subject to 
FTC review would face a different remedial regime, not because 
there's something different about the industries, but merely 
because of the unfortunate accident of falling under the FTC, 
not the DOJ.
    My sixth point is that, if this committee does reauthorize 
the FTC, it should address another arbitrary and unfair 
distinction between the two antitrust agencies, namely the 
different standards the FTC has, and easier standards when 
seeking to adjoin a merger. Both the FTC and DOJ enforce the 
same statute, but the FTC has an easier time. That's 
fundamentally unfair.
    Finally, I believe that a separate third-party liability 
section in the FTC Act is both unwise and unnecessary. It's 
unwise, because it creates a uniform standard where uniformity 
is inappropriate. A new section is unnecessary, because the FTC 
already can attack third-parties in appropriate circumstances. 
The standards for third-party liability should be developed 
case by case, under the FTC's current unfairness jurisdiction.
    Thank you. I would be glad to answer your questions.
    [The prepared statement of Mr. Muris follows:]

  Prepared Statement of Hon. Timothy J. Muris, Foundation Professor, 
  George Mason University School of Law, and Of Counsel, O'Melveny & 
                               Myers LLP
    Chairman Pryor, Ranking Member Wicker, and members of the 
distinguished Subcommittee, my name is Tim Muris. I am Foundation 
Professor at the George Mason University School of Law, and Of Counsel 
at O'Melveny & Myers LLP. Most relevant for today's hearing, I have 
held four positions at the Federal Trade Commission (FTC), most 
recently as Chairman from 2001-2004. Also I am the only person ever to 
direct both of the FTC's enforcement arms--the Bureau of Consumer 
Protection and the Bureau of Competition. I believe strongly in the 
importance of the FTC as a consumer protection agency. Serving as 
Chairman was the greatest honor of my professional career, and I am 
especially proud of our accomplishments, such as our work in fostering 
competition in healthcare, developing and strengthening the anti-fraud 
program, and promoting and protecting the privacy of Americans, 
including creation of the National Do Not Call Registry.
    Because most of the issues raised by the efforts to expand the 
FTC's authority are in the agency's consumer protection mission, most, 
but not all, of my testimony discusses that mission. I address seven 
points:

        1. The FTC has an important, albeit limited, role in our 
        economy. The Commission works best when it acts as a referee, 
        not the star player.

        2. Using its existing statutory authority, the Commission ranks 
        as one of the world's preeminent competition and consumer 
        protection agencies.

        3. Under its existing statutory authority, the Commission has 
        embraced some new, aggressive, and in some cases controversial, 
        initiatives that would greatly expand its impact on the 
        economy.

        4. The so-called ``Magnuson-Moss'' rulemaking procedures are 
        reasonable; their elimination would result in a major 
        regression for the FTC. Coupled with almost certain 
        Congressional requests for new rules, lowering the barriers to 
        agency rulemaking will transform the FTC, threatening to place 
        the Commission in the untenable posture of the 1970s, during 
        which time it sought to be the second most powerful legislature 
        in Washington, proposing dramatic, usually harmful, changes 
        over wide-ranging sectors of the economy.

        5. The FTC already can obtain civil penalties in many cases, 
        notably those involving Commission order and rule violations. 
        Further, the FTC currently can obtain all the monetary relief 
        possible in fraud cases through its existing Section 13(b) 
        authority. Civil penalties would add nothing to the FTC's 
        arsenal in such cases. Nevertheless, a majority of the 
        Commission seeks automatic civil penalty authority in all 
        cases. Such authority would represent another fundamental 
        change in FTC law, resulting in over-deterrence in some 
        circumstances, and unnecessarily complicating efforts to expand 
        FTC law to new areas. Moreover, because there is no sure way to 
        limit this expansion of FTC authority to consumer protection 
        cases, it would create an additional, arbitrary, and unfair 
        distinction between the two Federal antitrust agencies, the 
        Department of Justice and the FTC. (Given that the FTC and the 
        DOJ divide the economy between the two agencies in making 
        enforcement decisions, those firms subject to FTC review would 
        face a different remedial regime, not because there is 
        something different about the industry, but merely because of 
        the historical accident of falling under FTC review, and not 
        the DOJ.)

        6. If this committee does reauthorize the FTC Act, it should 
        address another arbitrary and unfair distinction between the 
        FTC and the DOJ, namely the different, and easier, enforcement 
        standards that the FTC has recently obtained for itself in 
        seeking to enjoin proposed mergers. Although both the FTC and 
        the DOJ enforce the same merger statute, Section 7 of the 
        Clayton Act, a merger's legality can turn, not on its 
        underlying merits, but on which agency evaluates the 
        transaction.

        7. Finally, creation of a separate third-party liability 
        section in the FTC Act is both unwise and unnecessary. The step 
        is unwise because it creates a uniform standard in an area 
        where uniformity is inappropriate. The new section is 
        unnecessary because the FTC already has the ability to attack 
        third parties in appropriate circumstances. Careful use of the 
        Commission's ``unfairness'' jurisdiction provides the best 
        vehicle to address third parties who facilitate violations by 
        others. The standards for third-party liability should be 
        developed, case-by-case, under the FTC's current authority.
1. The FTC Is a Referee in Our Economy, Not a Star Player
    As a Nation, we use markets to organize and drive our economy. We 
derive vast economic benefits from these markets and the competition 
that helps markets function properly. These benefits should not be 
taken for granted; they are not immutable. The Nation's consumer 
protection policy can profoundly enhance these benefits by 
strengthening the market. The policy also can reduce these benefits, 
however, by unduly intruding upon the market and hampering the 
competitive process. The Federal Trade Commission has a special 
responsibility to protect and speak for the competitive process, to 
combat practices that harm the market, and to advocate against policies 
that reduce competition's benefits to consumers.
    The FTC protects consumers in part through its responsibility to 
prevent ``unfair or deceptive acts or practices.'' \1\ The FTC, and 
other public institutions, operate against a backdrop of other consumer 
protection institutions, most notably the market and common law. In our 
economy, producers compete to offer the most appealing mix of price and 
quality. This competition spurs producers to meet consumer expectations 
because the market generally disciplines sellers who disappoint 
consumers, and thus those sellers lose sales to producers who better 
meet consumer needs. These same competitive pressures encourage 
producers to provide truthful information about their offerings. Market 
mechanisms do not always effectively discipline deceptive claims, 
however, especially when product attributes are difficult to evaluate 
or sellers are unconcerned about repeat business.
---------------------------------------------------------------------------
    \1\ 15 U.S.C.  45.
---------------------------------------------------------------------------
    When competition alone cannot punish or deter seller dishonesty, 
another institution can mitigate these problems. Private legal rights 
provide basic rules for interactions between producers and consumers. 
Government also can serve a useful role by providing default rules, 
which apply when parties do not specify rules. These rights and default 
rules alleviate some of the weaknesses in the market system by reducing 
the consequences to the buyer from a problematic exchange. Although 
private legal rights provide powerful protections, in some 
circumstances--as when court enforcement is impractical or economically 
infeasible--they may not be an effective deterrent.
    When consumers are vulnerable because market forces are 
insufficient and the common law is ineffective, a public agency, such 
as the Federal Trade Commission, can help preserve competition and 
protect consumers. The FTC's consumer protection and competition 
missions naturally complement each other by protecting consumers from 
fraud, deception, and harmful restraints on competition without 
restricting their market choices or their ability to obtain truthful 
information about products or services. The Commission attacks conduct 
that undermines competition, impedes the exchange of accurate 
information, or otherwise violates the common law rules of exchange.
    Because of its antitrust responsibilities, the agency is well aware 
that robust competition is the best, single means to protect consumers. 
Rivalry among incumbent producers, and the threat or fact of entry from 
new suppliers, prompt firms to satisfy consumers. In competitive 
markets, businesses prosper by surpassing their rivals. In turn, this 
competitive market has important implications for the design of 
consumer protection policies to regulate advertising and marketing 
practices.
    Without a continual reminder of the benefits of competition, 
consumer protection programs can impose controls that ultimately 
diminish the very competition that increases consumer choice. Some 
consumer protection measures--even those motivated by the best of 
intentions--can create barriers to entry that limit the freedom of 
sellers to provide what consumers demand. While I was Chairman, for 
example, the Commission participated in a court challenge to a state 
law that banned anyone other than licensed funeral directors from 
selling caskets to members of the public over the Internet. While 
recognizing the state's intent to protect its consumers, the Commission 
questioned whether the law did more harm than good. In an amicus brief, 
the FTC noted that ``[r]ather than protect[ing] consumers by exposing 
funeral directors to meaningful competition, the [law] protects funeral 
directors from facing any competition from third-party casket 
sellers.'' \2\ The synergy between protecting consumers from fraud or 
deception without unduly restricting their choices in the market or 
their ability to obtain truthful information should undergird all of 
the Commission's consumer protection initiatives.
---------------------------------------------------------------------------
    \2\ Memorandum of Law of Amicus Curiae Federal Trade Commission, 
Powers v. Harris, No. CIV-01-445-F (W.D. Okla. Sept. 5, 2002), 
available at http://www.ftc.gov/os/2002/09/okamicus.pdf.
---------------------------------------------------------------------------
2. Under its Existing Authority, the FTC Has Become One of the World's 
        Preeminent Competition and Consumer Protection Agencies
    With broad authority to protect consumers from fraudulent, 
deceptive, and unfair practices and to preserve competitive markets by 
prohibiting anticompetitive mergers and business conduct, the Federal 
Trade Commission's actions affect the lives of every American. As the 
only Federal agency with both consumer protection and competition 
jurisdiction, the FTC has the unique ability to investigate the conduct 
of numerous players across our ever-changing economy and stop unlawful 
behavior that harms Americans. Particularly in difficult economic 
times, the agency protects financially distressed individuals who fall 
victim to fraud and deception and stops anticompetitive practices that 
deter the lower cost products and services that result from vigorous 
competition.
    During the past 2 years alone, the Commission has targeted problems 
in financial services as a primary area for helping consumers.\3\ In 
particular, the agency has focused on deceptive practices in mortgage 
servicing, subprime credit, foreclosure rescue, fair lending, debt 
relief, credit repair, debt collection, advance fee loans, payday 
lending, and credit card marketing.\4\ In addition, the FTC has 
targeted deceptive health, safety, and weight loss claims; 
telemarketing fraud; fraud against small business; and business 
opportunity schemes.\5\
---------------------------------------------------------------------------
    \3\ See Federal Trade Commission, The FTC in 2009 45 (Mar. 2009).
    \4\ See id. at 46-48; Financial Services and Products: The Role of 
the Federal Trade Commission in Protecting Consumers Before the Senate 
Comm. On Commerce, Science, & Transportation, 110th Cong. 4-9 (2010) 
(Statement of the Federal Trade Commission).
    \5\ See, e.g., Final Order, FTC v. Roex, Inc. et al., No. SACV09-
0266 (C.D. Cal. May 20, 2009) (Marketers of dietary supplements and 
devices agree to pay $3 million to settle FTC charges of deceptive 
advertising); Final Order, FTC v. Advantage Credit Repair, et al., No. 
08-CV-5994 (N.D. Ill. Oct. 27, 2009) (Credit repair scammers settle FTC 
charges).
---------------------------------------------------------------------------
    The Commission has been very successful in addressing fraudulent, 
deceptive, and unfair practices. For example, from March 2008 through 
February 2009, the Commission filed 64 Federal district court actions 
and secured 83 judgments and orders requiring defendants to pay more 
than $371 million in consumer redress or disgorgement of ill-gotten 
gains.\6\ During this same time, the Department of Justice, on behalf 
of the FTC, obtained 15 civil penalty orders and $9.6 million in 
assessed civil penalties, of which nearly $8.3 million has been 
collected.\7\
---------------------------------------------------------------------------
    \6\ See The FTC in 2009 supra note 3 at 45-46.
    \7\ Id. at 46-48; Statement of the Federal Trade Commission supra 
note 4 at 4-9.
---------------------------------------------------------------------------
    Besides the high status accorded to fraud, deception, and 
unfairness cases, the FTC also places a very high priority on consumer 
privacy and the protection of personal information. The FTC enforces 
the FTC Act, the Safeguards Rule under the Gramm-Leach-Bliley Act, and 
the Fair Credit Reporting Act to protect consumers from threats to the 
security of their personal information. Using these various statutes 
and the Safeguards Rule, as of March 2009, the FTC brought 25 
enforcement actions that challenged inadequate security practices by 
firms that mishandled sensitive consumer information.\8\
---------------------------------------------------------------------------
    \8\ The FTC in 2009 supra note 3 at 56.
---------------------------------------------------------------------------
    On the competition side, the FTC scrutinizes industries that have a 
significant effect on consumers' daily lives, including health care, 
energy, technology, and consumer goods and services.\9\ Challenging 
alleged anticompetitive mergers has been a key priority. The Commission 
reviews premerger notification filings and other information to 
determine if a transaction may substantially lessen competition. From 
March 2008 through February 2009, for example, the FTC filed six 
preliminary injunctions and administrative complaints challenging 
proposed and consummated mergers that it believed raised competitive 
concerns.\10\ The agency also identified competitive concerns in an 
additional 16 proposed acquisitions during that time period that it 
resolved through consent agreements with the merging firms.\11\ These 
consent orders permitted the transactions to proceed after changes were 
adopted in markets such as those involving generic and branded 
pharmaceuticals, specialty chemicals, medical devices, electronic 
public records services, and consumer goods and technology.\12\
---------------------------------------------------------------------------
    \9\ Id. at 15.
    \10\ Id. at 12.
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------
    The Commission continues to be vigilant in challenging possible 
anticompetitive conduct through filing actions in Federal court. 
Examples of such challenges from March 2008 through February 2009 
include actions to stop:

        (a) The payments by branded drug makers to generic rivals to 
        agree not to market a lower-priced generic drug; \13\
---------------------------------------------------------------------------
    \13\ Id. at 13.

        (b) The use of Multiple Listing Service rules to prevent 
        discount real estate professionals from making their listings 
        available on popular websites listing homes for sale; \14\ and
---------------------------------------------------------------------------
    \14\ Id.

        (c) The use of joint fee negotiation by physician groups to 
        keep reimbursement rates high without providing benefits to 
        patients.\15\
---------------------------------------------------------------------------
    \15\ Id.

    The FTC uses a variety of tools to accomplish its objectives, 
including litigation, rulemaking, policy research and development, 
competition advocacy, consumer and business education, hearings, and 
the encouragement of self-regulatory initiatives.\16\ The Commission 
also promotes sound policy initiatives by holding public workshops with 
industry leaders and consumers. Recent workshops have included, 
``Exploring Privacy: A Roundtable Series,'' \17\ held in March 2010; 
``Horizontal Merger Guidelines Workshop,'' \18\ held in January 2010; 
and ``Protecting Consumers in Debt Collection Litigation and 
Arbitration: A Roundtable Discussion,'' \19\ held in December 2009.
---------------------------------------------------------------------------
    \16\ Former Chairman Robert Pitofsky and I discuss the remarkable 
range of FTC tools in Timothy J. Muris & Robert Pitofsky, More Than Law 
Enforcement: The FTC's Many Tools--A Conversation With Tim Muris and 
Bob Pitofsky, 72 Antitrust L.J. 773 (2005).
    \17\ ``Exploring Privacy: A Roundtable Series'' explored privacy 
issues posed by 21st century technology and business practices that 
collect and use consumer data, including social networking, cloud 
computing, online behavioral advertising, mobile marketing, and the 
collection and use of information by retailers, data brokers, third-
party applications, and other diverse businesses.
    \18\ ``Horizontal Merger Guidelines Workshop'' explored possible 
updates to the Horizontal Merger Guidelines used by both the FTC and 
the Department of Justice to evaluate the potential competitive effects 
of mergers and acquisitions.
    \19\ ``Protecting Consumers in Debt Collection Litigation and 
Arbitration: A Roundtable Discussion'' examined consumer protection 
issues in debt collection proceedings.
---------------------------------------------------------------------------
    Given this impressive agenda and workload, in 2009 the Global 
Competition Review (``GCR'') gave the FTC its highest rating, five out 
of five stars.\20\ The GCR stated that ``[f]ew agencies in the world 
balance their antitrust and consumer protection duties as well as the 
U.S. Federal Trade Commission. While many agencies struggle to be good 
at one or the other, the FTC has mastered both.'' \21\ The agency does 
not need new authority to continue this stellar performance.
---------------------------------------------------------------------------
    \20\ Global Competition Review, Rating Enforcement 2009--United 
States Federal Trade Commission (2009).
    \21\ Id.
---------------------------------------------------------------------------
3. Under its Existing Statutes, the FTC Already Is Embarking on Major, 
        Sometimes Controversial, Expansions of its Authority
    As our economy evolves, so too should the FTC. Fraud, for example, 
takes new forms, and the Commission must adapt to the new threats. 
Moreover, the agency is currently considering using new remedies 
against fraudsters that appear worthwhile, such as banning them from 
certain activities in the future. Even without expanded statutory 
powers, the Commission has embarked on many other new initiatives. 
Whether or not one thinks these initiatives are wise, it is clear the 
FTC does not feel constrained by a lack of authority to pursue them. I 
discuss a few of the new activities in this section.
A. The Proposed ``Voluntary'' Guides for Food Marketing
    Today, most adults are either obese or overweight, and the rate of 
overweight children has increased rapidly. This alarming increase in 
obesity is a complex public health issue that demands effective 
response by parents, industry, physicians, consumer advocates, and 
government.
    Responding to a Congressional request for a report and 
recommendations about guidelines for marketing food to children and 
teens, the Commission, together with the Food and Drug Administration 
(FDA), the Center for Disease Control, and the U.S. Department of 
Agriculture released proposed guides that would ban advertising of 
(among other products) many breakfast cereals, soups, and yogurts from 
thousands of TV shows and other media.\22\ These foods, according to 
the standards, should not be advertised on television and other media 
when the audience has more than 20 percent teens or 30 percent 
children.
---------------------------------------------------------------------------
    \22\ Workshop, Federal Trade Commission, Sizing Up Food Marketing 
and Childhood Obesity (Dec. 15, 2009).
---------------------------------------------------------------------------
    The FTC has been down this road before. Prodded by consumer 
activists in the late 1970s, the Commission sought to stop advertising 
to children because of concerns that they did not understand the nature 
of advertising, were eating too much of the wrong food, and were 
suffering tooth decay and other health risks as result.\23\ After 3 
years of work, 6,000 pages of transcript, 60,000 pages of comments, an 
editorial in The Washington Post scolding the Commission for acting 
like the National Nanny, and an increasingly exasperated Congress, the 
Commission abandoned the rulemaking.
---------------------------------------------------------------------------
    \23\ See FTC Staff Report on Television Advertising to Children 
(Feb. 1978); Notice of Proposed Rulemaking on Television Advertising to 
Children, 43 Fed. Reg. 17,967 (April 27, 1978).
---------------------------------------------------------------------------
    Today's proposal should fare no better. It is impractical, 
ineffective, and (were it to become law) illegal. It's impractical 
because, although kids see many food ads on children's programming, 
many ads they see air on programs that are not directed to them. 
Moreover, a ban would be ineffective because there is no reason to 
think that the ads kids see make them obese. Although American children 
see thousands of food ads each year, they have done so for decades--
since long before the dramatic upswing in obesity. Today's kids 
actually watch less television than previous generations and have many 
more commercial-free choices. They see fewer food ads, but they weigh 
more. Even our dogs and cats are fat, and it is not because they are 
watching too much advertising.
    Finally, a ban would be illegal. Food is not illegal to sell to 
those under 18. Our First Amendment requires government to demonstrate 
that restrictions on truthful, non-misleading commercial speech for 
legal products meaningfully advance a compelling interest. Because a 
children's advertising ban would be ineffective,\24\ it would fall far 
short of that test. Moreover, many of the restricted foods actually 
meet existing government standards--such as those under WIC, the 
Special Supplemental Nutrition Program for Women, Infants, and 
Children.\25\ Among the foods that the government is encouraging 
children to eat, but that the proposed standards would prevent 
advertisers from marketing to families, are milk, cheese, eggs, most 
breakfast cereal, and peanut butter. In any event, the government 
certainly cannot legally restrict truthful ads when the majority of the 
audience are adults.
---------------------------------------------------------------------------
    \24\ The Institute of Medicine found insufficient evidence to 
conclude that advertising caused obesity in either kids or teens. See 
IOM, Food Marketing to Children and Youth: Threat or Opportunity? 
(2006).
    \25\ ``[T]he WIC Program--serves to safeguard the health of low-
income women, infants, & children up to age 5 who are at nutritional 
risk by providing nutritious foods to supplement diets, information on 
healthy eating, and referrals to health care.'' See http://
www.fns.usda.gov/wic/aboutwic/.
---------------------------------------------------------------------------
    One difference between the current proposal and the old 
rulemaking--called Kid Vid--is that this time the agencies are 
suggesting that the standards be adopted ``voluntarily'' by industry. 
Yet, can standards suggested by a government claiming the power to 
regulate truly be ``voluntary''? Moreover, at the same workshop that 
the standards were announced, a representative of one of the same 
activist organizations that inspired the 1970s efforts speculated that 
a failure to comply with the new proposal would provoke calls for rules 
or legislation.\26\ And, it would be a risky proposition for 
advertisers all to adopt the Commission's standards voluntarily, as 
joint restraints on advertising are well known to impair 
competition,\27\ and these restraints would hardly pass antitrust 
muster.\28\
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    \26\ See Jared Favole, Federal Group Proposes Curbs on Marketing 
Food to Kids, WSJ.com, Dec. 16, 2009, available at http://
online.wsj.com/article/SB126092800862493091.html (``The foods and 
beverages that could be affected if the proposed marketing restrictions 
became law include most sodas, candies, cookies, cereals and some types 
of yogurt, said Margo Wootan, Director of Nutrition Policy at the 
Center for Science in the Public Interest.'').
    \27\ Numerous studies have demonstrated the role of advertising in 
competitive markets. Some are collected in William MacLeod, et al., 
Three Rules and a Constitution: Consumer Protection Finds Its Limits in 
Competition Policy,'' 3 Antitrust L. J. (2005). For an example in the 
food industry, see C. Robert Clark, Advertising Restrictions and 
Competition in the Children's Breakfast Cereal Industry, 50 J. L. & 
Econ. (Nov. 2007), which found that cereal prices and shares of leading 
brands were higher in Quebec Canada, which banned advertising to 
children under 13, than in other Canadian provinces where the 
advertising is allowed.
    \28\ See Food Marketing to Children and Youth: Threat or 
Opportunity? supra note 24.
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    Attacking food advertising may offer the illusion of progress in 
the fight against childhood obesity. But in the end, Americans must eat 
less and exercise more. That said, advertising can play a role in 
fighting obesity. One FTC study showed that when the government changed 
its position and permitted cereal advertisers to make truthful claims 
about the relationship between fiber intake and reduced cancer risk, 
consumers and sellers responded.\29\ Consumers increased their 
consumption of high-fiber cereals, the market share for high-fiber 
cereals increased, and more high-fiber cereals found a place on 
grocers' shelves.
---------------------------------------------------------------------------
    \29\ Pauline Ippolito & Alan Mathios, Health Claims in Advertising 
and Labeling: A Study of the Cereal Market (1989) (FTC Bureau of 
Economics Staff Report) (``Study of the Cereal Market'').
---------------------------------------------------------------------------
    We need to harness that same power to help fight obesity. Year 
after year, manufacturers have shown great ingenuity in pitching foods 
to kids as tasty and fun; their challenge now is to develop and promote 
healthy foods, too. Major marketers (representing over three quarters 
of all ads kids see) have already undertaken initiatives to market 
nutritious foods and healthy lifestyles. Under the auspices of the 
Council of Better Business Bureaus, the companies also made individual 
commitments to do so, and we have seen big shifts in advertising to 
kids, and major reformulations of the foods advertised to them.
B. Changes in Advertising Substantiation
    Changing the advertising substantiation doctrine is another 
significant new initiative. The Commission has long required that 
advertisers possess a ``reasonable basis'' to substantiate their 
advertising claims. Since its inception, the substantiation doctrine 
has employed a flexible approach for determining the amount of evidence 
an advertiser needs to substantiate a particular claim.\30\ Recognizing 
the importance of the free flow of information to help markets best 
serve consumers' needs, the Commission has developed a balancing test 
to assure that information flows both freely and truthfully, without 
unnecessarily chilling advertisers' ability to provide consumers with 
important information.\31\
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    \30\ Pfizer, Inc., 81 FTC 23 (1972).
    \31\ FTC Policy Statement Regarding Advertising Substantiation, 
appended to Thompson Med. Co., 104 FTC 648, 839 (1984), aff'd, 791 F.2d 
189 (D.C. Cir. 1986).
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    Thus, to support health-related claims for foods, the Commission 
has traditionally required that companies have ``competent and reliable 
scientific evidence.'' \32\ That standard requires tests or other 
studies using ``procedures generally accepted in the profession to 
yield accurate and reliable results.'' \33\ Clinical testing is 
sometimes required because there is no other method that professionals 
believe yields accurate and reliable results. In other cases, however, 
other forms of evidence are generally accepted as reliable. There are, 
for example, no clinical trials of parachutes--and no serious doubt 
about whether they actually work to reduce risk.
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    \32\ Bureau of Consumer Protection, FTC, Dietary Supplements: An 
Advertising Guide for Industry 9 (1998).
    \33\ Id.
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    In recent investigations, however, the staff has been seeking to 
replace that flexible standard with the same kinds of evidence that the 
Food and Drug Administration has traditionally required to approve new 
drugs. These proposed standards would require two well-controlled 
clinical trials to substantiate certain claims even if experts 
generally accept other methods as reliable. Moreover, they would 
apparently prohibit more limited claims that accurately disclose the 
limitations of the available evidence. An advertiser could not report, 
for example, that a single well-conducted clinical trial supports a 
claim until a second study came to the same conclusion. Courts have 
consistently rejected such blanket prohibitions on truthful speech as 
violations of the First Amendment.\34\
---------------------------------------------------------------------------
    \34\ See Pearson v. Shalala, 164 F.3d 650 (D.C. Cir. 1999); 
Whitaker v. Thompson, 248 F. Supp. 2d 1 (D.D.C. 2002).
---------------------------------------------------------------------------
    Abandoning the flexible substantiation standard is a bad idea. The 
current approach lets the Commission strike the appropriate balance 
between the risks of mistakenly allowing false claims and the risks of 
mistakenly prohibiting truthful ones. When the consequences of false 
claims are high, as they are when an unsafe new drug is allowed on the 
market even though effective alternatives are available, a high 
substantiation standard is appropriate. But the risks of mistaken 
claims about foods are vastly lower. Consumers may pay a few pennies 
more or give up a better tasting product, costs that are purely 
economic.
    In contrast, mistakenly prohibiting truthful claims about the 
relationship between diet and disease creates risks to public health. 
Consumers who do not know about the relationship between saturated fat 
consumption and heart disease, or about the relationship between fiber 
and cancer, or the relationship between folic acid and neural tube 
birth defects may suffer serious health consequences. When experts in 
the field believe that reliable studies indicate the likely truth of 
these relationships, there is good reason to allow such claims, even if 
the evidence does not meet the standard that would be required for a 
new drug.
    The empirical evidence is clear that excessive restrictions on 
truthful advertising harm consumers.\35\ They lead to higher product 
prices and less incentive for sellers to improve their products. 
Moreover, excessive restrictions have a disproportionate effect on 
those who are not as good at finding information from other sources. 
The well-educated, two-parent household may find their information 
elsewhere, but too often the less-educated, single-parent household 
will not. Much of the evidence for these conclusions is developed in a 
series of reports by the FTC's Bureau of Economics, beginning with a 
ground-breaking study of the impact of health claims on the market for 
cereals.\36\ Applying FDA-like standards in cases in which experts 
regard other methods as reliable is simply bad policy.
---------------------------------------------------------------------------
    \35\ See J. Howard Beales & Timothy J. Muris, State and Federal 
Regulation of National Advertising (1993), especially Chapter 2.
    \36\ Ippolito and Mathios, Study of the Cereal Market, supra note 
29.
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    Finally, repudiation of the Commission's flexible standard is not 
necessary to facilitate enforcement of FTC orders. Although the 
Commission does not win every case, it wins the overwhelming majority 
of those it brings. That fact alone makes clear that a more specific 
standard is not necessary to simplify enforcement. ``Fencing in'' order 
provisions that cover more products or more claims from a company that 
has violated the law are entirely appropriate, and widely used. There 
is no reason, however, to require past violators to meet a higher 
burden to substantiate the likely truth of their claims. A more 
specific requirement would not ``fence in'' proven violators; rather, 
it would ``wall off'' truthful claims that would be quite valuable to 
consumers.
C. Behavioral Advertising
    Increasingly, advertising supports the provision of free Internet 
content. The amount of money available to fund that content, and hence 
the quality of information available online, will depend on the 
advertising rates. The higher the rates, the more (and better) content 
consumers will receive. Behavioral advertising, which uses information 
about an anonymous consumer's browsing behavior to infer which ads are 
most likely to appeal to that consumer, promises to raise the rates 
that advertisers are willing to pay. Inappropriate restrictions on such 
ads could significantly impair the advertising-based model for 
financing Internet content.
    The FTC is evaluating its approach to privacy, and is considering 
preventing behavioral advertising unless consumers affirmatively agree 
(i.e., opt in) to accept such ads.\37\ The analytical framework that 
the FTC currently employs was the result of a similar review undertaken 
when I became Chairman in 2001. That review led the Commission to shift 
its focus to the adverse consequences of the use and misuse of 
sensitive consumer information. Consequently, the Commission launched 
the National Do Not Call Registry and filed several cases involving 
failure to protect sensitive personal information.
---------------------------------------------------------------------------
    \37\ Stephanie Clifford, FTC: Has Internet Gone Beyond Privacy 
Policies?, N.Y. Times, Jan. 11, 2010.
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    The consequences model remains a powerful basis for guiding FTC 
privacy policy. Under that model, the Commission can protect consumers' 
subjective preferences for anonymity, just as it protects subjective 
preferences for products that are ``Made in America.'' (Advertising 
misrepresenting that a product is made in America would violate the FTC 
Act. Moreover, customs and tariff rules may require disclosure of 
origin information for reasons unrelated to consumer 
misrepresentation.) For the Commission to protect consumer preferences, 
however, they must be preferences that are actually reflected in 
marketplace behavior. Subjective preferences only can be known from 
consumer behavior in the marketplace. They cannot be inferred from 
survey results if consumers can ignore the consequences of their own 
answers. Precisely because they are subjective, we cannot infer that 
because some consumers care about a particular attribute that such an 
attribute is worth the costs to others.
    The question is one of approach. Of course, the Commission should 
protect known subjective consumer preferences, whether for products 
made in America or for privacy. Such preferences are important drivers 
of a market economy. It is another thing altogether, however, to argue 
that because some consumers have a preference, the Commission should 
require all sellers to satisfy that preference. That argument is simply 
wrong. Assuring the accuracy of claims that a product is made in 
America enhances consumer sovereignty--it lets consumers choose what 
matters to them and what does not. Requiring all sellers to offer 
American-made products--or even to disclose that their products are not 
made in America--is another matter altogether. It imposes the costs of 
admittedly real preferences of some on many who do not share them. The 
fact that a particular product characteristic, whether related to 
privacy or product attributes, is important to me is a very good reason 
for protecting affirmative claims about that characteristic. It is a 
very bad reason for imposing that preference on everyone else.
    For consumers who independently value anonymity, an opt-out regime 
protects them because for these consumers, the benefits of opting out 
exceed the minimal costs.\38\ Consumers who are willing to opt out 
reveal that they, in fact, have a preference for anonymity.
---------------------------------------------------------------------------
    \38\ Of course, the ability to opt out should be prominently 
disclosed and easy to use.
---------------------------------------------------------------------------
    An opt-in regime, however, does not reveal consumer preferences in 
the same way. Because most consumers apparently think that little is at 
stake in deciding whether to allow information sharing, they are not 
willing to incur even small costs to exercise choice. Therefore, an 
opt-in regime will protect ``privacy'' on which they place little 
value, while denying them the benefits of information sharing--
including, perhaps, some of the Internet content they desire.
    Opt-out is clearly superior to opt-in in this context. It protects 
those who care about preserving anonymity in commercial transactions, 
while allowing the benefits of information sharing and advertiser-
supported content for those who do not care. An FTC decision to require 
opt-in for behavioral advertising would adversely affect consumers and 
their use of the Internet.
D. Endorsements and Testimonials
    Many advertisers use testimonials from satisfied customers to tout 
the product's benefits. The available evidence indicates that consumers 
discount the performance claimed in testimonials. Most consumers 
believe that their results will differ from those claimed and that a 
variety of factors influence the results they will achieve.\39\
---------------------------------------------------------------------------
    \39\ See Comments Of Kelley Drye & Warren On The Commission's 
Guides Concerning The Use Of Endorsements And Testimonials In 
Advertising, In re Guides Concerning the Use of Endorsements and 
Testimonials in Advertising, Commission File No. P034520 (Mar. 2, 
2009), available at http://www.ftc.gov/os/comments/endorsementguides2/
539124-00016.pdf.
---------------------------------------------------------------------------
    In 1972, the Commission published Guidelines for endorsements and 
testimonials that have provided valuable guidance to advertisers using 
such techniques.\40\ Nevertheless, there were some problems that were 
apparent in certain testimonial advertising. For example, testimonials 
were frequently used for essentially fraudulent products with a 
ritualistic disclaimer that the results were not typical. Such a 
disclaimer should not protect fraud. A second problem occurs when the 
testimonials, even for non-fraudulent products, portray results that 
are so extreme that almost no one will realize them.
---------------------------------------------------------------------------
    \40\ FTC Guides Concerning the Use of Endorsements and Testimonials 
in Advertising, 16 C.F.R.  255 (1980).
---------------------------------------------------------------------------
    Rather than narrowly addressing these problems, the revised 
Guidelines the Commission recently issued are overbroad.\41\ The 
changes have created confusion among advertisers, endorsers, 
celebrities, bloggers, and the media regarding what conduct complies 
with Section 5 of the FTC Act. Accompanying this confusion is the fear 
that the Commission may soon have the power to impose civil penalties 
the first time it decides an advertiser failed to follow its guidance.
---------------------------------------------------------------------------
    \41\ Guides Concerning the Use of Endorsements and Testimonials in 
Advertising, 16 C.F.R. pt. 255 (Dec. 1, 2009).
---------------------------------------------------------------------------
    Contrary to consumer expectations, the tendency at the Commission 
now is to treat a testimonial as a representation of the average or 
typical performance that consumers can expect.\42\ If advertisers meant 
to communicate that the results in a testimonial were those that most 
people receive, they could say so directly, and thereby avoid the 
discounting that consumers apply to claims made in testimonials.
---------------------------------------------------------------------------
    \42\ David C. Vladeck, Director, Bureau of Consumer Protection, 
Federal Trade Commission, A Look Forward With the FTC: Advertising and 
Marketing Enforcement Challenges (Feb. 3, 2010).
---------------------------------------------------------------------------
    An additional problem with the new Guidelines involves 
``endorsers,'' especially those in the new media, such as bloggers. The 
Commission warned advertisers that they would be responsible for media 
over which they had no control:

