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AUTHORIZATIONS FOR THE FEDERAL TRADE
COMMISSION AND GENERAL OVERSIGHT ISSUES
HEARINGS
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION
AND FINANCE
OF THE
COMMITTEE ON
INTERSTATE AND FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES
NINETY-SIXTH CONGRESS
FIRST SESSION
ON
H.R. 2313 and H.R. 2367
BILLS TO AMEND THE FEDERAL TRADE COMMISSION ACT
TO EXTEND THE AUTHORIZATIONS CONTAINED IN THE ACT,
AND FOR OTHER PURPOSES
FEBRUARY 28, MARCH 1 AND 7, 1979
Serial No0 96-35
Printed for the use of the
Committee on Interstate and Foreign Commerce
ERS LAW SCHOOL Ur3RAR~*
~A~DEN, N. J. 08102
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-~ L s~ób MENT PRINTING OFFICE
47-917 0 WASHINGTON : 1979
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(/-~)
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COMMITI'EE ON INTERSTATE AND FOREIGN COMMERCE
HARLEY 0. STAGGERS, West Virginia, Chairman
JOHN D. DINGELL, Michigan
LIONEL VAN DEERLIN, California
JOHN M. MURPHY, New York
DAVID E. SAT~ERFIELD ifi, Virginia
BOB ECKHARDT, Texas
RICHARDSON PREYER, North Carolina
JAMES H. SCHEUER, New York
RICHARD L. OTrINGER, New York
HENRY A. WAXMAN, California
TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
JAMES J. FLORIO, New Jersey
ANTHONY TOBY MOFFETF, Connecticut
JIM SANTINI, Nevada
ANDREW MAGUIRE, New Jersey
MARTY RUSSO, Illinois
EDWARD J. MARKEY, Massachusetts
THOMAS A. LUKEN, Ohio
DOUG WALGREN, Pennsylvania
ALBERT GORE, JR., Tennessee
BARBARA A. MIKULSKI, Maryland
RONALD M. MOTI'L, Ohio
PHIL GRAMM, Texas
AL SWIFT, Washington
MICKEY LELAND, Texas
RICHARD C. SHELBY, Alabama
SAMUEL L. DEVINE, Ohio
JAMES T. BROYHILL, North Carolina
TIM LEE CARTER, Kentucky
CLARENCE J. BROWN, Ohio
JAMES M. COLLINS, Texas
NORMAN F. LENT, New York
EDWARD R. MADIGAN, Illinois
CARLOS J. MOORHEAD, California
MA~FHEW J. RINALDO, New Jersey
DAVE STOCKMAN, Michigan
MARC L. MARKS, Pennsylvania
TOM CORCORAN, Illinois
GARY A. LEE, New York
TOM LOEFFLER, Texas
WILLIAM E. DANNEMEYER, California
W. E. Wn.uAlssoN, Chief Clerk and Staff Director
KE~Fns J. PAINTER, First Assistant Clerk
ELIZABFTrH HARRISON, Professional Staff
JoIIN H. Au~N, Professional Staff
SUBCOMMIrFEE ON CONSUMER PROTECTION AND FINANCE
JAMES H. SCHEUER, New York, Chairman
RICHARDSON PREYER, North Carolina JAMES T. BROYHILL, North Carolina
RICHARD L. OTflNGER, New York MNITHEW J. RINALDO, New Jersey
DAVID E. SAT~ERFIELD ifi, Virginia SAMUEL L. DEVINE, Ohio
THOMAS A. LUKEN, Ohio (Ex officio)
HARLEY 0. STAGGERS, West Virginia
(Ex officio)
JANIE KIN~Y, Counsel/Staff Coordinator
NM~cY A~e NORD, Minority Staff
(II)
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CONTENTS
Hearings held on- Page
February 28, 1979 . 1
March 1, 1979 135
March 7, 1979 171
Text of-
H.R. 2313 3
H.R. 2367 5
Statement of-
Broyhill, Hon. James T., a Representative in Congress from the State of
North Carolina 294
Cirona, James, president, Rochester First Federal Savings & Loan, appear-
ing on behalf of the U.S. League of Savings Associations 101, 113
Clanton, David A., Commissioner, Federal Trade Commission 174
Densmore, Edward A., Jr., Associate Director, Human Resources Division,
General Accounting Office 25
Devine, Hon. Samuel L., a Representative in Congress from the State of
Ohio 197
Dixon, Paul Rand, Commissioner, Federal Trade Commission 174
Eckhardt, Hon. Bob, a Representative in Congress from the State of
Texas 136, 148
Greeley, Paul M., Boston Regional Office, General Accounting Office 25
Green, Mark, Director, Congress Watch 136, 156
Gustini, Raymond J., assistant counsel, on behalf of U.S. League of Savings
Associations 101
Joseph, Jeffrey H., Director, Government and Regulatory Affairs, Chamber
of Commerce of the United States 68
Levitas, Hon. Elliott H., a Representative in Congress from the State of
Georgia 136
Nelson, Sharon, legislative counsel,: Consumers Union 88
Pertschuk, Hon. Michael, Chairman, Federal Trade Commission 174
Pitofsky, Robert, Commissioner, Federal Trade Commission 174
Rabkin, Norman, Supervisory Auditor, Human Resources Division, Gener-
al Accounting Office 25
Russo, Hon. Marty, a Representative in Congress from the State of
Illinois 20
Schultz, Mark, Regulatory Affairs Attorney, Chamber of Commerce of the
United States 68
Schwartz, Bernard, professor, New, York University School of Law 136, 153
Silbergeld, Mark, director, Consumers Union 88
Sohn, Michael, General Counsel, Federal Trade Commission 174
Williams, Harding deC., general counsel on behalf of the National Savings
and Loan League 101
Additional material submitted for the record by-
Consumers Union, letter dated March 27, 1979, from Mr. Silbergeld,
director to Chairman Scheuer, requested material for record 92
Federal Trade Commission:
Southern District of New York for the U.S. District Court, civil action
No. 77 civ. 3004 203
Chronology of events Federal Glass Co. closing 255
Dougherty, Alfred F., Jr., Director, Bureau of Competition, statement
of 268
Notes to accompany Bureau of Consumer Protection impact evaluation
project list 307
Objections filed with Board 328
General Accounting Office, Edward A. Densmore, Jr., Associate Director,
Human Resources Division, estimated consumer loss 39
(III)
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Additional material submitted for the record by-Continued Page
League of Savings Association, letter dated April 30, 1979, from Mr.
Gustini, assistant Washington counsel to Chairman Scheuer re requested
material for the record 127
National Funeral Directors Association report 24
National Savings and Loan League, letter dated April 5, 1979, from Mr.
Williams, general counsel to Chairman Scheuer re HR. 2367 130
Letters submitted for the record by-
Administrative Conference of the United States, with enclosure, Robert A.
Anthony, Chairman 365
American Dental Association, William E. Allen, D.D.S., chairman, Council
on Legislation 332
Formica Corp., Martin B. Friedman, president 336
Statement submitted for the record by Grocery Manufacturers of America, Inc.. 338
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AUTHORIZATIONS FOR THE FEDERAL TRADE
COMMISSION AND GENERAL OVERSIGHT
ISSUES
WEDNESDAY, FEBRUARY 28, 1979
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCE,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
W~hington, D.C.
The subcommittee met at 10 a.m., pursuant to notice, in room
2322, Rayburn House Office Building, Hon. James H. Scheuer,
chairman, presiding.
Mr. SCHEUER. This meeting of the Subcommittee on Consumer
Protection and Finance will come to order.
We will commence our first day of hearings on the authorization
bill for the Federal Trade Commission. This will be the first of 3
days of hearings. In the last session of Congress we had several
amendments to the Federal Trade Commission authorization. They
were defeated twice on the floor, so I think it is time to perhaps
take a step back and look at the FTC in detail and look at all
aspects of their operations before making any substantive amend-
ments to the basic authorizing legislation.
Therefore, my bill, H.R. 2313, simply authorizes funds for the
fiscal years 1980 and 1981. I would hope that after this legislation
is out of the way, we could conduct a well thought out significant
series of substantive hearings and perhaps, then, put together some
amendments after the end of that process.
My distinguished colleague, Jim Broyhill, has a bill, 2367, which
does address several other matters and does contain several amend-
ments. He is at an important meeting and will be with us very
shortly. In the meantime, he is very well represented by counsel.
And we have the pleasure Of another distinguished member of
the committee present, Sam Devine, so we will proceed.
I did not serve on this subcommittee for the last year. I was on it
before that but when I was made chairman of the Select Commit-
tee on Population I resigned from this subcommittee because of
time constraints. So, I am really not in a position now to hold out
any expertise on the FTC programs.
This set of hearings will be a learning process for me. I have
asked the witnesses to address themselves to the general operation
of the Commission, how it sets its priorities and the validity of
those priorities and how successful it has been in carrying out its
mission and meeting its statutory mandates.
As I said, we will have extensive hearings later on the detailed
work of the FTC. We also plan to hold a joint set of hearings with
(1)
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Congressman Bob Eckhardt, chairman of the Oversight and Inves-
tigations Subcommittee on the costs and benefits of the Govern-
ment regulatory process.
There are those on the consumer end of the spectrum represent-
ing consumer interest and consumer oriented organizations who
talk persuasively about the benefits of Government regulations. On
the other hand, from the industry end of the spectrum, we hear
frequent criticism of the regulatory process and much talk about
the cost of regulation.
We do know there are both benefits and costs. The question is:
How do you quantify them and how do you arrive at the right mix?
How do you stop regulating at the point of diminishing returns?
It will be my goal with Bob Eckhardt and the members of his
subcommittee to look at the costs and the benefits of the Govern-
ment regulatory process in all of the regulatory agencies under the
jurisdiction of the Interstate and Foreign Commerce Committee
and perhaps a few others outside of the jurisdiction of our commit-
tee, assuming that we can stimulate the encouragement of some
standing full committee and subcommittee chairmen of other
standing full committees and subcommittees.
We will also be having a look at the effectiveness of the Magnu-
son-Moss rulemaking procedures. So, I would think by the end of
the year we would be in a much better position than we are now to
assess whatever substantive changes, if any, seem needed to be
made in the Federal Trade Commission Act or in the direction of
its proposed rulemaking.
Without objection the text of H.R. 2313 and H.R. 2367 will be
printed at this point in the record.
[Testimony begins on p. 19.]
[The text of the bills referred to follow:]
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96TH CONGRESS
1ST SESSION *
To amend the Federal Trade Commission Act to extend the authorization of
appropriations contained in such Act.
IN TIlE HOUSE OF REPRESENTATIVES
FEBRUARY 21, 1979
Mr. SCIIEUER introduced the following bill; which was referred to the Committee
on Interstate and Foreign Commerce
A BILL
To amend the Federal Trade Commission Act to extend the
authorization of appropriations contained in such Act.
1 Be it enacted b~ the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 That section 20 of the Federal Trade Commission Act (15
4 U.S.C. 58) is amended by striking out "and" after "1976;",
5 and by striking out "1977. For fiscal years ending after
6 1977, there may be appropriated to carry out such functions,
7 powers, and duties, only such sums as the Congress may
8 hereafter authorize by law." and inserting in lieu thereof
9 "1977; not to exceed $75,000,000 for the fiscal year ending
I-E
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2
1 September 30, 1980; and not to exceed $80,000,000 for the
2 fiscal year ending September 30, 1981.".
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96TH CONGRESS
1ST SESSION *
To amend the Federal Trade Commission Act to extend the authorization of
appropriations contained in the Act, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
FEBRUABY 26, 1979
Mr. BROYHILL (for himself and Mr. RINALD0) introduced the following bill; which
was referred to the Committee on Interstate and Foreign Commerce
A BILL
To amend the Federal Trade Commission Act to extend the
authorization of appropriations contained in the Act, and for
other purposes.
1 Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 That section 20 of the Federal Trade Commission Act (15
4 U.S.C. 58) is amended-
5 (1) by striking out "and" after "1976;"; and
6 (2) by striking out "1977. For fiscal years ending
7 after 1977, there may be appropriated to carry out
8 such functions, powers, and duties, only such sums as
[-E
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2
1 the Congress may hereafter authorize by law." and in-
2 serting in lieu thereof "1977; not to exceed
3 $75,000,000 for the fiscal year ending September 30,
4 1980; not to exceed $80,000,000 for the fiscal year
5 ending September 30, 1981; and not to exceed
6 $85,000,000 for the fiscal year ending September 30,
7 1982.".
8 SEc. 2. (a) Section 5(a)(2) of the Federal Trade Com-
9 mission Act (15 U.S.C. 45(a)(2)) is amended by inserting
10 after "banks," the following: "savings and loan institutions
11 described in section 18(0(3),".
12 (b)(1) Section 6(a) of the Federal Trade Commission Act
13 (15 U.S.C. 46(a)) is amended by inserting after "banks" the
14 following: ", savings and loan institutions described in section
15 18(f)(3),".
16 (2) Section 6(b) of the Federal Trade Commission Act
17 (15 U.S.C. 46(b)) is amended by inserting after "banks," the
18 following: "savings and loan institutions described in section
19 18(0(3),".
20 (3) The proviso at the end of section 6 of the Federal
21 Trade Commission Act (15 U.S.C. 46) is amended-
22 (A) by inserting after "banks" the following: ",
23 savings and loan institutions described in section
24 18(0(3),"; and
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3
I (B) by inserting ", in business as a savings and
2 loan institution," after "banking".
3 (c)(1) Section 18(0(1) of the Federal Trade Commission
4 Act (15 U.S.C. 57a(f)(1)) is amended-
5 (A) in the first sentence thereof-
6 (i) by inserting "or savings and loan institu-
7 tions described in paragraph (3)" after "banks"
8 each place it appears therein; and
9 (ii) by inserting "or (3)" after "(2)";
10 (B) in the second sentence thereof, by inserting
11 after "System" the following: "(with respect to banks)
12 and the Federal Home Loan Bank Board (with respect
13 to savings and loan institutions described in paragraph
14 (3))"; and
15 (C) in the last sentence thereof-
16 (i) by inserting "each" before "such Board"
17 the first place, it appears therein;
18 (ii) by striking out "such Board finds that
19 (A)" and inserting in lieu thereof "(A) either such
20 Board finds that";
21 (iii) by inserting "or savings and loan institu-
22 tions described in paragraph (3), as the case may
23 be," after "banks" the first place it appears there-
24 in;
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1 (iv) by inserting after "or (B)" the following:
2 "the Board of Governors of the Federal Reserve
3 System finds"; and
4 (v) by striking out "the Board" and inserting
5 in lieu thereof "such Board".
6 (2) Section 18(f) of the Federal Trade Commission Act
7 (15 U.S.C. 57a(f)) is amended by redesignating paragraphs
8 (3), (4), and (5) thereof as paragraphs (4), (5), and (6), respec-
9 tively, and by inserting after paragraph (2) thereof the follow-
10 ingnewparagraph:
11 "(3) Compliance with regulations prescribed under this
12 subsection shall be enforced under section 5 of the Home
13 Owners' Loan Act of 1933 (12 U.S.C. 1464) with respect to
14 Federal savings and loan associations, section 407 of the Na-
15 tional Housing Act (12 U.S.C. 1730) with respect to insured
16 institutions, and sections 6(i) and 17 of the Federal Home
17 Loan Bank Act (12 U.S.C. 1426(i), 1437) with respect to
18 savings and loan institutions which are members of a Federal
19 Home Loan Bank, by a division of consumer affairs to be
20 established by the Federal Home Loan Bank Board pursuant
21 to the Federal Home Loan Bank Act.".
22 SEc. 3. (a) Section 18(a)(1) of the Federal Trade Corn-
23 mission Act (15 U.S.C. 57a(a)(1)) is amended by striking out
24 "The" and inserting in lieu thereof "Subject to the provisions
25 of subsection (i), the".
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5
1 (b) Section 18 of the Federal Trade Commission Act (15
2 U.S.C. 57a) is amended by adding at the end thereof the
3 following new subsection:
4 "(i)(1) Notwithstanding any other provision of this Act,
5 simultaneously with prescribing any rule under this Act, the
6 Commission shall transmit a copy thereof to the Secretary of
7 the Senate and the Clerk of the House of Representatives.
8 Except as provided in ~aragraph (2), the rule shall not
9 become effective if-
10 "(A) within 90 calendar days of continuous ses-
11 sion of the Congress after the date the rule is pre-
12 scribed, both Houses of the Congress adopt a concur-
13 rent resolution, the matter after the resolving clause of
14 which is as follows: `That the Congress disapproves
15 the rule precribed by the Federal Trade Commission
16 dealing with the matter of , which rule
17 was transmitted to the Congress on .`, the
18 blank spaces therein being appropriately filled; or
19 "(B) within 60 calendar days of continuous ses-
20 sion of the Congress after the date the rule is pre-
21 scribed, one House of the Congress adopts such a con-
22 current resolution and transmits such resolution to the
23 other House, and such resolution is not disapproved by
24 such other House within 30 calendar days of continu-
25 ous session of the Congress after such transmittal.
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1 "(2) If, at the end of 60 calendar days of continuous
2 session of the Congress after the date on which a rule is
3 prescribed, no committee of either House of the Congress has
4 reported or been discharged from further consideration of a
5 concurrent resolution disapproving the rule, and neither
6 House has adopted such a resolution, the rule may go into
7 effect immediately. If, within such 60 calendar days, such a
8 committee has reported or been discharged from further con-
9 sideration of such a resolution, or either House has adopted
10 such a resolution, the rule may go into effect not sooner than
11 90 calendar days of continuous session of the Congress after
12 such rule is prescribed unless disapproved as provided in
13 paragraph (1).
14 "(3) Congressional inaction on, or rejection of, a resolu-
15 tion of disapproval under this subsection shall not be deemed
16 an expression of approval of the rule involved.
17 "(4) For purposes of this subsection-
18 "(A) continuity of session is broken only by an ad-
19 journment of the Congress sine die; and
20 "(B) the days on which either House is not in
21 session because of an adjournment of more than 3 days
22 to a day certain are excluded in the computation of 30,
23 60, and 90 calendar days of continuous session of the
24 Congress.".
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1 (c) The amendments made in this section shall apply to
2 any rule of the Federal Trade Commission which has not
3 become final on or before March 1, 1979. If any such rule
4 becomes final after such date, but before the date of the en-
5 actment of this Act, such rule shall cease to be in effect and
6 shall be subject to the provisions of section 18(i) of the Feder-
7 al Trade Commission Act, as added by subsection (b).
8 SEC. 4. (a) The Federal Trade Commission Act (15
9 U.S.C. 41 et seq.) is amended by redesignating section 21 as
10 section 27 and by inserting after section 20 the following
11 new sections:
12 "SEC. 21. The Commission, in connection with carrying
13 out any proposed rulemaking under section 18, shall-
14 "(1) prepare a statement relating to the need for,
15 and the purposes and applicability of, the proposed rule
16 involved in accordance with section 22;
17 "(2) prepare a statement containing an analysis of
18 regulatory and nonregulatory alternatives to such pro-
19 posed rule in accordance with section 22; and
20 "(3) carry out an economic impact analysis of
21 such proposed rule in accordance with section 23.
22 "SEC. 22. The Commission shall include in the general
23 notice of proposed rulemaking required in section 553(b) of
24 title 5, United States Code-
25 "(1) a statement which-
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1 "(A) describes in specific terms the need for
2 the proposed rule involved and the purpose which
3 will be served by such proposed rule;
4 "(B) indicates the legal basis for the pre-
5 scription of such proposed rule; and
6 "(0) specifies the scope and applicability of
7 such proposed rule; and
8 "(2) a statement which-
9 "(A) describes each regulatory and nonregu-
10 latory alternative which was considered by the
11 Commission in connection with preparation of
12 such proposed rule;
13 "(B) discusses the reasons for selection of
14 such proposed rule as the most effective means
15 for the achievement of the policy goals and pur-
16 poses of the Commission, taking into account the
17 costs and benefits associated with each regulatory
18 and nonregulatory alternative considered by the
19 Commission; and
20 "(0) indicates the manner in which the eco-
21 nomic impact analysis prepared by the Oomnils-
22 sion in accordance with section 23 was taken into
23 account in connection with selecting the proposed
24 rule as the most effective means for the achieve-
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9
1 ment of the policy goals and purposes of the Corn-
2 mission.
3 "Sec. 23. (a) The Commission, in connection with car-
4 rying out any proposed rulemaking under section 18, shall
5 prepare an economic impact analysis of the proposed rule
6 involved. Such analysis shall examine-
7 "(1) the direct and indirect costs associated with
8 compliance with such: proposed rule;
9 "(2) the potential inflationary or recessionary ef-
10 fects of such proposed rule;
11 "(3) the direct or indirect effects which such pro-
12 posed rule may have on employment;
13 "(4) the effects which such proposed rule may
14 have on competition in businesses and industries affect-
15 ed by such proposed rule, with particular attention to
16 any competitive effects upon small businesses;
17 "(5) the effects which such proposed rule may
18 have on consumer óosts, with particular attention to ef-
19 fects upon economically depressed segments of the na-
20 tional population;
21 "(6) the impaet of such proposed rule on produc-
22 tivity in businesses: and industries affected by such pro-
23 posed rule; and
24 "(7) the impact of such proposed rule on record-
25 keeping and reporting requirements, including-
47-917 0 - 79 - 2
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1 "(A) an estimate of the number of, and a de-
2 scription of the classes of, persons who would be
3 required to maintain records, submit reports, and
4 fulfill other information-gathering requirements
5 under such proposed rule; and
6 "(B) an estimate of the nature and amount of
7 information which would be required to be con-
8 tamed in such reports, the frequency of such re-
9 ports, and the costs associated with complying
10 with such recordkeeping, reporting, and other in-
11 formation-gathering requirements.
12 "(b) The Commission shall take the economic impact
13 analysis prepared in accordance with subsection (a) into ac-
14 count in preparing the statement required in section 22(2).
15 "(c) Copies of each economic impact analysis prepared
16 by the Commission in accordance with subsection (a) shall be
17 made available by the Commission for public inspection and
18 copying during normal business hours, subject to the pay-
19 ment of a reasonable fee to cover any cost of such copying.
20 "SEc. 24. (a)(1) Each statement prepared by the Com-
21 mission under section 22 in connection with a proposed rule-
22 making, and included in the general notice of proposed rule-
23 making, shall be included by appropriate reference in the
24 publication of the final rule in the Federal Register.
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11
1 "(2) If the Commission makes any change or alteration
2 in any statement specified in paragraph (1) before publication
3 of the final rule, then the Oommission shall include in such
4 publication a detailed explanation of the nature of, and rca-
5 sons for, each suôh change or alteration.
6 "(b) The Commission shall prepare a statement, which
7 shall be signed by the chairman of the Commission and shall
8 be included in the publication of the final rule involved in the
9 Federal Register, indicating that the chairman of the Com-
10 mission has reviewed such final rule and that-
11 "(1) such final rule is stated in clear, readily un-
12 derstandable, and uunmbiguous language which specifi-
13 cally describes the scope and applicability of such final
14 rule;
15 "(2) such final i~uIe is not in conflict with any cx-
16 isting rule prescribed by the Commission or by any
17 other Federal agency;
18 "(3) such final rule shall not be interpreted or oth-
19 erwise construed in such a manner as would make
20 such rule in conflict with any existing rule prescribed
21 by the Oommission~ or by any other Federal agency;
22 and :
23 "(4)(A) such final rule is not duplicative of any
24 existing rule prescribed by the Commission or any
25 other Federal agency; or
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1 "(B) in any case in which such final rule is dupli-
2 cative of any such existing rule, there is a need for
3 such duplication.
4 In any case in which a final rule is duplicative of any existing
5 rule, the statement required in this subsection shall include a
6 description of such duplication, together with an explanation
7 of the need for such duplication.
8 "SEc. 25. (a) The Oommission shall review each rule
9 prescribed by the Oommission not later than 5 years after
10 such rule is prescribed (and not later than the end of each 5-
11 year period thereafter) in order to determine whether-
12 "(1) such rule continues to be necessary, taking
13 into account technological and other developments, any
14 changes in economic and other conditions, and any
15 changes in the policies and priorities of the Oommis-
16 sion, which have occurred since such rule was initially
17 prescribed;
18 "(2) such rule is carrying out the purposes it was
19 designed to carry out at the time it was initially pre-
20 scribed;
21 "(3) such rule is in conflict with, or is duplicative
22 of, any existing rule prescribed by the Commission or
23 any other Federal agency;
24 "(4) the language of such rule should be simplified
25 or clarified; and
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1 "(5) such rule should be amended or repealed.
2 "(b) The Commission shall, not later than 5 years after
3 the effective date of this section, review each rule prescribed
4 by the Commission which ~5 in effect on such effective date in
5 order to make the determinations specified in subsection (a)
6 with respect to each such rule.
7 "(c) The Commission, in making the determinations re~
8 quired in subsection (a): and subsection (b), shall take into
9 account-
10 "(1) the number and nature of complaints, com~
11 ments, and suggestions received by the Commission
12 with respect to the rule involved; and
13 "(2) the nature and extent of any burdens im-
14 posed by such nile upon persons required to comply
15 with such rule, as compared to the effectiveness of
16 such rule in achieving the purposes for which it was
17 initially prescribed.
18 "(d) The Commission shall publish each determination
19 required in this section, together with a summary of the rea~
20 Sons for such determination, in the Federal Register.
21 "SEc. 26. (a) If the Commission fails to comply with
22 any procedural requirement established in section 21 through
23 section 25, then any jerson may file a petition for judicial
24 review in an appropriate circuit court of the United States
25 not later than 60 days after such failure to comply.
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1 "(b) Upon the filing of a petition under subsection (a),
2 the court shall have jurisdiction to review the action of the
3 Commission, and if the court finds that the Commission has
4 failed to comply with any procedural requirement the court
5 shall have authority to order the Commission to suspend fur-
6 ther rulemaking proceedings relating to the rule which is the
7 subject of the petition, or to order the Commission to suspend
8 further enforcement of the rule, until the Commission is in
9 compliance with the procedural requirements established in
10 section 21 through section 25.
11 "(c) The judgment of the court in any action brought
12 under this section shall be final, subject to review by the
13 Supreme Court of the United States upon certiorari or certifi-
14 cation, as provided in section 1254 of title 28, United States
15 Code.".
16 (b) The amendments made in subsection (a) shall apply
17 to proposed rulemakings of the Federal Trade Commission
18 which commence after the date of the enactment of this Act.
0
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Mr. SCHEUER. My distinguished colleague, would you like to
make some preliminary remarks?
Mr. DEVINE. My interest today is perhaps parochial. I represent
the Columbus, Ohio district. Recently, the Federal Trade Commis-
sion involved themselves in a case out there wherein a glass com-
pany called Federal Glass was i~ financial difficulty and there was
an offer to~ acquire that by an organization known as Lancaster
Colony.
The Federal Trade CommissiOn in its wisdom or lack thereof
denied the Lancaster Colony people the right to acquire this, not-
withstanding the fact that this company was virtually going out of
business unless something happened. The Federal Trade Commis-
sion remained adamant, did not respond to correspondence, and it
was part of the record-there was no ex parte problem-that
unless this acquisition did occur the business would go or they
would go out of business and in fact it did and 1,500 longtime
employees were put out on the street seeking other employment.
After the fact, the Federal Trade Commission decided they had
indeed made a mistake in the action they took, seeking to preserve
competition and prevent monopoly. It did in fact just the reverse; it
cut down competition. When you put a place out of business, it
creates more of a monopoly than letting someone acquire it and
continue operation.
They changed their mind just last week and Lancaster Colony is
in a position of reckoning with the defunct company and we are
hopeful that 500 employees will go back on and the rest at a future
time.
But it is a classic case, Mr. Chairman, of a regulatory agency
overregulating and being self-defeating by the type of action that
they took. That is a matter of concern to this member and to other
members, I am sure, as we deal with regulatory agencies and their
purpose and whether or not they are defeating their own purpose.
Thank you very much.
Mr. SCHEUER. Congressman Devine, what you are alleging-if it
is true-would be a shocking example of the worst kind of regula-
tory abuse, and it is very disturbing to me. I justify Government
regulation in all of its myriad forms when it is more than balanced
by some provable benefit to the community, to the consumer, but
the kind of action you have just described, if true, would be the
classic kind of Government regulation that should never take
place.
I would like to invite you to give us a brief on that subject,
exactly what did happen, and perhaps we could get some official of
your community to come and testify in one of our future days of
hearings.
Mr. DEVINE. I have a file 5 to 6 inches deep already, and Con-
gressman Wylie and Senator Glenn are involved in this as well as
a number of other people.
Mr. SCHEUER. Congressman, on March 7, Commissioner Perts-
chuk and every member of the Commission is scheduled to testify
here. I wonder if you could prepare a brief summary of your 5-inch
file for the benefit of the members of this committee and if you
would be kind enough to come to that hearing, we will recognize
you forthwith.
PAGENO="0024"
20
Mr. DEVINE. I will accept the invitation and be happy to do so.
Mr. SCHEUER. I would very much like to hear their explanation
of how, according to your report they could have bungled this case
so. I will ask them to be prepared to answer questions on it.
I expect they will have some kind of answer. I suppose there are
always two sides to every question, but you have made a prima
fade case of maladministration of the regulatory process.
Mr. DEVINE. If I am not myself mistaken, the minority member,
Mr. Broyhill, is aware of the situation. We have discussed it in the
past.
Mr. BROYHILL. It has recently been brought to my attention.
Mr. SCHEUER. We know you had a very important meeting that
delayed you a few minutes. Would you like to make some prelimi-
nary remarks before we begin?
Mr. BROYHILL. No.
Mr. SCHEUER. Sam Devine has done an excellent job in peaking
our curiosity as to how this episode could have ever taken place.
Without objection, the Chair wishes to place in the record, as
though read, the statment of Congressman Marty Russo of Illinois.
[Statement of Congressman Marty Russo follows:]
STATEMENT OF HON. MARTY RUSSO, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Russo. I appreciate the opportunity to appear before the
members of the Commission this afternoon to present my views on
the subject of Federal regulation of the funeral industry. I will
attempt to address myself to the issue and not bore you with a lot
of rhetoric. I do not believe your staff has proven the case that a
Federal law governing the funeral industry is needed. In addition
to that I am very distressed over the whole manner by which your
investigation was begun and then conducted. I consider the exer-
cise to have been a biased one with your staff often acting in an
arrogant, sometimes belligerent manner and even utilizing the
media to present a distorted picture of the funeral industry. This
includes things like giving the impression that the average funeral
costs twice as much as it does by including burial expenses which
the funeral director does not control.
As chairman of a small business subcommittee, I am disturbed
by what you say on the one hand and then what you do on the
other. You have testified before another one of our subcommittees
on more than one occasion that your resources are not what they
should be, or you would be able to provide even more protection for
small business. Yet, look at your record.
In recent years, you have begun several rulemaking proceedings.
Of all the industries and companies affected, the overwhelming
majority have been small businesses. The funeral industry for ex-
ample is a small business intensive one. More than 92 percent of
the firms are small businesses. This one rule alone so far has cost
the taxpayers well over $1 million, perhaps even $2 million. Is it
any wonder I question the real role of the Commission?
I will now direct myself to various specific issues.
Throughout the proceedings on this rule, your staff has given the
impression that the furneal industry has been totally uncoopera-
tive in this investigation. In fact, at various times your staff has
PAGENO="0025"
21
even used the term "stonewalling" in reference to the industry's
position. This apparently was said on the record by Presiding Offi-
cer Kahn among others.
In this connection at a recent Small Business hearing, repre-
sentatives of the industry were asked about this. In respone, they
gave us a list of contacts with yOur agency dating back to 1972. A
reading of this list does not appear to support this stonewalling
image. This list was included in my earlier submission for the
Commission record. From reading the list it appears your staff had
its mind made up and wasn't interested in sitting down with indus-
try representative.
Although we brought this issue up back in the 94th Congress,
none of the witnesses were sworn at the Commission's hearings on
this rule. Your hearing officer explained that this was because
some people find the requirement of an oath offensive. In a matter
as important as this, I don't. What I would find offensive is a
record filled with inflated and incorrect information due to the
lack of an oath.
Although funeral industry representatives asked to be allowed to
question FTC staff members, their request was refused. We were
told that the record was not be based on staff opinion and therefore
this was not needed. This is in violation of the legislative history of
the Magnuson-Moss Warranty-Federal Trade Commission Improve-
ment Act. Proponents of the bill in the House assured House
Members that staff members were indeed subject to questioning.
I was under the impression that the rulemaking proceeding was
to be as fair to all interested parties as possible. This has not been
the case. For example, your staff took well over a year to prepare
its staff report summarizing the hearings. Yet everyone was sup-
posed to obtain a copy of this 600-page document and comment on
it in 30 days. After everyone involved complained, this was ex-
tended to 60 days after half Of the original 30 days had lapsed.
Fairness should have dictated much more time. It is obvious that
the average consumer or businessman is not being considered a
respondent, because how can they react in such a short time to
such voluminous material?
I would also ask that you look at the report your staff put
together summarizing the hearings which comes out supporting
their rule. Then look at the staffs' summary of the comments of
interested parties to the rule most of which were in opposition. The
latter looks like it was thrown together in a few days. Again, are
you getting an objective picture of what the issues are here?
It is my understanding that funds for public participants are
intended for interested parties who are not able to afford extended
participation on their own. Allegations have been made to me that
your staff vigorously sought out various consumer groups, yet ig-
nored any industry contacts. It is alleged that representatives of
the Nation's black funeral homes were never contacted and never
told such funds were available. The Commission should investigate
this and make a statement on who is eligible for such funds and
how notice should be served.
There are many examples of alleged lack of objectivity in the
proceedings on your rule. I will give you one example which you all
may want to personally review.
PAGENO="0026"
22
Dr. Roger D. Blackwell of Ohio State University is a well-known
authority on consumer behavior. He coauthored the textbook "Con-
sumer Behavior" which is used in many of the Nation's colleges.
In an appendix to the presiding officer's report there is a section
concerning the credibility of the testimony of Dr. Roger D. Black-
well. I have received correspondence from Dr. Blackwell which
indicates he believes he was not a participant in an informal
hearing. Rather he suggests he was thrust in the middle of an
adversary hearing without benefit of legal counsel and badgered,
intimidated, and questioned over areas unrelated to my written
statement. Dr. Blackwell further states that in his report the pre-
siding officer in nine instances made statements which are contra-
dicted by the record, or which would serve to mislead the Commis-
sioners. Due to the seriousness of his allegations, I suggest Black-
well's testimony, the presiding officer's comments, and Blackwell's
rebuttal all be reviewed by the Commission.
Beyond that you should be made aware of what has allegedly
happened to Dr. Blackwell since his appearance before the Com-
mission. Blackwell told my staff that the president of Ohio State
received correspondence from a director of. one of the consumer
groups you funded claiming Blackwell should not be teaching and
should be removed from his class on death. The letter caused both
the vice president and academic dean to investigate the complaint
fully. Needless to say this caused Blackwell much embarrassment
and ridicule. Following this incident Blackwell received an inquiry
from the Internal Revenue Service. They were acting on a tip that
he had for several years received substantial sums of unreported
income from the funeral industry. The IRS found nothing.
Needless to say I find this treatment of a voluntary witness
outrageous. Such conduct will no doubt have a chilling effect on
Blackwell and his colleagues who might again consider testifying
before a Federal panel.
I have several more procedural problems with your investigation
and these were mentioned in a statement on the House floor by me
on September 28, 1978.
There are two versions of a proposed rule before you. Neither is
needed. In my opinion your staff has not made a case for Federal
regulation in this area.
The original attorney on the funeral investigation, Arthur Angel,
told our committee back in 1976:
Our position is-which returns to our rule-it should be up to the individual
family member to make the arrangement, to choose as freely as possible the kind of
funeral arrangements that meet their needs; free of any influence from the Federal
Trade Commission, but also free from influence from a funeral director who is going
to profit more on an elaborate funeral.
We are attempting by the regulations to provide information to consumers which
will give them a broader range of choices.
What we need is more consumer information not another Feder-
al law. The funeral directors, consumer groups, and the Govern-
ment should sit down and work out a voluntary program to provide
any required information.
We are into a very dangerous area when we try to legislate
funerals. Societal and religious customs dictate most funerals. This
is not the average business. Priorities, and preference differ as to
people, businesses, and geography.
PAGENO="0027"
23
Our Government itself is already very involved in this area.
When a major political or military figure dies, do we not have
elaborate traditional funerals? Are not many social security and
veterans benefits related to the death of a family member? Who
are we in the Government to go a step further and almost reach a
point of trying to influence a person's choice on how a death
ceremony will be performed? I will not discuss all the issues raised
section by section in the rule because later witnesses you will hear
are intending to do that. Some observations are in order however.
Your staff has continually supported the concept of price itemiza-
tion as being an important factor in lowering costs. Price advertis-
ing is also stressed. What has been overlooked is the added cost of
advertising and psychological implications of itemizations.
In the State of New Jersey, itemization was mandated. The
result of mandatory itemization in New Jersey has been increased
not lower prices for funerals. Why? According to the State's funer-
al directors, once consumers saw a detailed breakdown of prices
item by item they chose more items than ever before, because
apparently they did not look at the overall total until the end of
the process. For example, when a person saw a limousine was $25,
they thought that was reasonable, so why not select two or three?
Our point here is that if one supports price itemization, he or she
should state the facts for such support. There is evidence that
itemization could raise, not lower funeral costs. Also, with forced
itemization the package funeral could eventually disappear. This
would be very economically harmful to lower income groups. I
believe this debate on itemization is important because it is almost
the backbone of both proposed rules.
The division of professional services has recommended modifying
the original rule. In their memorandum they rightfully show that
several provisions of the rule are not supported by the record and
would cause impossible enforcement nightmares.
What will this rule cost? Very little according to your staff. Yet,
recently, Dr. Vanderlyn R. Pine submitted a cost study of the
original proposed rule to the White House Council on Wage and
Price Stability. Since much of what he discussed is still a part of
the final staff rule, his study warrants the Commission's attention.
He concludes that the rule will cost the public an additional $50
million annually. This directly contradicts the assertions of your
staff which infer, if anything, lower costs.
I think it is also important to note that the average funeral price
in the Nation has been somewhat constant in recent years. In-
creased land and labor costs and cemetary regulations on the other
hand have added more to the overall funeral and burial costs.
The inference that has run throughout this investigation is that
there is gross consumer fraud and misrepresentation throughout
the Nation in the funeral industry. It is fair to say that the
industry's reputation has been damaged, and I think unfairly.
A former small business chairman said in 1976:
In a democracy, it is not required that the public prove why the Government
should not regulate them, the burden is on the Government to show why they
should issue regulations against their citizens.
In my humble opinion that has not been done. I would hope you
agree with me.
PAGENO="0028"
24
[The following was submitted for the record.]
NATIONAL FUNERAL DIRECTORS ASSOCIATION REPORT
In November of 1972 NFDA was Contacted by an economist seeking certain
information. An attempt was made to provide that information and meet with the
economist. The economist never permitted a meeting with him nor was any ar-
rangement made for him to get the NFDA material he originally requested. It was
learned that this university professor was seeking a consultantship with the Federal
Trade Commission. In his refusal for a meeting with the Executive Director of
NFDA or one of the association's consultants, he indicated that the FTC was taking
a look at funeral service and implied that when he would see Howard Raether it
would be as the result of FTC litigation involving NFDA and Howard Raether.
Concomitant with this development was an FTC member approaching a repre-
sentative of NSM about the possibility of a trade regulation rule such as had been
suggested during the Senate Antitrust Subcommittee hearings in 1964.
On July 24, 1973 a resolution was passed by the Commission "directing use of
compulsory process in a non-public investigation" of funeral service. NFDA was
never notified of this although named in it. It had to read about it in the newspa-
pers.
In October of 1973 the FTC called a press conference in Washington. The purpose
was to discuss a resolution directing a funeral price survey in the District of
Columbia. NFDA was never notified of this conference and learned of it through
one of the media. Therefore, it sent its public relations consultant to be on hand.
Advertently or inadvertently this conference was held during the NFDA Convention
being staged in Cincinnati, October 14th to 18th.
On February 18, 1974 NFDA wrote to the FTC offering NFDA's cooperation and
asking that guides be considered in lieu of a TRR.
On April 18, 1974 the NFDA proposed guides were filed with the FTC in Washing-
ton.
On April 30, 1974 NSM supported and endorsed the NFDA guides.
On May 3, 1974 NFDA's General Counsel wrote Managing Attorney Arthur Angel
regarding complaints received by the FTC about funeral services.
On May 23, 1974 there was a meeting in Washington based on a request of NFDA
and NSM. At that time members of the FTC staff revealed areas they think should
be included in the guides or in a rule.
On May 29, 1974 printed material of NFDA referred to during the meeting of May
23, 1974 was sent to the FTC by NFDA.
On May 29, 1974 NFDA General Counsel Clark wrote to the FTC regarding
disposition of complaints arising in Florida and asked if there were any further
complaints.
In May of 1974 FTC representatives visited the late George Goodstein who was
then Legal Counsel of the New York State Funeral Directors Association.
On July 26, 1974 representatives of NFDA and Mr. Goodstein met with the staff
of New York's FTC regional office.
On October 29, 1974 FTC staff members Angel and Nelson wrote to NFDA
regarding guides and itemization. General comments were made on the NFDA
suggested guides. The conclusion of the letter indicated that the staff would provide
a more comprehensive reply when they had finished their own draft of industry
guides or regulations.
On October 30, 1974 and December 4, 1975 representatives of NFDA and the New
York and New Jersey associations met with staff of New York FTC's regional office.
On February 13, 1975 New York regional office wrote to General Counsel Clark.
On February 28, 1975 NFDA representatives met in Washington, D.C. with
Joanne Bernstein, James DeLong, Arthur Angel, and Thomas Nelson. NFDA repre-
sentatives were told specifically that before any recommendation was made to the
commissioners regarding a rule or guides that funeral service input would be
requested. And, such input would be evident in what is submitted to the commis-
sioners. Or, those in funeral service could submit their suggestions separate and
distinct from those of the staff.
On August 7, 1975 the world learned of a trade regulation rule having been
submitted to the Commission by the FTC staff with implication that a memorandum
and a proposed rule soon would be announced. When Miss Bernstein was questioned
about the commitment made on February 28th, she indicated there must have been
a slip-up somewhere along the line.
On August 28, 1975 FTC staged news conference at which it released the staff
memorandum and proposed rule.
PAGENO="0029"
25
This was followed by very much publicity in support of the proposed rule, much of
which was initiated by the FTC staff.
On March 21, 1976 there was a hearing before what was then the Subcommittee
on Activities of Regulatory Agencies of the Committee on Small Business.
On March 12, 1976 the petition for guides in lieu of a mandatory rule was
discussed at a formal hearing with three commissioners present. The decision of the
Commission was not to consider guides until after the hearings.
April 20th to August 6th, 1976, fifty-two days of hearings over a span of one
hundred nine days.
August of 1977 report of Hearing Officer Jack Kahn was released.
September of 1977, there was a meeting with Albert Kramer who had been
recently named Director of the Bureau of Consumer Protection. The purpose of the
meeting was to see whether something could be worked out with the staff as to
guides. No encouragement was given for such a session.
In March of 1978 an attempt was made to again meet with Mr. Kramer. After a
lengthy delay Mr. Kramer responded that any session had to be arranged with the
staff while implying that he was in support of a TRR.
On June 19, 1978 FTC staff report released.
Mr. SCHEUER. Our first witness will be Mr. Edward Densmore,
Associate Director of the Human Resources Division at the General
Accounting Office, who will discuss with us the results of two
recent investigations by the GAO of the Federal Trade Commis-
sion's enforcement of its statutory responsibility.
We are happy to have you with us today. Your entire testimony
will be reprinted in full in the record, so what you might like to do
is give us the high points informally and then give us any other
thoughts you might have, and then we will ask some questions.
STATEMENT OF EDWARD A. DENSMORE, JR., ASSOCIATE DIREC-
TOR OF HUMAN RESOURCES DIVISION, GENERAL ACCOUNT-
ING OFFICE, ACCOMPANIED BY NORMAN RABKIN, SUPERVI-
SORY AUDITOR, HUMAN RESOURCES DIVISION AND PAUL M.
GREELEY, BOSTON REGIONAL OFFICE
Mr. DENSMORE. I would like to introduce my colleagues. On my
right is Mr. Norm Rabkin, supervisory auditor in the Human Re-
sources Division who is responsible for all of our work done at~ the
Federal Trade Commission. On my left is Paul Greeley from our
Boston Regional Office who did much of the work that we are
going to be discussing today and who is involved with our other
work at the Federal Trade Commission that we have underway at
the present time.
We are pleased to appear here today to discuss our report on the
Federal Trade Commission's limited success in helping consumers
to obtain redress for economic injury resulting from unfair or
deceptive business practices. We issued that report to the Congress
on October 17, 1978.
Although a majority of businesses in this country operate reputa-
bly, unfair and deceptive practices by some companies pose serious
problems for consumers and Federal, State, and local law enforce-
ment officials.
When taken advantage of by unfair practices, consumers should
seek redress. Consumer redress is satisfaction or payment to con-
sumers by businesses for economic injury resulting from unfair or
deceptive business practices. Redress can be in different forms
including restitution of all or part of the consumers' financial loss,
rescission of the contract between the business and the consumer,
or a requirement that the business provide the promised goods or
services.
PAGENO="0030"
26
Mr. SCHEUER. Excuse me, Mr. Densmore. Do you intend to read
through your statement?
Mr. DENSMORE. Not all of it.
Mr. SCHEUER. I think it would be more interesting and informa-
tive for us if you would summarize what is in your statement, we
have all had a chance to read it, and then we will be asking some
questions.
Mr. DENSMORE. Basically, Mr. Chairman, we feel many consum-
ers are the targets of unfair or deceptive business practices which
work to the in detriment We looked into three areas where there
seemed to be a lot of Commission activity, vocational training
schools, land sales, and business opportunities.
We found several examples where consumers suffered serious
economic injury and where in our opinion redress or some restitu-
tion was warranted. In many of the cases we looked at there was
no redress obtained for the consumer. In many of the other cases
redress that was obtained was very limited and it was given to only
a very small number of the consumers that were so injured.
Mr. SCHEUER. How do you decide in a case where a consumer
bought and paid for either a good or a service that it was not a
good bargain? Which case justifies Government intervention and
which case does not?
Mr. DENSMORE. That is not the type of decision that we would
make. That is the type of decision that the Federal Trade Commis-
sion, going through its administrative procedures, would make.
What we did was review some of the case of the Federal Trade
Commission, review the files, talk to the people both in Washing-
ton and the regional offices, find out how they went about making
their investigations, how they arrived at the conclusions they came
to.
Mr. SCHEUER. Do you have anything to tell us about the cases in
which they become involved?
On the top of page 4 you talk about a gas turbine mechanics
course. You say that 2,500 students received little or no benefit
from it. How does the Federal Trade Commission ascertain that
these people received little or no benefit from the course? Was it
that they did not learn anything or was it that what they learned
was not relevant to the job market? Perhaps they learned some-
thing that was very valuable in past years, but when they got out
with their certificate that described the skills they acquired, the
job market had no demand for it.
How does the Federal Trade Commission define the situation
where 2,500 kids received little or no benefit from a course they
paid for?
Mr. DENSMORE. Let Mr. Greeley address that in a little detail,
Mr. Chairman.
Mr. GREELEY. Several of the items mentioned are part of the
consideration. For example, the quality of the training. But I think
the most important reason usually is related to whether or not the
students had favorable experience in obtaining employment. Gen-
erally that is the aspect that students are looking for most.
Mr. SCHEUER. In other words, the FTC is assessing the success or
failure of the students in getting jobs. Does this mean the FTC feels
PAGENO="0031"
27
or should feel that a vocational school is, in effect, a guarantor of
jobs for the preponderance of its graduates?
Mr. GREELEY. No, Mr. Chairman. I do not believe they feel that
way. I think their position is that if the school. in advertisements
has led the consumer or potential student into believing that he
will in effect be guaranteed a job.
Mr. SCHEUER. In other words, the FTC is looking to see if there is
fraud or deception.
Mr. GREELEY. Yes. If there is deception in the advertisements
that is of particular concern to the Commission. One of the ways
they measure whether there was deception or fraud in the adver-
tisements is to look at the actual placement rate. In this school the
placement rate was low.
Mr. SCHEUER. If they advertise a high placement rate and in
actuality they had a low placement rate, then there would be fraud
or deception or both.
Mr. GREELEY. Right.
Mr. SCHEUER. From the paragraph on page 4 there did not seem
to be any fraud or deception. It was just the students got little
benefit from the work. That dOes not justify FTC intervention to
me. I do not suppose FTC would want to undertake assuring that
every business transaction results in benefit to both parties.
Mr. GREELEY. I do not believe they would want to do so.
Mr. SCHEUER. Also, when you talked about the land sale over on
the middle of page 6, 10,500 lots in Arizona sold at an average unit
price of over $4,000. You say~ that the Commission staff valued
those lots at half that amount.
Well, that is your judgment. The people obviously valued them,
perhaps erroneously, at $4,000.: Again, was there fraud or deception
there? You would not want to : guarantee every person who bought
a piece of real estate that he did not overpay for it. I do not think
you would want to guarantee: that every purchaser of real estate
would make a profit on the deal, would you?
Mr. DENSMORE. No, sir, that is true. In this case there were
representations made with regard to certain improvements of rec-
reational facilities that would be provided which were not provided
until such time as the Commission intervened and required that
the company deliver the promised facility.
Mr. SCHEUER. So there was a failure to deliver. Was there any
other fraud or deception in the original sale of the parcels? The
Commission valued the lots at half the $4,000. What are we sup-
posed to deduce from that? YOu must have had something in mind
when you made that comment.
Mr. GREELEY. The $2,000 was some measure of whether the sales
were good investments. There were representations that purchas-
ing the property would be a favorable or a good investment.
Mr. SCHEUER. Isn't that the puffery that is involved in every real
estate transaction? Unless there was specific language here guar-
anteeing it, doesn't every real estate sale involve somebody telling
somebody else they are getting the bargain of the century?
Mr. GREELEY. I am not sure of every transaction, but I am sure
there is some degree of puffery.
PAGENO="0032"
28
Mr. SCHEUER. I am not clear on what your perception of the FTC
role is. Estimated consumer loss was between $17 and $21.5 mil-
lion. How did that loss come about?
Mr. DENSMORE. In this case, Mr. Chairman, we were reviewing
the FTC investigation and records and in the opinion of the FTC,
there was a loss to the consumers on the basis of the prices that
were paid for the property and FTC estimates as to what the
property was worth, both the unimproved property as well as the
value of the property that would be enhanced had these other
facilities in fact been made available.
So, there is a combination of the original purchase price plus the
facilities that the businessman promised to provide with the gener-
al development.
Mr. SCHEUER. The FTC charged the sales company with deceiv-
ing customers. Where was the deception, in failing to deliver the
recreational facilities or was there earlier deception involved?
Mr. DENSMORE. The deception in this case was both with regard
to the investment potential of the property plus the facilities that
were to be made available. In some of these land sales part of the
advertising or the promotion is the investment potential and in
many cases the investment potential does not exist so this is decep-
tion or misrepresentation.
Mr. SCHEUER. I would take that statement with a large grain of
salt. I suppose every person who ever buys a piece of property
thinks it is going to appreciate in value and I would have real
reservations about whether the FTC wants to be the guarantor of
profitability to every real estate transaction that takes place.
If there is outright fraud and deception, that is a whole different
ball game. I think that the elimination of fraud and deception is
the Commission's appropriate mission. But I would have trouble
seeing their role as to assure every purchaser that the Federal
Government was going to back them up and make sure they did
not lose money on a real estate deal.