        An advertiser's lack of control over the specific statement 
        made via these new forms of consumer-generated media would not 
        automatically disqualify that statement from being deemed an 
        ``endorsement'' within the meaning of the Guides.\43\
---------------------------------------------------------------------------
    \43\ Guides Concerning the Use of Endorsements and Testimonials in 
Advertising, Overview of the Commission's Review of the Guides (Dec. 1, 
2009), available at http://www.ftc.gov/os/2009/10/
091005endorsementguidesfnnotice.pdf.
---------------------------------------------------------------------------
    After severe criticism in the blogosphere, the Commission has 
sought to temper the implications of this statement. Although company 
sponsorship and support of blogs raise different issues, merely 
providing free samples of a product to a blogger should not render the 
manufacturer liable for the blogger's conclusions. There is no reason 
to think that product reviews online are any different from a book or 
movie review for which the reviewer did not pay for the product.
4. Magnuson-Moss Procedures Should Be Retained \44\
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    \44\ Although within the Commission these procedures are uniformly 
referred to as ``Magnuson-Moss,'' in fact, the procedures are contained 
within Title II of the Magnuson-Moss Warranty--Federal Trade Commission 
Improvement Act of 1975. Only Title I involved the Magnuson-Moss 
Warranty Act, but I use here the conventional designation of Magnuson-
Moss procedures.
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    Proposals to expand the Commission's rulemaking authority should be 
considered in the historic context of the Commission's purpose and 
mission.
A. The Role of FTC Rulemaking
    As I discussed above, the Commission has relied on the development 
of common law principles, supplemented with occasional rules and 
guides. The cornerstone of the FTC's consumer protection mission is the 
fraud program, discussed in more detail below, through which the 
Commission has returned hundreds of millions of dollars to defrauded 
consumers.
    Although many do not think of them as such, these common law 
principles are rules, providing a crucial part of the institutional 
framework that helps our market economy to function. In most 
circumstances, these common law rules provide both clear guidance to 
the business community and an adequate basis for FTC enforcement 
actions.
    The common law process is well suited to develop new policy. For 
example, the Commission has used this process to formulate general 
rules to protect the security of sensitive consumer information. Using 
both its deception and unfairness authority, the Commission has brought 
cases addressing information security, as the growth of the Internet 
and new technologies have created new vulnerabilities. Attempting to 
write a rule defining the scope of liability in advance could have 
stymied the natural development of this common law process, leading to 
uncertain results.\45\
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    \45\ Although the FTC promulgated the Safeguards Rule at the same 
time as it was initiating information security cases, the rule was 
primarily useful in establishing a structure for remedies. Adopted 
under GLB, the rule set out a flexible, process-oriented approach to 
providing information security. Because Congress had specified 
liability for financial institutions that failed to protect sensitive 
information, the rule did not require a theory of who was liable under 
Section 5 and under what circumstances. Those theories were developed 
through the common law process in individual cases, and most of the 
Commission cases have involved industries not covered by GLB.
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    Rules seeking to address fraudulent or other practices often are 
very difficult to write. Unlike the Federal Communications Commission, 
the Securities and Exchange Commission, or other regulatory bodies, the 
FTC is not a sector-specific regulator. Thus, the agency generally 
lacks industry-specific knowledge, expertise, and routine contacts with 
regulated entities and congressional committees with jurisdiction over 
those industries.\46\ Instead, in its law enforcement experience, the 
Commission deals with pathology. It is familiar with bad actors, who 
have demonstrated their unwillingness to comply with basic legal 
principles.
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    \46\ Of course, the agency and its staff have become quite 
knowledgeable about certain sectors of the American economy, including, 
for example, the downstream parts of the oil industry, certain aspects 
of health care, and credit reporting agencies. For credit reporting 
agencies, the FTC is the regulator, and pursuant to the FACT Act, has 
promulgated numerous rules in the last few years. These rules, and many 
others, were promulgated pursuant to congressional direction.
---------------------------------------------------------------------------
    By their nature, however, rules also must apply to legitimate 
actors, who actually deliver the goods and services they promise. 
Remedies and approaches that are entirely appropriate for bad actors 
can be extremely burdensome when applied to legitimate businesses, and 
there is usually no easy or straightforward way to limit a rule to 
fraud. Rather than enhancing consumer welfare, overly burdensome rules 
can harm the very market processes that serve consumers' interests. For 
example, the Commission's initial proposal for the Telemarketing Sales 
Rule was extremely broad and burdensome, and one of the first acts of 
the Pitofsky Commission was to narrow the rule.\47\ More recently, the 
Commission found it necessary to re-propose its Business Opportunity 
Rule, because the initial proposal would have adversely affected 
millions of self-employed workers.\48\
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    \47\ Telemarketing Sales Rule, 60 Fed. Reg. 8313 (Feb. 14, 1995) 
(codified at 16 C.F.R. pt. 310 (1995)).
    \48\ Business Opportunity Rule, 73 Fed. Reg. 16110 (Mar. 26, 2008).
---------------------------------------------------------------------------
    Of course, rulemaking can be appropriate. For example, the 
Commission sometimes can provide ``rules of the game'' that reduce 
consumer harm in the future. The Commission can establish new default 
rules and procedures for transferring rights when it is otherwise 
difficult to do so. Thus, the Commission's Mail Order Rule provides 
that, unless the parties agree otherwise, the merchandise must be 
delivered within 30 days. While seeking to facilitate the exercise of 
consumer choice, the agency also is highly cognizant of the need to 
avoid unduly shackling market forces.\49\ For example, this balance 
undergirds the FTC's approach to unsolicited telemarketing calls, 
through which consumers decide whether or not they wish to receive such 
calls and express their preferences effectively through the Do Not Call 
Registry. Once these new rules of exchange are established, if 
transaction costs are low, parties can more easily transfer these 
rights when a different allocation is important to them.\50\
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    \49\ See, e.g., Comment of the Staff of the FTC before the 
Department of Health and Human Services Food and Drug Administration, 
In re Food Labeling: Health Claims; Dietary Guidance, Docket No. 2003-
0496 (Jan. 26, 2004), available at http://www.ftc.gov/os/2004/
040126fdacomments.pdf.
    \50\ See Ronald H. Coase, The Problem of Social Cost, 3 J. L. & 
Econ. 1, 15-16 (1960) (``Once the costs of carrying out market 
transactions are taken into account it is clear that such a 
rearrangement of rights will only be undertaken when the increase in 
the value of production consequent upon the rearrangement is greater 
than the costs which would be involved in bringing it about.'').
---------------------------------------------------------------------------
    It would be a major mistake for rulemaking to be a substantial 
component of FTC consumer protection. The FTC went down this road once 
before, with disastrous consequences. In the 1970s, using its 
unfairness authority under Section 5 without meaningful standards, the 
Commission embarked on a vast enterprise to transform entire 
industries. Over a 15-month period, the Commission issued a rule a 
month, usually without a clear theory of why there was a law violation, 
with only a tenuous connection between the perceived problem and the 
recommended remedy, and, at best, a shaky empirical foundation.\51\ 
This enterprise foundered because of the internal inadequacies of the 
Commission's procedures and because of intense opposition from both 
parties in Congress.
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    \51\ For similar criticisms of the FTC's rulemaking binge, see the 
extensive, contemporaneous studies by Barry Boyer, Report to the 
Administrative Conference of the U.S., Trade Regulation Rulemaking 
Procedures of the Federal Trade Commission (1979); and Teresa Schwartz, 
Regulating Unfair Practices Under the FTC Act: The Need for a Legal 
Standard, 11 Akron L. Rev. 1 (1977). See also Timothy J. Muris, Rules 
Without Reason--The Case of the FTC, 6 Regulation 20 (Sept./Oct. 1982).
---------------------------------------------------------------------------
    As it did before, the FTC will fail in its mission to protect 
consumers if it seeks to become the second most powerful legislature in 
Washington. This is surely an unsuitable task for five unelected 
representatives, not closely supervised by the White House or a Cabinet 
department.
    Regardless of the procedures, rulemaking is a resource-intensive 
activity that inevitably draws resources away from enforcement. While I 
was Chairman, the agency was pursuing subprime lending cases involving 
failure to disclose adequately key terms of the transaction. In 2005, 
however, as more and more dubious loans were made, the agency diverted 
substantial resources to rulemakings to implement the FACT Act. The FTC 
asked for rulemaking authority in one narrow area (risk-based pricing); 
it ended up with statutory mandates for more than a dozen separate 
rules and studies. Whatever their value, those rules and studies 
consumed resources the Commission could have productively employed on 
cases.
B. Magnuson-Moss Procedures Are Appropriately Tough, But Usable
    Rulemaking is an exercise in generalization. The FTC should 
determine whether a problem occurs often enough to justify a rule, 
whether the problem has a common cause in a sufficient number of cases 
to justify the remedy, and whether that remedy can correct the problem 
without imposing excessive costs. Because the FTC cannot generalize 
simply from its own experiences or from the horror stories of others, 
it should rely on projectable evidence such as surveys of consumers and 
econometric studies of industry behavior.
    The Magnuson-Moss procedures force the Commission to be clear about 
its theories and focus its evidence on the key questions. Otherwise, 
the procedures can make the rulemaking almost interminable, as Chairman 
Leibowitz recently testified.\52\ The ability of rulemaking 
participants to propose disputed factual issues and cross-examine 
witnesses on those issues the presiding officer designates as disputed 
is very useful in testing the Commission's theories. Properly focused, 
Magnuson-Moss procedures are workable.
---------------------------------------------------------------------------
    \52\ Financial Services and Products: The Role of the Federal Trade 
Commission in Protecting Consumers Before the Senate Comm. On Commerce, 
Science, & Transportation, 110th Cong. (2010) (Statement of the Federal 
Trade Commission).
---------------------------------------------------------------------------
    The Commission's recent experience in the Business Opportunity 
Rulemaking is a reminder of the useful aspects of the Magnuson-Moss 
procedures. The Commission proposed a wide-ranging rule, apparently 
aimed at fraud, but that instead would have adversely affected millions 
of self-employed workers and the consumers they serve. Based on the 
public comments and the need to proceed under Magnuson-Moss, the 
Commission has now sensibly proposed a much more targeted rule that 
addresses fraud without regulating legitimate businesses.\53\ Although 
the Commission may have retreated without the threat of hearings and 
cross examination, those threats undoubtedly helped to influence the 
Commission's deliberations.
---------------------------------------------------------------------------
    \53\ Business Opportunity Rule supra note 48.
---------------------------------------------------------------------------
    The FTC has successfully used Magnuson-Moss Rulemaking in the past. 
Several of the rules proposed in the 1970s were eventually promulgated. 
Some rules, like the two involving eyeglasses, were well conceived 
initially and concluded expeditiously. More recently, the Commission 
has used these procedures to amend the Franchise Rule.
    The Commission's most prominent rulemaking endeavor, the creation 
of the National Do Not Call Registry, could have proceeded in a timely 
fashion under Magnuson-Moss procedures. It took 2 years from the time 
the rule was first publicly discussed until it was implemented. 
Although it would have been necessary to structure the proceedings 
differently, there would have been little, if any, additional delay 
from using Magnuson-Moss procedures.
C. Magnuson -Moss Procedures Should Be Retained \54\
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    \54\ The Administration's proposal would do more than just change 
the procedures used in rulemaking. It also would eliminate the 
requirement that unfair or deceptive practices must be prevalent, and 
eliminate the requirement for the Commission's Statement of Basis and 
Purpose to address the economic effect of the rule. It also changes the 
standard for judicial review, eliminating the court's ability to strike 
down rules that are not supported by substantial evidence in the 
rulemaking record taken as a whole. The current statutory restrictions 
on Commissioners' meeting with outside parties and the prohibition on 
ex parte communications with Commissioners also are eliminated. These 
sensible and important protections should be retained.
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    The problems that resulted from FTC rulemaking in the 1970s are not 
just that the agency needed ``better'' regulators. Instead, the problem 
is one of incentives and constraints. We are entering a period of 
unusual consumer activism. Numerous groups are pressing the Commission 
for immediate action, whether or not the proposal is well considered. 
In the short run, Congress may push hard for action as well. Without 
the constraints of the Magnuson-Moss procedures, the potential for 
mischief and long run harm to the Commission and to consumers is 
enormous. Although Congress and the courts may eventually restrain the 
Commission, it would be far better to avoid these costs from the 
beginning.
    It is true that part of the problem from the 1970s has been 
addressed with the Commission's adoption of the Deception Policy 
Statement and the codification of the definition of unfairness. 
Nonetheless, the Commission's authority remains extremely broad. The 
procedural safeguards of Magnuson Moss create a strong need for the 
Commission to develop clear theories and strong incentives to develop a 
firm evidentiary base early in the rulemaking proceeding. When these 
requirements are met, Magnuson Moss rulemaking is workable.
    In some areas, the FTC has engaged in rulemaking, pursuant to 
congressional direction, using APA procedures. Congressional directives 
avoid a significant part of the problems that bedeviled the FTC in the 
1970s, as they provide explicit political ``cover'' for the specific 
rulemaking at issue. That cover may subside, however, as the political 
tides shift or as the specific parameters of the proposal prompt fierce 
industry resistance. Moreover, congressional directives often remove 
the question of what constitutes a violation, which proved to be one of 
the most contentious issues of many 1970s rulemakings. Even with 
congressional authorization, I would retain Magnuson-Moss procedures 
when a rulemaking is major and when Congress has not specifically 
defined the violation.
5. Broad Expansion of FTC Civil Penalty Authority Is Unwise
A. Automatic Civil Penalties Are Both Unnecessary and Harmful
    In most of its consumer protection matters for which monetary 
relief is appropriate, the FTC already has authority to obtain money. 
Using the extraordinary equitable powers of Federal district courts, 
the Commission routinely obtains ex parte asset freezes, injunctions, 
and redress for consumers. The Commission also can obtain disgorgement 
of ill-gotten gains, and in its fraud program, discussed in detail 
below, the Commission has used these powers extensively, and 
successfully.
    The Commission also has used these equitable remedies to recover 
substantial sums from legitimate companies that engaged in significant 
violations of the law. Moreover, the money recovered usually is paid as 
redress to consumers injured by the illegal conduct, rather than to the 
Treasury. For example, the agency obtained significant financial 
recoveries in many of its subprime lending cases, including $215 
million from Citigroup \55\ and $60 million from Famco.\56\ It obtained 
substantial monetary relief in the form of restoring inadequately 
disclosed fees in its gift card cases.\57\ And just last week it 
obtained $12 million in refunds for consumers to settle allegations of 
deceptive advertising of identity theft protection services.\58\
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    \55\ Order, FTC v. Citigroup Inc., No. 01 CV-0606 (N.D. Ga. Sept. 
19, 2002).
    \56\ Order, FTC v. First Alliance Mortgage Co., No. SACV 00-964 
(C.D. Cal. Mar. 21, 2002).
    \57\ E.g., FTC Order, In re Kmart Corp., No. 062 3088 (Mar. 12, 
2007); FTC Order, In the Matter of Darden Restaurants, Inc., et al., 
No. 062 3112 (Apr. 3 2007).
    \58\ Order, FTC v. Lifelock, Inc., (D. Ariz., Mar. 9, 2010).
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    The Commission should not, however, have the authority to obtain 
civil penalties in all cases. Faced with the threat of substantial 
civil penalties, firms may become too cautious to avoid any possibility 
of a law violation. The statutory cap on penalties at $16,000 per 
violation may not sound huge, but the way the FTC counts violations 
magnifies the impact. In one case, for example, the court regarded each 
instance of a direct mail advertisement sent to consumers as a separate 
violation.\59\ It is easy to argue that a separate violation occurs 
each time an advertisement containing a deceptive claim is aired 
(ordinarily hundreds or thousands of times in a campaign); it is 
plausible to argue that each consumer who sees the message constitutes 
a separate violation. Thus, a direct-mail advertising campaign sent to 
10 million consumers is potentially subject to a civil penalty of up to 
$160 billion. In practice, FTC civil penalties are obviously far 
smaller, but the potential for substantial liability may lead cautious 
firms to avoid conduct that would actually benefit consumers.
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    \59\ U.S. v. Reader's Digest Ass'n, 662 F.2d 955, 960 (3d Cir. 
1981).
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    Consider, for example, advertising cases. As discussed above, the 
economic evidence is clear that advertising offers important benefits 
for consumers. When advertising is restricted, prices rise because 
markets are less competitive. There is less incentive for product 
improvements, because producers find it more difficult to tell 
consumers about the change and to explain the benefits of the product 
change. Differences between demographic groups are larger, because 
advertising makes information widely available to everyone in a form 
that is remarkably easy to use.
    If the risk of substantial civil penalties makes advertisers too 
careful about providing information, these benefits of advertising may 
be reduced. There are, of course, advertising violations that are 
crystal clear, and as noted above, the Commission has obtained monetary 
relief in such cases. Many cases, however, are judgment calls about 
whether admittedly imperfect evidence is sufficient to substantiate a 
particular claim. Such cases may turn on disagreements between 
qualified experts, with different views about the state of the science 
or the appropriate methods for testing a particular claim. Civil 
penalty liability may make advertisers considerably less willing to 
make such claims, because the consequences of agreeing with the wrong 
expert could be large. Consumers, however, will benefit from hearing 
different points of view from different products, or from products in 
different categories, enabling them to make their own choices about 
which expert to believe. The risk of large civil penalty liability may 
discourage that marketplace debate.
    Obviously, we do not want companies to stretch the truth when doing 
so would be profitable. But it should be equally obvious that we also 
do not want companies to suppress the truth to avoid the risk that the 
FTC will second guess their judgment and impose civil penalties. If the 
claims are egregious, the Commission already has ample authority to 
seek financial sanctions against violators, and has done so 
successfully.
    A second difficulty of across-the-board civil penalty authority 
stems from the Commission's role in developing and extending common law 
principles. The case-by-case process is well suited to developing new 
policy, and the Commission has used it effectively to develop common 
law principles of consumer protection in new areas. For example, the 
Commission recently formulated general rules to protect the security of 
sensitive consumer information. Using both its deception and unfairness 
authority, the Commission has brought numerous cases in this century 
addressing information security.\60\
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    \60\ See, e.g., FTC Order, Eli Lilly & Co., No. C-4047 (May 8, 
2002) (deception); FTC Order, Microsoft Corp., No.C-4010 (May 15, 2001) 
(deception); FTC Order, BJ's Wholesale Club, Inc., No. C-4148 (Sept. 
20, 2005) (unfairness); FTC Order, Cardsystems Solutions, Inc., No. C-
4168 (Sept. 5, 2006) (unfairness).
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    Before the Commission began pursuing information security cases, 
companies were not on notice that failure to maintain reasonable and 
appropriate security precautions to protect sensitive information would 
subject them to liability, let alone to civil penalty liability. The 
fact that the Commission lacks the authority to impose civil penalties 
in such cases makes it easier to establish new legal principles, 
because it encourages both the Commission and the respondent to focus 
on reasonable standards for future conduct.\61\ Indeed, the vast 
majority of the Commission's efforts to expand consumer protection to 
new areas occur through consent agreements. For example, virtually none 
of its information security cases have been litigated. Civil penalty 
liability would increase a company's incentive to defend the choices it 
had made, even when it is perfectly willing to agree to new standards 
of conduct.\62\ This result would retard, rather than advance, the 
Commission's important mission of developing appropriate standards of 
consumer protection in areas it has not previously addressed. It would 
waste resources in litigation about past conduct that would be better 
spent on establishing appropriate standards for future behavior.
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    \61\ Of course, the Commission could decide not to seek civil 
penalties, but doing so when such penalties are available would subject 
the agency to serious second-guessing by Congress, the press, and 
consumer groups.
    \62\ As the General Counsel of the respondent in one information 
security case expressed it, the company was willing to be a martyr for 
privacy, but did not want to be Joan of Arc.
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    Given that the FTC's information security standards are now well 
known (although there are of course disputes at the margin), there may 
be a case for civil penalty authority in such cases, because 
establishing either harm (and therefore the basis for consumer redress) 
or ill-gotten gain is difficult. In fact, the Commission has only 
rarely obtained financial relief in its information security cases.\63\ 
If there is a case for civil penalties, however, it is a narrow one, 
based on the nature of the particular violation, and not at all 
generalizable to most Section 5 violations.
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    \63\ See U.S. v. ChoicePoint Inc., No. 1:06-cv-0198-JTC (N.D. Ga. 
Oct. 14, 2009).
---------------------------------------------------------------------------
    It is crucial to recognize that the Commission's ability to impose 
sanctions is not the only consequence for companies subject to FTC 
orders. Even before the FTC obtained financial relief in advertising 
cases, academic studies found that an FTC complaint about deceptive 
advertising led to a significant reduction in the stock market's 
valuation of the company. Peltzman, for example, found a 1 to 2 percent 
reduction in the stock market valuation of a company in the month 
before an FTC deceptive advertising complaint, and an additional 2 
percent loss in the month after a complaint.\64\ FTC economists found 
an even larger effect.\65\ These losses are themselves a substantial 
deterrent to violating the FTC Act. As Peltzman noted, ``the overall 
message of the results is that the salary of the copywriter or lawyer 
who avoids entanglement with the FTC in the first place is a bargain.'' 
\66\
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    \64\ Sam Peltzman, The Effects of FTC Advertising Regulation, 24 
J.L & Econ. 403 (1981) (``The story the stock market appears to be 
telling is that an FTC complaint implies essentially a wiping out of 
the brand's advertising capital.'').
    \65\ Alan Mathios & Mark Plummer, The Regulation of Advertising by 
the FTC: Capital Market Effects, 12 Res. L. & Econ. 77 (1989).
    \66\ Peltzman note 63 at 419.
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    Since these studies, other players able to impose significant 
financial penalties have also entered the scene. Class actions under 
state deceptive practices laws, virtually nonexistent when the academic 
studies were done, have increased substantially, and continue to grow. 
State attorneys general often also weigh in, and frequently seek 
monetary relief.
    There is simply no reason to suspect that widespread violations by 
legitimate companies subject to the Commission's jurisdiction are 
occurring or will occur because of inadequate financial sanctions. The 
Commission has not offered any persuasive examples of why it needs 
automatic civil penalty authority.
B. Civil Penalties Are Not Needed For Fraud Cases
    Preventing fraud is a crucial part of the Commission's support of 
the market system and the common law. More than half of the 
Commission's budget and staff is devoted to consumer protection, with a 
significant focus on fraud. Fraud is essentially theft. Fraud distorts 
market forces, limiting the ability of consumers to make informed 
choices. Fraud leads to inefficiency, causing consumers to allocate 
their resources unproductively. Fraud also reduces consumer confidence 
and reduces the efficacy of legitimate advertising, diluting the amount 
of useful information to guide consumers' choices. This effect also 
raises costs for legitimate competitors, who must offer more assurances 
of performance to overcome consumers' wariness.
    The costs of fraud to consumers are enormous. Fraud takes many 
forms from fraudulent credit repair services, to unauthorized billing, 
to deceptive weight loss products. A 2007 FTC survey showed that an 
estimated 13.5 percent of U.S. adults, approximately 30.2 million 
consumers, were victims of one or more of the frauds covered in the 
survey, and that an estimated 48.7 million incidents of these frauds 
had occurred during the previous year.\67\
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    \67\ FTC Staff Report, Consumer Fraud in the United States: The 
Second FTC Survey s-1 (Oct. 2007) available at http://www.ftc.gov/opa/
2007/10/fraud.pdf.
---------------------------------------------------------------------------
    The victims of fraud are as varied as the form of the fraud. For 
example, the AARP has shown that investment fraud victims are more 
likely to be male, 55-61, more financially literate, college-educated, 
higher income, and more optimistic.\68\ Lottery fraud victims are more 
likely to be female, over 70 years old, less financially literate, less 
educated, and have lower incomes.\69\
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    \68\ FTC Fraud Forum, Presentation, Day One: Panel 1 (Doug Shadel, 
State Director, AARP Washington, Advances in Fraud Prevention 
Research), at slide 31 (Feb. 25, 2009), available at http://
www.ftc.gov/bcp/workshops/fraudforum/index.shtm#presentations.
    \69\ Id. at slide 32.
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    Because fraud is often national in scope, and scarce Federal 
criminal law enforcement resources are used primarily against drug 
trafficking, terrorism, and other crimes, fraud will go largely 
unchecked without the active leadership of the Nation's consumer 
protection agency. We created the FTC's modern anti-fraud program in 
1981 when I was Director of the Bureau of Consumer Protection. The 
development of a vibrant anti-fraud program at the FTC is a major 
success story. Fortunately, the legal tools for such a program already 
existed; in 1973, Congress had amended the FTC Act in Section 13(b) to 
allow the Commission to sue in Federal district court and obtain strong 
preliminary and permanent injunctive relief, including redress for 
defrauded consumers.\70\
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    \70\ The Commission uses the ``second proviso'' of  13(b), ``in 
proper cases the Commission may seek, and after proper proof, the court 
may issue, a permanent injunction.'' Trans-Alaska Pipeline 
Authorization Act, Pub. L. No. 93-153,  408(f), 87 Stat. 576 (1973). 
See, e.g., John Villafranco, Looking Back on the Muris Years in 
Consumer Protection: An Interview With Timothy J. Muris, Antitrust 80, 
82-83 (Summer 2004).
---------------------------------------------------------------------------
    Before the shift to Federal court, the Commission's consumer 
protection work relied on its administrative process. Most 
investigations relied upon voluntary production of requested documents 
and information from the investigated targets, who had every incentive 
to delay. This process had obvious drawbacks for addressing fraud. 
Federal district court cases proved much more effective, enabling the 
Commission to bring fraudulent schemes to an immediate halt, to take 
the targets by surprise so that money might be available for redress, 
and to prevent destruction of records showing the extent of the fraud 
and identifying injured parties.
    Almost from the inception of the  13(b) program, the Commission 
has not only halted fraudulent schemes, but also pursued consumer 
redress and other potent equitable remedies to benefit consumers. Very 
early in the  13(b) consumer protection cases, the Commission 
obtained, as ancillary to issuance of permanent injunctions, 
provisional remedies such as a freeze of assets, expedited discovery, 
an accounting, and the appointment of a receiver on the ground that 
these remedies would insure the effectiveness of any final injunction 
ordered.\71\
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    \71\ FTC v. H.N. Singer, Inc., 668 F.2d 1108 (9th Cir. 1982) is a 
seminal case establishing the Commission's authority to seek, and the 
district courts' power to grant, all the traditional equitable remedies 
inherent in the authority granted by  13(b) to obtain permanent 
injunctions. Singer was the first  13(b) case to attack a business 
opportunity scam.
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    To use this approach effectively, the agency employed modern 
investigative techniques geared for speed and stealth. The agency also 
developed professional investigators trained to uncover fraudulent 
schemes, determine ownership and control of such schemes, trace assets, 
develop evidence, preserve evidence for trial, and testify in court. 
More recently, Commission investigators have become experts in Internet 
investigative techniques and have provided training for thousands of 
local, state, Federal, and international criminal and civil law 
enforcement offices.
    Once launched, the fraud program grew in importance and success. 
Each succeeding FTC Chairman has expanded its scope and improved its 
operation. By 2004, when my tenure as Chairman ended, there had been a 
total of 78 sweeps, resulting in 2,200 law enforcement actions.\72\ Not 
surprisingly, as the number of filings increased, so has the amount of 
consumer redress ordered. In Fiscal Year 2003, for example, nearly $873 
million in consumer redress was ordered in 98 judgments.\73\
---------------------------------------------------------------------------
    \72\ David R. Spiegel, Chasing the Chameleons: History and 
Development of the FTC's 13(b) Fraud Program, 18 Antitrust 43 (Summer 
2004).
    \73\ FTC, Federal Trade Commission Performance Report--Fiscal Year 
2003 (Mar. 2004).
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    Because of the ability to obtain consumer redress, and because 
virtually all of the money paid to the fraudsters is obtained illegally 
and thus eligible for redress, the FTC already has the authority to 
obtain all of the monetary relief available in these cases. The 
effective limit on the FTC's ability to recover money in cases of fraud 
is the money available, not any lack of authority to recover the funds. 
Expanded civil penalty authority is simply unnecessary in fraud 
cases.\74\
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    \74\ Many fraudsters should be jailed, and the Commission also has 
taken important steps to improve its cooperation with criminal law 
enforcement agencies. While Chairman, we established a Criminal Liaison 
Unit to coordinate with criminal law enforcement agencies across the 
country to encourage criminal prosecution of consumer fraud. The unit 
identifies criminal law enforcement agencies that may bring specific 
types of consumer fraud cases, educates criminal law enforcers in areas 
of FTC expertise, coordinates training with criminal authorities to 
help the FTC prepare cases for referral and parallel prosecutions, and 
provides Special Assistant United States Attorneys to help prosecute 
the worst FTC Act violators. Between October 1, 2002, and July 31, 
2007, 214 individuals were indicted in telemarketing fraud cases 
resulting from referrals from the Criminal Liaison Unit. (Prepared 
Statement of The Federal Trade Commission Before the Senate Committee 
on Commerce, Science and Transportation, U.S. Senate, July 31, 2007, 
available at http://www.ftc.gov/os/testimony/P034412telemarket.pdf.)
    Another important expansion of the FTC's consumer protection 
efforts involves Spanish language media. The agency uses its full 
powers to prosecute fraud and deception occurring in the media, and has 
brought numerous cases against fraud and other illegal marketing 
practices that targeted the Hispanic community. That effort continues.
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C. Automatic Civil Penalties Are Unnecessary in Antitrust Cases
    Although largely unnoticed, this committee's reauthorization bill 
in the last Congress and the House-passed version last year also would 
allow for automatic civil penalties in antitrust cases. The Senate 
Commerce Committee did so by its express terms.\75\ At first glance, 
the House bill does not appear to do so, because it provides for civil 
penalties only in cases involving ``unfair or deceptive acts or 
practices.'' Within the FTC, antitrust cases are traditionally thought 
of as involving ``unfair methods of competition.'' Yet, there is no 
prohibition, legal or otherwise, that prevents the agency from 
designating antitrust cases as involving ``unfair or deceptive acts or 
practices,'' and, in fact, the Commission has recently done so in its 
actions against Negotiated Data Solutions and Intel.\76\ Moreover, the 
FTC has proposed unfair acts or practices rules involving practices 
most practitioners would regard as antitrust issues, including 
restraints on advertising and restrictions on the form of operations 
businesses could take.\77\
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    \75\ FTC Reauthorization Act of 2008, S. 2831, 110th Cong. (2008) 
(``The Commission may commence a civil action to recover a civil 
penalty in a district court of the United States against any person, 
partnership, or corporation which violates this Act . . ..'').
    \76\ FTC Order, Negotiated Data Solutions, No. C-4234 (Sept. 22, 
2008); FTC Order, Intel Corp., No. 9341 (Jan. 19, 2010).
    \77\ Advertising of Ophthalmic Goods and Services, 43 Fed. Reg. 
23992 (June 2, 1978); (``Eyeglasses I''); Ophthalmic Practice Rules, 54 
Fed. Reg. 10285 (Mar. 13, 1989) (``Eyeglasses II'') (the rule regarding 
advertising restrictions was mooted when the Supreme Court protected 
such advertising under the First Amendment of the U.S. Constitution. 
The D.C. Circuit struck down the commercial practices rule for reasons 
unrelated to the antitrust/consumer protection distinction) (see Am. 
Optometric Ass'n v. FTC, 626 F.2d 896 (D.C. Cir. 1980)).
---------------------------------------------------------------------------
    Automatic civil penalties in antitrust cases are both unnecessary 
and unwarranted. Indeed, a unanimous FTC explicitly stated in 2003 that 
monetary relief (in the form of disgorgement) was inappropriate for 
most of its antitrust cases.\78\ The FTC said that it would ``continue 
to rely primarily on more familiar, prospective remedies,'' \79\ and 
would not seek monetary relief when it would result in injured persons 
receiving duplicative recoveries or cause defendants to make multiple 
payments for the same injury. As the agency stated: ``although a 
particular illegal practice may give rise both to monetary equitable 
remedies and to damages under the antitrust laws, when an injured 
person obtains damages sufficient to erase an injury, [the FTC does] 
not believe that equity warrants restitution to that person.'' \80\ 
Because private, treble actions follow most FTC antitrust cases, 
monetary relief is simply unnecessary as a routine part of the FTC's 
antitrust arsenal.
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    \78\ Federal Trade Commission, Policy Statement on Monetary 
Equitable Remedies in Competition Cases, 68 Fed. Reg. 45,820 (Aug. 4, 
2003).
    \79\ Id.
    \80\ Id.
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6. Congress Should Restore Equality Between FTC and DOJ Merger 
        Standards
    Both the FTC and the DOJ enforce Section 7 of the Clayton Act,\81\ 
which determines the legality of mergers. Mergers or acquisitions of a 
certain size \82\ (and not subject to an exemption) must be notified to 
the FTC and the DOJ, and the parties must observe a waiting period, 
prior to consummation of the transaction. Either the FTC or the 
Antitrust Division of the Department of Justice (but not both) can 
investigate a merger and seek to enjoin it in Federal district court. 
Unfortunately, a few recent court decisions provide the FTC with a 
lower preliminary injunction standard than the standard for the DOJ. 
Because of this lower standard, it is now possible for the FTC to 
obtain a preliminary injunction to block a merger with evidence that 
would be insufficient for the DOJ to obtain the injunction. Because 
most preliminarily enjoined deals cannot, as a practical matter, 
survive the months (much less years) of delay attendant upon an FTC 
administrative proceeding, the FTC's relative ease in obtaining a 
preliminary injunction means that it can permanently foreclose more 
mergers than its counterpart.
---------------------------------------------------------------------------
    \81\ 15 U.S.C.  18.
    \82\ 15 U.S.C.  18(a).
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    This result is fundamentally unfair. Because the FTC and DOJ divide 
merger review between them pursuant to an ad hoc agreement, the 
legality of some mergers today depends not on their underlying merits, 
but instead on which agency reviews them. In other words, the flip of a 
coin (to resolve a dispute between the two agencies over which agency 
should review the merger) could determine whether a merger survives 
antitrust scrutiny.
    Moreover, the FTC's advantage results from a judicial misreading of 
Congressional intent. Under the public interest test the courts apply, 
the DOJ must prove a likelihood of success to obtain a preliminary 
injunction:

        The proper test for determining whether preliminary relief 
        should be granted in a Government-initiated antitrust suit is 
        whether the Government has shown a reasonable likelihood of 
        success on the merits and whether the balance of equities tips 
        in its favor . . . once the Government demonstrates a 
        reasonable probability that  7 has been violated, irreparable 
        harm to the public should be presumed. To warrant that 
        presumption, the Government must do far more than merely raise 
        sufficiently serious questions with respect to the merits to 
        make them a fair ground for litigation.\83\
---------------------------------------------------------------------------
    \83\ U.S. v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980) 
(emphasis added).

    In some circumstances, the DOJ does not need to meet this standard. 
If the DOJ wants to use a lesser likelihood-of-success standard, 
however, it must--like private litigants--prove that the equities are 
strongly in its favor.\84\
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    \84\ See, e.g., United States v. Gillette, 828 F. Supp. 78, 96 
(D.D.C. 1993) (``given the strength of plaintiff's irreparable injury 
argument, plaintiff need only make a lesser showing on likelihood of 
success'' but ``[a]s plaintiff has failed to demonstrate any likelihood 
of success, the court may not enter a preliminary injunction on this 
balance''); United States v. UPM-Kymmene, Oyj, No. 03-2528, 2003 WL 
21781902 (N.D. Ill. July 25, 2003) (describing a sliding scale analysis 
that balances the harm to the parties against the Government's 
likelihood of success).
---------------------------------------------------------------------------
    Once the FTC acquired the right through section 13(b) of the FTC 
Act to seek an injunction against mergers, it was initially held to a 
quite similar standard. Under section 13(b), the FTC is entitled to a 
preliminary injunction ``[u]pon a showing that, weighing the equities 
and considering the Commission's likelihood of ultimate success, such 
action would be in the public interest.'' \85\ As one court commented: 
``The case law Congress codified [in section 13(b) of the FTC Act] . . 
. permits the judge to presume from a likelihood of success showing 
that the public interest will be served by interim relief.'' \86\ Like 
the DOJ, a lesser showing on likelihood of success was held to be 
appropriate only with a ``requisite showing on the equities'': \87\
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    \85\ 15 U.S.C.  53(b).
    \86\ FTC v. Weyerhauser Co., 665 F.2d 1072, 1082 (D.C. Cir. 1981) 
(quoting H.R. Rep. No. 624, at 31 (1973), reprinted in U.S.C.C.A.N. at 
2533).
    \87\ FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229 (D.C. Cir. 
1978) (citing FTC v. Lancaster Colony Corp., 434 F. Supp. 1088 
(S.D.N.Y. 1977)).

        [I]f [the FTC] shows that the newly-minted ``equities'' weigh 
        in its favor, a preliminary injunction should issue if the FTC 
        has raised questions going to the merits so serious, 
        substantial, difficult and doubtful as to make them fair ground 
        for thorough investigation, study, deliberation and 
        determination by the FTC in the first instance and ultimately 
        by the Court of Appeals.\88\
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    \88\ FTC v. Lancaster Colony Corp., 434 F. Supp. 1088 (S.D.N.Y. 
1977) (citing Hamilton Watch Co. V. Benrus Watch Co., 206 F.2d 738, 740 
(2d Cir. 1953)).

    Recent court decisions, however, have reduced the FTC's burdens. 
Under Whole Foods, the FTC can now use the ``serious question'' 
standard without making an equitable showing in its favor. It can 
enjoin a merger simply by demonstrating that there are ``questions 
going to the merits so serious, substantial, difficult, and doubtful as 
to make them fair grounds for thorough investigation.'' \89\ According 
to Judge Brown, this means that the FTC is entitled to a preliminary 
injunction unless it ``entirely failed to show a likelihood of 
success.'' This conclusion departs from the statutory standard and its 
legislative history, which requires the FTC, in the first instance, to 
show likelihood of success. Further, the equitable burden has somehow 
shifted to the merging parties, who now must demonstrate a ``balance 
[of equities] against the FTC'' in order to hold the FTC to a ``greater 
likelihood of success.'' \90\
---------------------------------------------------------------------------
    \89\ See FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir. 
2008); followed shortly thereafter by FTC v. CCC Holdings Inc., 605 F. 
Supp. 2d 26 (D.D.C. 2009).
    \90\ Whole Foods, 548 F.3d at 1035, 1041.
---------------------------------------------------------------------------
    These changes had a notable and predictable impact on the outcome 
in FTC v. CCC Holdings Inc. After finding that both the government and 
defendants had adduced evidence in their respective favors--a ``tie'' 
so to speak--the Court still granted the preliminary injunction, 
commenting that:

        Whether the Defendants' argument that the unique combination of 
        factors in these markets negates the probability that the 
        merger may tend to lessen competition substantially, or whether 
        the FTC is correct that the market dynamics confirm the 
        presumptions that follow its prima facie case, is ultimately 
        not for the Court to decide. . . . The Defendants' arguments 
        may ultimately win the day when a more robust collection of 
        economic data is lain before the FTC. On this preliminary 
        record, however, the Court must conclude that the FTC has 
        raised questions that are so `serious, substantial, difficult 
        and doubtful' that they are `fair ground for thorough 
        investigation, study, deliberation and determination by the 
        FTC.'' \91\
---------------------------------------------------------------------------
    \91\ CCC Holdings, 605 F. Supp. 2d at 67-68. O'Melveny & Myers, of 
which I am Of Counsel, represented one of the merging parties.