I was wondering what your perception is as to if that is their
role.
Mr. DENSMORE. Our perception is that it~ is not their role. We did
not make an investigation to determine whether or not fraud or
deception did exist. This is a case they brought.
Mr. SCHEUER. Please proceed.
Mr. DENSMORE. We found there were three basic reasons for the
limited redress that the FTC was able to provide people that did
suffer economic injury. One was the authority that FTC has is
impractical because of lengthy and time-consuming procedures,
weak financial condition of many businesses that were investigated
and the internal management problems that the F~PC has in this
particular area.
We found that the authority the FTC has in section 19 of the
FTC Act is time consuming and that it requires going through two
specific processes-an administrative process, which can and has
taken place in many instances more than 4 years plus follow-on
judicial process which also can take several years. So we are talk-
ing about 4 to 6 or more years that could be required.
Mr. SCHEUER. Do you have any recommendations as to how they
can expedite this process. How can they perhaps shorten the
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29
number of steps in the process or take the same number of steps
but shorten the time frame?
Mr. BROYHILL. Could I break in here? Let me break this down if I
could. Under the present law the Commission can go directly to
court for allegation of violation, whether it is allegation or viola-
tion of any rule under the act and then they can immediately seek
civil action for relief. Is that not correct?
Mr. DENSMORE. That is correct.
Mr. BROYHILL. Why should there be any delay there?
Mr. DENSMORE. In this particular case where there is a violation
of a specific rule or order, they~ can go directly to court for redress.
In the other circumstance, where there has not been a violation of
a direct rule or order but a situation where the FTC finds that
there has been unlawful, deceptive, or fraudulent conduct, they
will go through their administrative process to show this and then
they must go into court to obtain redress.
Mr. BROYHILL. Don't they have to prove there has been a viola-
tion of the law first?
Mr. DENSMORE. Yes.
Mr. BROYHILL. Isn't that a basic protection of rights under the
Constitution that before seeking redress that you have to prove
that you violated a law?
Mr. DENSMORE. Yes. And we are not suggesting that that would
change. What we are making a recommendation for is that the
Congress amend section 19 to provide in those cases, in the second
situation, section 19(a)(2) that the FTC have authority to order
redress.
We feel that the constitutional protections would be there and
that if the administrative law judge would order redress, the busi-
nessman would have the opportunity to appeal to the Commission.
If the Commission upholds the administrative law judge, the
appeal can then be made directly to the U.S. Court of Appeals.
This would not change from the protection point of view; there
would still always be the opportunity to appeal to the U.S. Court of
Appeals.
What we are suggesting is that if the FTC makes a finding that a
reasonable man would come to the conclusion that a practice was
fraudulent or dishonest that they not only would have to prove
that, that they would be iii a position where they could order
redress.
Mr. BROYHILL. Are you a lawyer?
Mr. DENSMORE. No, sir.
Mr. BROYHILL. I am not an attorney either but it does not seem
to me that the procedures that you are spelling out here are fair to
the person-maybe a small businessman-that might be involved
because you are giving the authority to the same person, not only
to bring the charge but to make the determination and hear the
appeal.
Mr. RABKIN. The Commission has that authority now, where
there are unfair or deceptive acts or practices, they hear the case if
it is litigated.
Mr. BROYHILL. But not for this purpose. As I understand it, you
do not go to the court of appeals under the present procedure. You
go to district court.
47-917 0 - 79 - 3
PAGENO="0034"
30
Mr. RABKIN. That is correct. After the order has become final.
Mr. BROYHILL. Then you can make the record there whereas in
the procedure you are describing, the appeal is going to be based on
the record that the agency has made.
Mr. DENSMORE. That is correct.
Mr. BROYHILL. It does not seem to me that you are giving it
much protection there under the Constitution.
Mr. DENSMORE. We feel, sir, on the basis of the records and the
cases we have looked at-there have been many cases of fraudu-
lent, deceptive, and unlawful practices that were very significant.
A 1~t of people were significantly economically injured. What we
are saying is under the present procedure, it is a very time-consum-
ing and cumbersome process. We feel that the consumer in these
very flagrant cases would have a better opportunity for redress if
this particular procedure could be lessened, simplified.
Mr. SCHEUER. Do you have any specific recommendations to
shorten the procedure and simplify the process?
Mr. DENSMORE. Yes. In our report we recommend that the Con-
gress amend section 19 to provide that the FTC can order redress
going through the administrative process.
Mr. BROYHILL. Has that legislation language been presented to
the committee?
Mr. DENSMORE. We did not provide specific language. We did
make a recommendation in a report that was issued to the Con-
gress.
Mr. RABKIN. We also made recommendations in the report to
speed up internal processes of the Commission.
Mr. SCHEUER. Please give us your recommendations in this
matter in as much detail as you can.
Mr. RABKIN. This recommendation for the legislative change
would be to allow the Commission to order the redress at the same
time it orders the remedy for the unfair deceptive act or practice.
The initial proceeding that results in a final order would include
the redress remedy. That order, which is under section 5 of the
current FTC Act appealable to a court of appeals after Commission
review, would likewise be appealable. The remedies which would be
available under section 5 prospectively would also include redress.
The Commission could order redress after finding that the act or
practice was unfair or deceptive and, in addition, dishonest, and
fraudulent. The safeguards built into section 19(a)(2) regarding
fraudulent conduct which were added to protect business from
unforeseen liability would remain.
The difference would be one instead of two processes. Now the
final order would first come up in the administrative proceeding,
the Commission would issue it and it is appealable to the courts.
Once all appeals are exhausted and the order becomes final, the
Commission would have to institute a second proceeding in the
courts. We would combine those two.
Mr. SCHEUER. What do you think of the recommendations, Jim?
Mr. BROYHILL. Mr. Chairman, I have to express some reserva-
tions about going to a procedure like this because of the past
actions of the Commission. If I thought that the Commission was
going to really go after these very narrow cases of where fraud is
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31
very clearly prevalent, I certainly would not have any objection but
that is not the way the Commission has been operating.
The Commission will go after people that have been operating
where the whole industry has been operating this way for genera-
tions and then suddenly single out one particular company and
say, "You are a violator," and that was the reason that we gave
them the authority to write fraud rules in the first place, that we
did not want them using this prpcedure. We wanted them to issue
a trade rule so that people knew where they stood.
What recommending would I give the Commission too much
authority to bypass the route that they should be using and that is
to issue a trade rule so everybody is operating in the same way.
Mr. DENSMORE. There is certainly a need for balance and over-
sight on the part of the Congress to insure that FTC is acting in
accordance with the--
Mr. BROYHILL. To my knowledge this committee-and I have
been a member of it for some time-we have never brought the
Commission up here and made them justify all of their actions as
far as the consent decrees and consent orders and so forth that
they force on individuals that in many cases they should be going
after an industry trade rule if they want to change industry trade
practices.
Mr. DENSMORE. In some cases, sir, what we are saying is that
there are specific instances where consumers are very--
Mr. BROYHILL. I understand that and if we could get at that, fine,
but what you have done is give them a tremendous weapon to
bypass, what I think was the intent of the Magnuson-Moss Act and
that was to tell the Commission to stop going after individuals but
to try to change the industry practices through industry trade
rules.
Mr. SCHEUER. Was there any evidence that many of these cases
of fraud and deception would not have met the test of reasonable-
ness? In other words, do you think there is a justification for this
two-step process or should it all be consolidated into a single proc-
ess from which there would be appeal to the courts?
Mr. RABKIN. That is a difficult question to answer because we
are not lawyers, although we do have lawyers on our staff. We do
not have the expertise the Commission has. None of these cases
have gone through section 19 :proceedings and the courts have not
ruled on whether in fact the commission's idea of what is fraud or
dishonesty is what the courts will accept.
There have been cases where the Commission staff in its discus-
sions on what to do with a case have told the Commission in their
opinion there was fraud, there was dishonesty, but for some other
reasons, the cost of litigation or the financial condition of the
firms, pursuing the matter in section 19 in the court was not
feasible.
Mr. DENSMORE. It should be brought out too that we are talking
about more than the unfair and deceptive practices. We are talking
about an additional burden of proof on the FTC to show that
something is dishonest or fraudulent which is a stiffer test than
unfair or deceptive.
Mr. SCHEUER. You have a situation here where the delay is so
long, 4 or 5 or 6 years, that the remedy is useless. Would it be
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32
better from the consumer point of view to have one process that
could be expedited that would have perhaps the higher standard
but at the very beginning one process that would be promptly
appealable to the courts?
Mr. DENSMORE. Yes, and that is in effect what we are recom-
mending. We feel in these flagrant instances FTC should have
stronger authority to act quicker and I would agree with what
Congressman Broyhill is saying, that there is a need for oversight
to determine that the agency is not carrying that to extremes
beyond which the Congress deems inappropriate. We feel in those
cases we looked at, these situations are flagrant.
There are a lot of people being very significantly adversely af-
fected from an economic point of view, and we feel they would have
a greater opportunity to get some restitution, some redress, if the
FTC's authority were changed to allow them to more quickly get
the redress than under the present legislation.
Mr. SCHEUER. Very good. Please continue.
Mr. DENSMORE. Beyond that, many of the institutions or compa-
nies the FTC wanted to institute redress against had either gone
out of business or the assets had been dissipated or were so small
in number that redress was not a feasible alternative.
Along these lines, we are recommending that once again there be
an amendment to the legislation to provide that when the Commis-
sion has a reason to believe that a company may be dissipating its
assets to avoid giving redress to consumers, the Commission should
be able to seek an injunction to preserve those assets until it can
complete its administrative proceedings.
We are recommending that section 13(b) be amended in that
regard.
Mr. BROYHILL. Would that be before a finding was made that
they had engaged in some unfair or deceptive practice or that the
* practice was fraudulent?
* Mr. RABKIN. Under section 13(b) an injunction suit is brought
approximately at the same time a complaint is issued. against the
company. This is before the final determination.
Mr. DENSMORE. What we are saying is in some of these situations
while this investigation is being done, before the final order is
made, a company anticipating redress is willfully dissipating its
assets.
Mr. SCHEUER. How do they do it? Do they just make loans to the
president or do they pay extraordinary salaries or what?
Mr. DENSMORE. That is one way. There is one example that is a
matter of public record where an individual paid his wife $60,000 a
week in consulting fees. In other cases the assets could be trans-
ferred to bank accounts or to other companies or corporations that
may be set up.
These are the types of situations that we are talking about where
there is a need or at least we perceive the consumer would have
some additional protection. When FTC had reason to believe that
these companies were dissipating assets before it could complete
the present proceedings there could be an injunction to preserve
those assets pending completion.
Mr. SCHEUER. It sounds eminently reasonable to me.
PAGENO="0037"
33
Mr. BROYHILL. What if it is later found that they were not
engaged in any fraudulent practice or that they were not engaged
in any unfair deceptive practice and here this has had the effect of
limiting management decisions that should have been made? Is
there any redress on the part of that company to the Government
for relief for damage?
Mr. SCHEUER. The only limitation on management as I under-
stand it would be they could not dissipate their assets. There would
be no interference with normal corporate decisionmaking in run-
ning the business.
Mr. BROYHILL. Mr. Chairman, if it is like the proposal that was
before us last year, an actual trustee would be appointed to run the
company.
Mr. RABKIN. Mr. Chairman, Mr. Broyhill, our recommendation is
similar to the proposal that was before the committee last year in
H.R. 3816.
Mr. SCHEUER. Would it involve the appointment of a trustee?
Mr. RABKIN. No. We are recOmmending the Commission have the
authority to go to court and let the court decide what is necessary.
It could be periodic reporting.: It could be a trustee. It could be a
receiver, but we do not have any basis for recommending which
specific actions be taken.
Similarly, we do not have a basis for recommending some of the
procedural steps that were in: last year's bill, about the burden of
proof the Commission must have. All we are saying is the current
section 13(b) injunctive authority that the Commission has should
be made more specific so the: Commission specifically has the au-
thority to get an injunction in: these cases.
Mr. DENSMORE. The authority now is unclear. We are recom-
mending that Congress clarify the authority in this particular area.
Mr. SCHEUER. Really the authority would only give FTC the right
to go to court and let the court apply the proper remedy that was
justified by the circumstances and if the court felt that dissipation
of the assets was a possibility, they could get some representation
by the company president or an assurance of reporting.
If the court found there was a higher level of proof necessary, I
would think then and only then would the court even contemplate
the appointment of a trustee, which is a rather draconian remedy.
Mr. RABKIN. We would leave it up to the court.
Mr. SCHEUER. In any event, that would be at the discretion of the
court. On its face that seems reasonable to me.
Mr. BROYHILL. No further questions.
Mr. SCHEUER. Please proceed.
Mr. DENSMORE. The only other thing I would like to point out is
that we did discuss in addition tO the legislative authority, in
addition to the weak financial conditions of some companies, there
were some internal management problems at FTC that contributed
to the limited redress.
These dealt with lengthy negotiation periods, lack of adequate
consumer injury analysis and problems with policy communication
between the Commissioners and the staff. FTC has taken action on
all of these points. We feel that the actions they have taken should
expedite the process and should result in a more effective and
efficient consumer redress program.
PAGENO="0038"
34
That concludes the summary of the report. We would be pleased
to address any other questions that you may have.
[Mr. Densmore's prepared statement follows:]
STATEMENT OF EDWARD A. DENSMORE, JR., AssOcIATE DIRECTOR, HUMAN
RESOURCES DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Mr. Chairman and members of the subcommittee: We are pleased to appear here
today to discuss our report on the Federal Trade Commission's limited success in
helping consumers to obtain redress for economic injury resulting from unfair or
deceptive business practices. We issued that report to the Congress on October 17,
1978.
Although a majority of businesses in this country operate reputably, unfair and
deceptive practices by some companies pose serious problems for consumers and
Federal, State, and local law enforcement officials.
When taken advantage of by unfair practices, consumers should seek redress.
Consumer redress is satisfaction or payment to consumers by businesses for econom-
ic injury resulting from unfair or deceptive business practices. Redress can be in
different forms including restitution of all or part of the conusmers' financial loss,
rescission of the contract between the business and the consumer, or a requirement
that the business provide the promised goods or services.
Because of its broad powers and responsibilities and national jurisdiction, the
Federal Trade Commission is in a unique position to reduce unfair and deceptive
acts and practices in the marketplace. It is also able to seek, through the courts,
redress for consumer losses resulting from acts and practices which a reasonable
person would have known were dishonest or fraudulent.
Our report discussed the Commission's activities concerning three programs-
vocational schools, land sales, and business opportunities-because these programs
were among the most active in terms of consumer redress.
Many consumers are easy targets for vocational training abuses. They may be
persuaded by misleading advertisements and salespeople promising the training and
placement help needed to get jobs such as a medical assistant, an insurance adjust-
er, or a truck driver. The career hopes of many students dim after completing the
courses when they are unable to get jobs. This happens in some cases where
employers consider the vocational training as unacceptable or where the school's
training or placement services may be inadequate. The student's investment of as
much as $1,000 or more and many hours of time and effort in the training program
proves virtually worthless.
People can also lose money on new business ventures. Take, as an example, a
couple that invests their hard-earned life savings in a business opportunity that
promises a chance to work at home and earn yearly gross profits from $39,000 to
$67,000. Such advertising is enticing. Unfortunately, many people, like this couple,
never see profits and instead lose much or all of their original investments.
Still other consumers are victims of land sales schemes. A seller may carefully
lead a consumer into buying underdeveloped land by misrepresenting facts. For
example, the seller may say that recreational facilities will soon be available, that
development potential of the area is good, or that the land is an excellent invest-
ment. If these representations prove false, the consumer seeking financial gain or a
home with facilities and amenities of a successful development may be left instead
with largely underdeveloped land with a market value below cost.
LIMITED SUCCESS IN GETTING CONSUMER REDRESS
In many Commission cases, consumers have not received any redress. Even when
the Commission is able to obtain redress it is often small or available only to a
limited number of injured consumers.
The Commission did not obtain any consumer redress in 12 of 24 cases involving
vocational schools, land sales, and business opportunities that were resolved be-
tween January 1975 and August 1978. In one case where no redress was obtained,
the Commission issued a consent order on October 19, 1977, against a vocational
school for misrepresenting current and future job prospects for students completing
its gas turbine mechanics course. Commission staff estimated that from mid-1972 to
mid-1975, about 2,500 students enrolled in the course but received little or no
benefit from it. The course tuition in 1975 was about $1,100; the Commission
estimated the total consumer loss at $2 million.
In another case, the Commission's investigation of an idea-promotion company
showed that it misrepresented, among other things, its engineering and marketing
ability to develop and promote clients' ideas and to obtain financial gain for its
PAGENO="0039"
~35
clients. Consumers spent from $750 to $1,200 each to have their ideas and inven-
tions promoted. Few realized gains. Commission staff estimated the total consumer
loss at about $750,000.
The Commission did obtain some redress in the other 12 cases but the redress
obtained was generally much less than the consumers' losses and was provided to
only some eligible consumers. For example, in January 1975 the Commission settled
its case against a vocational school offering courses such as computer keypunching,
computer programing, secretarial training, and medical and paramedical personnel
training. Commission staff estimated that students paid about $12 million in tuition
for courses which were virtually worthless for future employment. The negotiated
settlement required the school to refund up to $1.25 million to certain students. The
school had diifficulty locating students eligible for the refund and ended up paying
back only about $675,000.
On July 13, 1976, the Commission settled its case against another vocational
school. The Commission charged the school with using unfair and deceptive prac-
tices in promoting and selling trailer truck driver courses. Commission staff estimat-
ed that 1,950 students each paid $795 in tuition, about $1.5 million in total, from
1971 to 1973. The negotiated settlement required the school to pay a total of only
$25,000 to students enrolled in the courses during calendar year 1973. In the end,
292 students each received about $86.
Commission staff negotiated a settlement only for students enrolled during calen-
dar year 1973 mainly because (1) an extensive survey of students enrolled during
the other years would have been needed and (2) with the school having limited
assets for restitution, expansion of the refund period might have doubled or tripled
the number of eligible students, significantly reducing the amount of restitution
each would receive.
These are two cases in which the Commission obtained some restitution for
consumers. The amount of restitution obtained in most of the other cases was also
substantially less than the consumer losses.
Redress has not always been restricted to restitution. In two land sales cases the
Commission obtained consumer redress othe than restitution, such as land improve-
ments. While the cost of the redress package to the business can be estimated, the
total value provided to consumers is difficult to measure.
For example, on September 27, 1977, the Commission settled its case against a
land sales company charged with deceiving consumers in land sales transaction.
Over 10,500 lots in Arizona were sOld at an average unit price of over $4,000.
Commission staff valued these lots at about half that amount. While no detailed
analysis was made, the estimated consumer loss was between $17 and $21.5 million.
The major part of the Commission's settlement did not provide any restitution to
individual consumers. It did, however, require the company to spend about $4
million on improvements and recreational facilities, including those originally prom-
ised to consumers along with some additional improvements. The real value of the
redress package to consumers however, is unclear.
REASONS FOR LIMITED SUCCESS
The Commission's ability to obtain consumer redress has been limited by its
impractical authority because of lengthy and time-consumer procedures; the weak
financial condition of many businesses it investigates; and its internal managment
problems.
The Commission's authority is impractical
In January 1975 the Congress added section 19 to the Federal Trade Commission
Act (FTC Act) to enable the Commission to seek redress for consumers in Federal
district courts or any State court with jurisdiction over such matters. Section
19(a)(1) authorizes the Commission to go directly to court to seek redress for consum-
ers harmed by violations of the Commission's rules. Section 19(a)(2) authorizes the
Commission to seek redress for unfair and deceptive practices which result in a
final Commission order but requires the Commission to go through both administra-
tive and judicial processes.
Section 19(a)(2) also provides that the courts are to order consumer redress only if
the Commission proves that the act or practice resulting in a final order is one
which a reasonable person would have known was dishonest or fraudulent. The
legislative history on this provision indicates Congressional concern about protect-
ing a business from the unforeseen liability of redressing consumers in those situa-
tions where the business would have no reason to suspect it was behaving unlawful-
ly.
The administrative and judicial processes add considerably to the time it takes
the Commission to obtain redress under section 19(a)(2). The Commission must first
PAGENO="0040"
36
issue a final order which can take several years. Once the order becomes final, the
Commission must within 1 year initiate a second process which involves a State or
Federal court proceeding which can also take several years.
In a majority of the 43 redress cases we reviewed, four years or more elapsed from
the start of an investigation until the Commission issued a final order. In fact, of
the 17 cases still in process when we finished our audit work in August 1978, 13 had
been active for at least four years.
Long time frames can have a negative impact on consumer redress. First, as time
passes, particularly if the case involves litigation, there is a greater chance that
company assets will be unavailable for redress. Second, it becomes increasingly
difficult as the years go by to locate consumers eligible for refunds. Therefore, fewer
consumers may receive benefits. Third, years of inflation reduce the value of any
refunds obtained. Finally, the Commission's bargaining position in negotiating set-
tlements is weakened where a long processing time is viewed as inevitable.
It is significant to note that in the four years since the Congress added section 19
to the FTC Act, only two redress cases have reached the courts under section
19(a)(2).
To give the Commission clearer and more practical authority to obtain redress for
economically injured consumers, we recommended that the Congress amend section
19(a)(2) of the FTC Act to authorize the Commission, after a hearing, to order
redress if it determines that a reasonable person would have known that the
violations were dishonest or fraudulent. Under this concept businesses would be
protected from unforeseen liability as the Congress originally intended in enacting
section 19 and the need for a separate judicial process would be eliminated.
Weak financial conditions limit a business' ability to provide consumer redress
In many of the potential redress cases we reviewed, the poor financial condition of
the business was one of the major reasons that the Commission accepted a settle-
ment that did not provide for full redress to injured consumers. In 3 of the 24
completed cases we reviewed, the business had closed. In 14 others, Commission
staff cited the businesses' weak financial condition in recommending that the Com-
mission accept settlements which required the companies not provide redress for
consumers injured by past actions.
The Commission Chairman has stated that violators have often dissipated their
assests and left only a shell of a closely held corporation before the Commission
could complete its case. For example, the first section 19 redress case came under
Commission investigation in 1968. From mid-1967 through mid-1972 when the Com-
mission issued its complaint against the company, it had grossed about $44 million
from its challenged practices. Between 1972 and 1973 the company's total assets
dropped form $22.5 million to $11.7 million. The Commission issued a final order to
the company in 1976 and began the redress action in February 1977. In November
1978 the Commission determined that only a limited amount of assets could be
recovered for consumers and, that even if the Commission were successful, the
amount it would recover would not redress, to any substantial degree, the injury to
consumers. Therefore, the Commission withdrew its case and the suit was dismissed.
Preservation of company assets in consumer redress cases may be necessary to
better assure that the assets will be available for consumer redress. Although the
Commission may ask a district court to preserve a company's assets once the section
19 proceeding is underway, its authority to preserve a company's assets pending
completion of administrative proceedings is into clear. Section 13(b) of the FTC Act
authorizes the Commission to seek a court injunction against a company about to
violate any law the Commission enforces. However, the Commission's injunctive
authority does not explicity provide for the use of injunctions to preserve a compa-
ny's assets. When the Commission has reason to believe that a company may be
dissipating its assets to avoid redressing consumers, we believe that the Commission
should be able to seek an injunction to preserve those assets until it can complete
its administrative proceedings. Accordingly, we recommended that the Congress
amend section 13(b) of the FTC Act to authorize the Commission to seek an injunc-
tion to prevent businesses from dissipating their assets to avoid redressing consum-
ers.
Management problems reduce Commission effectiveness in obtaining redress
If consumers are to receive adequate redress, the Commission should begin cases
as soon as possible and handle them expeditiously. Case delays weaken the consum-
ers' position by lessening the potential for obtaining redress and reducing the value
of any redress received. The Commission has experienced delays in some redress
cases because of lengthy negotiation periods, lack of adequate consumer injury
analysis, and problems with policy communication. Commission officials recognized
these management problems and have revised operating policies and procedures.
PAGENO="0041"
~37
Lengthy negotiations between the Commission and a business to reach a settle-
ment agreement often caused the Commission's investigative activities to be sus-
pended and evidence of deceptive practices to become stale. Dated evidence weakens
the Commission's ability to litigate a case and seek consumer redress under section
19(a)(2). To eliminate the problem, in December 1977 the Commission's Bureau of
Consumer Protection directed it staff to limit suspension of investigative activity
during negotiations to 20 staff hours or 20 days, whichever comes first.
Consumer injury analyses are important because on every case questions can
arise on a variety of issues such as (1) the choice of remedies; 92) whether to accept
a consent agreement or issue a complaint; and (3) whether to require restitution for
past transactions, protect consumers in future transactions, or both. Analysis of
these issues requires a thorough understanding of the amount and nature of the
consumer injury. The Commission has not always adequately analyzed these issues
before attempting to negotiate a redress settlement. Such an analysis can be diffi-
cult, costly, and imprecise, but if it is not done adequately it can slow down the case
or lead to an inappropriate decision.
In recent cases lack of adequate consumer injury analysis created problems in
case handling. After review of these cases, Commission officials informed the staff
about the need to obtain sufficient information to evaluate the propriety of seeking
consumer redress. Also, in January 1978 the process for evaluating staff requests for
Commission action was restructured so that attention is focused on the analysis of
consumer injury at the outset of formal investigations.
When communications problems occur, delays in processing redress cases are
inevitable. The Commission has had much difficulty communicating policies and
procedures, including those pertaining to potential redress cases, to its staff. Studies
by outside consultants and internal cOmmittees found this communications problem
to be serious and frustrating to staff.
The Commission has implemented periodic review sessions of pending matters so
that early communication of policies can be assured. In addition, the Commission
told us that its Bureau of Consumer Protection and Office of General Counsel have
established procedures to assure development of consistent policies and eliminate
some review delays.
Several of the Commission's changes or proposals should expedite case processing
and put consumers in a better position to receive redress. The Commission must
emphasize and assure, however, that the management changes provide accelerated
case procession, better communications among the staff and the Commission, and,
ultimately, more equitable redress for injured consumers.
Therefore, we recommended that the Commission ensure that redress cases are
handled as expeditiously as possible by monitoring the implementation of its man-
agement changes designed to reduce delay and improve communications.
Mr. Chairman, that concludes our prepared statement. We will be pleased to
answer any questions that you or other members of the Subcommitte may have.
Mr. SCHEUER. You mentioned that in 12 of the 24 redress situa-
tions there was no redress. In two cases you cite the consumer loss
at $2.75 million. Do you have any estimate of losses in the other
ten cases?
Mr. DENSMORE. Yes. We have figures that deal with the consum-
er losses in many of the other cases.
Mr. SCHEUER. Can you give us some, an estimate of the order of
magnitude in the other 10 cases?
Mr. DENSMORE. The largest one here is $500 million.
Mr. SCHEUER. That is a big case. What did that involve?
Mr. RABKIN. That was a land sales case. The loss was an esti-
mate that the staff made to the Commission to balance against the
redress that they had obtained in the case. The redress they valued
at $20 to $30 million in terms of specific performance-having the
company actually construct: the facilities that the Commission al-
leged were implied in the representations the company had made
to the consumers.
Mr. BROYHILL. Are these GAO findings?
Mr. RABKIN. We are reporting Commission findings.
Mr. BROYHILL. Have you : confirmed all of these or are you just
taking what FTC has given you and repeating it to us?
PAGENO="0042"
38
Mr. DENSMORE. The problem we have, Congressman, is we do not
have access to records of these companies, so we were not in a
position where we could go in and verify the specific numbers that
we are talking about. These are FTC figures. They are the figures
that are used in the cases, and we have accepted those because of
the problem we have in getting access to the records of the compa-
nies.
Most of the others are in the magnitude of several hundred
thousand dollars to $11 million or $12 million.
Mr. SCHEUER. Perhaps you could submit for the record the evi-
dence of loss in 12 of the 24 redress cases where there was no
redress.
Then in the 12 cases where there was some redress you cite some
details for three of the cases. Do you have any information as to
what the losses were on the other nine?
Mr. DENSMORE. Yes. We could give you the estimated consumer
loss in all of the cases plus the redress available in those where we
have it so you will be able to balance one against the other for all
24.
[Testimony resumes on p. 65.]
[The following information was received for the record:]
PAGENO="0043"
39
ESTIMATED CONSUMER LOSS
FIRM : Fuqua Industries
CASE NO. : C. 2626
DATE OF FINAL ORDER: 1/21/75
CHARGES : The firm misrepresented that (1) it knew
of specific jobs in which graduates would be placed,
(2) there was an urgent need or demand for graduates,
(3) all graduates received free placement assistance,
(4) the training program was specifically designed
to qualify graduates for local employment requirements,
(5) local businesses were hiring graduates, (6) graduates
were guaranteed jobs through the firm~s placement office,
(7) purchasers of courses would receive full refunds of
their ~reservation fees: if they cancelled their agreement
before the beginning date, and (8) the courses were
approved for veterans educational assistance benefits.
ESTIMATED CONSUMER LOSS: The Commission charged that the
firm~s courses were virtually worthless. Staff estimated
that the firms potent:ial liability for restitution
could be as high as $24 million; staff had identified
38,000 students who had paid an average of $300 each,
or a total of about $11 million.
VALUE OF REDRESS: The order required the firm and its
controlling officer tO make refunds of up to $1.25
million to students who (1) paid over $100 for a
a course, (2) did not receive a job as a result of
the tr~ininq, (3) attended some of the courses, (4) did
not drop out except for reasons related to the training
received or the job demand, and (5) sought employment
in training related fields.
PAGENO="0044"
40
Weaver Airline Personnel School, Inc.
C. 2638
2/13/75
The firm misrepresented the degree of
industry demand for its graduates its selectivity in
accepting enrollees, the availability of jobs, and the
nature and effectiveness of its placement service.
ESTIMATED CONSUMER LOSS: Although the Commission did not
estimate consumer loss its staff reported that the firm
enrolled over 15,000 students during the year under
investigation; of which about 2,000 graduated and 102
obtained employment with the airline industry. The course
consisted of a home-study portion costing $765 and a
residence training costinq $200.
VALUE OF REDRESS: The firm agreed to two restitution funds.
The first, $249,000; was paid to students enrolling after
January 1, 1972, who paid in full for the course and who
the firm had not placed in employment. The second fund
was accumulated from the firm's collections on its
accounts receivable and was paid to certain students who
had not paid their account in full. [The first fund
resulted in $251,732 being paid to 3.794 students; the
second resulted in $98004 going to 136 students.]
FIRM
CASE NO.
DATE OF FINAL ORDER:
CHARGES
PAGENO="0045"
41
FIRM : Worldwide Systems, Inc.
CASE NO. : C. 2683
DATE OF FINAL ORDER: 7/16/75
CHARGES : The firm advertised its school in the
"Help Wanted" column of newspapers, misrepresented
employment opportunities and salary potential of its
graduates, the cost of the training, the manner of
payment for training, the training facilities, and
the placement assistance provided by the school.
ESTIMATED CONSUMER LOSS: The Commission concluded that if
graduates did not secure employment ma field related
to the training, as was almost always the case, the
money spent on the course was totally wasted. The
firm's courses cost about $895, but the files we
reviewed had no information on the number of enrollees,
graduates, or graduates obtaining employment in a
training related field.
VALUE OF REDRESS: The order contained no redress provisions.
The Commission learned that the firm was defunct.
PAGENO="0046"
42
FIRM : Maralco Enterprises; Inc.
CASE NO. : C. 2711
DATE OF FINAL ORDER: 7/25/75
CHARGES : The firm falsely represented the likelihood
of placement and starting salaries available to graduates
of its computer school. The firm falsely implied that a
college degree and job experience were not advantageous
to secure a job as a computer programmer. The firm
misrepresented the number of computer programming
languages taught and the type of materials and computer
hardware available to students. The firm assisted
students in preparing resumes falsifying their job
experience. The firm also failed to disclose to pros-
pective students the "finance charge", "annual percentage
rate", "cash price", and other credit terms required under
the Truth in Lending Act.
ESTIMATED CONSUMER LOSS: Although no specific dollar figure
was estimated, Commission staff reported that the school
had an enrollment of only 40 to 50 students; but that
the individual tuition was $2400.
VALUE OF REDRESS: The order contained no redress provisions.
The staff reported that the firm was insolvent; based on
unaudited financial statements.
PAGENO="0047"
43
FIRM American Tractor Trailer Training, Inc.
CASE NO. * : D. 9025
DATE OF FINAL ORDER: 9/17/75,
CHARGES : The practices used by the firm in
obtaining enrollees for its tractor trailer training course
included false and misleading claims regarding employment and
earnings opportunities for its graduates, the efficacy of its
placement service, its affiliations with the trucking industry,
and the quality of the course and the qualifications of the
graduates. Further, the firm did not afford the prospective
enrollees sufficient time to consider their purchase decision,
did not furnish them with enrollee drop-out and graduate
placement information which illustrated the firms particular
track record in placing:students in the trucking industry.
ESTIMATED CONSUMER LOSS: Abàut 500 students received training
each year. The Commission estimated the economic loss
* suffered by each enrollee to be equal to the tuition - $795.
The Commission believed that from the point of view of the
enrollees careers, employment, and earnings, the firms
course was worthleess.
VALUE OF REDRESS: The order contained no redress provision.
business on 11/14/75 with substantial
The firm went out of
outstanding debts.
PAGENO="0048"
44
FIRM : Lear Siegler. Inc.
CASE NO. : D. 8953
DATE OF FINAL ORDER: 10/6/75
CHARGES : The firm misrepresented that (1) there was
an urgent need or demand for all or most of its
graduates in traininq-related positions, (2) it had a
reasonable basis to conclude that the representations in
(1) were true, (3) that all or substantially all of its
graduates were able to secure training-related positions
after graduation, (4) it was offering or knew of paid
employment opportunities. (5) its placement office would
secure employment for its graduates in most cases, (6)
its graduates would qualify as experienced job applicants,
and (7) its placement assistance was free.
ESTIMATED CONSUMER LOSS: The Commission concluded the courses'
value for training-related employment was virtually
worthless. During the period under investigation, about
600 students paid on the average $2.000 for the courses;
the total loss would have been about $1.2 million.
VALUE OF REDRESS: The firm was ordered to pay $750,000 to
certain former students who failed to obtain training-
ralated employment.
PAGENO="0049"
45
Diesel Truck Driver Training School, Inc.
C. 2759
The firm misrepresented the demand for itS
graduates and the salaries that its graduates were likely
to obtain. Also, the firm misrepresented the ability
of its placement service to find jobs for graduates and
that the placement service was free.
ESTIMATED CONSUMER LOSS: The Commission concluded that if
graduates did not secure employment as truck drivers,
as was almost always the case, the money spent on the
course was totally wasted. The tuition was $895. For
the years which the Commission investigated, the firm
enrolled 2,007 students, graduated 1,322 of them, but
only 160 found employment, in the field for which they
were trained. The consumer loss under these
circumstances would be between $1.04 million and
$1.65 million.
VALUE OF REDRESS: The order contained no redress provisions.
The Commission concluded that, on the basis of financial
data submitted by the firm, restitution would impose an
unreasonable hardship.
FIRM
CASE NO.
DATE OF FINAL ORDER: 11/3/75
CHARGES
47-917 0 - 79 - 4*
PAGENO="0050"
46
FIRM : G & A Industries, Inc., and
Nord-Viscount, Inc.
CASE NO. : C. 2776
DATE OF FINAL ORDER: 1/6/76
CHARGES : The firm falsely claimed that persons
who sold its auto polish would make up to $50,000 per
year or $15 to $35 an hour; that sellers could make
a 400% profit on each sale and would be assigned
exclusive selling territories; and that a single
application of its auto polish was guaranteed to
protect and beautify a car for several years.
ESTIMATED CONSUMER LOSS: Although the Commission concluded
that there was no way to precisely measure the consumer
injury, it estimated it at $250,000 annually.
VALUE OF REDRESS: The firm was ordered to offer refunds for
all unsold merchandise returned within 30 days of
notification. The refund privilege applied to persons
who purchased merchandise from the firm within the three
years before the order and who had purchased no more
that three separate shipments of product. [As a result
of the order, a total of $4,387 was refunded to 83 persons.]
PAGENO="0051"
47
FIRM COPE ENTERPRISES, Ltd.
CASE NO. : C. 2783
DATE OF FINAL ORDER: 1/23/76
CHARGES : The firm engaged in misrepresentations
and deceptive practices in connection with sale of
distributorshiPs for batteries and hypo-allergeflic
lipsticks and nail polishes. The misrepresentations
included overstatements regarding the high potential
earnings of the distributors, the type and number of
sales locations the firm would secure for the
distributors, the availability of training, business
assistance, sales aids, and advertising, the
availability of other products to be added to the
cosmetics line available to distributors, and the
history of the company. The deceptive practices
included the firm~s failure to deliver locations, sales
aids, and merchandise within a specified time, its
failure to advertise and, provide training and business
assistance, its failure to buy back the distributorshiPs
or assist in the sale of~ same as provided in the
distributors~ agreements, and its failure to introduce
new products to the cosmetic line.
ESTIMATED CONSUMER LOSS: The Commission concluded that
although it would be difficult to estimate precisely
the injury sustained by~ each distributor, it would
PAGENO="0052"
48
be safe to assume that the estimated dollar volume loss.
at a minimum, would amount to $358.400--the sum paid
to the firm by distributors, exclusive of monies paid
for delivered merchandise.
VALUE OF REDRESS: The order contained no redress provisions.
The firm was out of business when the order was issued
and the individuals cited by the Commission were in jail
for similar activities; havinq been prosecuted by a
U.S. Attorney.
PAGENO="0053"
49
FIRM : Nationwide Training Service, Inc.
CASE NO. : C. 2814
DATE OF FINAL ORDER: 3/30/76
CHARGES : The firm advertised its school in the
~Help-Wanted~ and other columns of newspapers, and
misrepre~ented the employment opportunitieS and salary
potential of its graduates, the cost of the training,
the manner of payment for training, the training
facilities, the training program, placement assistance
provided by the school, the nature of the contractual
agreement for training, and: the nature and manner of its
business.
ESTIMATED CONSUMER LOSS: The Commission concluded that if
graduates did not secure employment as truck drivers or
heavy equipment operators, as was almost always the
caSe, the money spent on the course was totally wasted.
The firm charged $695 for its truck driver training
course and $1,050 for its heavy equipment operators
course. The firm enrolled 954 students and graduated
409 during the period of the CommiSsion~s investigation,
but the files we reviewed contained no information about
the number of graduates hi:red as driver or operators.
VALUE OF REDRESS: The order contained no redress provisions.
The firm submitted financial data to support its
contention that it was not in a position to make
extensive refunds.
PAGENO="0054"
50
FIRM : New England Tractor Trailer Training
of Massachusetts, Inc.
CASE NO. : D. 9026
DATE OF FINAL ORDER: 7/13/76
CHARGES : The firm misrepresented the availability
of jobs for its graduates, that it offered employment to
qualified applicants, that its placement services would
secure jobs for graduates, and that its representatives
were qualified vocation counselors. The firm also made
representations regarding the demand for its graduates
and the wages earned by its graduates without having a
reasonable basis to support such claims. In addition
the firm failed to disclose information about placement
and salary of graduates, about attrition, and about
employment inthe trucking industry.
ESTIMATED CONSUMER LOSS: The Commission concluded that the
economic loss suffered by each enrollee was equal to the
tuition amount - $795. From the point of view of enrollees
careers, employment and earnings, the course was worthless.
About 1,950 enrollees attended courses during the period
of the Commission's investigation; the total tuition was
about $1.5 million.
VALUE OF REDRESS: The order provided a $25,000 restitution
fund for students who enrolled in the course during
calendar year 1973 and completed the course but failed
to get a training-related job.
PAGENO="0055"
51
FIRM : Tn-State Driver Training, Inc.
-CASE NO. : C. 2839
DATE OF FINAL ORDER: 9/20/76
CHARGES : The firm had falsely represented, among
other things, that it had been requested to train drivers
for specific jobs by trucking companies, that it offered
employment, that its graduates would be qualified for truck
driver jobs without furthertraining or experience, and
that graduates were assured of such jobs.
ESTIMATED CONSUMER LOSS: The Commission concluded that if
graduates did not secure employment as truck drivers, as was
almost always the case, the, money spent on the course was
totally wasted. The firm charged $795 for the course
and had 101 graduates for the year under investigation.
The Commission had no information in the files we reviewed
about the employment rates of the firm's graduates.
VALUE OF REDRESS: The order contained no redress provisions.
The Commission concluded that restitution would impose an
unreasonable hardship on the firm because of the severe
losses or reduced profits suffered by the firm during
fiscal years 1971 throuqh 1974.
PAGENO="0056"
52
FIRM : U.S. Marketing Institute
CASE NO. : C. 2844
DATE OF FINAL ORDER: 9/30/76
CHARGES : The firm misrepresented its expertise in
the fields of marketing, engineering, and patent law;
its ability to recognizze ideas or inventions which
could result in financial gain; its ability to
obtain manufacturing contracts for its clients; and its
ability to obtain manufacturing contracts for its clients;
and its ability to obtain financial gain for its
clients. Few; if any; of the firm's clients had their
ideas or inventions evaluated by qualified and
appropriately licensed persons, received legal
protection for their ideas or inventions, or received
a financial gain as a result of contracting with the
firm. In addition, the firm failed to protect clients'
investments and failed to disclose facts concerning the
probability that such clients would receive a financial
gain as a result of contracting with the firm.
ESTIMATED CONSUMER LOSS: The firm's clients generally paid
a fee of between $l.500 and $4.500. For the period
under Commission investigation, the firm contracted with
213 clients and none had obtained a financial gain. Over
this period, the firm received $340.000 and the Commission
considered the entire amount as a loss.
VALUE OF RFOPES: The order contains no redress provisions.
Commission staff cited financial documents which
revealed that the firm had no available revenue,
assets, or the financial capability to pay any form
of redress.
PAGENO="0057"
53:
FIRM : International, Inventors, Inc.
CASE NO. : C. 2845
DATE OF FINAL ORDER: 9/30/76
CHARGES : The firm misrepresented its expertise in
the fields of marketing, engineering, and patent law,
its ability to recognize ideas or inventions which
could result in financial gain, its ability to obtain
manufacturing contracts for its clients, and its
ability to obtain financial gains for its clients.
Few, if any, of the firm's clients had their ideas
or inventions evaluated by qualified or appropriately
licensed persons, received legal protection for their
ideas or inventi~ons, or received a financial gain as
a result of contracting with the firm. In addition, the
firm failed to protect clients' investments and failed
to disclose facts concerning the probability that such
clients would receive a financial gain as a result of
contracting with the firm.
ESTIMATED CONSUMER LOSS: The firm's clients generally paid
a fee of $1,690. For the period under Commission
investigation, the firm contracted with about 260
clients and none received a financial gain. Over this
period, the firm received about $298,115, and the
Commission considered the entire amount as a loss.
VALUE OF REDRESS: The order contained no redress provisions.
The firm closed its offices and ceased operations in
June 1975. Commission staff cited financial documents
which revealed that the firm had no available revenue,
assets, or the financial capability to pay any form
of redress.
PAGENO="0058"
~54
FIRM : Lafayette United Corp.
CASE NO. : D. 8963
DATE OF FINAL ORDER: 10/26/76
CHARGES : The firm misrepresented that it would
provide a high school equivalency diploma to those
completing its home study course, and that no state
exam was required for the awarding of a diploma.
Misrepresentations also included assertions that there
were many job openings available, persons completing the
courses were assured of placement, and the firm maintained
a placement service which actively sought jobs for
graduates.
ESTIMATED CONSUMER LOSS: Commission staff estimated that about
5.500 students enrolled in the school's courses during
the period under investigation at tuition costs ranging
from $595 to $895. The Commission estimated the consumer
loss to be at least $1 million.
VALUE OF REDRESS: The firm provided a redress fund of $200.000
for those students who (1) completed the courses but did
not obtain related employment or elected not to seek such
employment for reasons related to the sufficiency or
quality of training or job demand, or (2) decided not to
complete the course for reasons related to the sufficiency
or quality of training or job demand.
PAGENO="0059"
55
FIRM : Commercial Programming Unlimited, Inc.
CASE NO. : D. 9029
DATE OF FINAL ORDER: 12/9/76
CH~ RGES
The firm misrepresented. among other things,
that its courses would qualify qraduates for employment
as computer programmers; a college education was not
necessary for placement of graduates; the firm had a
reasonable basis from which to conclude that there was
a need for people in its training fields and that
graduates were virtually assured of placement in
trained-for fields; it was advantageous to take more
than one course of instruction; and it owned a computer
located on the premises. The firm failed to disclose
accurate information about the success of graduates in
obtaining employment related to their traininq. The
firm also violated the Truth in Lending Act by failinq
to provide all required credit cost information and to
use proper terminology.
ESTIMATED CONSUMER LOSS: The Commission estimated that the
school enrolled less than 2,000 students each year.
[The files we reviewed contained no information as to
the cost of these courses.] The Commission believed
the courses were of little value in preparing
graduates for existing entry level positions as computer
programmer trainees and computer operator trainees.
VALUE OF REDRESS: Based on a review of the firm's financial
statements by a Commission accountant, the Commission
concluded that the firm's financial difficulties made
redress impractical.
PAGENO="0060"
56
FIRM : International Telephone and Telegraph Corp.
ITT Community Development Corp.
CASE No. : C. 2854
DATE OF FINAL ORDER: 12/10/76
CHARGES : The firms misrepresented that the parent
company was legally responsible for the subsidiary's
debts and the development of the area in which land
was being sold, that the purchase of a lot sold by the
subsidiary involved little or no financial risk, and
that the lots were, or were soon to be, within a
self-contained and fully developed community. The
contracts were also unfair in providing that the
subsidiary kept all sums previously paid by a
defaulting purchaser.
ESTIMATED CONSUMER LOSS: The Commission concluded that one
of the factors contributing to consumer injury was the
population estimates used by the firms. Consumers
believed that the predicted massive influx of people
would generate tremendous demand for land and land
prices would consequently skyrocket. Consumer injury,
the Commission concluded; could be the difference
between the anticipated value and the actual value
of the property. The director of the Commission's
land sales prooram estimated the injury at half a
billion dollars. Other staff commented that
PAGENO="0061"
57~
althouqh the Commission sought the advice of
professional land planners, it lacked the expertise
to estimate the consumer injury.
VALUE OF REDRESS: The order required the firm to provide:
an office building for the corporate headquarters of the
subsidiary; an office and research park; a multi-purpose
office structure within the office and research park;
a major highway interchange; and a shopping center.
Commission staff estimated the value of this package
at $20-30 million.
PAGENO="0062"
58
FIRM : Idea Research and Development, Inc.
CASE NO. : D. 9032
DATE OF FINAL ORDER: 1/11/77
CHARGES : The firm, engaged in the idea promotion
business, was inducing clients to enter contracts for
the promotion of clients' ideas. inventions, or products
by representing that clients could earn substantial sums
of money through their association with the firm. Few,
if any, clients ever received a sum of money qreater
than what they paid. The firm also misrepresented its
ability to recognize ideas which miqht result in
financial gains, its engineerinq and marketing ability,
the development or promotion of such ideas; its ability
to provide legal protection for clients' ideas, and its
ability to obtain manufacturing contracts for its clients.
ESTIMATED CONSUMER LOSS: The Commission concluded that the
firm had received $752.373 in clients' fee over the
period under investigation. Only $140 was paid to the
clients. Therefore; the consumer loss was $752,233.
VALUE OR REDRESS: The order contained no redress provisions.
The Commission concluded that; because the Internal
Revenue Service, in its case aqainst the firm, could
not locate any assets; consumer redres.s was not feasible.
PAGENO="0063"
59
FIRM : Great Western United Corp.
CASE NO. : C. 2306
DATE OF FINAL ORDER: 1/26/77
CHARGES : The firm misrepresented that the land
it offered for sale was a good investment because it
was certain to rise in price misrepresented the nature
and extent of the real estate developments; misrepresented
its policy concerning the resale of land purchased by
consumers, misrepresented the amount of water available
at the developments, and failed to include certain
required affirmative disclosures in its advertising.
(the firm had been violating a 1972 consent order.)
ESTIMATED CONSUMER LOSS: The files we reviewed contained no
specific information on the consumer loss.
VALUE OF REDRESS: The firm was to make partial refunds of
almost $4 million to up to 14,000 consumers who bought
property between January 1, 1972, and the date of the
order. In addition, the firm was to spend $16 million
on capital improvements such as roads; electrical, gas,
water; and sewer facilities; recreational facilities;
stores; and commercial and industrial buildings.
PAGENO="0064"
60
FIRM : Flaqg Industries, Inc.
CASE NO. : C. 2903
DATE OF FINAL ORDER: 9/27/77
CHARGES : The firm misrepresented that the
unimproved lots it was selling constituted an excellent
investment, that siqnificant monetary gain could be
achieved, that there was little or no financial risk
involved in the purchase; that resale of the lots
was not difficult, that the lots offered the comforts
of suburban living; and that the lots were in other than
isolated, sparsely populated areas.
ESTIMATED CONSUMER LOSS: From 1968 to 1975. the firm sold
10,528 lots for about $43 million. Commission staff
estimated the lots to be worth from $21-26 million.
Staff estimates were based on sales prices for these
lots at a distress sale.
VALUE OF REDRESS: The firm was to construct all facilities and
amenities as represented in its report filed with the
U.S. Department of Housing and Urban Development. The
firm was also ordered to construct additional facilities
and make additional improvements and to pay $100,000 to
a property owners' assocation. The Commission estimated
that these improvements would cost the firm about
$4.1 million.
PAGENO="0065"
61
FIRM : Jetma Technical Institute
CASE NO. : D. 9061
DATE OF FINAL ORDER: 10/19/77
CHARGES : The firm misrepresented that there was a
substantial need for its graduates and that jobs would be
readily available to them. In addition, students were
incorrectly led to believe that the need for gas turbine
mechanics wouuld steadily expand in the future.
ESTIMATED CONSUMER LOSS: The Commission concluded that the
consumer loss was the total fee paid to the school
because there was no benefit derived from completion of the
course. The staff estimated that ahout 2,500 students
would be covered by the order; each paid a fee of about
$1,095. Therefore the loss would he about $2.7 million.
VALUE OF REDRESS: The order contained no redress provisions.
The Commission relied on certified financial statements in
concluding that funds were not available for redress.
47-917 0 - 79 - 5
PAGENO="0066"
62
FIRM : Ryder System, Inc.
CASE NO. : C. 2915
DATE OF FINAL ORDER: 12/28/77
CHARGES : The firm falsely advertised, among other
things, that (1) there was an urgent need or demand for
graduates of its tractor-trailer driver and heavy
equipment operator courses; (2) all or substantially all
graduates were able, upon graduation, to secure positions
for which they were trained; (3) students would complete
the tractor-trailer driver course and qualify for
employment as drivers within three weeks of beginning
the course on a part time basis; and (4) the firm
furnished a free placement service.
ESTIMATED CONSUMER LOSS: The Commission did not calculate the
loss but rather estimated that the students who would be
eligible for the redress had paid tuitions totalling about
$7.6 million.
VALUE OF REDRESS: The firm set up a $1.5 million fund to
provide restitution to certain eligible students.
Although the Commission announced that it would not be
able to estimate the total amount of tuition to be
refunded until the eligibility was determined, its staff
had estimated that total refunds would amount to about
$768,000 to $986,000.
PAGENO="0067"
63
FIRM : Firestone Photographs, Inc.