    This lower standard is much more like that imposed for summary 
judgment--whether there are issues of fact that require a trial--than 
the standard for a preliminary injunction.\92\ The court further found 
that the defendants had not met their equitable burden--even though it 
accepted that the evidence supported the combined company's ability to 
offer an integrated product that incorporated the best features of each 
company's portfolio, that the merging parties envisioned spending more 
on research and development than they could spend individually, and 
that the consumers would benefit from more innovative products.\93\
---------------------------------------------------------------------------
    \92\ Id. at 36, n. 11 (``precedents irrefutably teach that in this 
context `likelihood of success on the merits' has a less substantial 
meaning than in other preliminary injunction cases'').
    \93\ Id. at 76.
---------------------------------------------------------------------------
    With these rulings, the DOJ and FTC no longer operate under the 
same, or even similar, standards. The DOJ must still prove that it is 
likely to succeed in blocking a merger to obtain a preliminary 
injunction. Alternatively, if the DOJ shows that the equities are in 
its favor, above and beyond the normal public interest presumption, it 
may obtain a preliminary injunction by showing that it has raised a 
``serious question'' meriting further investigation. In contrast, the 
FTC can now invoke Whole Foods and CCC Holdings to access the ``serious 
question'' standard without making a concomitant equitable showing. 
Indeed, to avoid a preliminary injunction the merging parties in an FTC 
case (but not a DOJ one) must demonstrate that the equities are 
decidedly in their favor.
    Thus, merging companies under FTC review have a more onerous burden 
than those before the DOJ in preliminary injunction proceedings: they 
must show that there is no serious question on the merits or, if there 
is a serious question, that the preliminary injunction would 
irreparably harm the public. Because there is no policy justification 
for imposing a higher standard of proof on some industries and not on 
others, and because this result is fundamentally unfair, this 
difference in standards should be rectified. Congress should restore 
its original intent and return the FTC standard to that of the DOJ.\94\
---------------------------------------------------------------------------
    \94\ This committee may also wish to consider the recommendations 
of the Antitrust Modernization Commission in 2007, which address the 
issue discussed above, as well as the FTC's ability to challenge 
mergers administratively while the DOJ can proceed only in Federal 
court. See Antitrust Modernization Commission--Report and 
Recommendations 129-132 (2007).
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7. Creation of a Separate Third-party Liability Section in the FTC Act 
        Is Both Unwise and Unnecessary
    The step is unwise because it creates a uniform standard where 
uniformity is inappropriate. For example, consider advertising 
agencies, which the Commission has long held liable for deceptive and 
unsubstantiated claims if they ``knew or should have known'' that the 
claim was deceptive or unsubstantiated.\95\ The rationale for liability 
is that the ad agency has considerable expertise in how consumers are 
likely to interpret the communication, and can easily check with the 
client to determine whether there is a reasonable basis for the claim. 
Agencies are not, however, held responsible for evaluating all of the 
scientific details that may stand behind the claim. If the 
substantiation on its face supports the claim, the agency can rely on 
the client for the details, but it is responsible if there are obvious 
flaws in the substantiation.
---------------------------------------------------------------------------
    \95\ See e.g., FTC Consent Order, Bozell Worldwide, Inc., (Jan. 13, 
1999); FTC Consent Order, Jordan, McGrath, Case & Taylor, No. 96-3053 
(June 26, 1996).
---------------------------------------------------------------------------
    Publishers are every bit as essential to the completed deceptive 
advertisement as the advertising agency. If they are liable at all, 
given the First Amendment concerns that such an action would raise, it 
should be under a different and much more stringent standard than the 
standard for ad agency liability. The publisher has no particular 
expertise in determining the messages the advertisement is likely to 
convey to consumers, and it has no expertise in evaluating the 
substantiating evidence.
    This conclusion does not mean that publishers cannot play a role in 
policing fraud. During my tenure as Chairman, we launched a program to 
address deceptive weight loss claims that were widespread in the 
popular press. After a workshop to explore the scientific issues, we 
developed a list of seven weight loss claims that were false on their 
face. These claims, identified and explained in a pamphlet distributed 
to publishers called Red Flag Bogus Weight Loss Claims,\96\ formed the 
basis for a campaign to get publishers to reject advertisements 
containing bogus claims.\97\ The campaign reduced the incidence of 
obviously false claims from 50 percent of weight loss ads in 2001 to 15 
percent in 2004.\98\
---------------------------------------------------------------------------
    \96\ Available at http://www.ftc.gov/bcp/edu/pubs/business/adv/
bus60.pdf.
    \97\ Timothy J. Muris, Chairman, FTC, Remarks at the Cable 
Television Advertising Bureau: Do the Right Thing (Feb. 11, 2003).
    \98\ 2004 Weight-Loss Advertising Survey: A Report From the Staff 
of the Federal Trade Commission (April 2005), available at http://
www.ftc.gov/os/2005/04/050411weightlosssurvey
04.pdf.
---------------------------------------------------------------------------
    A new section establishing third-party liability is unnecessary 
because the FTC already has the ability to attack third parties in 
appropriate circumstances. Careful use of the Commission's 
``unfairness'' jurisdiction, which Congress codified in 1994,\99\ 
provides the best vehicle to address third parties. If a third party 
can prevent a violation that injures consumers at low net cost, it is 
straightforward to argue that the failure to do so is an unfair 
practice. Unfair practices derive from substantial injury to consumers, 
that consumers cannot reasonably avoid, the third party can prevent the 
violation at low cost, and the injury is not outweighed by 
countervailing benefits. The extent to which the third party knows of 
the violation will of course be relevant in determining the costs of 
avoiding injury, but it is not necessarily the only factor. The 
unfairness analysis focuses the inquiry on the benefits and costs of 
liability for a particular practice, which is precisely where the focus 
should be.
---------------------------------------------------------------------------
    \99\ 15 U.S.C.  45(n).
---------------------------------------------------------------------------
    In a recently proposed rule aimed at fraud in certain mortgage 
practices, the FTC would impose third-party liability, using its 
existing authority.\100\ As in this proceeding, the standards for 
third-party liability should be developed under current law.
---------------------------------------------------------------------------
    \100\ Mortgage Assistance Relief Services, 74 Fed. Reg. 26,130 
(June 1, 2009).
---------------------------------------------------------------------------
Conclusion
    Once again, thank you for the opportunity to testify today. I would 
be glad to answer any questions.

    Senator Pryor. Thank you.
    And I want to thank Senator Wicker for helping me manage 
this hearing.
    But, thank you very much.
    Let me start, if I might, with Ms. Pridgen. You mentioned, 
in your written testimony, that there are checks and balances, 
in the APA process and elsewhere, that would be sufficient to 
protect the interests of all parties, while providing FTC with 
the tools it needs to protect consumers. Which checks and 
balances are you talking about? And, you know, how will they 
protect interested parties?
    Ms. Pridgen. Well, what I was saying was that, under the 
APA rulemaking, the agency has to provide notice of the 
proposed regulation, and they have to allow comments from all 
interested parties. It's my understanding that the FTC and 
other agencies don't rely solely on written comments, but also 
have open roundtable-type hearings to gather information. The 
main difference would be, instead of having a trial-type arena, 
where you have 100 attorneys examining 100 witnesses, and 100 
other attorneys cross-examining those witnesses, you have a 
more informal roundtable discussion, where the facts can be 
gathered.
    APA rulemaking is subject to judicial review. Not only can 
a rule be overturned if it's arbitrary and capricious, it can 
be overturned if it goes beyond the statutory mandate of the 
agency. And also, courts can review regulations, under the 
Constitution; and that would be particularly relevant, in terms 
of the FTC, if they were to regulate in the area of 
advertising. Commercial advertisers do have some limited First 
Amendment rights, and the court would be there to provide a 
check on that.
    As far as impact on businesses is concerned, there are--the 
Regulatory Flexibility Act, the Congressional Review Act. And 
then, also, a little-mentioned part of the FTC Act is, the FTC 
Act already requires the Commission to act in the public 
interest. That doesn't get mentioned much in FTC cases. But, 
under state little FTC Acts or Unfair and Deceptive Trade 
Practices Acts, the public-interest requirement is often used 
in court cases to say that those statutes can't be used for 
individual or trivial cases, that it has to be something that 
affects the public at large. And so, I think that would be kind 
of a substitute for the prevalency requirement in Mag-Moss.
    Senator Pryor. OK.
    Mr. Mierzwinski, let me ask you--in your testimony, you 
wrote that you support a robust FTC, and you also support the 
proposed Consumer Financial Protection Agency. So, tell me, in 
your view, kind of, what's the interplay between them, you 
know, what's the right combination of a--in your view, a strong 
FTC and a strong Consumer Protection watchdog.
    Mr. Mierzwinski. Thank you, Senator.
    And the reason that consumer groups and others--Professor 
Elizabeth Warren came up with the idea--support a new Consumer 
Financial Protection Agency is that we don't have an agency 
that has one job: protecting financial consumers. The bank 
regulators have at least two jobs; safety and soundness always 
trumps the consumer role that they have. And we have numerous 
cases and examples of the bank regulators ignoring their 
consumer protection mission. As we heard earlier, the Federal 
Trade Commission has numerous other missions, besides its 
Division of Financial Practices.
    The Federal Trade Commission is primarily a law enforcement 
agency, however, and most of its actions are after a violation 
has occurred. It doesn't--it has limited rulemaking authority, 
as we've already heard. And we do support giving it more. But, 
it doesn't have that examination authority, that prudential 
supervision authority that we want to give the CFPA. We want to 
make it one-stop shopping for consumers. But, on the other 
hand, on the enforcement side, we think that they can work 
together with concurrent jurisdiction over enforcement. More 
than one cop on the beat is usually a good thing. My office is 
on Capitol Hill, as yours are, and we're patrolled both by 
Metro and by the Capitol Police. There's no problem with that. 
We see the same issue here. The Federal Trade Commission and 
the CFPA or the CFPB, in Senator Dodd's bill, can work together 
on the enforcement side.
    Senator Pryor. Mr. Muris, I'd like to ask you a follow-up 
to something you said in your opening statement, and I just 
want to make sure I got this right. I think you said that 
rulemaking should not be part of--I don't remember if you said 
``oversight'' or ``enforcement''----
    Mr. Muris. No, I--no. Formal rulemaking shouldn't be a 
major part of FTC consumer protection.
    Senator Pryor. OK.
    Mr. Muris. You want me to----
    Senator Pryor. Yes. I----
    Mr. Muris. I'm sorry. I didn't mean to
    Senator Pryor. Well, I----
    Mr. Muris.--cut you off.
    Senator Pryor. No, no. That's really, you know, what I'm 
asking. And one of the concerns I have about Magnuson-Moss is--
you've heard the witnesses today say that--and Mr. Rosch 
earlier said this--that when you get into this, I guess they 
call it a trial or this hearing phase, it sounds like it's a 
kind of a morass of a procedure could literally take years to 
get through. And with all the cross-examinations and all the 
panels--and I'm not sure I understand it--you've been there, 
and you know how it works--you know, I'm concerned about that 
process. That sounds very inefficient and ineffective. But, at 
the same time, I am curious about your views about whether 
rulemaking should really be part of what FTC does.
    Mr. Muris. Well, it should be a part. But, as I testified 
last summer before most of what the FTC does is enforce what 
are already rules. We just don't think of them as rules. 
They're the common-law principles of----
    Senator Pryor. Right.
    Mr. Muris.--for example, ``Don't breach your contract. 
Don't engage in fraud''----
    Senator Pryor. I remember you saying that.
    Mr. Muris. Right.
    Senator Pryor. Right.
    Mr. Muris. Right. And so, those are rules. I believe in 
enforcing them. I believe it's most of what the FTC does. 
That's why I used the word ``formal'' in terms of rulemaking. I 
believe there are some necessary rules--we did the National Do 
Not Call rule, my 15 minutes of fame in life. So, I'm certainly 
not an opponent of FTC rules.
    I do think the Magnuson-Moss procedures are workable. 
You've been involved in trials. Many rules got through in 2, 3, 
4 years. The problem of why so many rules took so long is the 
FTC began them without knowing what they were doing. This whole 
idea of the designation is not a big problem. In the notorious 
children's advertising rule, they designated three disputed 
issues of material fact. Three isn't a large number. If you 
know what you're doing, you can manage the process.
    And, as Ms. Woolley said, the FTC's an unusual and, in some 
ways, unique agency. It has this broad jurisdiction over 
everything. It's not an expert. So, I think these extra 
procedures are useful and helpful.
    Senator Pryor. Thank you.
    Senator Wicker.
    Senator Wicker. Thank you.
    Continuing with Chairman Muris, Commissioner Rosch said 
there were no Magnuson-Moss rules since 1978. Is that correct?
    Mr. Muris. Well, that's literally not true. By my count, 
there are at least 15 Magnuson-Moss rules that got to the 
Commission. Some of them the Commission killed. Most of them 
started before 1978, but there have been a few rules. But, it's 
clear that the major binge of FTC rulemaking--of proposed 
rulemaking--began before 1978, and that's what I was responding 
to, for Chairman Pryor. That was a different agency.
    Senator Wicker. Before 1974?
    Mr. Muris. No, 1978. When Magnuson-Moss passed in 1975, you 
had a splurge of rulemaking; some of them had already been 
underway. You had 16 in 15 months. And that was a different 
vision of the FTC. It was a vision of the FTC as the second 
most powerful legislature in Washington, passing rules to 
transform entire industries. The vision of the FTC that has 
prevailed for the last 30 years is that the FTC's primary job 
is a law enforcement agency enforcing these basic common-law 
rules, supplemented by occasional formal rules.
    What I'm worried about is, if you change Magnuson-Moss and 
go to APA rulemaking that, unfortunately, as Congress has shown 
in the past when it makes these changes, they come with 
mandates to do many rules. When we did the Fact Act, a 
Republican Congress gave us 15 or 16 new rules to do. I'm 
worried about that. And I'm worried about the temptation to 
send the FTC back to the 1970s.
    Senator Wicker. The Magnuson-Moss statute did not change in 
1978, did it?
    Mr. Muris. It was 1975 that it passed.
    Senator Wicker. OK. So, what I understand your testimony to 
be is that, from 1975 to 1978 there was a spate of rulemaking.
    Mr. Muris. Correct.
    Senator Wicker. And then the tapering off of that 
rulemaking was for reasons other than the statute----
    Mr. Muris. Yes.
    Senator Wicker.--we have.
    Mr. Muris. Magnuson-Moss did not kill FTC rulemaking. A 
change in enforcement philosophy killed FTC rulemaking.
    Senator Wicker. So, the large number of rules that were 
made early on, were made under the very statute that we're 
operating under today, is that correct?
    Mr. Muris. As I discussed, yes.
    Senator Wicker. OK.
    Mr. Muris. Yes, that's correct.
    Senator Wicker. What about this issue that Commissioner 
Rosch mentioned of not, after all this time, being able to know 
what the word ``prevalent'' means?
    Mr. Muris. I would like a real prevalence requirement--that 
the problem is, at the Commission, they interpret it as having 
two consent orders. And if you're in an industry with some bad 
actors, you can have lots of consent orders, where most of the 
industry is legitimate. I would support a prevalence 
requirement that meant something. The current prevalence 
requirement doesn't mean----
    Senator Wicker. So, you----
    Mr. Muris.--anything.
    Senator Wicker.--have no objection to the Congress working 
on tightening that definition up and being more helpful.
    Mr. Muris. That's correct. But, the heart of Magnuson-Moss 
is the designation of the disputed issues of material fact and 
the cross-examination. ``Prevalence'' is not meaningful as 
defined now.
    Senator Wicker. OK. Chairman Pryor mentioned, in his 
question, the testimony about the complicated procedures of 
cases. And then his question actually went in a different 
direction. But, let me follow up on that.
    ``Thirty-eight days of testimony, 7 years of proceedings,'' 
that was the testimony of Commissioner Rosch. Do you have any 
reason to disagree with those facts? Was that factual 
testimony, as far as you know?
    Mr. Muris. I don't know the exact average. But, I do know 
there's a big variance. I know the eyeglasses rules, for 
example, in which I was involved, took around 3 years. I dare 
say--I know Senator Pryor's prior record in enforcement, and he 
would've done the rules a lot faster.
    Senator Wicker. OK. Well, why would a case take 38 days and 
7 years of proceeding?
    Mr. Muris. Well, 38 days of hearings is not always a lot of 
days. Seven years of proceedings was because they did not have 
a clear theory of what they were doing. They believed, in those 
days, that the Commission had this vast power to transform the 
economy. And they were proposing rules with 500-page 
statements, that--when you sorted them out, they didn't really 
say, ``These are the three or four things we think are wrong. 
These are why we think they're wrong. This is the empirical 
evidence that supports why we think they're wrong.'' The 
eyeglasses rules, on the other hand, which took 3 years, did 
exactly the things that I said.
    Senator Wicker. If we move forward and repeal, or 
substantially change, the Magnuson-Moss safeguards, what's it 
going to hurt? How's it going to hurt the average guy out there 
in Arkansas and Mississippi?
    Mr. Muris. The Commission has enormous power over vast 
sectors of the economy. If you change rulemaking and give the 
FTC instructions to do rules in food, to do rules in behavioral 
advertising, to do rules in this, that, or the other thing, 
you'll put the FTC on a course where, 5 years later, you know, 
your constituents are going to be very unhappy and Congress is 
going to say, ``Why are you doing all this?'' The Commission 
can't be a competitor with the Congress in trying to legislate 
for so much of the economy. And I don't think the Commission 
can do it well. I think what it does well, and what it has done 
well for 30 years, is enforce these common-law rules. And 
that's made the Commission one of the most renowned agencies in 
the world, and I think it deserves that rank. Most of their 
work today continues on that. And I would hope it would 
continue.
    Senator Wicker [presiding]. Thank you.
    And the Chair's allowed me to go over just a bit.
    Mr. Mierzwinski, Ms. Pridgen seems to be saying, in her 
testimony, that things have changed since 1974. Commissioner 
Rosch says Magnuson-Moss was wrong from the outset. Which 
position do you subscribe to?
    Mr. Mierzwinski. Well, I think I subscribe to both. Things 
have changed, and Magnuson-Moss was wrong. I think where things 
have changed is, the Commission has, in fact, new duties and 
new responsibilities, that weren't countenanced back then, that 
it deserves greater powers to enforce against. But I think 
Magnuson-Moss was wrong, because it imposed just a tremendous 
regulatory burden on the agency. It slowed it down. It tied it 
in knots. And it never really worked.
    Senator Wicker. And then, for Professor Pridgen and Ms. 
Woolley, and then Commissioner Muris, I understand, Professor, 
that your testimony is that there are indeed safeguards against 
overzealousness, above and beyond the generic Administrative 
Procedures Act. Is that your testimony? And would you describe 
those in a little more detail?
    Ms. Pridgen. Yes. Well, first of all, the FTC has tried to 
restrain itself with their unfairness and deception policies, 
so that the Commission no longer views itself as a second 
legislature. It has used cost-benefit analysis, it looks for 
material consumer injury, it looks for deception against the 
reasonable consumer. So, there are those things within the 
agency itself.
    The Regulatory Flexibility Act came into play, I believe, 
in the early 1980s, which requires all agencies to have a 
regulatory agenda, to submit a statement of impact on small 
entities, and kind of a cost-benefit analysis there.
    The Congressional Review Act requires regulations to be 
submitted to Congress before they take effect.
    Senator Wicker. Been used one time.
    Ms. Pridgen. Well, it's there.
    Senator Wicker. Ms. Woolley, would you like to comment?
    Ms. Woolley. I would have to say that--going back to the 
previous witness's testimony of the amount of time that APA 
rulemaking authority takes, versus Magnuson-Moss--in some ways, 
I would have to say that that's kind of evidence that Magnuson-
Moss is actually working. There have been--in the intervening 
30 years, there have been many instances where Congress--many 
instances where Congress has designate--has delegated APA 
rulemaking authority to the Federal Trade Commission. Some of 
the issues, that have been mentioned here already, include data 
security and data-breach issues, identify theft. The--those 
are--CAN-SPAM is another one--Those are all areas where the 
Congress has been the decider and said, ``We think that these 
are significant enough practices that--they've attracted our 
attention, and we would like you, FTC, to issue rules on these 
practices.'' And FTC has done that quite successfully.
    So, I would argue that it's really Congress's role to 
decide when FTC needs that authority, delegate it 
appropriately, and then have FTC do its job.
    Senator Wicker. Commissioner Muris, do you have anything to 
add to that?
    Mr. Muris. Yes. Let me give you a recent example why 
Magnuson-Moss is helpful. The FTC, again, has experience with 
fraud. And they decided to do a business opportunities rule 
recently, because they had this experience with fraud. It 
turned out that--and they didn't know this, and, there was no 
reason that they should by their experience--they were 
proposing a rule that would affect 13 million people in part-
time business--in your state, for example, there are Amway 
agents and several part-time insurance agents--legitimate 
business people, who work part-time who would've been hurt by 
that rule. If the Commission had gone ahead, you would have 
been deluged. I represented someone in this issue, and we were 
able to threaten the Commission with Magnuson-Moss procedures. 
They were never used. And the Commission--I hope it would have 
pulled back anyway, but it did pull back. It--they said we 
didn't mean this. We did not want to regulate all these 
legitimate businesses. But, because the Commission isn't a 
sector-specific regulator, like most of the other agencies 
we're talking about, the Mag-Moss procedures provide this extra 
check. And they worked there. Yet the Commission didn't even 
have to use them. The threat, I think, was helpful.
    Senator Wicker. Thank you.
    Senator Pryor [presiding]. Thank you.
    Mr. Muris, let me follow up with you on that sort of 
general line. Just--not to spar with you, but just for 
clarification, you said that Magnuson-Moss didn't change 
because the statute changed, but it was a philosophy that 
changed. But, I thought there----
    Mr. Muris. Yes.
    Senator Pryor.--there was a statutory change in 1980. Am I 
wrong about that?
    Mr. Muris. There were some changes in 1980. There was a 
reauthorization fight, and the biggest change since 1975 
happened in 1994, which was the codification of Unfairness. 
Congress made it clear, in 1980, that the Commission could not 
do the children's advertising rule under Unfairness. Yet, the 
Commission when it killed the Children's Advertising Rule, 
said, ``We could've done it anyway, under Deception, but we're 
not going to do it.'' The Congressional opposition was a big 
deal, but I don't think the statutory change--I think it was in 
an Appropriations Act--was a big deal.
    Senator Pryor. And you mentioned Do Not Call. How long did 
that take you--the Commission to do?
    Mr. Muris. The Do Not Call, from the time we first talked 
about it publicly to the time it went into enforcement, was 2 
years. I believe if we were just doing Do Not Call--I said this 
in my testimony--and it was Magnuson-Moss, we would have had to 
change how we did it, but we could have done it in 2 years.
    Senator Pryor. So, in other words, it was done under APA.
    Mr. Muris. Sure.
    Senator Pryor. Yes. I just wanted to get that clear in my 
mind, and also on the record.
    Ms. Woolley, let me ask you a question about the DMA. And I 
know you talked about this some in your testimony and in 
questions since, but, give me--and I'm sorry I missed a little 
bit of your testimony because of the vote--but, which proposed 
reform, in--of the FTC concerns DMA the most? Is it the 
Magnuson-Moss? And which part of Magnuson-Moss? The reform or--
--
    Ms. Woolley. Thank you, Senator.
    Senator Pryor.--you know.
    Ms. Woolley. Yes. It is the Magnuson-Moss provision. Of the 
four things that have been outlined today--aiding and abetting, 
civil penalties, independent litigation authority, and APA 
rulemaking authority--I would have to say APA rulemaking 
authority is our primary concern. I don't want to diminish the 
others, but that would be----
    Senator Pryor. Right.
    Ms. Woolley.--right at the top of the list.
    Senator Pryor. And is it your view that your industry--at 
least your industry does a good job of self-policing?
    Ms. Woolley. Our self-regulatory program is--has been in 
existence for 30 years, and does a very good job of policing 
not only DMA members, who--when you become a DMA member, you 
literally have to sign, on your application--membership 
application, that you will adhere to our guidelines and 
standards. But, because there are so many DMA members and they 
represent such a large sector of the economy--as an example, 
most Fortune 500 companies that market to consumers are members 
of DMA--because we represent such a large sector and such a 
swath across the economy, our guidelines wind up being, in 
essence, best practices for marketing. And our self-regulatory 
program is--takes enforcement cases, not only against DMA 
members, but against nonmembers, as well. We actually have an 
exemption from the Federal Trade Commission that allows us to 
prosecute business-to-business--the exemption is an antitrust 
exemption and it allows us to prosecute business- to-business 
complaints.
    Senator Pryor. Now, when you say ``prosecute those 
complaints,'' what's the remedy there?
    Ms. Woolley. Well, let me explain that the process is a 
quasi-judicial process. There is a notice that goes out to the 
parties, and they have a certain amount of time to respond, and 
the responses are reviewed and go out to the parties. And there 
is a procedure for dealing with a complaint. The remedies, in 
our ethics cases, are really--the point of it is really to turn 
bad actors into good actors, and to stop the practice that's 
going on. So, our complaint process is--our ethics process is 
not focused on monetary damages or any of the other things that 
the FTC would seek, in terms of remedies. We want to get the 
practice out of the system and, as I say, turn bad actors into 
good actors.
    If we've got a recalcitrant party and we can't do that, we 
refer cases to the FTC for enforcement. So--and the ultimate 
remedy for a DMA member is that they are----
    Senator Pryor. They lose their membership.
    Ms. Woolley.--thrown out of membership, and we publicize 
that.
    Mr. Muris. Mr. Chairman, could I----
    Senator Pryor. Yes, sir.
    Mr. Muris.--add one sentence of clarification on what I 
said before? I believe, in 1980 the Congress--somewhere in and 
around there--may have also added ``prevalence'' and requiring 
addressing economic effects. I don't think either of those had 
a significant effect, but I think they're useful. Like I said 
with ``prevalence,'' the effect is very minor.
    Senator Pryor. Well, listen, I want to thank the panel. I 
actually have several more written questions that I'll probably 
submit to you, but, in the interest of time, I think what we 
will do is hold the record open for--7 days? Two? For 2 weeks. 
We'll hold the record open for 2 weeks. So, it's very 
possible--and, in fact, probable--that you'll be getting 
questions from the Committee staff, that the Senators are 
submitting. So, we appreciate those coming back in the next--as 
quickly as you can, but in the next couple of weeks.
    And I want to thank you for your time, and your 
preparation.
    And I want to thank Senator Wicker for his participation, 
and the other Senators that were here today.
    So, with that, we'll adjourn the hearing.
    And thank you very much.
    [Whereupon, at 4:39 p.m., the hearing was adjourned.]
                            A P P E N D I X

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia
    Today's hearing reflects the Commerce Committee's ongoing 
commitment to consumer financial protection and the important role of 
the Federal Trade Commission (FTC). It is an important follow-up to the 
full committee hearing we held on February 4th when we heard from FTC 
Chairman Jon Leibowitz.
    Today, members of the Subcommittee will hear a wider array of 
viewpoints on proposed reforms to the FTC and its authorizing statute, 
the Federal Trade Commission Act. I want to thank Senator Pryor for 
presiding and for his excellent work as Chairman of the Subcommittee on 
Consumer Protection.
    As I said last month, we cannot forget how we got here: many of the 
enormous economic problems we face today are a direct result of weak 
consumer protections in the financial sector.
    We have to do better for the American consumer. With family budgets 
stretched thin, foreclosures up and unemployment still sky-high, 
unscrupulous business practices continue to target consumers directly 
when they can least afford it. The American people need to know there 
is someone out there they can trust to stand up against those bad 
actors.
    The Federal Trade Commission is our Nation's premier consumer 
protection agency. When credit repair companies defraud consumers, it 
is the FTC that steps in to stop the scams and provide relief to 
victims. When people are sold products or services under false 
pretenses, billed for services they do not want, or have their identity 
stolen, it is the FTC that takes action. Only the FTC has the 
experience and expertise to regulate consumer protection across a broad 
swath of the U.S. economy.
    The Commission's core consumer protection mission embodied under 
Section 5 of the FTC Act is to prevent and enforce against ``unfair or 
deceptive acts or practices in or affecting interstate commerce.'' This 
broad prohibition has served as the bedrock of consumer protection law 
in the United States for over 70 years. Throughout its history, the FTC 
has used its authority to enforce and regulate against unfair or 
deceptive acts or practices to address a wide range of commercial 
abuses--from abusive credit practices, to fraudulent debt relief scams, 
to deceptive advertisements and marketing schemes.
    Whenever and however the Senate addresses financial regulatory 
reform and consumer protection in the coming weeks and months, I 
believe this well-established authority must be kept firmly intact. We 
cannot afford to compromise the FTC's core consumer protection mission 
that has served the American public well.
    What is more, we may need further reforms to the FTC and its 
underlying statute, to ensure the Commission can fulfill its mission as 
effectively as possible. During the full committee hearing we discussed 
a number of long-sought reforms. Consumer advocates believe we need to 
liberate the FTC from statutory limitations that have shackled the 
Commission from aggressively and effectively addressing abusive 
commercial practices.
    At the top of the list: granting the FTC normal rulemaking 
authority set forth under the Administrative Procedures Act. Currently, 
the Commission must follow cumbersome Magnuson-Moss rulemaking 
procedures, so difficult to navigate that it can take the FTC, 
literally, 10 years to promulgate a rule involving any controversy. The 
rulemaking process is so burdensome the Commission no longer devotes 
any time or resources to it.
    Critics argue that Magnuson-Moss's procedural hurdles are necessary 
given the broad scope of ``unfair or deceptive acts or practices.'' And 
they point to alleged Commission abuses of the past, specifically 
during the late 1970s. But the statutory and regulatory landscape has 
changed significantly since the turbulent 70s, and I am not sure the 
criticism still stands.
    Other proposed reforms include granting the Commission authority 
to:

   Independently seek civil penalties without approval from the 
        Justice Department;

   Enforce against those who aid and abet unfair or deceptive 
        acts or practices and;

   Seek civil penalties for general violations of the FTC Act.