CASE NO. : C. 2921
DATE OF FINAL ORDER: 4/20/78
CHARGES
The firm misrepresented, among other
things, that it was closely affiliated with Kodak
Corp., that a franchisee would earn between $5,200
and $52,000 or more a year and could recover the
entire initial investment within one year, and
that the firm would obtain and set up sales locations
shortly after the contract was signed. The firm also
required all suits against it to be brought in an
Ohio court.
ESTIMATED CONSUMER LOSS: The Commission estimated the loss
at $1 million.
VALUE OF REDRESS: The order required the firm to notify all
franchisees that it would not enforce the contractual
provision limiting lawsuits to Ohio. The order
contained no other redress provisions.
PAGENO="0068"
64
FIRM : Driver Traininq Institute, Inc.
CASE NO. : D. 9060
DATE OF FINAL ORDER: 7/27/78
CHARGES : The firm misrepresented the employment
opportunities and salary potential for truck and
tractor-trailer drivers, the availability of steady,
high-paying jobs to graduates of its training courses,
and the effectiveness of its placement activities in
securing jobs for its graduates. The firm also
failed to disclose to prospective students important
facts, such as the minimum age requirements for
drivers and employer preferences for experienced
drivers.
ESTIMATED CONSUMER LOSS: The Commission estimated that the
firm's placement rate was at best 37% of all graduates.
Since the average cost of tuition was $1,000 and about
1,000 students enrolled each year. the consumer injury
was about $630,000 annually.
VALUE OF REDRESS: The firm established a $50,000 restitution
fund from which it was to make pro rata refunds to each
former student who met certain eliqibility requirements.
PAGENO="0069"
65
Mr. BROYHILL. Again, these come from the staff of the FTC.
Mr. .DENSMORE. These are FTC estimates that are in the case
files. These are staff estimates, yes.
Mr. SCHEUER. You have not done any independent verification of
the reasonableness of those estimates.
Mr. DENSMORE. The reason for, that being we are not able to get
access to the records of the companies.
Mr. SCHEUER. Why can't you get access to everything that FTC
has?
Mr. RABKIN. We can get what they have, but we cannot get what
they do not have. To make an analysis, we would have to go
beyond what they have.
Mr. SCHEUER. To come up with estimates of loss they must have
had access to the company files, didn't they?
Mr. RABKIN. Certainly.
Mr. SCHEUER. And you would have access to those files.
Mr. RABKIN. We would have access to what the Commission had
in its records.
Mr. SCHEUER. You could not send your investigators to the com-
pany files just as FTC does?
Mr. DENSMORE. I do not believe we have that authority.
Mr. SCHEUER. So you could only have access to what they actual-
ly placed in their files, the studies they did and the analysis they
did and copies of documents they took. That would be the limit of
what you could look for.
Mr. DENSMORE. Yes.
Mr. SCHEUER. Presumably they would have in their files what-
ever they thought from the company's files made their case.
We have Congressman Rinaldo here. Do you have any questions?
Mr. RINALDO. I am sorry I am late. Probably most of the same
questions that I would want to ask have been already covered.
However, in an effort to insure that it is on the record, I would like
to ask about GAO's findings that consumers are not receiving the
benefits of section 19. I note from your recommendation that you
want to give FTC the power to freeze a company's assets.
Now, I cannot picture myself wanting to do business with a
company whose assets are froien. In other words, wouldn't such an
injunction almost guarantee a company will fail? If a company is
only accused of wrongdoing, F fear that it could be ruined and just
about put out of business based only upon allegations that it in-
tends to dissipate its assets.
Could you comment on that?
Mr. DENSMORE. We discussed that a while ago, sir, and the same
concern was raised but what we are talking about is FTC going
into court and getting an injunction to prevent a company from
dissipating its assets. I think it is a little different than saying
those assets are frozen.
We gave a couple of examples where for instance one company
was paying an individual's wife $60,000 a week in consulting fees,
transferring large sums from one account to different accounts,
setting up additional corporations and so forth. We are talking
about this type of flagrancy. It would rest with the court to deter-
mine what particular restrictions should be placed.
PAGENO="0070"
66
So we are talking about oniy dissipating assets in anticipation of
being required to provide redress.
Mr. BROYHILL. Would the gentleman yield? The problem, as I
pointed out a few moments ago, is this is fine and we would like to
see these people make redress, but the problem is that the Commis-
sion will take this as they have in the past, to try some new and
novel theory and they will use the threat of going to court, seek
consumer redress for this new and novel theory of authorization
and use this to force them to sign a consent decree when they are
entirely innocent.
And it is probably something that should have been done
through industry trade rule.
Mr. RABKIN. That could well happen.
Mr. BROYHILL. It has happened. Did you investigate that?
Mr. RABKIN. We have no way of knowing what goes on at the
negotiations between the business and the Commission and what
threats, if you will, the Commission makes as to the potential
actions it could take if the company does not consent.
Mr. SCHEUER. I must confess-none of you three fellows are
lawyers, but I must confess as a one-time lawyer I do not under-
stand Congressman Broyhill's case at all because all the Commis-
sion is doing is going to court. If they do not, under your situation,
they would not have any power to affect that business operation.
They would simply present their case to the court alleging certain
improprieties, deceptions, frauds, whatever.
Now, any company that is doing business would have a lawyer
and, of course, the FTC would have the burden of the proof. They
would have the burden of making their case. The company would
have a lawyer. I think Congressman Broyhill is unduly exercised
and has anxieties that are not real.
The company would then come to court with their lawyer and
they would tell the court what the facts were. I cannot believe if
this was a frivolous thing that the FTC was trying to do that for a
very brief court appearance the company could not get the FTC off
their backs.
We do have a judicial system in this country and what these
recommendations would do would be to shortcircuit in effect the
regulatory process and require the FTC to make its case very early
on in a court of law; in a Federal court, too, where you have a very
high quality of judicial expertise and professionalism and responsi-
bility.
I think a Federal court would give very swift comeuppance to the
FTC if they were trying in effect to blackmail a company into
signing some kind of consent order that was not justified by the
fact or unfairly to do any arm twisting or whatever. It is what we
have a federal court system for.
Mr. RINALDO. The problem, however, Mr. Chairman-and I un-
derstand exactly what Mr. Broyhill is saying-is that it is one
thing for us to say here how it is going to work. It is one thing for
us to say here how we are going to legislate.
But I think you yourself not too long ago, at a meeting we had
when we were laying out the groundwork for this subcommittee,
admitted one of the biggest problems in the country today is over-
zealousness in the bureaucracy and the extension of regulations to
PAGENO="0071"
67
the point where the bureaucracy does not even follow the intent of
Congress. Certainly where the FTC is given the power, as it would
be under the terms of this particular section, to freeze a company's
assets or prevent them from--
Mr. SCHEUER. That is a big difference. Are you a lawyer?
Mr. RINALDO. No, I am not. The fact of the matter is no matter
how we try to paint it, you are~ causing a stigma to be placed on
that company. You are causing~ that company to be on the front
page of the newspaper. You are ëausing that company to lose sales.
You are causing that company to have problems. That is why I am
surprised at what you are saying.
Last year I signed the conference report. Let me quote one of the
main sentences: "The possibility exists that some few overzealous
staff people may be tempted to suggest equitable relief as a negoti-
ating device even when they know it would not be proper."
Now, this is exactly the problem. The problem is not with the
intent as set forth here. The problem is not with the legislative
language. The problem, as I see it, is with the interpretation of the
legislative language, the rules that will be promulgated and the
harm that will be done.
Mr. SCHEUER. Congressman Rinaldo, you and I both identified a
problem but in that conference report we gave them equitable
relief and you signed that very same conference report so we both
recognize it as a problem, but we are relying on the Federal judici-
ary to bring the FTC up very short and to keep them on a very
tight rein if they abuse the right that we are now giving them to
take a case to court for some kind of injunctive relief.
Mr. RINALDO. You have more faith in FTC and the Federal
judiciary system than I do.
Mr. SCHEUER. I have a lot of faith in the Federal judiciary
system.
[Discussion off the record.]
Mr. SCHEUER. I have a lot of confidence in our court system.
When push comes to shove that is the best thing we have going for
us in this country to preserve not only our democracy but to
preserve the free enterprise system that has made this country
great and has been the foundation of our prosperity.
Mr. DENSMORE. If I could say just one more thing along these
regards. There are a couple of other things I think should be taken
into consideration. That is, that with this type of authority, in
order to get the injunction FTC would have to prove to the court
that it had a likelihood of~ ultimate success in the complaint
against the defendant and that it has a likelihood of obtaining of
restitution or other redress under section 19. It is not a question of
only going in and making a case to stop a practice but they would
have to show at that particular point in time the chance of success
they would have in the final proceeding.
Mr. RINALDO. I have no further questions, Mr. Chairman.
Mr. SCHEUER. Thank you very much. We appreciate your testi-
mony.
We will now move to Jeffrey Joseph, who is representing the
Chamber of Commerce of the United States. Mr. Joseph, we are
running against a time constraint this morning. Your entire state-
ment will be printed without any abridgement in the record, so
PAGENO="0072"
68
what we would hope is that you would just chat informally with us
hitting the highlights, summarizing your statement and then I am
sure we will have some questions for you.
STATEMENT OF JEFFREY H. JOSEPH, DIRECTOR, GOVERNMENT
AND REGULATORY AFFAIRS, CHAMBER OF COMMERCE OF
THE UNITED STATES, ACCOMPANIED BY MARK SCHULTZ,
REGULATORY AFFAIRS ATTORNEY
Mr. JOSEPH. Good morning, Mr. Chairman, Congressman Broy-
hill, and Congressman Rinaldo. I am Jeffrey H. Joseph, Director of
Government and Regulatory Affairs of the Chamber of Commerce
of the United States. Accompanying me today is Mark Schultz,
Regulatory Affairs Attorney at the National Chamber. In the past,
it has been our impression that reauthorization hearings such as
these were considered by all parties to be relatively proforma.
Times change, however, and today a new political environment is
sweeping our country. An increasingly cynical and frustrated
public is becoming more vocal about the role of government in
society. Proposals that 1 year ago no one could have predicted with
great certainty, like proposition 13 and constitutional conventions,
are becoming familair concepts for today's politician.
This new public attitude has permeated all levels of our govern-
ment. As candidate Jimmy Carter ran against the Washington
establishment; the Congress has since become more conservative.
Current events continue to escalate the public debate. For example,
one month ago, in a little publicized address to the faculty and
students of the University of Kansas, Attorney General Griffin Bell
offered a grim perspective on the state of our Nation today. The
Attorney General's premise for the public address was, "that if the
republic is to remain viable, we must find ways to curb, and then
to reduce, this government by bureaucracy. We must return to
government by directly accountable public officials-local, State,
and Federal."
Mr. SCHEUER. What distinguishes a public official directly ac-
countable to the people from one who is a bureaucrat?
Mr. JOSEPH. These people who go to the ballot boxes who find
fault with anything you as an elected official might do have a
chance to express some feeling about it. They cannot find the
bureaucrat who has come up with the regulation that mandates
what they have to do next. The Attorney General proposed drastic
solutions including a one 6-year term for the President, reduction
of the litigating authority of the independent agencies, reduction in
the staff of all bodies, the courts, the Congress, even the Presiden-
cy, and suggested to Congress they should sharply curtail rulemak-
ing which he said was a complete total substitute for all forms of
government, executive, legislative, and judicial. Its abuse could
stymie the government of whole States in the operation of entire
industries.
Mr. SCHEUER. I am confused. Congressman Broyhill and Con-
gressman Rinaldo want to cut down on adjudications which means
they want more rulemaking. You want to cut down on rulemaking.
I do not understand it. Do you want to cut down on the access of
regulatory agencies to the court so the courts would do most of that
work or do you want that process handled through rulemaking?
PAGENO="0073"
69
Mr. JOSEPH. I am offering an observation by the Attorney Gener-
al that rulemaking process has created a lot of problems and
rulemaking has really focused a lot of attention on the Federal
Trade Commission.
Mr. SCHEUER. But this whole process we are talking about this
morning--
Mr. BROYHILL. I was referring a few moments ago to the narrow
practice of the Commission in using either consent decrees or cease
and desist orders in certain instances where perhaps it would have
been better advised to have used rulemaking. That is a narrow
area. That is what I was referring to.
Mr. SCHEUER. You are not in favor of a vast expansion of rule-
making.
Mr. BROYHILL. No. I am just saying in some instances the Com-
mission instead of going in and issuing a rule or set of regulations
for industrywide practice, has attempted to do this on a case-by-
case basis.
Mr. SCHEUER. Via the court system?
Mr. BROYHILL. Right.
Mr. SCHEUER. Please proceed.
Mr. JOSEPH. Perhaps more so than any other Federal agency, the
FTC typifies what the average American seems to be concerned
about in government. Through its rulemaking powers, the FTC has
involved itself in the affairs of industry and commerce stretching
from one end of society to another. Hearing aid dealers, funeral
parlor operators, used car dealers, cereal and food manufacturers,
vocational school operators, mObile home manufacturers, T.V. ad-
vertisers, protein supplement manufacturers, health spa operators,
and the science of product standards and certification are all sub-
ject to action by the Federal Trade Commission.
There appears to be no area in our society where the FTC does
not seem to have a better idea. This omniscience raises a funda-
mental question: As it now exists under the FTC act, is rulemaking
prudent and consonant with the principles of government em-
braced by the constitution?
Now it is interesting to note just last week the administrative
conference published in the Federal Register for public comment
some preliminary findings as a result of a study they were mandat-
ed to do. The study so far raises some significant questions and
criticisms about the Commission's handling of the rulemaking
process.
You go back to the statute. The operative words are: "either
unfair or deceptive." Clearly in legal practice it need not be both.
From 1938 on, FTC spent most of their time eliminating deceptive
practices and they built up a good case history on what a deceptive
practice was.
There is no arguing that a misrepresented produce characterizes
something that should be enjoined, but it has only been recently
that the Commission has gotten into determining what is unfair
and after all what is unfair is really in the eye of the beholder.
That is áreating a problem for, the Commission.
Mr. SCHEUER. Do you have any egregious examples that spring to
mind of some activity that they declared unfair that you would say
is not unfair?
PAGENO="0074"
70
Mr. JOSEPH. Go through the entire list of rulemakings and you
will find novel concepts proposed from 1975 on.
Mr. SCHEUER. I am asking you for a specific example.
Mr. JOSEPH. I listed in the statement that what brings most
instances to light is the rule for the ban on advertizing to children
that has generated a lot of criticism on the part of the public.
Whose right is it to say you should mandate what children should
be able to see on television?
The same thing with what people who produce hearing aids
should have to advertise in their product. Should they claim what
is substantial benefit or additional substantial benefit? Why should
protein supplement manufacturers have to put labels on their
products and say people do not need to buy them?
If you run through the whole list of proposals that have come out
in trade regulation rulemaking proceedings you will see novel con-
cepts have been proposed where staff people at the FTC have taken
their definition of what is unfair and said this should apply for the
whole country.
This is the kind of point you will get into when you have your in-
depth hearings on rulemaking process because they are not isolat-
ed instances by any means.
Mr. SCHEUER. I must say you have not cited a single instance
that bothers me one iota, and I would be happy to take up the
cudgel in each of those cases but that is not our role here today. Do
you have any other instances of what you would feel would be
unfair intrusion on unfettered, free, private enterprise?
Mr. JOSEPH. You have to look at the whole process. The question
is: Is the rulemaking process fair? You have half a dozen to a dozen
industries who spent millions of dollars participating in these rule-
making proceedings where the prosecuting attorney is a staff
member of the Bureau of Consumer Protection and the hearing
officer, who was determining the objectiveness of everything pre-
sented, was from the same bureau.
The same bureau determined which public interest group got
funds to participate and offer novel points of view which were
reiterations of the points the staff was proposing. So, you ask if
industry thinks they are being fairly treated, and the answer most
people seem to have is no, it is not very fair.
The public funding program raises important questions of fair-
ness and equity. We believe-all National Chamber believes all
interested groups, particularly consumers, should be represented in
agency proceedings. But we continue to oppose the authorization of
additional Federal expenditures to result in unfair or unnecessary
regulatory efforts.
The same study of the Magnuson-Moss Act by Professor Boyer
has another preliminary report out which reinforces testimony
that was given and information that was learned in hearings in the
Senate Judiciary Committee in June of 1977. Professor Boyer con-
firmed that the FTC had a potentially extremely difficult task in
identifying which interests should be compensated but attempted
to avoid the problem by accepting at face value a conclusory defini-
tion of consumer interest that the applications advanced FTC took
a liberal approach on the issue of financial inability with the
PAGENO="0075"
7i
agency concluding a group was financially unable to participate if
its unrestriced funds had been budgeted for other projects.
Mr. Boyer also found that FTC staff attorneys have played a
major role in selecting paid participants, both in making formal
recommendations and through informal preapplication contracts
with consumer groups and other applicants. Also, Mr. Boyer found
that "like staff, the consumer groups tended to mobilize witnesses
who were rule-supporters and overall there were many more pro-
rule than anti-rule witnesses at the hearings." He observed that,
"Compensated consumer groups tended either to support the rule
or take the position it did not go far enough."
The concept of intervenor funding is not one that is business
versus consumer because you have the former Executive Director
of FTC in Senate testimony-Margaret Smith says she had reserva-
tion about how the program was going and you have John Gardner
who said if the concept of conflict of interest means anything, there
is danger in potential criticism of an agency being financed by the
agency that criticized and the problem was you would create a
class of critics.
Now, the problems we raise, we are not saying we are against
rulemaking. We are saying as long as abuses in rulemaking exist
and FTC takes it upon themselves to determine what is unfair,
then the concept of congressional veto becomes a much more im-
portant issue and it raises more and more interest as the days go
by because as long as unelected agency officials come out with new
rules and regulations which have the effect of law and can be
enforced in court, there should be an opportunity for Congress to
affirmatively do something to stop these from going into effect and
let Congress impose its judgment of what is fair.
There are two instances in the Federal Trade Commission now
that come to mind where the Commission is going ahead with
proposals which got no place in the Congress. For a number of
years Senator Kennedy had a proposal to restructure voluntary
standards. No congressional support, so now they are doing it by
regulatory fiat. Senator Kennedy had difficulty promoting legisla-
tion in the Congress that would break up oil companies so he
petitioned Federal Trade to do it by rulemaking.
If agencies do by bureaucratic fiefdom what the Congress, as the
policymaking body of the United States, refused to do, we think
congressional veto as a concept should be established and the Con-
gress should have the right to stop these agency regulations from
going into effect.
Our board recently gave support to Congressional veto--
Mr. SCHEUER. Doesn't the court at the present time have a role
in stopping them from going into effect if they are unfair and
arbitrary? Don't the companies have as their first line of defense
the five Commissioners who themselves must approve staff recom-
mendations and after that can't the companies have access to the
Federal courts on the whole question of the fairness and reason-
ableness of the FTC output?
Mr. JOSEPH. There are due process safeguards but they are all ex
post facto. One of the things we like about HR 2367 is that it lays
out a number of regulatory reform type procedural requirements
for an agency to follow. There is an opportunity for interlocutory
PAGENO="0076"
72
challenge. Why should industry have to spend 4 or 5 years negoti-
ating, litigating, getting involved in agency appeals to the Commis-
sioners, appealing to courts and spending all that time and money
to overturn what the public does not seem to want?
I seem to recall that not that many months ago FDA came out
with a provision to ban saccharin. It did not take long for the
public as a mass to get to the Congress and get a message to
Congress.
Mr. SCHEUER. How would you have Congress play that role?
Mr. JOSEPH. The Congress plays the role in the congressional
veto. Anyone has the right to try and raise the issue. We think
that in H.R. 2367 there are a number of concepts which need to be
applied to the Federal Trade Commission so it can be made more
responsive, so industry does not have to spend time and money for
no results.
You are aware of the political scenario that happened in the last
Congress, great support for this concept on this bill. It is not
without justification. There is enough pressure for a lot of different
reasons to create this environment. So, I do not think what we are
talking about is something that is a phantom issue. The regulatory
reform provision--
Mr. SCHEUER. Congressman Levitas will be testifying before this
committee tomorrow, and I suppose he will be making an eloquent
plea for support of the congressional veto.
Mr. JOSEPH. As I said, we support that provision which is in H.R.
2367, section 3 of that bill, section 4. H.R. 2367 also embodies a
number of basic principles that the chamber has adopted in terms
of reforming the regulatory process. We support the requirement
that FTC conduct cost-benefit analyses, issue economic impact
statements and consider alternatives, and indirect costs interest all
rulemaking proceedings.
In addition, we support its requirement of periodic review of
existing and new FTC regulations to determine whether they con-
tinue to be necessary, are carrying out their statutorily intended
purposes or whether they conflict with or duplicate any other rule
or regulation.
Finally, we endorse the idea of providing an opportunity for
judicial review, on an interlocutory basis, of any rulemaking pro-
ceeding which fails to comply with any procedural requirement
outlined in section 4.
Consequently, we urge subcommittee adoption of the Broyhill
bill, legislation that would achieve meaningful regulatory reform
by eliminating excessive, inflationary regulations. As we see it, this
proposal would be beneficial not only to the business community,
but to the American consumer as well.
In summary, we hope that the above recommendations will be
received in the spirit in which they are intended. They are offered
as part of the national chamber's continuing effort to achieve
regulatory reform, and our continued commitment to remove Gov-
ernment impediments to growth in the regulatory system, a com-
mitment clearly shared by President Carter, as evidenced by this
statement to Congress:
One of my administration's major goals is to free the American people from the
burden of overregulation. We must look, industry by industry, at what effect regula-
tion has-whether it simply blunts the healthy forces of competition, inflates the
PAGENO="0077"
73
prices and discourages business innovation. Whenever it seems likely that the free
market would better serve the public, we will eliminate government regulation.
[Testimony resumes on p. 84.]
[Mr. Joseph's prepared statement follows:]
PAGENO="0078"
74
STATEMENT
on
H.R. 2313 and H.R, 2367, AMENDMENTS TO
THE FEDERAL TRADE COMMISSION ACT
before the
CONSUMER PROTECTION & FINANCE SUBCOMMITTEE
of the
HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
for the
CHAMBER OF COMMERCE OF THE UNITED STATES
by
Jeffrey H. Joseph
February 28, 1979
I am Jeffrey H. Joseph, Director of Government and Regulatory Affairs
of the Chamber of Commerce of the United States. Accompanying me today is
Mark Schultz, Regulatory Affairs Attorney at the National Chamber. On behalf
of our 80,000 members, who produce most of America's goods and services,
we greatly appreciate the opportunity to present our views on the role of
the Federal Trade Commission in our society today.
PUBLIC ATTITUDE TOWARD GOVERNMENT
In the past, it has been our impression that reauthorization hearings
such as these were considered by all parties to be relatively pro-forma.
Times change, however, and today a new political environment is sweeping
our country. An increasingly cynical and frustrated public is becoming
more vocal about the role of government in society. Proposals that one
year ago no one could have predicted with great certainty, like Proposition 13
and constitutional conventions, are becoming familiar concepts for today's
politician.
This new public attitude has permeated all levels of our government.
As a candidate Jimmy Carter ran against the Washington establishment; the
Congress has since become more conservative. Current events continue to
escalate the public debate. For example, one month ago, in a little
publicized address to the faculty and students of the University of Kansas,
Attorney General Griffin Bell offered a grim perspective on the state of
our nation today. The Attorney General's premise for the address was, "that
if the republic is to remain viable, we must find ways to curb, and then
to reduce, this government by bureaucracy. We must return to government by
directly accountable public officials -- local, state and federal."
PAGENO="0079"
75
Attorney General Bell went on to offer a few "modest" suggestions
to turn the tide. Among these he proposed:
* A constitutional amendment to provide for a sole, six-year term
f or the President;
* A complete review and reduction of the regulatory and litigating
authority of the independent federal agencies;
* A reduction in the staffs allocated to the President, the Congress,
and even the federal courts; and
* A drastic call to Congress to "sharply curtail, if not abolish,
the so-called rulemaking power of the independent regulatory
cOmmi55iOfl5.~
Attorney General Bell called rulemaking "a total substitute for
all forms of government, executive, legislative, and even judicial. Its
abuse can stymie and frustrate the government of whole states and the
operations of entire industries."
RULEMAKING AND THE FTC
Public attitudes today dictate that Congress take an extremely
hard look at the operations and policies of the Federal Trade Commission.
Perhaps more so than any other federal agency, the FTC typifies what the
average American seems to be concerned about in government. Through its
rulemaking powers, the FTC has involved itself in the affairs of industry
and commerce stretching from one end of society to another. Hearing aid
dealers, funeral parlor operators, used car dealers, cereal and food
manufacturers, vocational school operators, mobile home manufacturers,
T.V. advertisers, protein supplement manufacturers, health spa operators,
and the science of product standards and certification are all subject to
action by the Federal Trade Commission. There appears to be no area in our
society where the FTC does not seem to have a better idea. This omniscience
raises a fundamental question: as it now exists under the FTC Act, is
rulemaking prudent and consonant with the principles of government embraced
by the constitution?
It is clear to many observers that the Federal Trade Commission's
rulemaking process is not working well, The Administrative Conference of the
PAGENO="0080"
76
United States has published in the Federal Register of February 21, 1979,
a request for public comments on certain proposed recommendations which
pertain principally to the preparation and prehearing stages of the trade
regulation rulemaking process. The study is directed by Professor Barry B. Boyer,
a law professor at the University of Buffalo who is serving as a consultant
to the Administrative Conference. The Conference is scheduled to report
to Congress the results of its study of the Magnuson-Moss Act. The preliminary
study raises significant questions and criticisms of the FTC's handling of
the preparatory and prehearing phases of the rulemaking process.
Any study of rulemaking by the FTC must commence with a close
examination of the powers from which the trade regulation rules emanate.
The FTC Act, as amended by the Magnuson-Moss FTC Improvement Act, reads in
part as follows: "The Commission may prescribe ... rules which define with
specificity acts or practices which are unfair or deceptive acts or practices
in or affecting commerce." There are two clear standards applicable
to the FTC rulemaking -- "unfair" and "deceptive." Under the clear language
of the statute, an illegal practice need not be both.
Since 1938, when the "unfair or deceptive acts or practices" language
was added to the FTC Act, the Commission has made great strides in defining
and eliminating "deceptive" practices. Its premise has been that the free
flow of accurate consumer information is necessary for the efficient operation
of markets -- a premise with which few would argue. There is no arguing
with the proposition, for example, that a misrepresented product characteristic
is a deception that should be enjoined.
However, it has not been until recently that the Commission has made
significant use of the "unfairness" standard. Evidence of the FTC's judgement
as to what is or is not unfair is evident in the current debates which are
keeping the highly controversial nature of this agency in the public's eye.
From the standpoint of the FTC, "unfairness" has no bounds, It lies in
the eyes of the beholders, in this case the staff and the members of the FTC.
Furthermore, the vagueness of unfairness is increased in the context
of rulemaking, which itself has ill-defined boundaries. The FTC was originally
PAGENO="0081"
~77
intended to be a "cease and ~ agency, Under rulemaking, it may
apparently order any affirmative or negative action it wishes to eliminate
the practice it deems unfair. It is obvious to those who are contesting
FTC actions that the agency is the second most powerful "legislative"
body in the United States.
While it is clear that the FTC is going out of its way to impose
its standard of "unfairness" on the country, the public is becoming increasingly
aware that the base concept, "fairness," is not always present in the conduct
of the various rulemaking proceedings. As this committee examines the
performance of the agency, it must ask why semblances of fairness must
continually be compromised. Why, for example, did the staff lawyers in
the hearing aid proceeding take the unprecedented step of providing their
personal evaluation of the credibility of various participants in the
rulemaking proceeding, arriving at a statistically impossible conclusion
that almost all of the individuals who testified in opposition to the rule
were deemed not to be credible, while those who supported the rule had,
by no strange coincidence, most unimpeachable characters? The concept
of commenting on the credibility of witnesses is astounding, since the
staff lawyers are supposedly serving as advocates, not factfinders.
The concept of fairness also extends to the relationship among
FTC staffers who participate in rulemaking. Many industries which face
the possibility of living with new, agency-mandated rules of practice
feel victimized in a proceeding where a staff member of the Bureau of Consumer
Protection proposed the rule; a colleague from the Bureau served as the
"impartial" hearing officer; and still other bureau c'olleagues decided which
"public interest" groups were reimbursed to play the "objective" role of
supporting the proposed rule.
The FTC's "public funding" program itself raises an important
question of fairness and equity. While opposing the proliferation in other
agencies of the concept of direct reimbursement of particLnsnt costs,
the National Chamber is well aware that the FTC has the statutory authority
pursuant to the Magnuson-Moss Warranty Act to award public participation
grants under certain conditions. We also are aware that the FTC makes
separate grants to witnesses from its own budget, and has authority to do so.
47-917 0 - 79 - 6
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In fact, when the Nagnuson-Moss bill went to the President for his
signature, we informed him that we supported the bill and were curious
to see how the intervenor funding portion would be administered. In our
opinion, it has not been administered well.
Hence, we will not address the underlying concept of direct
reimbursement for public participation in rulemaking proceedings. We
view that issue, at least as it applies to the FTC, as moot. Nor do we
object to the ~ issuance of rules of practice or its issuance
of Guidelines to explain those rules of practice. However, we regret
the FTC's decision not to adopt the guidelines suggested by the National
Chamber in a statement submitted to the FTC on July 25, 1977.
While the National Chamber believes that all interest groups,
particularly consumers, should be represented in agency proceedings,
the National Chamber continues to oppose the authorization of any federal
activity or expenditure that would result in an unfair or unnecessary
regulatory effort.
In testimony before a Senate Judiciary Subcommittee in June of 1977,
these serious abuses in the funding program used at the FTC were cited:
- Funds were disbursed, in many instances, to specific individuals
or groups in agreement with the FTC's position.
- Funds went to individuals and groups not qualified to receive them
under the definition of "participation," as spelled out in the law.
- Funds went to organizations which had sufficient funds of their
own to pay the costs of their participation in FTC proceedings.
- Staff attorneys of the FTC, in effect, played a double and
conflicting role; they took part in the hearings and joined in
determining what outside groups should be compensated for taking
a position in the hearings.
- The FTC failed to guard against staff excesses, such as what
might be called "ventriloquist advocacy" -- the preparation of
written statements delivered by public witnesses,
These abuses suggest there are many difficult questions to be
resolved in framing detailed standards for a direct compensation program
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and in administeging the granting o~ compensation funds. This point has also
been confirmed in another report by Barry B. Boyer.
Professor Boyer, in a preliminary review of the FTC's use of payments
to public participants, says that the FTC had "potentially an extremely
difficult task" of identifying which interests should be compensated,
but "tended to avoid the problem by accepting at face value the broad and
conclusory definitions of the consumer interest that the applicants advanced."
The FTC took a "liberal approach" on the issue of financial inability, with
the agency concluding that "a group was financially unable to participate
if its unrestricted fundshad been budgeted for other projects,"
Mr. Boyer also found that FTC staff attorneys have played a major
role in selecting paid participants, both in making formal recommendations
and through "informal pre-applicationcontracts with consumer groups and
other applicants." Also, Mr. Boyer found that "(l)ike staff, the consumer
groups tended to mobilize witnesses who were rule-supporters, and overall
there were many more pro-rule than anti-rule witnesses at the hearings."
He observed that "(c)ompensated consumer groups tended either to support the
rule, or take the position... (it) did not go far enough."
In view of this evidence and other "abuses" which have occurred,
the National Chamber urges Congress to engage in an in-depth analysis of the
FTC's federal advocacy funding program to ascertain whether or not its
procedure is functioning fairly, impartially, and with proper restraint
in the use of public funds.
Because the reimbursement program has been used to giye special
status, advantages, or exemptions to~ consumer groups sharing an agency's
position, and has led to unnecessary, duplicative testimony and preparation
of testimony by staffers to be submitted by ostensibly objective witnesses,
Congress should take a serious look at this program.
Lest this be viewed as a classic confrontation between the business
community and the consumer movement, consider the following comments made
by respected "consumerists." John W. Gardner, founder of (the citizen
lobbying organization) Common Cause, has commented that "if the concept of
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conflict-of-interest means anything, then there is a danger in potential
critics of an agency being financed by the very agency they criticize.
We could easily create a class of kept critics, and damage the future of
an independent public interest movement." Margery Waxman Smith, former
Executive Director of the FTC, in testimony before a Senate Judiciary
Subcommittee, noted that she had a number of reservations about the FTC's
reimbursement program.
CONGRESSIONAL VETO
Ours is a government that rests on checks and balances. A backlash
to regulatory agency excesses is growing. At the present time, administrative
rules and regulations of the FTC have the same force and effect as laws
passed by Congress. As long as our unelected bureaucrats continue to pass
laws without effective Congressional control, support will continue to grow
for the use of congressional veto as an effective tool to improve the
regulatory process.
National Chamber support for the congressional veto concept was recently
enunciated by our Board of Directors with the realization that there are
existing tools available to Congress to control the agencies. These include
greater and more effective oversight, stricter standards on the appointment
of cabinet members and agency chairmen, and greater reliance on the authorization
and appropriation process. However, we have determined that these tools
simply are not adequate to address the problem a particular rule or regulation
may present. All the above remedies are ex ~p~t facto -- after the damage
has been done. The congressional veto would prevent the damage and serve
as a possible tool of "consumer redress" from egregious FTC rulemaking actions.
Therefore, we support the effort to apply this process to the FTC, as found
in section 3 of the Broyhill bill.
From a political standpoint, we must recall the noteworthy votes
taken on this issue in the last Congress. Although the House passed an
amendment providing for congressional veto of FTC regulations by a 2 to 1
vote, 272 to 139, the Senate refused to accept that provision in conference.
On two seperate occasions, the House voted to reject the FTC conference report
because it did not contain a congressional veto of FTC regulations. The first
vote was 146 to 255; the second vote was 175 to 214. The two-time rejection
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of the conference report constituted unprecedented action on the issue and
dramatized the feeling of concern thatthe actions of the FTC have brought
to bear on our public.
REGULATORY REFORM
Tn addition to supporting the addition of a congressional veto
provision to the FTC Authorization Act, the National Chamber strongly
endorses the regulatory reform procedures outlined in Section 4 of the
Broyhill bill.
A 1978 report by the Center for the Study of American Business
revealed that federal regulation of business for fiscal year 1979 would
cost more than $100 billion or about $500 per person, However, we feel
this figure seriously understates the actual costs involved for business and
the public-at-large. Almost certainly, this figure does not reflect
the `hidden costs" of regulation resulting from business time, money,
and manpower being diverted to preparing reports and complying with regulations,
rather than being spent on hiring and training new personnel and improving
a firm's productivity. This leads to higher overhead for business and,
in turn, to higher prices for the prdduct, adding to the inflationary
spiral.
Of ten, the net effect of regulation is a diversion of manpower
and capital from the firm's business activities to work which adds little
or nothing to the perceived utility of the ultimate product or service
offered to the consumer. As a result, consumers do not understand the
reason for certain price increases.
In sum, the federal government's regulatory activity -- and, the
FTC's in particular -- is being viewed by American business as a significant
impediment to economic growth.
Consequently, in addition to supporting efforts for government
reorganization, zero-base budgeting, and sunset legislation which certainly
will help reduce the regulatory and paperwork burden, the Chamber supports
regulatory reform based on the following guidelines:
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-- A competitive free market system should be retained and encouraged
to provide an incentive for innovation and productive economic
activities;
-- Regulations should be only those essential to the protection of
the health, safety and the general welfare, and should be
revised and administered so as to.,.
(1) Provide that degree of regulation essential to the proper
functioning of a competitive free market system;
(2) Eliminate uneven and inequitable enforcement;
(3) Eliminate regulatory duplication and conflict;
(4) Provide for prompt regulatory decisions consistent with due
process;
(5) Assure adequate consideration of costs and benefits;
(6) Minimize compliance costs;
(7) Provide federal preemption preemption only in essential
instances;
(8) Assure a more orderly development of regulation with the
Congress establishing basic policy, agencies regulating
in accord with intent of Congress, and Congress reviewing
regulatory actions through its oversight function.
As we see it, Section 4 of the Broyhill bill is the embodiment of
these principles. We wholeheartedly support its requirement that the FTC
conduct cost/benefit analyses, issue economic impact statements, and consider
alternatives and indirect costs in all FTC rulemaking proceedings. In
addition, we support its requirement of periodic review of existing and new
FTC regulations to determine whether they continue to be necessary, are
carrying out their statutorily-intended purposes, or whether they conflict
with, or duplicate any other rule or regulation. Finally, we endorse the
idea of providing an opportunity for judicial review, on an interlocutory
basis, of any rulemaking proceeding which fails to comply with any procedural
requirement outlined in Section 4.
Consequently, we urge Subcommittee adoption of the Broyhill bill --
legislation that would achieve meaningful regulatory reform by eliminating
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excessive, inflationary regulations. As we see it, this proposal would
be beneficial not only to the business community, but to the American
consumer as well.
CONCLUSION
In summary, we hope that the above recommendations will be received
in the spirit in which they are intended. They are offered as part of the
National ~ continuing effort to achieve regulatory reform, and our
continued commitment to remove government impediments to growth in the
regulatory system -- a commitment clearly shared by President Carter, as
evidenced by this statement to Congress:
One of my Administration's major goals is to free the American
people from the burden of overregulation. We must look, industry
by industry, at what effect regulation has -- whether it simply
blunts the healthy forces of competition, inflates the prices
and discourages business innovation. Whenever it seems likely
that the free market would better serve the public, we will eliminate
government regulation.
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Mr. BROYHILL. I would like to ask Mr. Joseph a couple of ques-
tions. I am interested in his comment with respect to the reim-
bursement of public witnesses or participation in the rulemaking
proceeding before the Trade Commission. Did I understand now
that you are opposed to the concept or you are expressing the
concern as to how this has been implemented? That is, that the
weight of the testimony of the witnesses has been slanted or they
have been expressing one point of view.
Mr. JOSEPH. When the intervenor funding provision was given to
the Federal Trade Commission in 1975, the chamber had no posi-
tion on the concept and it is much the same concept in its applica-
tion as the Federal Trade Commission has now given us, the posi-
tion that we oppose.
We oppose the concept in its totality.
Mr. BROYHILL. I want to interject. I did note in the Federal Trade
Commission report on public participation in the rulemaking proc-
ess, that in several instances substantial funds have been expend-
ed. I assume the groups receiving funds are primarily consumer
groups such as in the food advertising rule-$154,375 has been
expended and I assume these are 9 or 10 consumer groups. I do not
note any business groups on the three pages here and since we are
discussing it, Mr. Chairman, I would ask unanimous consent that
this be put into the record so anybody who wants to can review the
record.
Mr. SCHEUER. No objection. It is so moved.
Mr. BROYHILL. I assume industry groups are well financed and
are able to appear but I would also assume that in many instances
that some of the consumer groups might have budgets that are far
in excess of small business organizations or particularly individual
small businesses that might want to participate.
I do not know many small businesses, for example, that could
expend $26,000 as was granted to one organization here to partici-
pate in the rulemaking process through the advertizing rule. That
is one example. There have been several cases here on this sheet
which show that groups have been given grants into five figures,
$10,000, $20,000, $30,000, $40,000 to participate and there are not
many small businesses, particularly who might be affected by these
rules, who could afford that type of expenditure to participate in
the rulemaking process.
So, I assume what you are saying is you are concerned about the
watchdogs.
Mr. JOSEPH. All the consumer groups that have been reimbursed
are full-time political groups. They are in business to try and serve
as watchdogs from one perspective or another. A small business is
not politically oriented. They have a lot of things to do besides the
Congressional Record to keep up with where they can go in Wash-
ington to spend 6 months and tell their point of view.
Mr. SCHEUER. Isn't that what trade associations do? Isn't that
what you are doing?
Mr. JOSEPH. That is right. But let's say we support the concept
and we were to go to the Federal Trade Commission and say,
"There is a new rulemaking that has come up and we do not have
money budgeted for this, so we would like you to pay us to be
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there." They would not buy that from us but they would buy it
from consumer groups.
Mr. BROYHILL. Americans for Democratic Action, which I thought
was a political action group per se, has been given substantial
grants to participate in several of these rulemaking procedures. I
appreciate the endorsement of my bill. I have introduced it and
have provided for what I think would be some requirements on the
Commission in their role of rulemaking or writing of regulations
that would be helpful and would be in the public interest.
I have no other questions.
Mr. RINALDO. I just have one point I would like to make and a
question to ask. In the first several pages of your prepared testimo-
ny, you make the point that FTC has used its rulemaking power to
in effect inject itself into all areas of society. You seem to question
whether rulemaking is even consonant with our constitutional
principles of government and then go on to quote Attorney General
Bell at length on page 2.
The last point that Mr. Bell makes is a drastic call to Congress to
"sharply curtail if not abolish the so-called rulemaking power of
the independent regulatory commissions."
Aside from what is in the legislation that we discussed, the bill
that Congressman Broyhill and I have introduced and the congres-
sional veto, do you have any other suggestion in that area? Certain-
ly, we cannot just abolish rulemaking, and I do not know what
would take its place. You seem to have skimmed over that area.
While you were highly critical of it-and with some justifica-
tion-you did not suggest any course of action aside from what has
already been offered in the legislation.
Mr. JOSEPH. Congressman, I think that we are not proposing that
the rulemaking be abolished. What we are saying is that the way
the process is being conducted, there needs to be safeguards ap-
plied, and we are making reference to the congressional veto as a
safeguard.
I think that the administrative conference study that is in the
process of starting to come out will have specific suggestions on
how the rulemaking process of FTC can be better structured. Pro-
cedural safeguards that were put in in 1975 clearly are not working
as well as they could.
And I think that there will be some constructive legislative
suggestion probably coming out of the administrative conference.
But the chamber has no formal recommendations at this time to
give you about what to do with rulemaking per se.
Mr. RINALDO. Except for your endorsement of the congressional
veto.
Mr. JOSEPH. Congressional veto is a tool which allows elected
officials to believe that they have more of a say in what is going
on.
Mr. RINALDO. Which certainly does not curtail or slow down the
rulemaking process in any manner, shape, or form.
Mr. JOSEPH. No. Although we would hope that the recognition
that the Congress has, the authority to involve itself in the process,
would get the attention of a lot of the agency staff people who
promote ideas that if they think hard about, might realize it would
not make sense to proceed with them.
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Mr. RINALDO. I have no further questions, Mr. Chairman.
Mr. SCHEUER. Can you give us any advice on the kinds of staff
increase that each of the 535 Members of the House and the Senate
would need to handle the additional burden of the flow of papers
through our offices that would result from the legislative veto?
Have you ever done a study of that?
Mr. JOSEPH. Mr. Schultz will be glad to respond to that.
Mr. SCHULTZ. About 34 States have some variation on the theme
of a congressional veto, using the States as social laboratories and
using their--
Mr. SCHEUER. The Congress of the United States would have to
deal with far more regulations than the State legislatures.
Mr. SCHULTZ. I am a lawyer and I understand that.
Mr. SCHEUER. Off the record.
[Discussion off the record.]
Mr. SCHULTZ. The point I was trying to make is State legislators
have smaller staffs and meet more infrequently than the Federal
Legislature. They have had a successful effort with respect to im-
plementing the congressional veto. I have not seen any facts or
figures as to what kind of increase as far as staff members or
budgetary increases that would be incurred if congressional veto
was implemented.
Our feeling is since there are oversight committees that are
already monitoring regulatory activities of given agencies that con-
gressional veto would work part and parcel with their oversight
responsibilities, and in fact probably would make the oversight
committees even more effective with respect to singling out partic-
ular rules and regulations that are excessive or inflationary.
We think that congressional veto could make the existing com-
mittee staffs more effective without making a significant increase
in the number of staffers that you would have to employ.
Mr. SCHEUER. But I would have to express a position on all kinds
of matters outside of the purview of the Interstate and Foreign
Commerce Committee. Would I not have to equip myself with staff?
For example, we spent 3,000 hours just on oversight of the pas-
sive restraint system last year. Now I do not say every one of the
535 Members of the House and Senate are going to ask their staff
to spend 3,000 or 300 or 30 hours, but still and all, if you ask every
Member of Congress to have to take a position on major acts of the
executive branch, you are going to impose an enormous additional
burden on us for which we are going to have to staff ourselves up.
There is no question about it. We have access to staff that would
help us scrutinize matters coming within the purview of both the
subcommittee and let us say all of the work of the full committee,
but there are a lot of other standing committees out there. How
are we going to pass on their work without significant extra staff
assistants?
Mr. SCHULTZ. At the present time you are asked to vote on a
number of pieces of legislation outside the ambit of Interstate and
Foreign Commerce.
Mr. SCHEUER. This is legislation that comes out of this body. If
you are going to ask us to review innumerable acts of the executive
branch, I think you are imposing an additional burden on us for
which we are going to need additional staff.
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Mr. SCHULTZ. Mr. Chairman--
Mr. SCHEUER. Please do not interrupt me before I am finished
speaking. I do not interrupt you. I wonder whether you have fac-
tored into your computer and could give us any advice on the
enormous amount of work that e are going to have to do scruti-
nizing the acts of the executive branch in addition to scrutinizing
all the legislative proposals of other congressional committees and
subcommittees for which we are staffed now?
I have heard criticism from the private sector of the degree to
which we are staffed now to enable each Member of Congress
intelligently to pass on our own acts, the legislative proposals of
our own subcommittees and the full committee on which we serve
as well as all of the others.
Now, many people out there in the private sector have criticized
the degree to which we have staffed ourselves and they have ex-
pressed the view that it is counterproductive if you are going to
impose additionally this whole new level of oversight and analysis
so that we have to gain additional staff that we will need to
perform this function.
Mr. SCHULTZ. I am not aware of any dispositive study that dem-
onstrates what exactly the increase in staff or budgetary level will
be. The submission we are making is one, oversight committees
already exist to monitor regulatory activities. This is part of the
normal everyday task.
The other point we want to make is that it is not every regula-
tion or rule that is going to require congressional action. It is only
the most egregious and excessive regulations that will be subject to
congressional review and veto. We are not asking Congress to act
on every rule and regulation.
It probably would be only a handful of excessive regulations that
would actually be reviewed and possibly vetoed by one or both
bodies of Congress within a given session.
Mr. JOSEPH. If I may--
Mr. SCHEUER. Just take the last session. Why don't you submit
for our edification the list of executive branch actions during the
95th Congress that, assuming we had a legislative veto, should
properly have been acted upon by us. Could you submit that for the
record?
Mr. JOSEPH. We would be glad to do that and the list would not
be as long as you think.
That is the point we are trying to make. There are 300 laws now
that require congressional action or some sort of agency action. On
the front page of the paper this morning-the proposed energy
conservation plan-both Houses have an opportunity to vote on
that plan. It happens all the time.
What the purpose of the congressional veto would be, would be is
to send a message to the bureaucracy that they are not completely
out of control and nobody is watching. I suspect there would be
additional staffing. We would expect the numbers would be mini-
mal.
We expect all congressional veto does is give a Member of Con-
gress the right to introduce a motion of resolution of disapproval to
an agency rulemaking proceeding. It goes to the appropriate com-
mittee. It does not get acted upon.
PAGENO="0092"
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There are many pieces of legislation which have been introduced
by your colleagues on the subcommittee that you will never take
up anyway and why should a congressional veto provision be any
different?
Mr. BROYHILL. Would the chairman yield? I have in my hand a
list of several hundred laws that require congressional review of
agency actions that have been enacted since the 1930's and I do not
note that there has been any undue amount of additional work
that has been placed on my shoulders as a result of these require-
ments.
Frankly, I think it would be refreshing for the Congress for a
while to do a better job of reviewing these rules and regulations
coming out of these agencies, Mr. Chairman. After all, we have
delegated our authority to them to make these rules which actually
will have the force and effect of law.
If someone violates the rule or the regulation, they are violating
the law and so we have in effect delegated to these agencies the
authority to actually write law. I think it would be good if we did
spend some time actually reviewing what they are doing.
I think this would actually make the Congress do a better job of
congressional oversight.
Mr. SCHEUER. Thank you very much.
Now, we will hear from Mark Silbergeld, director of Consumers
Union, Washington office. As we mentioned before, your entire
testimony will be reprinted in full at this point in the record.
Mr. SCHEUER. What we would suggest to you-and we are run-
ning short of time-would be that you hit the high points of your
testimony and then we will have questions.
STATEMENT OF MARK SILBERGELD, DIRECTOR, CONSUMERS
UNION, ACCOMPANIED BY SHARON NELSON, LEGISLATIVE
COUNSEL
Mr. SILBERGELD. I would like to introduce our legislative counsel,
Sharon Nelson, who is here with me today. I will be glad to
summarize very quickly, Mr. Chairman, and then I would like to
address for a moment this rather amazingly overblown attack on
the FTC's regulatory process. It is sort of like the mother hen who
has provided at least a great deal of the warmth and comfort
necessary to hatch the egg and who now wants to know why the
chicks are running around the floor of the hen house. The history
of those provisions of the Magnuson-Moss Act is very relevant to
the discussion which preceded my taking the microphone. We sup-
port reauthorization of the Federal Trade Commission.
We do not think there is any doubt simply about the question of
reauthorization. We support the Scheuer bill. We like the 3-year
provision in Mr. Broyhill's bill, frankly, because that is the period
for which regulatory agencies traditionally have been renewed.
But we do not believe this is the time to address the complex
question of an FTC improvements bill which is in effect what Mr.
Broyhill's bill partially is, partly because the FTC should have been
reauthorized in the last Congress and that action is overdue.
We feel there is no question about the appropriateness of the
Congress continuing the FTC's authorization. It is a keystone of
consumer protection. It is the Federal agency that consumers look
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to for protection from unfair and deceptive practice in the market-
place. Its consumer protection activities and its competition activi-
ties are antiinflationary in the long run at least.
We recognize of course antitrust actions take many years both at
the Commission and in the judiciary review process but those
activities are inflationary, and we are in a time when that is a
major concern. We have to look to long-term antiinflationary reme-
dies as well as to short-term efforts that the administration is
making.
We think the Commission has used its resources well. The chair-
man in his opening statement asked about the way the Commission
sets its priorities and while I will leave the details of that descrip-
tion to the Commission witnesses later in these hearings, I think it
is well worth noting, as one can absorb from the hearing records of
the past several FTC appropriations hearings in both Houses, that
the Commission has focused a great deal of its resources on such
key areas of the economy as food, energy, health care, transporta-
tion and other key areas and has come a long way since the
charges of "do-nothingism" that came out of both the Nader report
and the American Bar Association report. We believe that, basical-
ly, those resources are now well focused. There may be still plenty
of room for improvement in the process of determining how they
focus that but if we look at the result, it is a good result.
The Commission has turned a small portion, but an important
portion, of its efforts to attacking itself, or calling to the attention
of other Government agencies,, areas where Government action is
an impediment to competition of sellers and providers in the mar-
ketplace. We think that is a signal activity at the Federal Trade
Commission.
I would note, with respect to rulemaking, the Commission itself
has made substantial efforts in the last year or so to reduce the
timelag involved in their own trade regulation rulemaking. For
instance, the Commission has moved exceptionally fast in the home
insulation trade regulation rulemaking by the Commissioners
themselves designing a very truncated kind of proceeding in which
everybody has the opportunity to be heard, yet without going
through the unnecessary elaborate processes that sometimes have
resulted from literal application of the Magnuson-Moss Act proce-
dural requirements.
To summarize, I would say that the committee ought to act
quickly to reauthorize the Federal Trade Commission and that
then this committee, as the chairman has indicated, should take up
the far more complex question of improvements of the FTC's statu-
tory mandate and statutory authority and the question of over-
sight, looking into such individual cases as Mr. Devine brought to
the subcommittee's attention this morning and many others. I can
assure the committee that consumers as well as business interests
and as well as members of this committee have specific questions
in which they raise doubts abOut the adequacy of the Commission's
performance, but none of that goes to the suggestion that it is not
doing a basically effective job;
It goes to the question of whether there should be substantial
improvements.