    All of these reforms were included in the House-passed version of 
consumer financial protection legislation, and they deserve to be 
considered in our Committee as well.
    We can bring much-needed transparency to financial services by 
fully preserving the FTC's enormously important role in protecting 
consumers from unfair or deceptive practices and strengthening that 
authority through legislative reforms. As Chairman of the Commerce 
Committee with a fundamental commitment to consumer protection, I fully 
intend to pursue the legislative options that best serve this goal.
    Again, I want to thank Senator Pryor for presiding over this 
important hearing. And I want to thank our witnesses for testifying 
today. As the Committee continues to focus on consumer financial 
protection, we will continue to call on their expertise and 
perspective.
                                 ______
                                 
  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas
    Thank you, Mr. Chairman, for scheduling this second hearing this 
year to review the Federal Trade Commission (FTC) and the role it plays 
in protecting consumers.
    Last month, FTC Chairman John Leibowitz appeared before the 
Committee and outlined a request for new authorities for the 
Commission. Chairman Leibowitz stated that the significant expansions 
of authority and jurisdiction are necessary in his judgment to protect 
consumers. I look forward to working with my colleagues to consider 
this request and to making sure that the FTC has the resources and 
authorities that it needs to execute its vital consumer protection 
mission. I would be remiss, however, if I did not say that I am 
concerned about the potential for a significant increase in the 
agency's regulatory footprint given the extremely broad jurisdiction it 
has.
    As we continue our work on consumer protection as it relates to the 
FTC, I believe we need to remain mindful of the costs associated with 
complying with new regulations and the difficult economic circumstances 
of the country. Protecting consumers is a key responsibility of the FTC 
and of this committee, and we can stay true, in my judgment, to that 
goal while not complicating the efforts of thousands of businesses to 
create new jobs by dramatically increasing their legal and operational 
costs.
    In evaluating whether, and how, to change the scope and extent of 
FTC regulatory authority, I believe we must first ask whether there is 
a particular exigency, or area of consumer harm, that is so pervasive 
that the FTC's existing enforcement capabilities and rulemaking 
processes are not sufficient to address the issue. Second, if there is 
such an exigency, is the proposed legislative change broadly applied, 
resulting in greater regulatory burdens across a wide range of 
industries, or is it appropriately narrow to provide the FTC greater 
ability to develop rules and carry out enforcement actions directly 
relevant to that exigency. Third, we need to consider whether the FTC 
has sufficient personnel in key areas of its responsibility to carry 
out its enforcement and consumer protection mandates. Finally, we 
should consider whether there are areas, such as Internet-based 
commerce where the FTC lacks technical proficiency and experience such 
that we should require it to proceed carefully through traditionally 
deliberative rulemaking proceedings that allow extensive comment from 
the public and the relevant industries.
    This framework is how I will be looking at any potential 
reauthorization of the FTC. I am pleased that this hearing will provide 
concerned entities and knowledgeable parties the opportunity to express 
their views on what could be a substantial variation of authority for 
an already powerful Federal agency. I do wish, however, that we could 
hear from more of the stakeholders and a broader segment of the public 
interest community.
    When Chairman Leibowitz testified before this committee last month, 
he specifically requested the ability to use streamlined Administrative 
Procedure Act-style rulemaking across the entirety of the Commission's 
broad jurisdiction. He also requested the ability to collect civil 
penalties for violations of the FTC Act, the authority to litigate 
independently when seeking civil penalties, and the ability to pursue 
parties the FTC believes ``aided or abetted'' violators of the FTC Act. 
While I appreciate the Chairman's position, I will say at the outset 
that I have very strong concerns about these requests, particularly 
permitting the FTC to promulgate rules using the procedures outlined in 
the Administrative Procedure Act (APA). We must not forget the reasons 
why the more deliberative rulemaking process was established for the 
FTC in the first place, it's rules apply to a significant range of the 
Nation's economy and the impact of hastily crafted rules has the 
potential for substantial, and costly, unintended consequences. 
Congress expressed a desire for the FTC to proceed through additional 
steps that allow for extensive comment and input to avoid these 
unintended consequences.
    Mr. Chairman, we all share the desire to ensure that the FTC has 
all of the tools that it needs to protect consumers, particularly 
during a difficult economic climate where some have sought to prey upon 
vulnerable consumers. The key point, however, is to ensure the agency 
has the authority it actually needs. I have not seen an indication that 
the FTC actually needs these new authorities to address any existing or 
ongoing activity. I will be looking for that demonstration as we move 
forward and will apply the framework for evaluating the FTC's 
appropriate structure and authority that I outlined earlier. I hope 
that we will proceed carefully with potential legislation.
    Thank you again, Mr. Chairman.
                                 ______
                                 
                                                     March 17, 2010
Hon. Mark Pryor,
Chairman,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Hon. Roger Wicker,
Ranking Member,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Chairman Pryor and Ranking Member Wicker:

    We commend you for holding today's hearing on ``Financial Services 
and Products: The Role of the FTC in Protecting Consumers, Part II.''
    I appreciate the opportunity to submit for the hearing record this 
statement on behalf of the Association of National Advertisers (ANA). 
The focus of this hearing is on the powers of the FTC with regard to 
financial products and services. That was also the focus of the full 
Senate Commerce Committee hearing on February 4. As you know, the FTC 
has very broad regulatory authority over many other sectors of the 
American economy as well.
    We have very serious concerns about several changes that have been 
proposed in the broad consumer protection regulatory authority of the 
Federal Trade Commission (FTC). Those changes were included in H.R. 
4173, the ``Wall Street Reform and Consumer Protection Act of 2009,'' 
which passed the House of Representatives on December 11th. H.R. 4173 
would make three critical changes in the regulatory authority of the 
Commission: expedited rulemaking authority; expanded liability for 
``aiding and abetting'' an unfair act or practice; and immediate civil 
penalty authority.
    We are also very concerned about the potential overlap between the 
regulatory powers of the FTC and any new Federal agency or bureau 
created to regulate consumer financial products and services. H.R. 4173 
would create a powerful new independent Consumer Financial Protection 
Agency (CFPA). Senator Chris Dodd (D-CT), Chairman of the Senate 
Banking Committee, just introduced legislation that would create a new 
Bureau of Consumer Financial Protection, to be housed at the Federal 
Reserve. It is far from clear in either bill how the FTC would interact 
with this new mega-regulatory agency in the financial arena. What would 
these changes mean for the current authority of the FTC? How would 
these agencies coordinate in order to avoid duplication and confusion 
for both consumers and the business community?
    Congress is considering one of the largest regulatory 
reorganization efforts for the financial sector since the Great 
Depression of the 1930s. However, due to its scope and complexity, we 
believe critical aspects of this proposal, including the proposed 
changes in FTC regulatory authority, have received inadequate focus and 
analysis. We agree that our Nation's consumer protection regulatory 
regime needs to be reformed. However, we are very concerned that this 
legislation would dramatically transform the regulatory powers of the 
FTC without any detailed hearings or opportunity for industry input.
Expedited Rulemaking Authority
    H.R. 4173 gives the FTC authority to conduct across the board 
rulemakings under the expedited Administrative Procedures Act (APA) 
rather than under the present Magnuson Moss rulemaking procedures. This 
would allow three commissioners to push through a sweeping new rule 
affecting entire industries with limited opportunity for industry input 
or thoughtful consideration.
    Congress instituted the Magnuson-Moss rulemaking procedures in 1975 
and expanded the Commission's powers in several areas, including the 
ability to impose fines and seek injunctions against false or deceptive 
acts. In light of the Commission's extremely broad powers over vast 
segments of the Nation's economy, the Congress believed that expedited 
rulemaking authority (180 days) could lead to a serious ``rush to 
judgment'' allowing the FTC to make major, industry-wide regulatory 
changes without adequate time for industry input and thoughtful 
consideration.
    Thus, the Magnuson-Moss rulemaking procedures include a number of 
important checks and balances. These safeguards include: the 
requirement that the Commission must identify a pattern of activity--a 
prevalence, as opposed to one instance--before engaging in a 
rulemaking; the requirement that a rule may be overturned by the courts 
if it is not supported by substantial evidence taken as a whole; the 
requirement that the Commission provide a statement as to the economic 
effect of the rule.
    All of these protections would be removed in the House bill. They 
are all sensible requirements that should be maintained.
    Senator Warren Magnuson (D-WA) and Congressman Frank Moss (D-CA) 
were two of the leading consumer champions of their era and certainly 
would never have pushed this legislation if they thought it would 
handcuff the agency.
    Timothy Muris, who served as Chairman of the FTC from 2001-2004, 
testified at a July 14 hearing of the U.S. Senate Commerce Committee 
Subcommittee on Consumer Protection, Product Safety, and Insurance to 
strongly urge the Congress to retain the Magnuson Moss rulemaking 
procedures at the FTC. Muris stated:

        ``The administration's [CFPA] proposal would do more than just 
        change the procedures used in rulemaking. It also would 
        eliminate the requirement that unfair or deceptive practices 
        must be prevalent, and eliminate the requirement for the 
        Commission's Statement of Basis and Purpose to address the 
        economic effect of the rule. It also changes the standard for 
        judicial review, eliminating the court's ability to strike down 
        rules that are not supported by substantial evidence in the 
        rulemaking record taken as a whole. The current restrictions on 
        Commissioners' meetings with outside parties and the 
        prohibition on ex parte communications with Commissioners also 
        are eliminated. These sensible and important protections should 
        be retained.''

    The FTC is not an agency that has specific subject matter expertise 
over a particular area of the economy, such as the SEC, the CFTA or the 
EPA. Therefore, it is more important for the agency to follow the 
detailed and focused procedures of Magnuson Moss when carrying out an 
industry-wide rulemaking.
    There has been no explanation why requirements to demonstrate a 
substantial basis for a rule or to require a showing of prevalence 
should make an FTC rulemaking unnecessarily cumbersome or time 
consuming. When regulating whole industry sectors, careful deliberation 
should be required.
    We urge the members of the Senate Commerce Committee to either 
uphold the Magnuson Moss provisions or keep some hybrid version of the 
procedural safeguards in the Act.
Aiding and Abetting
    H.R. 4173 would give the FTC the authority to go after companies or 
persons that ``aid or abet'' a violation of the FTC Act. This would 
have serious implications for advertising agencies, media companies and 
other companies that play any role in the communication/sale/delivery 
process. For example, if a television station knowingly accepts an ad 
from a marketer and the FTC later decides that the ad was somehow false 
or deceptive, the television station could also be subject to very 
serious financial penalties. This also raises some serious practical 
and constitutional concerns for marketers. If there is any ambiguity 
about what is lawful, that may result in the chilling of speech because 
the media will reject ads that are in fact truthful and nondeceptive 
because of the blurring of the legal lines.
    We are also very concerned that this change would import criminal 
law concepts into a civil statute.
Immediate Civil Penalty Authority
    H.R. 4173 would give the FTC general power to impose civil 
penalties without any prior rule or order by the agency for any 
violation of section 5 of the FTC Act, a sweeping scope of authority 
the Commission has never had before.
    Currently, the FTC is generally limited to recovering civil 
penalties for violations of a rule or a final cease and desist order 
with respect to an unfair or deceptive act or practice. For example, 
unfairness is a very broad and evolving standard. Giving the FTC the 
authority to immediately impose civil penalties, without any 
understanding of or notice that particular conduct is ``unfair,'' could 
impose serious multimillion dollar financial burdens on a business. 
Honest companies could be faced with back-breaking burdens despite the 
fact that they made every effort to stay within the strictures of the 
FTC Act.
    It is possible that these major revisions to FTC authority might be 
appropriate after careful review. However, we believe it is 
inappropriate to make such significant and fundamental changes to FTC 
powers without full hearings and analysis, as an afterthought in a 
legislative package focusing on financial regulatory reform.
Relationship between the CFPA and FTC
    We are very concerned that there has not been adequate 
consideration given to the potential overlapping jurisdiction of the 
FTC and any new agency or bureau that is created to regulate consumer 
financial products and services, broadly defined. This overlap and 
potential confusion could have very serious consequences for both the 
business community and consumers.
    Under H.R. 4173, much of the regulatory authority that the Congress 
has given to the FTC over financial products and services would be 
transferred to the new Consumer Financial Protection Agency (CFPA), 
with the FTC retaining backstop or residual authority in this area. 
Under the new bill introduced this week by Senator Dodd, a number of 
consumer financial protection functions of the FTC would be transferred 
to the Bureau of Consumer Financial Protection. However, that bill also 
provides that the FTC would continue to have authority to enforce 
section 5 of the FTC Act, the Credit Repair Organizations Act and the 
Telemarketing and Consumer Fraud and Abuse Prevention Act.
    It is unclear which products and services would fall under the 
jurisdiction of the CFPA or the Bureau and which would remain under the 
jurisdiction of the FTC. For example, if an automobile company creates 
a consumer lease program, are the terms of the lease subject to the 
CFPA, the Commission or both? Cable television operators often provide 
digital video recorders and modems under a lease that is part of the 
monthly subscriber program. Does this convert the subscription to a 
financial instrument subject to the CFPA?
    Also, which agency would take the lead in protecting consumers? 
Under the Dodd bill, the FTC would retain jurisdiction over the 
telemarketing fraud law. However, if a financial product that is 
subject to the jurisdiction of the CFPA is being sold through 
fraudulent telemarketing, would the FTC have to defer to the new 
Bureau?
    We do not believe there has been sufficient consideration given to 
these and a host of other concerns about the relationship and potential 
overlap between the two agencies.
Conclusion
    H.R. 4173 not only attempts to totally transform consumer financial 
regulation. It also launches sweeping changes in the enforcement powers 
of the FTC in areas having nothing ostensibly to do with financial 
reorganization. These changes do not merely tinker at the margins of 
the Commission's authority. Instead, they substantially impact critical 
aspects of the FTC's functions and responsibilities.
    Nevertheless, there has been no systematic examination of the 
implications of these changes or an opportunity for thorough 
examination by the numerous constituencies directly affected by these 
proposals.
    Overlapping jurisdiction and inconsistent standards could lead to 
bureaucratic overregulation or confusion for companies that operate in 
a national and global marketplace. We urge you to reject these proposed 
changes in FTC authority.
    Thank you for your consideration of our views.
            Sincerely,
                                           Daniel L. Jaffe,
                                          Executive Vice President,
                             Association of National Advertisers (ANA).
                                 ______
                                 
                                   Federal Trade Commission
                                  Washington, DC, November 24, 2009
Hon. Christopher J. Dodd,
Chairman,
Committee on Banking, Housing, and Urban Affairs,
U.S. Senate,
Washington, DC.

Dear Chairman Dodd:

    Thank you for undertaking the difficult task of seeking to improve 
consumer protection for financial services. I want to bring to your 
attention, however, five fundamental concerns I have with the November 
10, 2009 discussion draft of the Committee's proposed legislation 
relating to the creation of a new consumer financial protection agency.
    First and foremost, as currently drafted, the proposed bill appears 
to assume that, like other agencies whose consumer protection law 
enforcement authority is transferred to the new agency, the FTC failed 
to perform adequately its consumer protection law enforcement during 
the recent financial crisis. That assumption is erroneous.
    Before the financial crisis arose in the Fall of 2007, the FTC 
worked to vigorously protect consumers in the financial marketplace, 
including mortgages, through its law enforcement efforts. Since 1998, 
the FTC has been at the forefront of the fight against deceptive 
subprime lending and servicing practices, when it filed its case 
against Capital City Mortgage, which allegedly took advantage of 
African American consumers. In the past decade, the FTC has brought 
dozens of actions focused on the mortgage lending industry, with 
particular attention to entities in the subprime market, alleging that 
mortgage lenders and servicers engaged in unfair or deceptive acts and 
practices. Through these cases, the FTC has returned hundreds of 
millions of dollars to consumers.\1\ In addition, the FTC convened a 
May 2006 workshop on alternative mortgage products and engaged in 
consumer education respecting the perils of certain kinds of 
mortgages.\2\ The FTC also provided advice and developed prototype 
mortgage disclosures for other Federal regulatory agencies.\3\
---------------------------------------------------------------------------
    \1\ See generally Hearing On Improving Consumer Protections In 
Subprime Lending, Before the Before the Subcommittee On Interstate 
Commerce, Trade, and Tourism of the Committee On Commerce, Science, and 
Transportation, U.S. Senate (Apr. 29, 2008).
    \2\ See, e.g., ``Home Equity Loans: Borrowers Beware,'' ``High-
Rate, High-Fee Loans,'' and ``Reverse Mortgages: Get the Facts Before 
Cashing In On Your Home's Equity,'' available at www.ftc.gov/bcp/
conline/edcams/credit/coninfo.htm.
    \3\ See, e.g., Federal Trade Commission Staff Comment to Jennifer 
J. Johnson, Secretary, Board of Governors of the Federal Reserve Board 
System, Regarding Proposed Illustrations of Consumer Information for 
Subprime Mortgage Lending (Nov. 2007), (comment to the OCC; the Federal 
Reserve Board; the FDIC; the OTS; and the NCUA), available at 
www.ftc.gov/opa/2007/11/mortgage.shtm; Federal Trade Commission Comment 
Before the Board of Governors of the Federal Reserve System, Docket No. 
OP-1253: Unfair and Deceptive Practices in the Mortgage Lending Market, 
Alternative Mortgage Products, and Informed Consumer Choice in the 
Mortgage Marketplace (Sept. 2006), available at www.ftc.gov/opa/2006/
09/fyi0661.shtm.
---------------------------------------------------------------------------
    Second, as currently drafted, the proposed bill could be read to 
prevent the FTC from adequately enforcing even Section 5, which is its 
core consumer protection law enforcement statute. To be sure, 
subsection (C) of section 1061(b)(5) purports to except from transfer 
to the new agency the FTC's enforcement authority under Section 5. 
However, subsection (A) of section (b)(5) transfers to the CFPA 
exclusively ``all consumer protection functions of the Federal Trade 
Commission,'' which are broadly defined to include all ``research, 
rulemaking, issuance of orders or guidance, supervision, examination 
and enforcement activities, powers and duties relating to the provision 
of consumer financial products or services.''  1061(a)(1). At a 
minimum, that provision may be read to prevent the Commission from 
conducting research or issuing guidance under Section 5 of the FTC Act, 
as well as the enumerated consumer laws and other areas where the 
Commission has traditionally conducted research, provided business 
guidance, and marshalled consumer education efforts.
    Third, ``consumer protection financial products or services'' is 
also broadly defined.\4\ Thus, the proposed bill, as currently drafted, 
could be read not only to strip the FTC of the authority that it 
exercised to protect consumers during the recent financial crisis, but 
actually to disable the FTC from enforcing its core consumer protection 
statute against a broad spectrum of arguably ``financial'' scams 
practiced by individuals and firms not normally considered as financial 
institutions.
---------------------------------------------------------------------------
    \4\ Section 1002 (5) defines ``consumer financial product or 
service'' as ``any financial product or service to be used by a 
consumer primarily for personal, family, or household purposes.'' 
Section 1002 (14) defines ``financial product or service'' as meaning 
``any product or service that, directly or indirectly, results from or 
is related to engaging in one or more financial activities.'' Section 
1002 (13)(0), in turn, includes within the definition of ``financial 
activity,'' ``engaging in any other activity that the CFPA defines, by 
rule, as a financial activity. . . .''
---------------------------------------------------------------------------
    Fourth, the proposed bill, as currently drafted, could be read to 
hinder the role the Congress has heretofore given the FTC in vigorously 
challenging violations of the Equal Opportunity Act, the Fair Credit 
Reporting Act, the Fair Debt Collection Practices Act, the Truth in 
Lending Act, the Home Ownership and Equity Protection Act, the 
Electronic Funds Transfer Act, and the Gramm-Leach-Bliley Act. 
Authority to enforce those other statutes would also be transferred to 
the proposed new agency as the ``primary'' Agency having authority to 
enforce them.\5\ Indeed, to the extent the FTC retains any authority at 
all to enforce those statutes,\6\ it could apparently do so only after 
first recommending that the new agency initiate an enforcement 
proceeding itself, and initiating an enforcement proceeding only after 
the new agency does not do so within 4 months of receiving the 
recommendations. It goes without saying that with respect to cases 
involving fraud, where immediate action is needed to stop consumer 
injury and freeze assets for consumer redress, that waiting period 
would severely impair the FTC's effectiveness.
---------------------------------------------------------------------------
    \5\ See, e.g.,   1002 (12), 1011, 1022 (e)(1)(``[t]o the extent 
that a provision of Federal law authorizes enforcement by the CFPA and 
another Federal agency, the CFPA shall have primary authority to 
enforce that provision of Federal law'').
    \6\ See Section 1022 (e)(2) & (3). These provisions arguably could 
affect both the FTC's ability bring a case solely alleging violations 
of the enumerated consumer law statutes as well as its ability to 
supplement a Section 5 case with violations of those statutes.
---------------------------------------------------------------------------
    Finally, the proposed bill, as currently drafted, could be read to 
transfer to the new agency not only the FTC's authority, but also its 
personnel and resources performing the transferred law enforcement 
functions, on a mandatory basis. See Section 1061 (b)(5)(``all consumer 
protection functions of the Federal Trade Commission are transferred to 
the CFPA'').
    I believe that the best solution to these problems would be to 
amend the proposed bill to exempt completely the FTC from the 
strictures of this legislation. Such a carve out would correct the 
misimpression that the FTC did not exercise its consumer protection law 
enforcement powers to the best of its ability during the recent 
financial crisis. If and to the extent the Committee is concerned about 
the FTC's authority to provide consumer financial protection, it should 
supplement that authority as does the proposed financial consumer 
protection bill offered in the House.
    If these amendments are not adopted, however, I would like to offer 
some proposed language on how to revise the proposed bill to address 
the other issues I have highlighted. First, the seemingly different 
scope of section 1061 (b)(5)(A) and section 1061 (b)(5)(C) can be 
remedied by narrowing the transfer language in subsection (A) from 
``all consumer protection functions of the Federal Trade Commission,'' 
to ``the consumer protection functions of the Federal Trade Commission 
that are contained within the enumerated consumer laws.'' Likewise, 
subsection (B) would be revised to narrow the scope from ``all consumer 
protection functions of the Federal Trade Commission,'' to ``all 
consumer protection functions that were contained within the enumerated 
statutes, except as provided in Section 1022 (e).'' Subsection (C) 
would then be unnecessary and should be deleted.\7\
---------------------------------------------------------------------------
    \7\ It may also be beneficial to add a savings clause to the 
proposed legislation that would specifically articulate the intent that 
`no provision of this title shall be construed as modifying, limiting, 
or otherwise affecting the authority of the Federal Trade Commission 
under the Federal Trade Commission Act or other laws other than the 
enumerated consumer laws.''
---------------------------------------------------------------------------
    Second, the problems introduced by transfer of authority to the new 
agency as the ``primary'' agency to enforce the enumerated statutes 
should be eliminated by revising the proposed bill to remove the FTC 
from the referral and backstop authority provisions in section 1022 
(e), and to instead add a new subsection that would authorize the FTC 
specifically to enforce such laws and rules and to notify the CFPA 
prior to initiating an enforcement action, or as soon thereafter as 
practicable. In addition, subsections of current Title H, Conforming 
Amendments, should be amended to provide the FTC with at least 
concurrent enforcement authority jurisdiction over the entities it has 
historically regulated.
    Third and finally, the mandatory transfer of the FTC's personnel 
and resources should be avoided by exempting the FTC from the mandatory 
transfer provisions of the proposed bill and any other Federal statute. 
The following language could be added to avoid that unintended effect: 
``Nothing in this title shall be construed to require a mandatory 
transfer of any employee of the Federal Trade Commission to the 
Agency.''
    Thank you in advance for your consideration of these matters, and I 
wish you the best as you mark up this bill.
            Sincerely,
                                           J. Thomas Rosch,
                                                      Commissioner.
cc: The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
U.S. Senate
                                 ______
                                 
                                   Federal Trade Commission
                                      Washington, DC, July 16, 2009
Hon. Barney Frank,
Chairman,
Committee on Financial Services,
U.S. House of Representatives,
Washington, DC.

Dear Chairman Frank:

    I appreciate the opportunity to share my personal opposition to the 
proposal to create a new consumer financial protection agency. I am a 
Commissioner of the Federal Trade Commission (FTC), sworn in on January 
5, 2006, to a term that expires in September 2012.\1\ Although I am a 
Republican appointee, in the three-and-a-half years of my service as a 
Commissioner, I have not hesitated to exercise my independence when I 
believed that it was in the best interests of consumers to do so,\2\ I 
also served as the Director of the FTC's Bureau of Consumer Protection 
from 1973 to 1975, and in 1989 was a member of the American Bar 
Association's Special Committee to Study the Role of the FTC. I have 
nothing to gain or lose politically or personally by opposing the 
proposal to create a new consumer financial protection agency (CFPA),
---------------------------------------------------------------------------
    \1\ By law, the Commission is an independent regulatory agency. The 
Commission is headed by five Commissioners, nominated by the President 
and confirmed by the Senate, each serving a seven-year term. The 
President chooses one Commissioner to act as Chairman. No more than 
three Commissioners can be of the same political party. 15 U.S.C.  41,
    The Commission is not an Executive Branch agency. It is instead 
subject to oversight by a number of Congressional committees. See 
Humphrey's Executor v. United States, 295 U.S. 602, 628 (1935).
    \2\ I have previously described my own independence. See J. Thomas 
Rosch, The Redemption of a Republican, FTC Watch, June 1, 2009, at 4, 
available at http://www.ftc.gov/speeches/rosch/090601redemption.pdf. My 
career predating my term as a Commissioner is described at http://
www.ftc.gov/commissioners/rosch/index.shtml.
---------------------------------------------------------------------------
I. Summary of Position
    The current system for protecting consumers against deception and 
unfairness in the financial marketplace is broken. Authority and 
responsibility to define and prevent deceptive and unfair practices are 
both diffuse and under-utilized. The current consumer protection regime 
gives authority and jurisdiction to a host of Federal agencies without 
regard to whether those agencies have the expertise or experience (core 
competency) to best perform the consumer protection functions assigned 
to them. As a result, because some agencies have little or no core 
competency to perform those functions and lack adequate resources to do 
so, they therefore cannot fairly be (and generally are not) held 
responsible for their failure to protect consumers adequately.
    The proposal to create a brand new Executive Branch agency \3\ to 
protect consumers of financial products and services would replace the 
current flawed system with an even more fundamentally flawed system. 
The proposed new agency has no track record in protecting consumers 
from deceptive and unfair practices in the financial marketplace, and 
the time, money and other resources necessary to implement the new 
agency promise to be immense. As proposed, the new agency seemingly 
would have unlimited jurisdiction, yet the extent to which the new 
agency would be subject to Congressional oversight is completely 
unclear. The public is simply asked to buy a pig in a poke. The only 
thing about which the public can be certain is that creation of this 
new agency would result in considerable delay in protecting consumers, 
wasteful and inefficient consumer protection law enforcement, and very 
substantial (if still indeterminate) costs to taxpayers.
---------------------------------------------------------------------------
    \3\ As proposed, the President would appoint all members of the new 
agency's governing board, but in contrast to the FTC, which limits to 
three the number of Commissioners from any one political party, all 
members of the new agency's governing board could come from one 
political party.
---------------------------------------------------------------------------
    The current broken system should be replaced instead with a system 
that assigns exclusive authority and responsibility to perform consumer 
protection functions to specific agencies based on the core competency 
of the agency to perform those functions. In the case of the FTC, this 
would mean that it would assume plenary authority and responsibility 
for, among other things, defining and requiring the necessary and 
appropriate consumer disclosures respecting financial products and 
services. It would also mean assigning to the FTC plenary authority and 
responsibility for protecting consumers against invasions of their 
privacy, including protecting them from identity theft and securing 
their other confidential data. These are functions where the FTC has 
not only taken the lead, but where other Federal agencies have looked 
to the FTC for guidance. Finally, it would mean that the FTC would be 
provided with the resources and law enforcement tools to enable it to 
perform those law enforcement functions by itself Taking these steps 
would make it fair to hold the agency responsible for performing those 
functions in a fashion that protects consumers.
    In short, replacing the current balkanized system of financial 
consumer protection with a brand new Executive Branch agency is very 
poor public policy. The FTC is an independent agency that has the 
expertise and experience to protect consumers in the realm of financial 
products and services, and there is no reason to supplant it.
II. The Current System is Broken
    No one can say that the current balkanized paradigm of consumer 
protection law enforcement regarding financial products and services is 
desirable. As matters now stand, for example, at least six different 
Federal agencies are responsible for protecting consumers in the 
financial marketplace,\4\ each having jurisdiction over only a specific 
segment of the marketplace. For example, the FTC's jurisdiction reaches 
only to non-bank financial companies, including non-bank mortgage 
companies, mortgage brokers, and finance companies. Banks, thrifts, and 
Federal credit unions are exempt from the Commission's jurisdiction 
under the FTC Act but are instead subject to the jurisdiction of other 
agencies.
---------------------------------------------------------------------------
    \4\ These agencies are the Federal Trade Commission, the Federal 
Reserve Board, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Office of Thrift 
Supervision, and the National Credit Union Administration.
---------------------------------------------------------------------------
    Similarly, a host of Federal statutes--the Gramm-Leach-Bliley Act, 
the Truth-in-Lending Act, the Fair Credit Reporting Act, the Home 
Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair 
Debt Collection Practices Act, the Fair Credit Reporting Act, the Equal 
Credit Opportunity Act, the Credit Repair Organizations Act, and the 
Electronic Funds Transfer Act--distribute to a number of Federal 
agencies various consumer protection responsibilities and obligations 
respecting only the financial institutions that they regulate.
    Thus, the current framework does not accord authority and 
responsibility based on any agency's core competency to perform that 
agency's consumer protection function(s). Rather, the current framework 
gives each Federal agency consumer protection authority and 
responsibility for the specific institutions over which it has 
jurisdiction in the financial marketplace. As a result, the current 
framework entrusts some agencies with consumer protection functions 
even though those agencies have little or no expertise in performing 
those functions. Other agencies, recognizing their shortcomings, rely 
on the agency which has demonstrated the highest degree of core 
competency to perform the functions. For example, a number of agencies 
in the past have looked to the FTC to determine the disclosures that 
are necessary and appropriate to protect consumers in the financial 
marketplace.\5\
---------------------------------------------------------------------------
    \5\ See, e.g., Federal Trade Commission Staff Comment for the Board 
of Governors of the Federal Reserve Board Regarding Truth in Lending, 
Proposed Rule (April 2008), available at http://www2.ftc.gov/opa/2008/
04/frb.shtm; Federal Trade Commission Staff Comment to Jennifer J. 
Johnson, Secretary, Board of Governors of the Federal Reserve Board 
System, Regarding Proposed Illustrations of Consumer Information for 
Subprime Mortgage Lending (November 2007), (comment to the OCC; the 
Federal Reserve Board; the FDIC; the OTS; and the NCUA), available at 
http://www.ftc.gov/opa/2007/11/mortgage.shtm; Federal Trade Commission 
Comment Before the Board of Governors of the Federal Reserve System, 
Docket No. 0P-1253: Unfair and Deceptive Practices in the Mortgage 
Lending Market, Alternative Mortgage Products, and Informed Consumer 
Choice in the Mortgage Marketplace (September 2006), available at 
http://www.ftc.gov/opa/2006/09/fyi0661.shtm.
---------------------------------------------------------------------------
    This patchwork quilt of jurisdiction results in wasteful 
duplication in performing some consumer protection functions. Law 
enforcement activities in the credit card industry illustrate this 
inefficiency. In a Federal court complaint filed in June 2008, the FTC 
alleged that CompuCredit Corporation, a company marketing Visa and 
MasterCard credit cards to consumers in the subprime credit market, 
engaged in deceptive conduct in connection with the marketing of credit 
cards.\6\ CompuCredit ultimately settled with the FTC and agreed to 
reverse fees charged to eligible consumers' accounts, estimated to 
result in more than $114 million in credits.
---------------------------------------------------------------------------
    \6\ CompuCredit settled with the FTC and agreed to reverse fees 
charged to eligible consumers' accounts to settle allegations that it 
violated Federal law. It is estimated that the redress program will 
result in more than $114 million in credits to consumer accounts. Press 
Release, available at http://www.ftc.goviopa/2008/12/compucredit.shtm.
---------------------------------------------------------------------------
    However, because CompuCredit also acted on behalf of some entities 
regulated by the Federal Deposit Insurance Corporation (FDIC), in 
addition to the FTC action, the FDIC also challenged the same 
practices, and put CompuCredit under order extracting a civil money 
penalty of $2.4 million.\7\ The need to engage in dual prosecutions 
relating to the same consumer protection issues was inefficient, time-
consuming and a wasteful use of agency resources.
---------------------------------------------------------------------------
    \7\ Id.
---------------------------------------------------------------------------
    Beyond that, because no one agency is given plenary authority or 
jurisdiction or the resources to effectively protect consumers, no 
single agency fairly can be held ultimately accountable for the 
protection of consumers.\8\ Consequently, the current balkanized system 
may result not only in the inefficient use of agency resources, but 
also in under-enforcement of existing consumer protection statutes and 
inadequate protection of consumers. For example, even though the FTC 
may detect deceptive and unfair practices in the financial marketplace, 
it can act only within its limited jurisdiction. Thus, despite the 
FTC's success in challenging the inadequate disclosures made by 
CompuCredit, the FTC was otherwise constrained from bringing such a 
case against any depository institutions--such as banks that issue 
credit cards.
---------------------------------------------------------------------------
    \8\ See generally, Hearing On Improving Consumer Protections In 
Subprime Lending, Before the Before the Subcommittee On Interstate 
Commerce, Trade, and Tourism of the Committee On Commerce, Science, and 
Transportation, U.S. Senate, April 29, 2008.
---------------------------------------------------------------------------
III. The Proposal to Create a New Agency is Fundamentally Flawed
    The creation of a new Executive Branch consumer protection agency 
will only make matters worse by compounding, rather than mitigating, 
the enforcement problems that now exist. First and foremost, there is 
no evidence that this proposed new agency has any core competency in 
protecting consumers in the financial marketplace. It is entirely 
untested and without any experience or expertise.
    Second, the creation of a brand new Executive Branch agency will 
come at a great financial cost to consumers. The resources necessary to 
implement this proposal will be immense, including space requirements, 
employees, infrastructure, and overhead. I have yet to see proponents 
of the proposal offer even an estimate of the cost to American 
taxpayers for this anticipated project. This proposal seems 
particularly ill-advised in light of the current economic situation and 
the fact that at least one existing Federal agency with proven 
expertise (the FTC) stands ready, willing and able to better perform 
most of the consumer protection functions that would be given to this 
new agency. Indeed, it is ironic that a consumer protection proposal 
should be so anti-consumer; as consumers, we generally demand to know 
beforehand the costs and benefits of the products we purchase.
    Third, it is anticipated that it will take at least eighteen to 
twenty-four months for this new agency to become operational. This long 
start-up time will entail considerable burden and delay in protecting 
consumers in the financial marketplace--consumers that need immediate 
assistance.
    Fourth, the proposal creates an agency with virtually unlimited 
jurisdiction and uncertain Congressional oversight. The definitions 
that determine the extent of the new agency's exclusive or primary 
authority are extremely broad:

   The definition of ``financial activity'' includes a long 
        list of activities, and then allows the proposed agency to add 
        others to the list by rule.

   Likewise, the definition of ``financial product or service'' 
        includes any product or service that ``directly or indirectly'' 
        ``results from or is related to'' engaging in a financial 
        activity. The payment side of every business of every sort 
        could be so described and thus apparently become the 
        responsibility of the proposed new agency.

   Specifically, because the granting of ``credit'' is 
        considered a ``financial product or service,'' the proposed new 
        agency would have authority over every transaction that 
        involves payment by means other than cash on the barrel head. 
        That is because ``credit'' is defined as including, among other 
        things, the right granted by a person to a consumer to 
        ``purchase property or services and defer payment therefor.''

    Fifth, the broad definitions of the new agency's plenary authority 
would also severely impact the future operations of the FTC. For 
example, in the proposal, a ``covered person'' is defined as one who 
engages ``directly or indirectly'' in a financial activity in 
connection with the provision of a consumer financial product or 
service, or one who provides a material service to or processes a 
transaction on behalf of such person. That definition would result in 
the transfer to the new agency all of the consumer protection functions 
that relate to financial products and services even if tangentially 
offered by any entity. Such a transfer would not only include a 
transfer of authority, but a transfer of staff, office space, 
infrastructure and funding--critical components without which the FTC 
would be crippled in exercising whatever enforcement authority remains.
    Indeed, the exclusive authority of the proposed new agency would 
extend beyond rulemaking to ``guidance, examination, and requiring 
reports.'' Such expansive authority would threaten to atrophy the FTC's 
ability to issue enforcement policy statements, business education 
materials, consumer education, press releases explaining its cases and 
other kinds of guidance relating to its retained authority over 
financial matters.
    Similarly, the proposal provides for the collection of financial 
consumer complaints by the new agency. Yet, for years, the FTC has 
developed and maintained an extensive database of consumer complaints 
including complaints about financial products and services, obtained 
from a myriad of sources and available to all interested law 
enforcement agencies. That database would inevitably wither.
    Finally, and perhaps most strikingly, the proposal does not even 
appear to authorize the FTC to enforce the new agency's rules (although 
it does authorize the states to enforce them). To be sure, there is a 
provision for coordinating enforcement, but it provides that the FTC 
must refer to the new agency any enforcement matter, then wait up to 
120 days for the new agency to bring the case; the FTC can then only 
bring a case if the new agency declines to do so. At worst, that is a 
recipe for duplicative and wasteful exercise of the agencies' 
prosecutorial discretion. At best, it is a recipe for delay. As noted 
earlier, there is no estimate as to the size or cost of the new 
agency's staff, but it is likely that it will be created at the expense 
of the FTC.
    This is not just parading horribles. The proposal would of course 
provide the FTC with ``backstop enforcement authority.'' However, that 
provision is at best a fig leaf for stripping the agency of its current 
role as the primary agency responsible for protecting consumers in the 
financial market.\9\
---------------------------------------------------------------------------
    \9\ See Prepared Statement of Stephen Calkins On the Proposed 
Consumer Financial Protection Agency: Implications for Consumers and 
the FTC, Testimony Before the Committee on Energy and Commerce 
Subcommittee on Commerce, Trade, and Consumer Protection, U.S. House of 
Representatives, July 8, 2009, at 9-10, available at http://
energycommerce.house. gov/Press_111/20090708/testimony_calkins.pdf.
---------------------------------------------------------------------------
    In sum, the creation of a new Executive Branch consumer protection 
agency for financial products and services will introduce an even worse 
situation than now exists. As with the creation of any new Federal 
agency from whole cloth, the proposal guarantees that there will be 
substantial delay in law enforcement while the new agency is 
established, in addition to imposing substantial financial costs on the 
public and sapping the vitality of the FTC as a consumer protection 
agency.
IV. The Proposal to Create the CFPA Should Be Scrapped in Favor of 
        Entrusting Consumer Protection Authority and Responsibility on 
        the Basis of Core Competency
    Plenary and exclusive authority and responsibility for consumer 
protection functions in the financial market, as in other markets, 
should be assigned to that agency which has the highest degree of 
expertise, experience and core competency to perform those functions.
    That agency is not inevitably the FTC. There are certain functions 
which the FTC is ill-equipped to perform. For example, the monitoring 
of the safety and soundness of financial institutions has never been 
within the FTC's purview and it is strongly arguable that the FTC might 
not be effective in performing that function. Likewise, the FTC lacks a 
comparative advantage in terms of the experience and expertise required 
to determine whether a particular financial product or service should 
or should not be offered to the public.
    On the other hand, the FTC has traditionally exercised particular 
expertise and experience with respect to, among other things, the 
fashioning of disclosures that are necessary and appropriate to protect 
consumers both from a lack of sufficient information to make an 
informed choice as well as from information overload. The Commission 
has a long history of conducting empirical tests of the efficacy of 
disclosures in a wide variety of commercial contexts.\10\ The 
Commission has made the development and testing of disclosures 
(especially mortgage disclosures) a key priority in its research 
relating to financial services. Current statutory and regulatory 
schemes related to financial services include a host of requirements 
mandating that information be disclosed to consumers. Most recently, 
the FTC's Bureau of Economics published a seminal research report 
concluding that the current mortgage disclosure requirements do not 
work and that alternative disclosures should be considered and 
tested.\11\
---------------------------------------------------------------------------
    \10\ For example, the FTC staff released a study showing that 
broker compensation disclosures that the Department of Housing and 
Urban Development had proposed confused consumers, leading many of them 
to choose loans that were more expensive. See Federal Trade Commission, 
Bureau of Economics Staff Report, The Effect of Mortgage Broker 
Compensation Disclosures on Consumers and Competition: A Controlled 
Experiment (February 2004). Another example is seminal empirical 
research conducted by FTC staff on rent-to-own transactions, including 
evaluating consumer disclosure requirements. See Federal Trade 
Commission, Bureau of Economics Staff Report, Survey of Rent-to-Own 
Customers (April 2000).
    \11\ See Federal Trade Commission, Bureau of Economics Staff 
Report, Improving Consumer Mortgage Disclosures: An Empirical 
Assessment of Current and Prototype Disclosure Forms (June 2007), 
available at http://www.ftc.gov/os/2007/06/
P025505mortgagedisclosurereport.pdf.
---------------------------------------------------------------------------
    In fact, evidencing that core competency, other agencies (including 
the Federal Reserve Board) have looked to the FTC for guidance in this 
respect. Furthermore, the FTC has been the dominant force in 
spearheading efforts to educate consumers about a wide array of 
important financial issues.\12\
---------------------------------------------------------------------------
    \12\ For example, the FTC distributes consumer education materials 
on mortgage servicing, what consumers should do if they are having 
trouble making mortgage payments, and how consumers can manage their 
mortgage if their lender closes or files for bankruptcy. See http://
www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm; http://www.ftc.gov/
bcp/edu/pubs/consumer/homes/rea04.shtm; http://www.ftc.gov/bcp/edu/pub 
s/consumer/homes/rea12.shtm.
---------------------------------------------------------------------------
    Another function as to which the FTC has been the lead agency has 
been data security and protection of consumers from identity theft. 
Because of its experience and expertise regarding consumer 
expectations, the FTC has exercised primacy in that area. Specific 
examples include the Commission's efforts to protect privacy and fight 
identity theft through its law enforcement actions, its leadership on 
the President's Identity Theft Task Force, and its extensive consumer 
and business education and outreach activities.\13\ This discussion of 
the FTC's core competencies is illustrative not exhaustive.
---------------------------------------------------------------------------
    \13\See generally Prepared Statement of the Federal Trade 
Commission On Protecting Consumer Privacy and Combating Identity Theft, 
Testimony Before the Subcommittee on Crime, Terrorism, and Homeland 
Security of the Committee on the Judiciary, U.S. House of 
Representatives, Dec. 18, 2007, available at http://www.ftc.gov/os/
testimony/P065404idtheft.pdf.
---------------------------------------------------------------------------
    Of course, the FTC cannot adequately perform these functions on a 
plenary and exclusive basis (as it should do) without adequate 
resources. Thus, the assignment of these functions to the FTC must be 
accompanied by an adequate addition of staff to perform them, as well 
as by safeguards against those resources being indirectly attacked by 
superior wages at other Federal agencies.\14\
---------------------------------------------------------------------------
    \14\ For example, the Securities and Exchange Commission and the 
Federal Reserve Board have higher pay scales than comparable pay scales 
at the FTC. Of course, reducing those pay scales is not the only way to 
avoid this problem.
---------------------------------------------------------------------------
    There is another compelling reason for entrusting certain functions 
to the FTC on a plenary and exclusive basis rather than to a new 
agency. Quite apart from its demonstrated superior core competency in 
performing these functions, the FTC has long maintained a vibrant 
competition mission. As former FTC Chairman Muris has pointed out, it 
is imperative to the competition mission that the consumer protection 
mission inform the competition mission. Otherwise, there is a danger 
that competition will be distorted by unwise consumer protection 
initiatives.\15\ This cross-fertilization is all the more important 
today, when ``behavioral economists'' suggest that consumers are not 
always rational in their behavior and that the best competition 
missions are those which are coupled with an expert and experienced 
consumer protection mission.\16\
---------------------------------------------------------------------------
    \15\ See Prepared Statement of Timothy Muris On The Economy and 
Fraud: Protecting Consumers During Downward Economic Times, Testimony 
Before the Committee on Commerce, Science, and Transportation, U.S. 
Senate, July 14, 2009, at 3-4, available at http://commerce.senate.gov/
public/_files/MurisJuly14Testimony.pdf.
    \16\ See Economics Roundtable, Global Competition Review (March 
2009).
---------------------------------------------------------------------------
V. Conclusion
    In short, trading the current flawed balkanized system of consumer 
protection for a new Federal Executive Branch consumer financial 
protection agency, with all of its fundamental faults, is no way to 
make sound public policy.
            Sincerely,
                                           J. Thomas Rosch,
                                                      Commissioner.
                                 ______
                                 
      Response to Written Question Submitted by Hon. Tom Udall to 
                          Hon. J. Thomas Rosch
    Question. Mr. Rosch, Native American and rural communities face 
different, but no less important, challenges in fighting consumer 
fraud. How would you describe the quality of the FTC's outreach to 
Native American and rural communities, especially regarding the current 
economic crisis? Are there areas for improvement? If so, what are your 
plans for implementing these improvements?
    Answer. The agency has done a significant amount of outreach to 
Native American and rural communities, but we can and will do more.
    For several years, the FTC--particularly through our Regional 
Offices--has partnered with the United States Department of the 
Interior's Indian Arts and Crafts Board to undertake outreach 
activities at various Native American and Alaska Native arts and crafts 
events where we have provided a wide range of consumer protection 
materials. Additionally, one of our Regional Offices has partnered with 
state law enforcement and the AARP in Montana to do outreach in rural 
parts of that state. Another Regional Office has done significant 
outreach in Oklahoma, meeting with dignitaries of several nations and 
with an Indian Legal Aid office in Oklahoma.
    There is more that we can and will do in this area. One project we 
are preparing to initiate in the near future is the development of a 
database of tribal newsletters and newspapers so that we can send them 
our consumer protection educational materials. Additionally, in the 
next few months, FTC staff will be doing more outreach in this area.
    The FTC is always looking for more partners, including partners 
with connections to Indian Country, and would welcome additional 
suggestions and ideas on ways to improve our outreach efforts.
    In addition, the FTC produces, promotes, and disseminates 
educational messages and materials to the widest possible audience 
through multi faceted communications and outreach programs, and we have 
focused extensively on issues relating to the current economic 
crisis.\1\ These efforts involve the use of print, broadcast, and 
electronic media, the Internet, special events, and partnerships with 
other government agencies, consumer groups, trade organizations, 
businesses, and other organizations. Additionally, our Office of 
Congressional Relations supports individual Members of Congress who are 
holding town halls on consumer issues and encourages them to put the 
FTC's consumer education materials on their websites.
---------------------------------------------------------------------------
    \1\ In March 2009, the FTC launched ftc.gov/MoneyMatters with 
information to help people dealing with challenging economic times. 
MoneyMatters offers short, practical tips, videos and links to reliable 
resources for more information on topics like credit repair, debt 
collection, job hunting and job scams, vehicle repossession, managing 
mortgage payments and recognizing foreclosure rescue scams.
---------------------------------------------------------------------------
    Given the size of our agency and our limited resources, our 
strategy is to be ``wholesalers'' of information, rather than 
``retailers.'' We work with an informal network of about 10,000 
community based and special interest groups that distribute our 
information to their members, clients and constituents. Most of the 10 
million print publications we distribute each year then are ``re-
distributed'' through this network of local partners. In addition to 
providing these groups with free publications, we encourage them to 
reprint our materials in their newsletters, websites or other 
communications channels.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Roger F. Wicker to 
                          Hon. J. Thomas Rosch
    Question 1. Please provide a chronological breakdown of each step 
in a rulemaking for a rule promulgated under the Magnuson-Moss process 
that is required of the FTC under current law (with references for each 
step to its specific location in statute).
    A chronological breakdown of each step in the Mag-Moss rulemaking 
process was submitted in response to the Questions for the Record 
(``post-hearing questions'') sent to Chairman Leibowitz (see pages 1-2 
of his response). For your convenience (and because it was submitted 
pursuant to an extension which meant that it was submitted shortly 
before the hearing), it is reproduced here with references to the 
statute (or the implementing regulations, if applicable). By my count, 
there are approximately 29 sequential steps in the Mag-Moss rulemaking 
process.