Finally, Mr. Chairman---
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Mr. SCHEUER. You make the point on page 3 of your testimony
that there are situations in which less government is good for
consumers and the economy and that efforts to promote less gov-
ernment by FTC are too antiinflationary. Can you give us any
examples of the areas in which you feel less regulation by FTC
would protect the Government better than more regulation?
Mr. SILBERGELD. I am not addressing the question of less regula-
tion by FTC although I am sure if we go down the list of all the
activities they have allocated resources to, we can find some that
are misallocated.
I am referring specifically to FTC's addressing questions where
State law or regulations promulgated by State boards consisting of
members of the regulated profession have served as an impediment
to both price competition and the availability of needed consumer
information in the marketplace, such proceedings as the optometry
advertising rule and their addressing other questions involving the
professions and State professional regulatory boards.
Mr. Chairman, in closing, the summary of my statement, I think
the committee should be very much aware of a report recently
released by Opinion Research Corp. which calls attention to the
fact that while only 30 percent of what that polling organization
calls "Washington thought leaders," thought the Commission was
doing too little for consumers, 45 percent of the general public
thinks the Federal Government is doing too little.
Mr. SCHEUER. Do you have a copy of that?
Mr. SILBERGELD. I will submit it for the record.
Mr. SCHEUER. How long is it?
Mr. SILBERGELD. I think it is only four pages and the relevant
chart.
Mr. SCHEUER. If there is no objection, we will include that in the
record.
[Testimony resumes on p. 100.]
[Mr. Silbergeld's prepared statement and the report of Opinion
Research Corp. follow:]
STATEMENT OF MARK SILBERGELD, DIRECTOR, CONSUMERS UNION WASHINGTON
OFFICE
Mr. Chairman, Consumers Union 1 appreciates the Subcommittee's invitation to
express its views on the proposed reauthorization of the Federal Trade Commission
for a period of three years. We fully support reauthorization and urge the Com-
merce Committee promptly to report a bill favorably to the House.
The Federal Trade Commission is a keystone of the protection which the federal
government provides the consumer from improper practices which occur in or affect
interstate commerce. Citizens look to the FTC to curb sharp practices, to improve
the honestly and quality of information available regarding important goods and
services, and to curb anticompetition inflationary forces in the marketplace. The
FTC has jurisdiction over a broader variety of marketplace practices affecting
consumer wellbeing than has any other federal agency. And Section 5 of the Federal
Trade Commission Act gives FTC the flexibility required to deal with unfair, decep-
tive and anticompetitive situations in the face of an ever changing marketplace.
1 consumers Union is a nonprofit membership organization chartered in 1936 under the laws
of the State of new York to provide information, education, and counsel about consumer goods
and services and the management of the family income. Consumers Union's income is derived
solely from the sale of Consumer Reports, its other publications and films. Expenses of occasion-
al public service efforts may be met, in part, by nonrestrictive, noncommercial grants and fees.
In addition to the reports on Consumers Union's own product testing, Consumer Reports, with
more than 1.8 million circulation, regularly carries articles on health, product safety, market-
place economics, and legislative, judicial and regulatory actions which affect consumer welfare.
Consumer Union's publications carry no advertising and receive no commercial support.
PAGENO="0095"
91
In the decade since the Nader and American Bar Association reports, which
charged the FTC with do nothingism and incompetence, great changes have taken
place which once again make FTC an important force for making the marketplace
more fair afor the consumer and the honest competitor.
FTC's attention in the early 1970's to, practices in the advertising industry ap-
pears to have reduced sharply nationally distributed ads, especially on television,
which are on their faces, false, misleading or deceptive. That having been accom-
plished, the Commission is able to turn a portion of its resources to equally trou-
bling questions involving the more subtle: effects inherent in some forms of advertis-
ing, including those which may be amenable to the pro-competitive remedy of better
information disclosure. And the FTC has shifted from an emphasis on issuing
complaints against individual advertisers to one which emphasizes rules which
effect equally all advertisers in a like situation. This promises the doublt-beneficial-
ly effect of prompting greater fairness to all competitors in a product or service
market and of assuring consumers of broader compliance with the law by adver-
tisers.
Other FTC proceedings now under way address a variety of marketplace practices
which require reform in the form of curbs or addition provision of the information
to prospective consumers of goods or services. These, two, will benefit from the
greater fairness and broader compliance promised by rulemaking.
The FTC's antitrust function is of great importance to consumers. For the long
run, it is part of the national effort to combat inflation, for lack of effective
competition adds to high prices and costs us all dollars in the marketplace. A
number of investigations and proceedings which the Commission has implemented
in the past few years address anticompétitive problems in such key areas as food,
energy, health care, transportation and other goods and services essential to the
economy. Section 5 of the FTC Act provides the flexibility to challenge practices
which indeed may be anticompetitive, but which may not quite fit into the more
narrow confines of the Sherman Act, or the other antitrust laws which the Justice
Department is empowered to enforce.
FTC has used a portion of its resources itself to challenge or to call the attention
of the public and other government agencies to government actions and regulations
which reduce and prevent effective competition. By doing so, FTC makes clear its
awareness that, while there are situations in which a government rule or regulation
is required to protect the public, there are other situations in which less govern-
ment is good for consumers and the economy. These efforts, too, are anti-inflation-
ary.
FTC has taken steps within its authority to reduce unnecessary delay within the
limits set by the Due Process requirement of the Constitution. While some rulemak-
ings now pending before the agency have taken a seemingly inordinate length of
time, last year the FTC initiated steps in some others which have reduced the time
involved in the processes of public hearings and preparation of staff and hearing
officer reports. This is not to suggest that procedural efficiency is yet the order of
the day. However, it is encouraging that some effective action in this direction has
been initiated.
If this overview of the Commission's functional importance to a more fair and
efficient economy sounds overly rosy, let me hasten to assure the Subcommittee
that each consumer organization and each "FTC Watcher" has a list of things which
the Commission has left undone, has yet to do, or could have done better. These
should be the subject of oversight hearings during this Congress. However, such
specific criticisms relate specifically to the adequacy of the detailed statutory au-
thority granted the FTC and of the detailed statutory requirements imposed on it.
As to the continued authorization of the FTC, there should be no doubt. The FTC
in the past decade basically has addressed important issues facing the economy and
the marketplace. We believe that it has done so fairly well.
The Subcommittee may find it interesting to note, in this respect, a recent opinion
poll released by the Opinion Research Corporation entitled "Government Action on
25 Key Issues". That poii shows that while only 30 percent of Washington "opinion
leaders" believe that the federal government is lax in "looking out after the interest of
the consumer", 54 percent of the general public believes that the government is doing
too little. Thus, it appears that the FTC is fulfilling not only the statutory duties
assigned to it by Congress, but a popular mandate, in carrying out its consumer
protection function. If anything, the demand appears to be for better, not less, federal
consumer protection from agencies such as the FTC.
Therefore, we urge the Subcommittee to act promptly and favorably on the
proposed FTC reauthorization.
Thank you, Mr. Chairman.
PAGENO="0096"
92
CONSUMERS UNION / A NONPROFIT ORGANIZATION / PUBLISHER OF CONSUMER REPORTS
Washington Office: 1714 MASSACHUSETTS AVENUE, WASHINGTON, D. C. 20036 / 202-785-1906
March 27, 1979
Honorable James Scheuer
Chairman, Subcommittee on
Consumer Protection and Finance
Committee on Interstate and
Foreign Commerce
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Enclosed is the item requested by you for inclusion in
the record of the February 28 hearings on reauthorizatiod of
the Federal Trade Commission. It is a copy of the Opinion
Research Corp. poll showing that more citizens than `Washington
Thought Leaders" believe the federal government is not doing
enough to protect consumers.
Also enclosed is another item which I would like to offer
for the record. It is Table 11 from the recently distributed
Yankelovich, Skelly and White, Inc. 1978 corporate priorities
opinion poll, entitled Leadership Report to Participants on
1978 Findings of Corporate Priorities. Table 11 shows that,
in 1978, only 10 percent of the public believed that the
government should cut back its consumer protection activities,
while 30 percent believed that these activities should continue
at the same rate and ~6 percent supported a stepup in govern
ment's consumer protection activities.
It is interesting to note, also, the trend reflected by
the Yankelovich poll. The 10 percent still favoring less govern-
ment consumer protection activity declined from 18 percent in
1977 and the !~6 percent favoring increased activities of this
nature increased from 37 percent in 1977.
These opinion poll findings relate directly to the colloquy
between myself and Mr. Rinaldo during the hearings. They are
important because they tend to demonstrate that whatever general
sentiment for less government may prevail does not extend to
consumer protection functions. Because Mr. Rinaldo raised this
National Office: 256 WASHINGTON STREET. MOUNT VERNON. NEW YORK 10550 / 974-6646400
PAGENO="0097"
93
question during the hearings, I am extending him the courtesy
of a copy of this letter with enclosures.
Your request to submit additional materials is appreciated.
Siricerel
Mark ilberg~1d
Director /
Washington Office
Enclosures
cc: Honorable Matthew Rinaldo
House of Representatives
Washington, D.C. 20515
47-917 0 - 79 - 7
PAGENO="0098"
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PAGENO="0099"
95
There is considerable dissatisfaction on the pin t of both the general public and thoughtleaders in
Washington regarding the sufficiency of feder;'l government activity in numerous problem areas.
At least half of the general public think the h' era! government could do much more in 12 areas
involving broad economic and social welfare issues. At least half of thoughtleaders also select 12
issues for increased government activity.
It is not that either group necessarily supports increased government spending to accompany
greater efforts in these broad areas. In fact, the public favors legislation that would put an overall
limit on government spending (see Index study, "Public Attitudes Toward Federal Tax Reform
And Tax Incentives For Business Growth," End July, 1978).
Very few thoughtleaders (13%) would like to see government spending increased. Almost half say
spending should actually be reduced (47%), while four in ten (39%) would at least favor holding
spending at the current level. Moreover, the majority of legislators (56%) favor spending cuts, al-
though eight in ten of these legislators advocate selective cuts.
Thus, it is clear that priorities for federal action take on an even greater significance, especially
in the light of current budget-tightening efforts undertaken by the Carter Administration as it at-
tempts to rein in the galloping rate of inflation and move toward a balanced budget.
The prime focus of the public and also of thoughtleaders is on economic issues.
As can be seen at the right, there are five iss~ies on which over six in ten members of the general
public say that more government action is necessary. Note that four issues are economic: control-
ling inflation, protecting Americans against the financial hardship of a long-term illness, ensuring a
job for all who are willing and able to work, and providing a fair and equitable tax system.
Four out of five of the top issues of primary concern to thoughtleaders also are economic in nature:
controlling inflation, eliminating the trade deficit, providing a fair and equitable tax system, and
protecting Americans against the financial hardship of a long-term illness. Moreover, three of these
economic issuea are given top priority by both groups, including majorities of ,ill key subgroups
in Washington-legislators, executive/regulatory officials, union leaders, public interest group
leaders, and members of the Washington press corps.
At the same time, there now appears to be less concern among the general public about several
key social welfare issues.
This is apparent when findings in this study are compared with results of a similar study con-
ducted by the Index three years ago:
Too little Action tty Federal Government
Significant
Total Public Points
1975 Latest Difference
Providing assistance to those
families whose incomes are
below the poverty level 61% 44% -17
Providing adequate housing
for all Americans 60% 47% -13
Ilelping solve the problems
of big cities 55% 49% - 6
Providing an adequate level of
medical care for the elderly 64% 59% - 5
On the other hand, there are strong feelings in favor of action on many of these social issues
among certain thoughtleader subgroups, namely, union leaders, public interest group leaders, and
press/media representatives:
`too Little Action By Federal Government
Union Public Interesl Press/Media
Leaders Group Leaders Representatives
Providing assistance to those
families whose incomes are
below the mverl level 11% 77% 60%
Providing adequate housing
for all Americans 100% 77% 50%
I lilping solve tie probliiis
of big cities 92% 85% 70%
Providing an adequate level of
medical care for the elderly 85% 62% 70%
)Contiiiiitd on page 4)
Copyright © 1979 OpInion Research Corporation. Au rights reserved.
No part of thIs material can be reproduced tn any manner without prior written permission of ORC.
PAGENO="0100"
96
N1VHONM. issi i:s ON WI tic! i 100 lIt I.E (;OVERNMEN1' ACtION IS BEING TAKEN
Total Washington Total
Thoughtleaders1 Public2
Taking steps to adequately
control inflation
Reducing crime
Protecting all Americans against ___________________________ ______________________
the possible financial hard-
ship of a long-term illness
Seeing to it that everybody who
is willing and able to work ___________________ ____________________
has a job ________________________ __________________
Providing a fair and equitable ____________________
tax system
Providing an adequate level of
medical care for the elderly
Protecting the American people
against the invasion of their
privacy by government _________________
Improving tie quality of
public education
Taking steps to solve our
energy problems
Eliminating the U.S.
trade deficit
Looking out after the interests
of the consumer
Protecting the American people
against the invasion of their _________________
privacy by business
Helping solve the problems of
big cities
Conserving our natural resources
Providing adequate housing for
all Americans
Providing assistance to those
families whose incomes are ________________
below the poverty level
Speeding tip the approval and
release of nets drugs
Improving the quality of
mass transit
Protecting the environment
Providing incentives to business
to encourage economic grossth
Providing an adequate level of
national defense
Maintaining a position of
leadership in scientific __________
and technical advancement
Providing equal rights for women
Providing equal rights
for minorities
Providing economic assistance to
underdeveloped countries
87% L
77%j
38% I
69%
em'..
:
63%
58%I__________
61%
47%
~ [1111
41% [
78%
81% r
83% I
59%
.,~ 55%
__________________ 55%
~ 55%
54%
30% [
52%
49%
48%
47%
______________ 44%
44%
43%
41%
57%
~I% E
El
38% [
43% E
51%
51% [
52% r
311%
22%
34%
32%
28%
25%
11%
37%
25% ________
22%
`Too much,'' ``About the right animint,'' and `No opinion' iimitteil
``Now, I ant going to hand you a list of 25 statenients that tIed with the rule of tie federal government in
various prohteni areas. For each statement, please indicate by circling tie appropriate number whether you
think the federal government is doing too much, about the right amount, or too little.'
2"Noss, I tvouilih like von to think atuout a number of national issues. As I read cacti one, please tell sue whether
you think the federal government is doing too much, about the right amount, or too little?"
PAGENO="0101"
97
((iiiitinuoil rush p5/7' 2)
In fact, overall, the greatest dissatisfaction with trtvernment activity across the board comes
from the nongovernment thoughtleaders.
For example, the majority of union leaders cite 17 out of the 25 issues as ones where they think too
little government action is being taken and the majority of public interest group leaders cite 19.
Most importantly, half or more of the members of the media-the all-important interface between
the public and the government-name 16 different issues as needing more action. (Legislators
select only eight issues and executive/regulatory officials only seven.)
There are other important differences in attitudes between the government and nongovernment
subgroups. For example, on the one hand, the majority of legislators and executive/regulatory
officials believe that the federal government should do more about providing incentives for busi-
ness, while union and public interest group leaders, as well as the public, are much less likely to
focus on the issue:
The Federal Government Is Doing Too little
About Providing Ilusiness Incentives For Growth
Total Public 35%
Legislators 64%
Executive/Regulatory Officials 57%
Union Leaders 15%
Public Interest Group Leaders 31%
Press/Media Representatives 50%
On the other hand, the majority of union lead~rs and public interest group leaders agree with the
majority of the public that the federal government is not doing enough about looking after the in-
terests of consumers, while legislators and executive/regulatory officials give this issue a low
priority:
The Federal Government Is Doing too little
About Protecting Consumer tnleresls
Total Public
Legislators 11%
Executive/Regulatory Officials 29%
Uiiion Leaders 54%
Public Interest Grout) Leaders 69%
Press/Media Representatives 40%
A similar attitudinal pattern exists with regard to protecting the American people against the in-
vasion of their privacy either by government or by business. In boll) instances, all nongovernment
thoughtleaders express greater discontent with government action titan do legislators and execu-
tive/regulatory officials, Note, too, in the two tables below, that legislators are more likely to ex-
press concern about the invasion of personal privacy by government than intrusion by business:
The Federal Government Is t)oing ton little
Atiout Protection From Government Invasion Of Privacy
Total Public 55%
Legislators 44%
Executive/Regulatory Officials 48%
Union Leaders 69%
Public Interest Group Leaders 77%
Press/Media Representatives 70%
The Fmteral Government Is lIning ron little
At)nul t'rntection From Business Invasion Of Privacy
Total Public 52%
Legislators 27%
Executive/Regulatory Officials - 29%
Union Leaders 62'~
Public Interest Group Leaders 61%
Press/Media Representatives 60°C
ABOUT TI-ItS STUDY: Results in this report are based on telephone interviews with a national probability sample of 1.019 per-
Sons aged 18 antI over, conducted between November 9 and Novenuber 12, 1978. Attitudes of washington thouglutteaders are
drawn from a sample of 102 persons: 45 legislators and legislative aides, 21 executive/regulatory officials, 13 union leaders, 13
pubtic interest group leaders, and to press/media representatives. Extensive personal interviews were conducted during the
period September 12 through October 6, 1978. ii is inuporlant to bear in-mind that the individuals interviewed in this study are
not representative of any particular group but shou!d be considered "purposive" samples of people prominent and highly in~
flueotiat in regard to government affairs.
Nv~ih iia,,i,xs /5-i. i',i,i,-vi,,:i, Ni- l's- iivsauirrii,1,t:,i': ituii:'izu-s'iuuui on un-roar e uriC coon-ax
NIh S I ii I 80192
Due Marutis,e I/vu. Sa,, Fs,siis,-o. (/lu1,urxin bail uiTvhphxse: 415/421-luSH
PAGENO="0102"
98
REPORT TO LEADERSHIP PARTICIPANTS
ON 1978 FINDINGS OF
CORPOPATE PRIORITIES
Corporate Priorities
A service of
Yankelovich, Skelly and White, Inc.
copyright Yankelovich, Skelly and White, Inc. 1978
575 Madison Avenue, New York
PAGENO="0103"
99~
TABLE 11
ATTITUDES TOWARD NADER AND CONSUMERISM
General Public
1978 1977 1976 1975 1974
% % % % %
Total 100 100 100 100 100
Statement: `Ralph Nader
and Other Such Consumer
Representatives Are
Doing Only Good for the
Country, Even If They
Are a Little Extreme."
Agree 64 65 61 63 70
Disagree 33 32 35 32 28
Don't know/no answer 3 3 4 5 2
1978 1977 1976 1975
% .% % %
Total 100 100 100 100
Government Should:
Step up its activities 46 37 40 41
Continue at the same rate 30 30 28 27
Cut back its activities 10 18 17 19
Don't know/no answer 14 15 15 13
Question: "All things considered, do you feel the government should step up its
dctivities, cut back its activities, or continue at the same rate to protect
consumers?"
PAGENO="0104"
100
Mr. RINALDO. I would like to ask a question on that particular
point. I think it is fine to bring in that type of survey, but I think
the statistics are also misleading. You say in your prepared testi-
mony that "the subcommittee may find it interesting to note in
this respect a recent opinion poll released by Opinion Research
Corp. entitled `Government Action on 25 Key Issues"-the ques-
tions are not here of course. We will get them when the report is
submitted and I am not doubting the accuracy of what you say.
While 45 percent of the general public may believe the Govern-
ment is doing too little because they would like perhaps to see
more protection, I am certain that more than 50 percent of the
general public also feels that the Government is too big, that there
are too many rules and regulations and that they are being har-
assed by government too much.
I have received within the past 6 months more mail than ever
before about Government rules and regulations and the problems
that they create, not only for business but for the average citizen.
When we say there is not enough consumer protection-I am not
aware of what every State has but certainly you can take the FTC
as a starting point-you can take all the consumer protection
agencies of the Federal Government and you have them in my
State. You have a State consumer protection agency; you have
county agencies.
Now, they are having municipal agencies and boards and it is
getting to the point where we will soon have block leaders going
around to see if people have any problems. The unfortunate part of
all this is there is duplication at every level.
I just received an inquiry from a person who had a damaged rug
and he is confused, not about whether there is a source of redress,
but about which agency he should go to. Which one is more effec-
tive? He has a whole list. He doesn't even know where to turn
because there are so many people out to help him, so the question
really has to be addressed in the light of the specific question asked
and also in relationship with other polls that ask similar meaning-
ful questions about the public's attitudes.
Mr. SILBERGELD. I have no question about that. My point is
simply that there is a lot of rhetoric being offered to the Congress
that all the public wants is less government. What I am saying is
there is at least one reputable poll that shows when you focus the
question specifically on the issue of the Government doing too
much for consumers, the public does not seem to respond to that
specific question with the answer "yes."
And you are right. Of course, we have to look at specific ques-
tions. And the answer, yes, does not mean that they think the
Government is doing it efficiently nor do they mean necessarily
that the Government is giving them the best information about
how they can use the process.
Those are all problems we have to deal with. But when you come
to the bottom line, which is do we deal with this by getting rid of
government or getting rid of regulations or getting rid of bureau-
crats, which simply means people employed by the Government to
do what Congress has given them basic statute authority to do,
then the answer is "No."
PAGENO="0105"
101
Mr. SCHEUER. We have enjoyed your testimony very much. At a
future time this subcommittee plus Bob Eckhardt's Subcommittee
on Oversight and Investigations will be carrying on what we hope
will be a very thoughtful, carefully crafted set of hearings on the
costs and benefits of Government regulations.
Perhaps at that time you might want to come and testify as to
how you think we in the Congress can strike a balance between on
the one hand ignoring the societal implications of private sector
activity in the field of health, environment, safety, so forth, and at
the other extreme the kind of excesses you have heard described by
Congressman Sam Devine.
You have heard various dramatic examples alleged of overregu-
lation to the point of silliness by OSHA. How do we, short of
scrutinizing every act of every regulatory agency, after a genera-
tion of experience with regulatory agencies, how do we bring some
sanity into the process and how do we avoid these egregious exam-
ples of bad judgment?
So, in effect, we want to have our cake and eat it too. We want
Government regulations where it is sensible, where it is productive,
where on a cost-benefit weighing, it obviously helps more than it
costs or helps more than it hurts, but we really want to sharpen
our perceptions as to how we can stop some of these egregious and
tragic examples of overregulation to the point of real harm and
total silliness.
Maybe you would want to come back. It is going to be a couple of
months from now, but you might start thinking about that now.
Thank you for your testimony. We will now get on with the last
two witnesses today, Mr. Harding Williams, general counsel, Na-
tional Savings and Loan League and Mr. James Cirona, represent-
ing the U.S. League of Savings Associations. -
We are short on time. Why don't each of you speak for 5 or 6
minutes or so informally, summarizing your testimony, and then I
am sure we will have some questions for you. Of course, as I have
said before, your full testimony will be printed in its entirety in the
record.
STATEMENTS OF HARDING deC. WILLIAMS, GENERAL COUNSEL
ON BEHALF OF THE NATIONAL SAVINGS AND LOAN LEAGUE;
AND JAMES CIRONA, PRESIDENT, ROCHESTER FIRST FEDER-
AL SAVINGS & LOAN, APPEARING ON BEHALF OF THE U.S.
LEAGUE OF SAVINGS ASSOCIATIONS, ACCOMPANIED BY RAY-
MOND J. GUSTINI, ASSISTANCE COUNSEL
Mr. WILLIAMS. My name is Harding Williams, general counsel of
National Savings and Loan League. We are here to support section
2 of Mr. Broyhill's bill and Mr. Rinaldo's bill which would provide
for exemption for savings and loan associations in the Federal
Trade Commission Act identical to that enjoyed by commercial
banks at the present time.
I would like to acknowledge Mr. Rinaldo's efforts in the last
Congress to secure the adoption of that amendment which of
course both our organizations support. We note that the defeat of
the conference report on the last year's bill, H.R. 3816, had nothing
to do with the savings and loan exemption.
PAGENO="0106"
102
I am going to address briefly several of the questions that were
raised during the course of consideration of that bill last year with
respect to our industry.
The first one was how persuasive is the regulation of the savings
and loan industry? Is there in fact duplication between the authori-
ty of the Federal Home Loan Bank Board with respect to the
industry and the potential authority of power of the Federal Trade
Commission, particularly under its rulemaking powers in section
18 of the act as well as its cease and desist powers under section 5.
The answer to that question is-and I think the record in last
year's hearings bears this out-that the regulatory scheme of the
Federal Home Loan Bank Board, and Federal Savings and Loan
Insurance Corporation, is pervasive. Certainly every aspect of sav-
ings and loan operations are regulated or subject to regulation. Our
regulation manual is about 1,000 pages. I almost brought it with
me but it is heavy to carry.
With particular respect to unfair and deceptive acts or practices,
the regulations of the Federal Home Loan Bank Board-I include
the Bank Board and the insurance corporation-the members of
the Bank Board are also operating heads of the insurance corpora-
tions-these regulations covering in detail activities of savings and
loan associations deals with consumers, both savers and borrowers,
in virtually every aspect, as I said, of consumer relations or acts or
practices which could be determined to be unfair or deceptive acts
or practices subject to the Commission's jurisdiction under the FTC
Act.
I have a particular example. Both of our statements list the
details of examples of this kind of regulation. I simply mention
advertising of interest rates. This is a regulation of the Federal
Home Loan Bank System. Interest or dividend rates should be
stated in terms of annual rates of simple interest or dividend. In no
case should a rate be advertised in excess of maximum rate for the
particular savings account. It is noted one association tried to get
around this by advertising not what their advertised rates were,
but stated, "come into our office and we will whisper in your ear
what you will really get in your account."
The Bank Board cracked down on that as being a violation of its
own regulation. We list a number of other examples. There are
specific examples dealing with the way associations can advertise,
both in printed media and on radio and television.