------------------------------------------------------------------------
                         Description of Step               Reference
------------------------------------------------------------------------
1               Prepare an Advance Notice of          15 U.S.C. 
                 Proposed Rulemaking (``ANPR'')        57a(b)(2)(A)
                 describing the area of inquiry
                 under consideration, the objectives
                 the FTC seeks to achieve, and
                 possible regulatory alternatives
                 under consideration
------------------------------------------------------------------------
2               Submit the ANPR to House and Senate   15 U.S.C. 
                 oversight committees                  57a(b)(2)(B)
------------------------------------------------------------------------
3               Publish the ANPR in the Federal       15 U.S.C. 
                 Register for public comment           57a(b)(2)(A)
------------------------------------------------------------------------
4               Receive public comments on the ANPR   15 U.S.C. 
                                                       57a(b)(2)(A)(ii)
------------------------------------------------------------------------
5               Determine that there is reason to     15 U.S.C. 
                 believe that the unfair or            57a(b)(3)
                 deceptive acts or practices at
                 issue appear are ``prevalent,'' on
                 the basis either of cease and
                 desist orders it has issued
                 regarding such acts or practices,
                 or if ``any other information
                 available to the Commission
                 indicates a widespread pattern'' of
                 such acts or practices
------------------------------------------------------------------------
6               Analyze comments received in          15 U.S.C.  57a(b)
                 response to the ANPR
------------------------------------------------------------------------
7               Prepare an initial Notice of          15 U.S.C.  57a; 5
                 Proposed Rulemaking (``NPR'') that:   U.S.C.  553(c)

                > Summarizes and addresses the ANPR   15 U.S.C. 
                 comments;                             57a(e)(3)(A)
                > Sets forth specific proposed rule   15 U.S.C. 
                 text and any alternatives under       57a(b)(1)(A),
                 consideration;
                > Explains the legal and factual      15 U.S.C. 
                 basis for the proposed rule;          57a(e)(3)(A)
                > Invites interested parties to       15 U.S.C. 
                 participate in the rulemaking         57a(b)(1)(B)
                 through submission of written data,
                 views, or arguments;
                > Invites interested parties to
                 propose issues;
                > Includes, if applicable, an         5 U.S.C.  601,
                 initial analysis under the            603; 44 U.S.C. 
                 Regulatory Flexibility Act (``Reg     3506(c)(2)
                 Flex'') based on the anticipated
                 effects of the rule on small
                 entities and an analysis under the
                 Paperwork Reduction Act (``PRA'')
                 of any disclosure, reporting, or
                 record keeping requirements the
                 rule would impose; and
                > Sets forth a preliminary            15 U.S.C. 57b-3(b)
                 Regulatory Analysis of anticipated
                 effects of the rule, both positive
                 and negative
------------------------------------------------------------------------
8               Submit the NPR to House and Senate    15 U.S.C. 
                 oversight committees 30 days before   57a(b)(2)(B)
                 publishing it
------------------------------------------------------------------------
9               Publish the NPR in the Federal        15 U.S.C. 
                 Register for public comment           57a(b)(1)(b); 5
                                                       U.S.C.  553(c)
------------------------------------------------------------------------
10              Receive public comments on the NPR,   15 U.S.C. 
                 usually for 60 days or more           57a(b)(1)(b); 5
                                                       U.S.C.  553(c)
                Provide an opportunity for a public   15 U.S.C. 
                 oral hearing before a presiding       57a(b)(1)(c); 15
                 officer, and if any member of the     U.S.C.  57a(c)
                 public requests such hearing:
------------------------------------------------------------------------
11              Appoint a presiding officer           15 U.S.C. 
                                                       57a(c)(1)(A)
------------------------------------------------------------------------
12              Designate disputed issues of fact to  15 U.S.C. 
                 be addressed at the hearing           57a(c)(2)(B)
------------------------------------------------------------------------
13              Decide petitions to designate fact
                 issues as disputed for the hearing
------------------------------------------------------------------------
14              Accord to (potentially numerous)      15 U.S.C. 
                 interested persons, rights to         57a(c)(4)(A)
                 examine, rebut, and cross-examine
                 witnesses
------------------------------------------------------------------------
15              Determine which among those           15 U.S.C. 
                 interested persons have similar       57a(c)(4)
                 interests
------------------------------------------------------------------------
16              Allow each group of persons with      15 U.S.C. 
                 similar interests to choose a         57a(c)(4)
                 representative
------------------------------------------------------------------------
17              Appoint a representative if the       15 U.S.C. 
                 group cannot choose one               57a(c)(4)
------------------------------------------------------------------------
18              Decide appeals from determinations    15 U.S.C. 
                 on which persons have similar         57a(c)(4)(B)
                 interests
------------------------------------------------------------------------
19              Prepare and publish a second NPR      15 C.F.R.  1.12;
                 addressing all these issues
------------------------------------------------------------------------
20              Conduct the hearings                  15 U.S.C.  57a(c)
------------------------------------------------------------------------
21              Make complete transcripts of all      15 U.S.C. 
                 testimony and cross-examinations      57a(c)(5)
                 available to the public
------------------------------------------------------------------------
22              Analyze the record amassed, and       15 C.F.R. 
                 prepare a staff report that           1.13(f)
                 summarizes and analyzes the record
                 and sets forth the final rule text
                 recommended for adoption by the
                 Commission
------------------------------------------------------------------------
23              If hearings have been held, the       15 U.S.C. 
                 Presiding Officer must prepare a      57a(c)(1)(B) 15
                 report with a summary and analysis    C.F.R.  1.13(g)
                 of the record amassed and
                 recommendations as to adoption of
                 final rule provisions
------------------------------------------------------------------------
24              Publish a Federal Register notice     15 C.F.R. 
                 announcing issuance of the Staff      1.13(h)
                 Report and seeking comments on it
                 and on the Presiding Officer's
                 report, if any
------------------------------------------------------------------------
25              Receive public comments on Staff      15 C.F.R. 
                 Report and Presiding Officer's        1.13(h)
                 Report for 60 days or more
------------------------------------------------------------------------
26              Obtain OMB approval for any           44 U.S.C. 
                 disclosure, reporting, or record      3506(c)(2); 44
                 keeping requirement                   U.S.C. 
                                                       3507(a)(2)
------------------------------------------------------------------------
27              Prepare a Final Rule and Statement    15 U.S.C. 
                 of Basis and Purpose (``SBP'') that   57a(d); 5 U.S.C.
                 sets forth:                            553(c)
                > A summary and analysis of the       15 U.S.C. 
                 record;                               57a(e)(3)(a)
                > The text of the recommended final   5 U.S.C. 
                 rule;                                 706(2)(a)
                > A determination that the practices  15 U.S.C. 
                 addressed by the recommended final    57a(d)(1)(A)
                 rule are prevalent;
                > An explanation of the legal and     15 U.S.C. 
                 evidentiary basis for each            57a(e)(3)(a)
                 provision;
                > A Final Regulatory Analysis,        5 U.S.C. 
                 includes a Final Reg Flex, if         706(2)(a); 15
                 applicable; and                       U.S.C. 
                                                       57a(d)(1)(C)
                > An effective date not earlier than  5 U.S.C.  553(d)
                 30 days after publication in the
                 Federal Register
------------------------------------------------------------------------
28              Publish the Final Rule and SBP in     15 U.S.C. 
                 the Federal Register                  57a(b)(1)(D) 15
                                                       U.S.C.  57a(d)
------------------------------------------------------------------------
29              Submit a notification to Congress     5 U.S.C.  801;
                 pursuant to the Small Business        Section 212 of
                 Regulatory Enforcement Fairness Act   SBREFA, P.L. 104-
                 (``SBREFA''), initiating a period     121, Mar. 29,
                 during which Congress can             1996 (As Amended
                 invalidate the rule by legislation    by P.L. 110-28,
                 and issue compliance guides if        May 25, 2007)
                 required under SBREFA
------------------------------------------------------------------------


    Question 1a. Include the average amount of time that each step in 
the process takes based on historical rulemaking data. If sufficient 
historical data to determine the average amount of time is not 
available, please estimate how long it would take and provide an 
explanation of how the estimate was determined.
    Answer. I cannot submit ``historical rulemaking data'' respecting 
the average amount of time spent on each step in the process because, 
except for the instances described below, no new Mag-Moss rules have 
been proposed for more than 30 years and because task-based timekeeping 
records are no longer retained.
    Based on my experience respecting the seriousness with which the 
Bureau of Consumer Protection (``BCP'') staff took its responsibilities 
when I was Director of that Bureau (from 1973-1975), I estimate that 
steps 1-6 would have taken an average of approximately 2 years. Based 
on my experience as an antitrust defense trial lawyer for nearly 40 
years (from 1965-1973 and from 1976-2006), and on the hearing-related 
steps that resemble pre-trial or post-trial steps, including motions 
practice and appeals,\1\ I estimate that steps 11-25 would take an 
average of approximately 3 years, taking into account petitions, and 
interlocutory appeals on them, as well as continuances, holidays, 
travel schedules and the extraordinary amount of pre-hearing 
preparation and post-trial work required by steps 11-25. Based on my 
experience with Administrative Procedure Act (``APA'') rulemaking since 
my return to the Commission as a Commissioner (2006-present), I 
estimate that steps 7-9, and steps 26-29 (which largely duplicate APA 
rulemaking requirements) would take an average of approximately 2 
years, for a total of 7 years on average.
---------------------------------------------------------------------------
    \1\ The Mag-Moss hearing process is an adversarial process that can 
be very similar to a multi-party trial. Determinations that would help 
control the process are themselves subject to interlocutory Commission 
review and/or to judicial review with the potential for reopening the 
matter.
---------------------------------------------------------------------------
    As I testified at the hearing, the Mag-Moss hearing process alone 
(not including the extraordinary pre-hearing and post-hearing work) 
consumed an average of 38 nonconsecutive days (566 days divided by 15 
rules) with the longest hearing lasting 58 nonconsecutive days and 6 of 
the hearings lasting 40 or more non-consecutive days.\2\ The Mag-Moss 
rulemaking process in its entirety consumed an average of 7 years (102 
years divided by 15 rules) with the longest proceeding lasting more 
than 11 years and nine of the proceedings lasting more than 8 years.
---------------------------------------------------------------------------
    \2\ See Chairman Leibowitz's response at 12-13 and accompanying 
chart.

    Question 2. Please provide a chronological breakdown of any 
additional requirements that are performed during a Magnuson-Moss 
rulemaking that result from FTC created rules and/or guidelines.
    Answer. As stated on page 14 of Chairman Leibowitz's responses to 
the post-hearing questions submitted to him, ``[i]n addition to the 
statutory requirements, the implementing rules provide that FTC staff 
shall make recommendations to the Commission in a report on the 
rulemaking record'' (referring to steps 22 and 24-25 of the 29 
sequential steps), that ``the public have an opportunity to comment on 
both the staff report and the Presiding Officer's report'' (speaking to 
step 25 of the 29 sequential steps), and that ``a procedure for oral 
presentations to the Commission after the close of the hearing record'' 
be established (referring also to step 25 of the 29 sequential steps). 
The most time-consuming of these is the staff report, which marshals 
and analyzes the voluminous record that results from the hearing 
process; while not specifically mandated by statute, such a report was 
considered essential to the Commission's consideration of the record.

    Question 2a. Identify when in the sequence of requirements outlined 
in your response to question 1 each of these FTC created rules and/or 
guidelines occurs.
    Answer. As I testified, each of these additional implementing rules 
was considered at the time to be necessary to carry out Congressional 
intent under the Mag-Moss Act. The sequence of these requirements in 
the Mag-Moss rulemaking process is described in the description of the 
29 total steps in the Mag-Moss rulemaking process set forth in response 
to Question 1.

    Question 2b. Include the average amount of time that each of these 
FTC created rules and/or guidelines take based on historical data. If 
sufficient historical data to determine the average amount of time is 
not available, please estimate how long it would take and provide an 
explanation of how the estimate was determined.
    Answer. The average amount of time that each of these FTC-created 
rules and/or guidelines took, based on historical data, is not 
available for the reasons described in my response to Question 1. Based 
on my experience respecting the seriousness with which BCP staff took 
its responsibilities when I was Director of that Bureau, I estimate 
that it would have taken an average of 18 months to complete these 
three tasks.

    Question 3. Please repeat questions 1 and 2 for the Commission's 
rulemaking process when a rule is promulgated under APA authority.
    Answer. A chronological breakdown of each step in the APA 
rulemaking process was submitted in response to the post-hearing 
questions sent to Chairman Leibowitz (pages 3-4 of his response). For 
your convenience (and because the responses were submitted pursuant to 
an extension which meant that it was submitted shortly before the 
hearing), it is reproduced here with references to the statute (or as 
supplemented by FTC practice):

        1. The rulemaking agency must prepare and publish in the 
        Federal Register a Notice of Proposed Rulemaking (NPR) that: 
        (a) sets forth either the terms or substance of the proposed 
        rule or a description of the subjects and issues involved; (b) 
        explains the legal and factual basis for the proposed rule 
        provisions; and (c) includes, if applicable, a Regulatory 
        Flexibility (Reg Flex) analysis based on the anticipated 
        effects of the rule on small entities, and an analysis under 
        the Paperwork Reduction Act (PRA) of any disclosure, reporting, 
        or record keeping requirements the rule would impose. In 
        addition, the proposed legislation would retain the current FTC 
        Act requirement that, for rules under the Act, the NPR also 
        must set forth a preliminary Regulatory Analysis of anticipated 
        effects of the rule, both positive and negative. 5 U.S.C.  
        553(b); 5 U.S.C.  603; 44 U.S.C.  3506(c)(2).

        2. The agency then must accept public comments on the NPR for a 
        period of 30 days or more. 5 U.S.C.  553 (c) & (d).

        3. The agency must also obtain OMB approval of any disclosure, 
        reporting, or recordkeeping requirements in the rule under the 
        PRA. 44 U.S.C.  3507(a)(2).

        4. After considering the comments, the agency then must prepare 
        and publish in the Federal Register a Statement of Basis and 
        Purpose, setting forth the final rule provisions and ``a 
        concise general statement of their basis and purpose.'' This 
        statement provides a summary and analysis of the record; an 
        explanation of the legal and evidentiary basis for the rule 
        provisions adopted; a final Reg Flex Analysis, if applicable; 
        and an effective date for the rule. Also, under the current FTC 
        Act requirement that would be retained by the proposed 
        legislation, the Statement of Basis and Purpose of rules must 
        set forth a final Regulatory Analysis. 5 U.S.C.  553(c); 5 
        U.S.C.  604.

        5. Subsequently, the agency submits a notification to Congress 
        pursuant to the Small Business Regulatory Enforcement Act 
        (SBREFA), initiating a period during which Congress can 
        invalidate the rule by legislation. The agency also commonly 
        issues compliance guides. 5 U.S.C.  801(a)(1).

        6. The final rule can be challenged in Federal court and will 
        be set aside if the court determines that the Commission's 
        findings are ``arbitrary, capricious, an abuse of discretion, 
        or otherwise not in accordance with law.'' 5 U.S.C.  
        706(2)(A).

    By my count, and as set forth in the Chairman's response to post-
hearing questions, the APA statutory process requires six sequential 
steps, with no required hearing, and the Commission, as a matter of 
practice, has added four additional steps in some instances:

        1. First, in many instances, the Commission has published an 
        Advanced Notice of Proposed Rulemaking (ANPR), providing even 
        earlier notice of the proceeding and opportunity to comment. 
        See, e.g., http://www.ftc.gov/opa/2009/05/decepmortgage.shtm 
        (ANPR issued by the Commission initiating its mortgage 
        practices rulemakings). Although they increase the time it 
        takes to promulgate the ultimate rule, ANPRs have proven useful 
        in situations where the Commission lacks sufficient experience 
        or knowledge in a particular area to formulate a proposed rule.

        2. Second, in some cases, the FTC has held public workshops 
        during the course of the rulemaking proceeding, enriching the 
        record and providing additional opportunities for those who 
        might be affected by the rule to express their views, provide 
        data, and address the assertions of other participants in a 
        practical manner and forum. See, e.g., http://www.ftc.gov/opa/
        2009/08/tsrforum.shtm (announcing public forum to discuss 
        proposed debt relief amendments to the Commission's 
        Telemarketing Sales Rule.)

        3. Third, to further ensure that its decisions are fully 
        informed, the Commission routinely has conducted informal, but 
        extensive, outreach to affected parties. For example, the FTC 
        participated in or conducted a number of rulemakings as 
        required by the FACT Act. For most of these rules, the FTC 
        (with its sister agencies in some cases) solicited data and 
        opinions in addition to the formal request for comments, and 
        often on multiple occasions, from industry groups, legal 
        practitioners, consumer advocates, and others.

        4. Fourth, the Commission has an ongoing program of reviewing 
        all of its rules periodically, seeking public comment on them, 
        and revising or repealing them as appropriate.

    I do not have ``historical rulemaking data'' respecting the average 
time spent on each of these steps in the APA process. Based on my 
experience with APA rulemaking since my return to the Commission (which 
represents the totality of my experience with APA rulemaking), I 
estimate that those six sequential steps would take approximately 2 
years or less to complete.
    I should add several caveats. First, the dates submitted and my 
estimates describe only the rulemaking requirements imposed by the APA, 
as supplemented by the Commission's APA rulemaking practices. They do 
not, in other words, describe the rulemaking that has occurred at other 
agencies (like the SEC) that are authorized to conduct APA rulemaking.
    Second, the Commission has engaged in APA rulemaking in a number of 
instances. Some examples of APA rulemaking (as supplemented by the 
Commission's practices) are described on page 11 of Chairman 
Leibowitz's response: (1) APA rulemaking pursuant to the Telephone 
Disclosure and Dispute Resolution Act of 1992; (2) APA rulemaking 
pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention 
Act (including the Do Not Call Amendments); (3) APA rulemaking pursuant 
to the Children's Online Privacy Protection Act of 1998; (4) APA 
rulemaking pursuant to the Fairness to Contact Lens Consumers Act; (5) 
APA rulemaking pursuant to the Controlling the Assault of Non-Solicited 
Pornography and Marketing Act of 2003; and (6) APA rulemaking pursuant 
to the Omnibus Appropriations Act, 2009 (mortgage practices draft 
rule). APA rulemaking has also been conducted pursuant to the Fair and 
Accurate Credit Transactions Act of 2003 and the Gramm-Leach Bliley 
Act.
    By my estimate, APA rulemaking respecting those rules (excepting 
the most recent mortgage practices rule, which has not been completed) 
has taken an average of zero (0) hearing time and the proceedings have 
taken less than 2 years. Where there have been statutory deadlines for 
completing APA rules--sometimes deadlines of a year or less--the FTC 
has met those deadlines in every instance.

    Question 4. For every proposed rule since 1970 (under both 
Magnuson-Moss and APA procedures), please identify each step in the 
processes outlined in question 1 and 2, or 3 (as appropriate) that was 
taken. In the description, please include the amount of time that was 
spent on each step and the number of staff that were a part of 
completing that step.
    With respect to ``historical rulemaking data'' for the number of 
staff members working on each step in the process, Chairman Leibowitz's 
response to the prior post-hearing questions stated at page 12:
    The records available do not include information sufficient to 
respond to the request in full. Staff has gleaned from some of the 
post-hearing staff reports illustrative staffing information:

   Mobile Homes: At least 13 staff members worked on the post-
        hearing staff report.

   Used Cars: More than 14 staff members worked on the post-
        hearing staff report.

   Funeral Industry: At least 16 staff members worked on the 
        post-hearing staff report.

    These numbers do not include the Presiding Officer (who was 
obligated to produce a separate report) or his staff, Bureau management 
reviewers, Office of General Counsel advisors, or the Commissioners' 
offices.
    I have no reason to doubt the above statement.
    I cannot submit additional ``historical rulemaking data'' for the 
time spent on each step in the Mag-Moss rulemaking process for the 
reasons described in response to Questions 1 and 2. I do not have 
``historical rulemaking data'' for the time spent on each step of the 
APA rulemaking process. I have instead provided my best estimates of 
the time spent on those tasks.
    Based on my experience respecting the seriousness with which the 
BCP took its responsibilities when I was Director of that Bureau, I 
estimate that at least 13-16 staff members would have participated in 
the tasks described in steps 1-6 of the 29 sequential steps of the Mag-
Moss procedures. Based on my experience as an antitrust defense trial 
lawyer described in response to Question 1, I estimate that the hearing 
officer and his staff, the stenographer, the staff members responsible 
for preparing the proposed rule, and cross examining opponents of the 
rule, as well as the staff members involved during the pre-hearing and 
post-hearing phases would have been required to participate in steps 
11-25 of the 29 sequential steps of the Mag-Moss procedures. Again, 
based on my experience respecting the seriousness with which the BCP 
staff took their responsibilities, I estimate that for the tasks 
described in steps 11-25 at least 20 staff members would have been 
necessary.
    Based on my familiarity with the APA rulemaking since I have 
returned to the Commission as a Commissioner, I estimate that 
approximately 7-10 BCP staff members would have participated in the 6 
steps in the APA rulemaking process, as supplemented by the 
Commission's practices.

    Question 4a. For each rule, please provide details on whether or 
not the rule was completed. If not completed, please state what the 
final outcome of the rulemaking was and why that decision was made. 
Please also provide a summation of the total amount of time spent 
working on each rulemaking by the Commission.
    Answer. Of the 15 Mag-Moss rules proposed, 5 were finalized; the 
Credit Practices Rule, the Funeral Industry Practices Rule, the 
Ophthalmic Practices Rule, the Used Car Rule and the Home Insulation 
Rule. In addition, Magnuson-Moss procedures were used to complete or 
modify some rules that had been issued or begun pre-Mag Moss.\3\ The 
other ten Mag-Moss rule proceedings were closed.
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    \3\ It appears to me that the Mail Order Merchandise Rule was 
initially proposed in 1971 under Section 6(g) of the FTC Act, but 
completed at the end of 1975 after the Mag-Moss Act was enacted by 
Congress. Similarly, it appears that the Franchise Rule was initially 
proposed in 1971, but completed over 7 years later in 1978 as a Mag-
Moss rule. That makes sense to me. Prior to the Mag-Moss Act, the FTC 
had the authority to challenge practices under Section 5 of the FTC Act 
and to enact rules respecting those practices but did not have the 
power to seek civil penalties for violations of either Section 5 or a 
rule unless and until a respondent was held in contempt of a Commission 
order respecting the same. Thus, a respondent effectively got ``two 
bites of the apple'' (the first one being a violation of Section 5 or a 
rule, for which there was no monetary penalty). One of the purposes of 
the Mag-Moss Act was to enable the Commission to make rules that were 
enforceable by civil penalties, thus giving a respondent only ``one 
bite at the apple.''
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    As you state in Question 14, former Chairman Muris has testified 
that the reason for that was because there was a ``change in 
enforcement philosophy.'' I have no reason to doubt his testimony. 
After the change in Administration in 1980, former Chairman Muris was 
appointed Director of BCP and I have no doubt that the issuance of Mag-
Moss rules was contrary to his ``enforcement philosophy'' and hence 
that he recommended closing those pending rulemaking proceedings. 
However, the Congress created the FTC as an independent agency, 
providing that no more than three of its members should come from the 
same political party, in order to avoid just such shifts in 
``enforcement philosophy'' upon a change in Administration. Thus, the 
explanation for closing the ten Mag-Moss rule proceedings proffered by 
former Chairman Muris would describe the sort of ``independent'' agency 
capture by an Administration that Congress intended to prevent.
    Furthermore, former Chairman Muris' view that this ``change in 
enforcement philosophy,'' not the time-consuming and burdensome nature 
of the Mag-Moss rulemaking process, ``killed FTC rulemaking'' (see 
Question 15) does not accord with the views of other BCP Directors. As 
previously stated, I was the BCP Director in 1975, when most of the 15 
Mag-Moss rules were proposed. At the outset, I felt the Mag-Moss 
process was workable. However, after all of those rules had already 
been in process for 3 or more years, and 12 of them for over 5 years, 
and before the change in enforcement policy referred to, I became 
convinced that my initial view was wrong. Instead, I came to realize 
that Mag-Moss rulemaking proceedings were not viable. Also, two 
subsequent Bureau Directors, for example, told me (when they were BCP 
Directors) that they shared that view, and that was the reason for the 
absence of Mag-Moss rulemaking.
    Moreover, former Chairman Muris has acknowledged that when he was 
Chairman, his ``enforcement philosophy'' did not prevent him from 
championing the Do Not Call Rule. He further acknowledged that that 
rule was promulgated using APA, instead of Mag-Moss, rulemaking 
procedures. Although he claims that a Mag-Moss rule would not have 
taken any more time to issue, his assertion is unsupported and contrary 
to the way the Commission in fact proceeded.

    Question 4b. For hearings, please note how long each hearing took 
and how long was spent after the hearing reviewing the record. Please 
identify the number of staff members who reviewed the hearing records.
    There are zero (0) hearings required in the APA rulemaking process. 
For my estimate of the time and staff resources spent on average in 
reviewing the hearing record in a Mag-Moss proceeding (see step 22), 
based on my experience as a BCP Director and my personal knowledge 
respecting the seriousness with which the BCP staff performed their 
responsibilities, I estimate the role of staff involved would accord 
with the number of staff reported to have worked on that task in 
connection with the Mobile Homes, Used Cars, and Funeral Industry 
proceedings (13-15 staff members), and the time needed to perform that 
task would have taken, on average, approximately 18 months.

    Question 5. Please identify which specific requirements under the 
FTC's Magnuson-Moss rulemaking process you believe are unnecessary or 
overly burdensome. For each requirement identified, please explain why 
you believe that requirement is unnecessary or overly burdensome.
    I consider all but the 6 steps of the Mag-Moss rulemaking process 
that are also required by APA rulemaking (i.e., publication of the 
prescribed NPR; acceptance of public comments; obtaining OMB approval 
of any disclosure, reporting or record keeping requirements in the 
rule; publication of the prescribed Statement of Basis and Purpose; 
notification to Congress pursuant to the SBREFA; and defending against 
challenges) to be duplicative, unnecessary and burdensome. The 
Commission has demonstrated repeatedly that it can fashion responsible 
rules using the APA procedures, without engaging in the numerous other 
time-consuming and burdensome steps required under Mag-Moss procedures. 
A number of other agencies (including but not limited to the SEC) have 
also demonstrated that APA rulemaking is sufficient to ensure due 
process and fairness. Indeed, Congress itself does not generally 
require hearings and proceedings that are as burdensome and time-
consuming as Mag-Moss rulemaking procedures before adopting important 
legislation (such as the Patriot Act).
    The justifications that have been proffered for such burdensome and 
time-consuming Mag-Moss procedures do not stand up to serious 
examination. It is said, for example, that Mag-Moss rules are necessary 
because otherwise the FTC's broad jurisdiction would make it ``the 
second most powerful legislature in Washington.'' \4\ Indeed, the 
opposite is true. Each of the 15 Mag-Moss rules sought to define 
specific ``rules of the road'' for businesses that otherwise would be 
governed by a broad statute (Section 5 of the FTC Act). Similarly, it 
has been said that rulemaking diverts the staff from doing what it 
should be doing, which is to bring cases.\5\ I am a big fan of bringing 
cases. But I am also a big fan of giving the businesses advance notice 
of the specific ``rules of the road'' before they are sued.
---------------------------------------------------------------------------
    \4\ Testimony of Timothy F. Muris before the U.S. Senate Committee 
on Commerce, Science, and Transportation, at 12-14 (July 14, 2009).
    \5\ Id. at 14.

    Question 6. With a Notice of Proposed Rulemaking, the APA process 
removes the explicit requirement to provide the text and purpose for a 
proposed rule, which is present under the Magnuson-Moss proceedings and 
has helped ensure the FTC designates the issues it is pursuing at the 
outset of a rulemaking. Do you believe this identification of issues is 
an unnecessary step in the FTC's rulemaking process?
    This question says that the APA process ``removes the explicit 
requirement to provide the text and purpose for a proposed rule, which 
is present under the Magnuson-Moss proceedings and has helped ensure 
the FTC designates the issues it is pursuing at the outset of a 
rulemaking.'' That is not how I read or interpret the APA. The APA 
process specifically requires that the Notice of Proposed Rulemaking 
(``NPR'') sets forth either the terms or substance of the proposed rule 
or a description of the subjects and issues involved; explains the 
legal and factual basis for the proposed rule provisions; and includes, 
if applicable, a Regulatory Flexibility analysis based on the 
anticipated effects of the rule on small entities, and an analysis 
under the Paperwork Reduction Act of any disclosure, reporting, or 
record keeping requirements the rule would impose. These are all 
necessary steps occurring at the outset of the APA rulemaking process, 
and I believe they adequately identify the issues. In any event, 
however, the Commission's long standing practice in its APA rulemaking 
is to include the text of the proposed rule in its NPR, and I do not 
foresee any change in this practice.

    Question 7. Do you believe it is beneficial to require a 
demonstration of prevalence at the outset of a rulemaking to ensure 
there is sufficient reason to pursue an industry wide rule? At what 
point in a rulemaking do you believe the Commission should be required 
to demonstrate the prevalence of a deceptive act or practice on which 
it intends to enunciate a rule?
    Answer. Requiring a demonstration of prevalence ``at the outset'' 
of a rulemaking proceeding to ensure that there is sufficient reason to 
issue an industry-wide rule seems to me to put the cart before the 
horse. A primary purpose of a rulemaking proceeding is to determine if 
there is a sufficient reason to issue an industry-wide rule; requiring 
that to be determined ``at the outset'' would oblige the FTC to 
prejudge that key issue. Moreover, requiring a demonstration of 
``prevalence'' to be shown at any point in the proceeding seems to me 
to be imprudent for two additional reasons. First, ``prevalence'' is 
largely in the eye of the beholder in that it is not defined in either 
the statute or the case law. Second, requiring a demonstration of 
``prevalence'' is contrary to the sage adage that even if bad apples do 
not predominate, they may spoil an entire barrel: more specifically, a 
rule that condemns specific ``deceptive or unfair'' business practices 
protects not only consumers but also legitimate businesses that must 
compete with the businesses engaging in those practices; indeed, that 
is why the FTC's consumer protection mission is symbiotic with its 
mission to protect against unfair competition. This is not to say I 
would favor issuing a rule to address a small number of isolated 
problems; business education and, if needed, enforcement action 
ordinarily would be the appropriate answer to that situation.

    Question 8. You stated the hearings usually take 38 days to 
complete. Why do you believe that the removal of this relatively short 
requirement (in the context of a multi-year rulemaking) will 
significantly decrease the time the Commission spends on a rulemaking?
    Answer. I do not consider 38 days of hearings to be a ``relatively 
short'' requirement in the context of a multi-year proceeding. As I 
testified, for nearly 40 years, I was an antitrust litigator for 
defendants in the Federal courts. Many of the antitrust cases in which 
I participated were ``multiyear'' proceedings. Yet, I never 
participated in a trial that was as long as the average Mag-Moss 
hearing (the closest I came was a 37 day jury trial in Chicago in the 
early 2000s). And, the average 38 day Mag-Moss hearing time omits the 
extensive time spent in preparing for, and analyzing the results of, 
the hearing, which are integral parts of the hearing process. Judged by 
other metrics--i.e., as previously discussed, the APA rulemaking 
proceedings (which involve 0 hearing time) conducted by both the FTC 
and other agencies, this is an inordinately long period of time. Nor 
can the time-consuming and burdensome nature of the Mag-Moss rulemaking 
process be justified by the breadth or the importance of the rule 
proposed. As previously discussed, each of the proposed Mag-Moss rules 
actually defined with specificity the applicable ``rules of the road'' 
under a broad statute; and those ``rules of the road'' were not any 
more important than the subject matter of APA rules proposed by the FTC 
and other like agencies, much less than legislation enacted by 
Congress.

    Question 9. Under Magnuson-Moss procedures, the hearing allows 
every party to suggest disputed issues of fact. Do you believe that 
allowing all parties to do so is unnecessary? If the Commission is 
given full APA authority for all rulemakings, how can we be sure that 
this and future Commissions will ensure that the concerns of all 
parties related to potentially disputed issues of fact are heard and 
considered?
    Answer. Based on my experience as an antitrust litigator described 
in response to Question 1, I believe requiring the FTC to consider the 
disputed issues submitted by all parties is unnecessary. Rule 26 of the 
Federal Rules of Civil Procedure, governing pre-trial proceedings in 
Federal courts, does not require a Federal judge to consider the issues 
submitted by all parties even though many of the antitrust cases in 
which I participated were multi-party proceedings with potential 
binding effects on the parties outside the scope of the particular 
case. Moreover, these submissions cannot be viewed in isolation; they 
are a prelude to cross-examination respecting each issue at the 
hearing. Thus, this requirement has the potential to make the hearing 
process extremely time-consuming and burdensome. Indeed, I know of no 
other agency that faces such a requirement. The APA requirement 
compelling an agency to consider all comments submitted, and to defend 
any rule in the courts, has proved to ensure that the legitimate 
concerns of all parties related to potentially disputed issues of fact 
are heard and considered.

    Question 10. In testimony, you referenced a recent attempt by the 
Commission to carve out business opportunities from the Franchise Rule 
as the only proposed rule under Magnuson-Moss requirements since 1978. 
Please explain what occurred with that rulemaking, including the 
ultimate result. Do you think the Magnuson-Moss procedures were too 
burdensome in that case? Why or why not?
    Answer. In 1995, the Commission conducted a regulatory rule review 
of the Franchise Rule to ensure that it was continuing to serve a 
useful purpose. In that review the Commission explored the issue of how 
the Franchise Rule was applied to the sale of business opportunities. 
At the conclusion of the rule review, the Commission determined to 
retain the Franchise Rule with modifications but also decided to seek 
additional comment on whether to address the sale of business 
opportunities through a separate, narrowly tailored rule. To that end, 
under Mag-Moss rulemaking procedures, in 1997 the Commission published 
an ANPR, which jointly considered Franchise Rule modifications as well 
as the bifurcation of the sale of business opportunities from the 
Franchise Rule. In addition to soliciting written comments, the 
Commission staff held 3 public workshops--held in Chicago, Dallas and 
Washington, D.C.--specifically addressing business opportunity sales 
issues.
    In October 1999, the Commission announced its intention to conduct 
a separate rulemaking to address business opportunity sales, but 
proceeded to modify the Franchise Rule under Mag-Moss rulemaking 
procedures first. As the Franchise Rule proceeding began to wind down 
(the final rule was published in January 2007), the Commission began 
Mag-Moss rulemaking proceedings relating to the sale of business 
opportunities. In April 2006, the Commission published an NPR, which 
included proposed language for the new Business Opportunity Rule.\6\ 
The comment periods for the NPR ultimately concluded at the end of 
September 2006. The Commission received over 17,000 comments and 
rebuttal comments.
---------------------------------------------------------------------------
    \6\ The initial comment period was 60 days, and was extended for an 
additional month. The rebuttal period was extended twice--first to 
accommodate the extension of the initial comment period, and then 
extended an additional 6 weeks to allow more time for rebuttal 
comments.
---------------------------------------------------------------------------
    In March 2008, still proceeding under the Mag-Moss rulemaking 
steps, the Commission issued a revised NPR, which proposed a more 
narrowly-focused Business Opportunity Rule. The comment periods for 
this NPR concluded in July 2008, and the Commission received 115 
comments and rebuttal comments. A public comment period relating to the 
Paperwork Reduction Act was conducted that October. The Commission held 
a day-long workshop on June 1, 2009, to explore proposed changes to the 
Business Opportunity Rule and the comment period for that hearing 
closed at the end of June 2009. A Staff Report is currently being 
drafted on the proposed Business Opportunity Rule and the Commission 
anticipates seeking comment on that Report later this year.
    The rulemaking proceedings described above illustrate the problems 
that I believe are inherent to the Mag-Moss rulemaking process. The 
proceeding to amend the Franchise Rule and bifurcate a separate rule 
for business opportunity sales began in 1995 and has still not been 
completed. Although not all of the delay in the Franchise Rule/Business 
Opportunity rulemakings has been due to Mag-Moss rulemaking procedures, 
I believe that much, if not most, of that delay has been.
    There are too many unnecessary steps in the Mag-Moss rulemaking 
process. For example, although the interested parties in the Business 
Opportunity rulemaking waived a hearing, thereby eliminating the time 
and resources required to conduct a hearing (as well as the pre-hearing 
and post-hearing steps integral to such a hearing), four workshops--
three in 1997 and one in 2009--were conducted as an alternative. 
Furthermore, Commission staff must still prepare a Staff Report and 
seek comment (with the requisite comment period) on that Report.
    In addition, Mag-Moss procedures require an unwieldy method of 
amending rules such as the Franchise Rule. The primary reason behind 
amending that Rule was to conform disclosure requirements with those of 
the Uniform Franchise Offering Circular. This modification would reduce 
costs on the business side of franchise sales by streamlining certain 
requirements. Because it took almost 12 years to amend the Franchise 
Rule, businesses lost out on 12 years of potentially reduced costs, 
most of which arguably were passed on to purchasers of those 
franchises.
    Question 11. In testimony, you stated that you believe the 
Commission should allow oral submissions during rulemakings. If the 
Commission were given full APA authority, would you support adding this 
as an additional requirement in statute?
    Answer. I stated in my testimony that the FTC as a matter of 
practice allowed oral submissions in some APA rulemaking proceedings. 
See my response to Question 4. I do not recall testifying that the 
Commission should allow such submissions in all APA proceedings, and I 
do not consider that necessary. I do think it is advisable when a rule 
is unusually novel or complex. However, I do not support adding that 
requirement to the statute. It should be the exception, not the rule.

    Question 12. In testimony, you stated that too strict a prevalence 
requirement on rulemakings would hurt legitimate business. Please 
explain why you believe this to be true.
    Answer. See my prior response to Question 7 respecting a 
``prevalence'' requirement above.

    Question 13. Former Chairman Muris stated that the FTC's rulemaking 
process has taken so long not because of the Magnuson-Moss procedures, 
but because many times the FTC did not have a clear idea of what it 
wanted to accomplish with a particular rule. Do you agree or disagree 
with this statement? Please explain your response.
    I respectfully disagree with my good friend former Chairman Muris. 
It is not correct to assert that ``many times the FTC did not have a 
clear idea of what it wanted to accomplish with a particular rule.'' 
Before any Mag-Moss rule was proposed, it was the subject of extensive 
investigation by the staff; vetting by the Bureau of Consumer 
Protection management; recommendation by the staff, the Bureau 
management and other interested offices at the agency (like the Office 
of Policy Planning and Evaluation (``OPPE'') and the Bureau of 
Economics); and review and adoption by the Commissioners. This was in 
addition to the 29 sequential steps of the Mag-Moss procedures. So in 
the case of each of the 15 proposed rules, both the agency staff and 
the Commission had a very ``clear idea of what [the Commission] wanted 
to accomplish'' with respect to the rule.
    Second, with respect, I was in a better position than former 
Chairman Muris to speak to whether the Commission had a clear idea 
about what it wanted to accomplish with the MagMoss rules it proposed 
in 1975. As previously stated, I was the Director of BCP at the time 
and, as such, I was involved in the investigation, vetting and 
recommendation processes I have described for each of the Mag-Moss 
rules proposed. By contrast, former Chairman Muris was a junior member 
of OPPE when the rules were proposed: as he acknowledged in his 
testimony last July, ``one of the first jobs I had out of law school 
was that as a staffer at the Federal Trade Commission.'' \7\ Finally, I 
do not recall any instance in which OPPE opposed any of the Mag-Moss 
rulemaking proposals recommended by BCP in 1975. To the contrary, OPPE 
enthusiastically supported a number of Mag-Moss rulemaking proposals in 
1975, including at least one that the Commission rejected.
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    \7\ Transcript of Hearing of the Consumer Protection, Product 
Safety, and Insurance Subcommittee of the Senate Commerce, Science, and 
Transportation Committee, at 20 (July 14, 2009).

    Question 14. In his testimony, Mr. Muris stated that Magnuson-Moss 
did not kill FTC rulemaking. A change in enforcement philosophy slowed 
FTC rulemaking efforts. Do you agree or disagree with this statement? 
Please explain your response.
    Answer. See my prior response to Question 4.

    Question 15. In her testimony, Ms. Woolley expressed concern that 
providing the FTC with full APA authority, and the resultant removal of 
Magnuson-Moss's procedural safeguards, creates a threat of new 
regulatory burdens that would limit market innovation and reduce the 
number of jobs the business community is able to create. Do you agree 
or disagree with this statement? Please explain your response.
    Answer. I respectfully disagree with Ms. Woolley. She did not 
explain how or why innovation or the number of jobs in the business 
community would be threatened. Nor did she link the FTC's use of APA 
rulemaking procedures with any of these effects. Thus, I am at a loss 
about what she had in mind.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. David Vitter to 
                          Hon. J. Thomas Rosch
    Question 1. The FTC is asking Congress to change a process enacted 
three decades ago, specifically the rulemaking procedures created by 
the Magnusson-Moss Act. In reviewing the prior testimony of Chairman 
Leibowitz before this committee, there is little documentation on the 
record of the specific problems the Commission incurred over the past 
several decades in exercising its current rule-making powers. Likewise, 
there are no recommended proposals offered by the FTC to fix any 
specific problems with the procedures. We simply have the FTC's 
proposal to replace the current process with APA authority for all the 
FTC's rulemakings. On what specific grounds is the FTC asking Congress 
to completely change the process required in one of the key statutes 
that guides the Commission's actions? Is there any documented evidence 
that the FTC can offer us today supporting this complete change in 
procedure for the Commission? If specific problems can be identified 
with the procedures of the Magnusson-Moss Act that have prevented the 
FTC from carrying out its mission, can the FTC document those so that 
this committee can work on addressing those specific concerns with 
those procedures?
    I respectfully submit that the ongoing experience respecting the 
Mag-Moss rulemaking process (which is described in the responses to 
post-hearing questions that Chairman Leibowitz and I have submitted) 
speaks for itself. Mag-Moss rulemaking has 29 sequential steps and it 
has resulted in hearings that have averaged 38 days in length and 
proceedings that have averaged 7 years in length. With the exception of 
the proposed Business Opportunity Rule, there has been no new Mag-Moss 
rule proposed since 1978. That is more than 30 years in which not only 
have consumers been without the protections afforded by a rule, but 
also bad businesses in the barrel have had two bites at the apple in 
most cases. Moreover, since a Mag-Moss rule is essential to the agency 
obtaining civil penalties in most cases, the good businesses have not 
only gone without ``rules of the road'' afforded by a rule, but have 
not had the protection against unfair competition provided by rules. 
Additionally, the FTC and numerous other agencies have demonstrated 
that APA rulemaking not only is an extremely valuable and responsible 
tool, but also that the APA procedures are more than adequate to ensure 
due process and fairness.

    Question 2. Businesses need greater certainty in order to have the 
confidence to invest in growth and new jobs. The proposed expansion of 
FTC powers creates a significant amount of uncertainty about how the 
FTC may use these new powers to regulate businesses across the entire 
economy. Before we take such a significant step, which may be difficult 
to reverse, it seems prudent to understand at least the potential 
economic impact that each of the FTC's proposed provisions could have 
on our economy. Has the Federal Trade Commission completed an economic 
analysis or impact report that it can share with the members of this 
committee? If not, does the FTC plan to conduct a cost-benefit analysis 
or otherwise assess what impact this proposal may have on our economy?
    Answer. To be sure, businesses need as much certainty as possible. 
That is why rules are essential and the delay that has occurred is 
intolerable. As I testified, the Commission has routinely prepared and 
included in the Statement of Basis and Purpose of each rule a 
consideration of the costs and benefits associated with that rule, 
which can and will be shared with the Committee.
                                 ______
                                 
      Response to Written Question Submitted by Hon. Tom Udall to 
                           Edmund Mierzwinski
    Question. Mr. Mierzwinski, in your organization's experience, how 
would you rate the quality and effectiveness of the FTC's efforts in 
Native American and rural communities? What, if any, suggestions would 
you have for improvement in services to these communities?
    Answer. Senator Udall, your point about financial threats to Native 
Americans and rural Americans is well-taken. Several years ago, on a 
tour of predatory lending hot spots in New Mexico as part of a campaign 
against payday lending, I visited Gallup. A legal services attorney who 
I met with reminded me of what General William Tecumseh Sherman had 
said in the 1870s: ``A reservation is a parcel of land inhabited by 
Indians and surrounded by thieves.'' What he said in 1870 is true in 
Gallup today.
    As you know, sadly, the same could be said of our military bases. 
But while the Congress in 2006 passed the Military Lending Act to 
protect service families from predatory lending I am unaware of any 
significant efforts to assist Native Americans, on or off the 
reservation, or rural Americans, by the FTC or other agencies. I have 
also spoken with private attorneys in New Mexico who have represented 
Native Americans who face deplorable and outrageous violations of law, 
including physical threats, by debt collectors.
    Does the FTC have such outreach programs? Perhaps, but it is not 
something I am aware of. Others I spoke with in response to your 
question did not know of any programs for Native, rural or any other 
under-served Americans. To be fair, perhaps there are outreach efforts 
in the FTC's regional offices I do not know about.
    The first step would be to study the problem more closely to 
determine whether my anecdotal opinions are fair. You might ask the FTC 
itself this same question or ask CRS or GAO for information. I would 
suggest that you consider holding a field hearing in Gallup, or on any 
of the reservations in your state. I would be glad to help you find 
witnesses. Then, the correct approach might be to seek greater budget 
authority for the FTC's field offices to conduct specific additional 
outreach efforts to these under-served communities. Alternatively, it 
might be a better solution--since the FTC does not have field offices 
in each state--to consider a program where it makes grants to or 
partners with state attorneys general offices or local legal services 
offices to provide these services. I hope you find this helpful.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Roger F. Wicker to 
                         Hon. Timothy J. Muris
    Question 1. Please explain why you believe the designation of 
issues in a rulemaking is so important, and how the Magnuson-Moss 
process ensures that the designation of issues is performed. What would 
the effect on the designation of issues be if the Commission was 
granted full APA rulemaking authority?
    Answer. Probably the most important benefit of designating issues 
is that it forces the Commission to be clear about its theories and 
their factual predicates. A clear theory of why a rule provision is 
needed makes clear which facts matter, and avoids the costs and delays 
inherent in exploring every possibly relevant fact. The need to limit 
the number of issues that must be explored is an important incentive 
for the Commission to think through its proposals before it begins the 
rulemaking process.
    The process of designating issues under the Magnuson-Moss 
procedures accomplishes other objectives. It is vital that rules, 
especially far-reaching ones, be based on a sound factual record. 
Designation identifies the key factual disputes that emerge from the 
written comments. Moreover, the procedures ensure that these factual 
predicates of the rulemaking proceeding are fully explored through 
hearings and, if necessary, cross examination. Whether to adopt a rule, 
and if so how to structure its regulatory requirements, depends on the 
Commission's ultimate conclusions about the facts, and the designated 
issues process causes the factual questions to be explored fully.
    Under the Commission's rules, any participant in the rulemaking can 
propose designated issues. The presiding officer or the Commission 
itself then identifies the particular issues that will be the subject 
of further exploration. Under the APA, there is no requirement to 
designate issues. The Commission can identify the questions on which it 
particularly seeks comment, and commenters can present their own view 
of the facts.

    Question 2. Please explain why you believe the right for parties to 
cross-examine during the rulemaking is an important step that should be 
retained.
    Answer. Because the Commission is not expert on many of the facts 
it must resolve, it is more dependent on the fact-finding process than 
many other agencies. Cross examination, as all trial lawyers know, is 
an extremely useful tool to identify weaknesses in the position a 
witness has taken and to highlight the differences between the opposing 
sides.

    Question 3. Commissioner Rosch testified that the Magnuson-Moss 
process was a mistake from its inception, and that the Commission was 
not guilty of overzealous regulation warranting Congressional 
restrictions on their rulemaking authority. Do you agree or disagree 
with this statement? Please explain your response.
    Answer. I disagree. The Magnuson-Moss procedures are tough, but 
workable, and an important safeguard for an agency with the FTC's far-
reaching authority and lack of expertise.
    Many of the early Magnuson-Moss rules were initially proposed 
before the statute was enacted. When Congress codified the Commission's 
rulemaking authority, the Commission simply re-proposed the rules under 
the new procedures. Frequently, these proposals sought to restructure 
entire industries, based on anecdotal evidence and poorly specified 
legal theories. (The Commission itself ultimately rejected many 
proposed rules.) Thus, the scope of the Commission's rulemaking 
ambitions were already apparent when the statute was enacted, and 
Congress appropriately concluded that special safeguards were necessary 
to ensure that the Commission made its decisions after a thorough 
exploration of the facts and issues.

    Question 4. In your testimony, you discussed the Business 
Opportunity Rule and how the threat of Magnuson-Moss procedures 
prevented the Commission from moving forward. Please explain what 
occurred in that situation, and how the Magnuson-Moss procedures 
prevented the Commission from creating unintentionally burdensome and 
unnecessary rules in that case.
    Answer. The originally proposed Business Opportunity rule was 
intended to do two things. First, it was envisioned as an easier way 
for business opportunity sellers historically subject to the 
Commission's Franchise Rule to provide consumers with the information 
they need to make an informed decision about whether to purchase the 
opportunity. Second, it sought to reach business opportunity areas, 
such as work at home schemes, where fraud was widespread and the 
Franchise Rule did not apply.
    Because it knew more about the fraudulent operators who were the 
subjects of frequent enforcement actions than it knew about legitimates 
businesses, the Commission's initial proposal was overly broad, and 
would have covered literally millions of self employed individuals, who 
often worked part time. Comments on the initial proposal documented 
these problems, and proposed numerous disputed issues of material fact 
that it would be necessary to resolve if the Commission wished to 
proceed. Based on the initial comments, the Commission re-proposed a 
more limited rule that avoided overreaching. Although the Commission 
may have retreated without the threat of hearings and cross 
examination, those threats undoubtedly helped to influence the 
Commission's deliberations.

    Question 5. In his testimony, Commissioner Rosch stated that the 
Magnuson-Moss rulemaking process is a ``prescription for doing 
nothing'' and has brought rulemaking at the FTC to a halt. Do you agree 
or disagree with this statement? Please explain your response.
    Answer. As I testified at the hearing, it was a change in 
enforcement philosophy, not Magnuson-Moss, that led to the reduced use 
of rulemaking that has characterized the Commission in the last thirty 
years. A bipartisan consensus has emerged that the Commission should 
seek to enforce common law principles, often through law enforcement 
actions in Federal district court. This approach has been extremely 
productive, and has led to substantial recoveries for injured 
consumers. Moreover, it has led to the development of the law through 
case by case exploration of the issues in areas where rulemaking would 
have been very difficult. For example, the Commission has developed 
through its cases important legal principles governing privacy and 
information security. Writing rules that specify in detail what 
companies must do in this area would be very difficult, and potentially 
counterproductive.
    The notion that Magnuson-Moss proceedings must take ``forever'' or 
an average of 8 years is, to say the least, misleading. If the 
Commission is clear about its theories and the facts that are relevant 
to those theories, there is no reason why rules under Magnuson-Moss 
cannot be completed within 2 to 4 years, as occurred in the two 
eyeglasses rules and would have occurred with the Do Not Call Rule had 
we been required to use Magnuson-Moss.
    Moreover, the historical average overstates the likely time for new 
rules. Many 1970s rules were re-proposed after the statute was passed, 
adding many months to the process. The controversial nature of several 
proposals, which were poorly considered, led to a public outcry that 
delayed the process. The election of Ronald Reagan brought rulemaking 
proceedings to a halt, as the staff realized that the new leaders of 
the Commission would likely have different attitudes toward many of the 
rules. In fact, it was 11 months after the election before the new 
Chairman, Jim Miller, took office, and several years after that before 
final decisions were made to resolve many of the pending rules. Even in 
the unhappy event that similarly ill-though out proposals were 
introduced today, they would not likely encounter the unique set of 
obstacles that delayed the early proposals.

                                  
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