As to enforcement, the Bank Board has pervasive enforcement
powers to enforce its rules and regulations. And I might add the
bill that was passed last year, the Financial Institutions Regulatory
and Interest Rate Control Act, increased the regulatory powers of
both the Federal Home Loan Bank Board and banking regulatory
agencies even further to authorize the Bank Board to bring cease-
and-desist orders against the individual officers, directors, and em-
ployees of savings and loan associations who the Bank Board be-
lieves might be violating a law, a regulation, or an order of the
Bank Board.
I might also add that the Bank Board apparently, unlike the
Federal Trade Commission, believes it has under its enforcement
powers the power to effect redress or restitution. There is a case
PAGENO="0107"
103
now pending in which the Bank Board's order would require an
association to make restitution to its borrowers.
Finally, I would like to call your attention to a precedent for this
kind of exemption. Not only of course was the Rinaldo amendment
approved by both the House and Senate last year, but the Hart-
Scott-Rodino Antitrust Act of 1975, Public Law 94-435, which pro-
vided for premerger notification to the Federal Trade Commission
and Justice Department, modified substantially the premerger noti-
fication for banks and savings and loan associations owings, that
banks and savings and loan associations are already regulated by
their respective regulatory agenôies.
Those agencies have the power to review proposed mergers.
[Testimony resumes on p. 112.]
[Mr. Williams' prepared statement follows:]
PAGENO="0108"
104
STATEMENT OF HARDING deC. WILLIAMS
on behalf of the
National Savings and Loan League
before the
House Committee on Interstate and Foreign Commerce
Subcommittee on Consumer Protection and Finance
on
N
H. R. 2367, A Bill to Amend the
Federal Trade Commission Act
February 28, 1979
Mr. Chairman and members of the Subcommittee, my name
is Harding Williams, and I am General Counsel of the National
Savings and Loan League, on whose behalf I appear here today.
The National Savings and Loan League, chartered in
1943, is a nationwide trade association comprised of a member-
ship of some 300 domestic savings and loan associations of all
sizes, including those with Federal as well as State charters,
40 State leagues of savings and loan associations, and over 60
associate members comprised of domestic and international firms
which are closely involved with the savings and loan business.
We would like to begin by thanking Congressman Broyhill
and Congressman Rinaldo for their introduction of H. R. 2367, pro-
posed legislation which contains an extremely important provision
PAGENO="0109"
105
relating to the savings and loan industry. This provision is
contained in Section 2 of H. R. 2367 and provides an exemption
for S&Ls from Sections 5, 6, and 18 of the Federal Trade
Commission Act (15 U.S.C. 4l~ et seq.) similar to the exemption
now permitted for commercial banks.
This provision, which is identical to Section 3 of last
year's authorization bill, H. R. 3816, originated in this Sub-
committee by Congressman Rinaldo and was not only adopted by the
full Committee on Interstate and Foreign Commerce, but was contained
in two separate Conference Reports (H. Report 95-892 and H. Report
95-1557), both of which were approved by the Senate and rejected
by the House nn other grounds.
Congress, in effect, has already passed this amendment.
We are here today to urge this Subcommittee to again include this
vital provision in the authorization bill which it adopts.
Our basic argument is quite simple. It is that savings
and loan associations are as extensively regulated by the Federal
Home Loan Bank Board, the Federal Savings and Loan Insurance
Corporation and the regulatory agencies of the 50 States as are
banks by their corresponding regulatory agencies. Further, there
are no acts or practices of savings and loan associations which
the Federal Trade Commission would reach under the FTC Act, which
could not also be reached by the Bank Board, FSLIC or State agencies.
Indeed Congress has recognized the merits of this policy
by providing in the Magnuson-Moss Act of 1975 that trade regulation
rules for `banks' be set by the Federal Reserve Board under certain
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circumstances and enforced by the respective banking regulatory
agencies. As this Subcommittee is aware, savings and loan
associations were included within this exemption in the Senate
version of the' bill, S. 356, 93rd Congress. The rationale for
this approach was outlined in the Report of the Senate Banking
Committee on 5. 356 (5. Report 93-280, pages 2-3) (to which the
bill had been referred by the Senate Commerce Committee for its
comments) as follows:
* `The primary basis for [this provision] is
* the need for expertise in the financial area and
in the functioning of the monetary system in any
agency which is authorized to place requirements
upon the functioning of depository institutions.
The FTC does not have the requisite expertise,
and the committee therefore transferred the situs
of the rulemaking authority to the Federal Reserve
Board. The Board would be expected to work closely
with the other financial agencies in exercising
this important consumer function, including the
drafting and modification of regulations.
banks and other financial institutions
are already among the most regulated forms of
business in the country today, and. . . an additional
layer of regulation by a different agency is likely
to detract from, rather than add to, the incentive
of institution managers and owners to attempt
innovations in operations which will benefit the
consumer.
The General Counsel of the Federal Home Loan Bank Board,
in a letter of October 11, 1974 to Senator Frank E. Moss, Chair-
man, Senate Commerce Subcommittee on the Consumer, before which
S. 356 was then pending, stated:
"Apparently, the reason the House bill does not
exempt thrift financial institutions from FTC juris-
diction is because the FTC Act, as it was enacted in
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1914, exempts `banks" from supervision by the FTC
and it was felt that the amendments to be made by
S. 356, which to a large extent clarify that
exemption, should be limited to the original cov-
erage of that exemption.
"The Board does not agree with this reasoning.
In the first place, when the FTC Act was enacted in
1914, thrift financial institutions were not subject
to Federal regulatory control and it is no doubt for
this reason that thrifts were not specifically exempted.
At present, Federal savings and loan associations are
chartered by the Federal government much the same as
national banks, and the majority of State associations
are insured by the Federal Savings and Loan Insurance
Corporation in a similar fashion to the FDIC's insur-
ance of the majority of the nation's State banks.
"It is the Board's opinion that thrift institu-
tions and banks, which are competitors, should be
subject to the same regulatory standards with respect
to consumer protection and that it is unfair and in-
efficient to provide for enforcement by the FTC on the
one hand, and by the bank regulatory agencies on the
other. The FTC should not regulate some Federally
regulated financial institutions, and not others. The
Board has full, plenary power over the operations of
Federal savings and loan associations and the authority
to protect against and prevent unsafe and unsound
practices in any financial institution insured by the
Federal Savings and Loan Insurance Corporation."
As to the pervasiveness of the regulatory scheme to which
S&Ls are now subject, *the General Counsel of the Bank Board
addressed this subject in a letter of May 3, 1977 to Senator
Wendell Ford, Chairman of the Subcommittee on Consumer Protection
and Finance, of the Senate Committee on Commerce, Science, and
Transportation. That Subcommittee was then considering 5. 1288,
a bill similar to H. R. 3816.
The letter begins by citing the general authority of the
Bank Board:
"The Bank Board charters Federal savings and
loan associations and, as the operating head of the
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108
FSLIC, insures most State-chartered associations.
The Board has full, plenary authority over the
operation of Federal associations and has broad
authority over the operation of FSLIC-insured
institutions. 12 U.S.C. §51464, 1725-26 (1976).
In addition, the Board has specific statutory
authority to require information and reports from
and to conduct examinations of insured savings and
loan associations. 12 U.S.C. §51726, 1730 (1976).
Thus, the Bank Board has authority with regard to
savings and loan institutions which essentially
duplicates that of the Commission under sections
5 and 6 of the FTC Act.
"The courts have construed this Congressionally
* delegated authority to issue regulations as being
"comprehensive and governing "the powers and opera-
tions of every Federal savings and loan association
from its cradle to its corporate grave...
`Thus, the Board has the necessary statutory
authority to enforce sections 5 and 6 of the FTC Act
with regard to Federally-chartered savings and loan
institutions. The Board has similar broad authority
over the operations of FSLIC-insured savings and loans.
12 U.S.C. §51725-26, 1730 (1976). The proposed amend-
ment to 5. 1288 would eliminate this unnecessary
duplication of regulatory authority...
"The Board's regulatory authority over Federal
and FSLIC-insured savings and loan associations in-
cludes general rulemaking authority. 12 U.S.C. §~1464,
1725 (1976). The Board has used its existing rulemaking
authority to prevent unfair methods of competition and
unfair or deceptive acts or practices by institutions
under its jurisdiction."
As to specific regulations dealing with unfair or deceptive
acts or practices, the letter goes on to say that:
"There are additional regulations which the
Board has promulgated to prevent unfair and deceptive
acts or practices by institutions under its jurisdic-
tion. Thus, for example, the Board has promulgated
regulations: prohibiting misleading advertising;
prohibiting discrimination in lending; limiting give-
aways; requiring payment of interest on escrow accounts
under certain conditions; limiting late charges and due-
PAGENO="0113"
109
on-sale clauses; governing loan payments and pre-
payments; governing forms of certificates and pass-
books; prohibiting sale of loans with recourse;
prohibiting tie-ins; ahd prohibiting loan procure-
ment fees, kickbacks and unearned fees."
In addition, advertising of interest or dividends is
covered by detailed provisions (12 CFR 526.6; 563.27). Supple-
mental Technical Memoranda ("T-Memos") have dealt with particular
aspects of advertising and promotion, such as whether or not a
particular slogan of an association was misleading (T.50) and
whether or not a particular promotion plan involving green stamps
was in violation of the Board's regulation (T-5l). Further limits
are imposed on advertising for remote service units which are
basically electronic funds terminals (12 CFR 545.4-2).
The letter then deals~with the Bank Board's supervisory
and enforcement powers:
"In addition to its rulemaking authority, the
Bank Board maintains a continual program for the
examination and supervision of all Federal and State-
chartered FSLIC-insured savings and loan associations.
Examinations of insured institutions is made under the
authority of 12 U.S.C. §1726 (1976). Board examiners
have full authority to inspect all books, papers and
records of insured institutions and may be given the
authority to administer oaths and affirmations, to
examine and to take and preserve testimony under oath
and to issue subpoenas and subpoenas duces tecuni.
"Existing statutory authority confers an assort-
ment of formal supervisory powers upon the Board. The
ultimate supervisory~ power is the termination of insur-
ance of accounts. The most flexible supervisory tool
available to the Board is cease-and-desist authority.
Under this authority, the Board may issue an order
that an institution and its directors, officers,
employees and agentscease and desist from a violation
of a law or regulation and take affirmative action to
correct the conditions resulting from any such violation
or practice. Other supervisory tools include temporary
47_9170-798
PAGENO="0114"
110
cease-and-desist authority, suspension or removal
of a director or officer and termination of Federal
hone loan bank membership. Enforcement of Board
supervisory orders is in the United States district
court. 12 U.S.C. §~l464, 1730 (1976)."
These enforcement powers were expanded by Title I of
the "Financial Institutions Regulator~j and Interest Rate Control
Act of 1978" (P. L. 95-630) to empower the Bank Board to bring
cease-and-desist actions against individual officers, directors,
and employees of a savings and loan association, its subsidiaries,
its holding company parent, and non-savings and loan affiliates
of savings and loan holding companies.
Two examples of actions by the Federal Trade Commission
which have intruded into areas clearly within the Bank Board's
jurisdiction are the holder in due course rule, 16 CFR 433,
(along with its proposed extension to creditors, 43 Fed. Reg.
54950, November 24, 1978), and its action against Perpetual
Federal Savings and Loan Association, Washington, D. C., alleging
that its director interlocks with commercial banks in the same
city was an "unfair method of competition" within the meaning
of Section 5 of the FTC Act. (Docket No. 9083, May 13, 1976).
One of the most alarming things about the holder in due
course rule to National League members was the fact that the
Commission apparently believed that the broad rulemaking powers
of Section 18 of the FTC Act could have applied to subsequent
holders of first mortgages on residential property. There is
no specific exemption for such mortgages in the rule itself, and
we are guided only by a staff interpretation to that effect.
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111
The application of the rule to residential nortgages
would among other things severely disrupt the secondary market
in such mortgages, which is a vital source of funds for housing
finance. The power to affect the rights of subsequent holders
of mortgage loans originated by savings and loan associations
should clearly be within the exclusive jurisdiction of the Bank
Board.
The Perpetualcase is an attempt to apply the general
language of Section 5 of the~ FTC Act to director interlocks in
the face of: (1) regulations issued by the Bank Board on the
same subject; and (2) a court decision that Section 8 of the
Clayton Act, which deals specifically with corporate and bank
interlocks does not prohibit interlocks between a bank and a
non-banking entity. (U. S. v. Crocker National Corp., 422 F.
Supp. 686, N. D. Cal., 1976).
Our purpose at this hearing is not to argue the merits
of either the holder in due course rule or the Perpetual case,
but to simply cite then as examples of actions affecting savings
and loan associations which need not have been taken.
The whole purpose of the regulatory process is to provide
a forum in which complex issues can be resolved and conflicting
viewpoints analyzed. This process should be conducted by the
agency which Congress intended to exercise such powers, not by
the FTC, and certainly not by litigation.
- We believe that these exemptions which are contained
in H. R. 2367 will not only be fair to the savings and loan
industry, but will also provide a reasonable separation of
jurisdiction between the Federal Trade Commission and a highly
regulated industry.
PAGENO="0116"
112
Mr. SCHEUER. Does the Federal Home Loan Bank Board have the
authority to enforce the Clayton Act with respect to the savings
and loan institutions just as the Federal Reserve Board has the
authority to regulate the banks?
Mr. WILLIAMS. The Bank Board has the power to approve pro-
posed mergers. They do not have the same kind of power that the
Bank Merger Act conferred on the bank regulatory agencies. But
we are not asking that any modifications to the Clayton Act be
made with respect to savings and loan associations.
The Justice Department and the Federal Trade Commission have
had since the inception of the Federal Savings and Loan System
the power to question mergers. They have not exercised that power
to the best of my knowledge, so the Bank Board does have the
power to approve or deny merger applications affecting savings and
loans.
Mr. SCHEUER. So the answer--
Mr. WILLIAMS. Substantially is yes.
Mr. SCHEUER. Is the Federal Home Loan Bank Board required by
statute to consider the antitrust laws and decisions in their regula-
tory determinations just as the Federal Reserve Board is so re-
quired under the Bank Merger Act?
Mr. WILLIAMS. Not formally by statute, but the Bank Board can
certainly use the tests and criteria under the Sherman and Clayton
Acts in approving the mergers or in examining any other practices
that are deemed to be anticompetitive.
Mr. SCHEUER. They can but do they as a matter of course system-
atically?
Mr. WILLIAMS. Yes, they do. The conflict regulations, which were
issued in 1976, deal with director interlocks which is one of the
subjects that the Federal Trade Commission involved itself in with
respect to Perpetual Federal here in Washington.
Mr. SCHEUER. The regulations require disclosure of interlocks or
do they prohibit interlocks?
Mr. WILLIAMS. It requires disclosure of quite an elaborate set of
information if the interlock guidelines are not adhered to.
Mr. SCHEUER. That is quite a big difference, wouldn't you say?
Mr. WILLIAMS. Yes, it is but again our point is, we are seeking
exemption only for the Federal Trade Commission Act, not the
Sherman Act or the Clayton Act, so the Justice Department can
certainly challenge a practice of a savings and loan association
which seems to have a monopolization of a market in a particular
area.
Mr. RINALDO. On that point, could you provide any examples
that would illustrate practices of S. & L.'s which the FTC could reach
under the FTC Act which the Federal Home Loan Bank Board
could not reach?
Mr. WILLIAMS. No, I could not and indeed when the chairman of
the Federal Trade Commission wrote to the Senate counterpart of
this subcommittee, when the Senate bill was pending before it, in
his letter to Senator Ford which is in the hearing record over
there, he did not himself come up with any act or practice which
he considered FTC could reach that the Bank Board could not.
Mr. RINALDO. Along the same lines and in order to give an
answer in greater depth to the question Congressman Scheuer
PAGENO="0117"
113
asked, I wonder if you consider the banking regulatory agencies to
have greater enforcement powers than the bank board.
Mr. WILLIAMS. No. As a matter of fact, both the last year's
financial institutions regulatory act and the 1966 financial institu-
tion supervisory act, which had initially conferred cease-and-desist
powers on the regulatory agenôies, contained parallel provisions,
parallel amendments to the various banking and savings and loan
statutes.
I would not say they were identical but I think for most purposes
they are identical. That is simply because the financial scheme of
financial institutions involves five or six acts. The National Hous-
ing Act and Home Owners Loan Act-it is a very cumbersome
practice but you will note in last year's financial institution act one
of the reasons title I was so long was because of the necessity of
having parallel amendments to those acts.
Mr. RINALDO. Thank you.
Mr. SCHEUER. We will hear from Mr. Cirona and again we would
suggest that you hit the high spots and not read your testimony.
STATEMENT OF JAMES CIRONA
Mr. CIRONA. I hope I can do that.
My name is Jim Cirona. I am president of First Federal Savings
and Loan Association, Rochester. With me is Mr. Raymond Gustini
who is assistant Washington ëounsel in the Washington office of
the United States League of Savings Associations.
We are appearing today before the subcommittee asking for es-
sentially the same treatment that savings and loans were accorded
in bills that were introduced in Congress last year. We are seeking
exemption from the Federal Trade Commission jurisdiction and
what we are asking for is parity in the treatment of savings and
loan associations and banks.
Banks have been exempted from the FTC jurisdiction since the
inception of the act in 1914 on the basis that they had adequate
supervision from their supervisor. Thus, we believe the Federal
Home Loan Bank Board believes that they have adequate authori-
ty to regulate savings associations. As an operating person, I can
say that they exercise that authority very well.
The rationale for the exclusion is that banks are specialized
institutions serving special purpose and that their regulators' have
a better degree of control over their activities. I might say I think
that applies very well to savings and loan associations.
Our primary business is financing homes and extending credit
for mortgage purposes and as such, it serves that business or that
segment of the economy very well. It is carefully regulated and
monitored by the Federal Home Loan Bank Board in the exercise
of that activity.
We do not think there are, any material differences between the
bank supervisory authority and S. & L. supervisory authority and,
as I said earlier, the Chairman of the Federal Home Loan Bank
Board, Mr. Robert McKinney, has already stated that the Federal
Home Loan Bank Board has full authority to regulate unfair or
deceptive acts or practices that might occur in the savings and loan
business. He has sent a letter to the Congress to that effect.
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114
The Bank Board, in addition to regulation of the business, has
responsibility for operation of the insurance corporation, FSLIC,
that covers the deposit accounts in savings and loan associations.
As such it is very concerned about the activities of associations
insured by that corporation, and carefully monitors their activities.
As mentioned earlier, the FHLBB issued regulations regarding
conflicts of interest, interlocking directorates. They get into such
things as premium promotions, giveaways in connection with sav-
ings accounts and how S. & L.'s can advertise and promote rates.
The other point .1 would make is that the bulk of our lending is
secured-type lending. It is mortgage lending. In our particular asso-
ciation, only 1 percent of the dollar amount of lending that we do
in any 1 year is unsecured lending.
The disclosure requirement, the notice that we are required to
give by Federal Home Loan Bank Board regulation, is very exten-
sive and it applies to that particular type of lending. Thus we do
not engage in many of the lending practices that commercial banks
pursue.
I think I will stop at this point and try to be responsive to your
questions. The only other point that I might add is that in some
areas of the country, notably the Northeast, there are other
mutual thrift institutions, namely, mutual savings banks which
have the word "bank" in their name and presumably because they
are a bank, are exempt from FTC jurisdiction. But, they look like
us; they behave like us, and in many ways are very similar to a
savings and loan association.
So, because of a name; that is, "bank", they would be exempt and
we would not be exempt from FTC jurisdiction, and I would' like to
call that to your attention.
[Testimony resumes on p. 125.]
[Mr. Cirona's prepared statement follows:]
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115
STATEMENT OF JAMES CIRONA
ON BEHALF OF THE U.S. LEAGUE OF SAVINGS ASSOCIATIONS
BEFORE THE SUBCOMMITTEE ON
CONSUMER PROTECTION AND FINANCE
RE: FTC EXEMPTION FOR SAVINGS AND LOAN ASSOCIATIONS
FEBRUARY 28, 1979
MR. CHAIRMAN:
My name is James Cirona. I am President of First
Federal Savings and Loan Association of Rochester, New York.
I am pleased to be here today to testify on behalf of the
United States League of Savings Associations* with respect
to the question of exempting savings and loan associations
from Federal Trade Commission jurisdiction.
At the present time, insofar as we are aware, there is
no legislation before this subcommittee like last years'
comprehensive H.R. 3816, The Federal Trade Commission Im-
provements Act of 1977. Nonetheless, the U. S. League
appreciates the opportunity~ to comment upon this important
question, and we are hopeful that FTC legislation reported
by this subcommittee and the Senate Commerce Committee will
contain an exemption from Federal Trade Commission juris-
diction for savings and loan associations.
*The United States League of Savings Associations (formerly
the United States Savings and Loan LeagueT has a membership
of 4,400 savings and loan associations representing 99-2/3%
of assets of the $510 billion savings and loan business.
League membership includes~all types of associations -- Fed-
eral and state-chartered, insured and uninsured, stock and
mutual. The principal officers are: Joseph Benedict, Pres-
ident, Worcester, Mass.; Ed Brooks, Vice President, Richmond,
Va.; Lloyd Bowles, Legislative Chairman, Dallas, Tex.;
Norman Strunk, Executive Vice Pres., Chicago, Ill.; Arthur
Edgeworth, Director-Washington Operations; and Glen Troop,
Legislative Director. League headquarters are at 111 E.
Wacker Drive, Chicago, Ill. 60601; and the Washington Office
is located at 1709 New York Ave., N.W., Washington, D.C.;
Telephone. (202) 785-9150.
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We view the exemption of savings and loan associations
from Federal Trade Commission jurisdiction as noncontrover-
sial since it tracks the bank exemption and was approved
(although not enacted) by Congress last year. In my state-
ment I intend to discuss the views of the Federal Home Loan
Bank Board, the chief regulatory body of the savings and
loan business on the question of an FTC exemption and the
powers of the Federal Home Loan Bank Board to control a wide
spectrum of practices and activities in the savings and loan
business. Finally, I will briefly review Public Law 95-630
approved last year, The Financial Institutions Regulatory
and Interest Rate Control Act, because I believe that its
enactment meets most of the prior objections of the FTC
during markup of H.R. 3816 with respect to the FHLBB's
regulatory authority over savings and loan associations.
A) Historical Background. The nation's banks have
been exempted from Federal Trade Commission jurisdiction
since the genesis of the Federal Trade Commission in 1914.
At that time banks were subject to Federal Reserve Board
jurisdiction and to Federal administrative controls. There
was no Federal Home Loan Bank system for savings and loan
associations nor was there Federal insurance of accounts.
The exemption provided for banks in the FTC Act as well as
for other specialized businesses such as common carriers and
packers reflected long standing Congressional adherence to
dividing regulatory responsibilities along industry lines.
The Commission's authority under Section (6) of the Act to
compile information, to conduct investigations and to require
the filing of reports on matters within domestic commerce or
affecting foreign trade similarly does not extend to banks
thus forming the second part of the two-part banking exemption.
There were good and substantial reasons why the 1914
Federal Trade Commission Act excluded banks. Simply stated,
- Congress recognized when the Act was passed that certain
entities, including banks, were subject to specialized, pre-
existing regulation. The intrusion of an additional regula-
tory agency into a specialized world was not deemed necessary.
Savings and loan associations, however, were never specifically
excluded under the 1914 law although the scope of the term
"banks" in Sections (5) and (6) (as I will point out later)
is still uncertain.
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Ii?
In 1975, the broad banking exemption from Federal Trade
Commission jurisdiction was narrowed with respect to FTC rule-
making authority. The Magnuson-Moss Amendments to the FTC
Act provided that 60 days after FTC rules were final the
Federal Reserve Board was required to promulgate "substantially
similar" rules to apply to similar unfair or deceptive
practices by banks. A specific exemption for savings and
loan associations was not included in the 1975 Magnuson-Moss
Amendments although it would have been appropriate at that
time to place banks and savings associations on the same
footing with respect to the Federal Trade Commission.
B) Recent Congressional Action with Respect to S&Ls.
In 1977 anU1978, Congress saw fit to approve an exemption
from FTC jurisdiction for Federally-insured savings and loan
associations or Federal Home Loan Bank System member associa-
tions. This exemption differs slightly from the bank exemption
which applys to all banks, not just those with some Federal
nexus. The Senate passed a bill with a narrower S&L exemption,
but then also voted to accept the Conference Report with the
broader exemption for savings and loan associations passed
by the House. For reasons which this Committee knows well,
the S&L exemption and the rest of H.R. 3816 did not "stick".
However, to my knowledge no Congressional objections were
raised in either the House or Senate with respect to the S&L
exemption. The amendments following their debate in this
subcommittee were perceived as noncontroversial. We recommend,
therefore, that the exemptiOn from FTC jurisdiction for
savings and loan associations be part of any FTC bill reported
by this Subcommittee or a comparable Senate committee.
There are several reasons for our recommendation.
C) FHLBB Powers and Authority. The first of these is
the jurisdiction of the Federal Home Loan Bank Board over
virtually every facet of S&L operation. There are no material
-~ differences between bank and S&L supervisory authority.
Moreover, the supervisory powers of financial institution
~egulators were buttressed even further just last year. The
chairman of the Federal Home Loan Bank Board, Robert McKinney,
has said that the Federal Home Loan Bank Board possess full
authority to regulate unfair and deceptive acts or practices
occuring in the savings and loan business. He notes in a
letter sent last year to COnferees on H.R. 3816 that:
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"The Home Owners Loan Act of 1933 gave the Board a
comprehensive authority to regulate Federal savings and
loan associations including the authority to enforce
any law or regulation which would affect the operation
of Federal savings and loans. The National Housing Act
of 1942 conferred similar broad authority over the
operations of Federally-insured savings and loans.
Thus the composite regulatory jurisdiction which the
Board has excercised over the savings and loan industry
leaves no meaningful area for supervision of these
institutions by the FTC".
McKinney goes on to say that providing savings associations
with the same limited exemption as banks under the FTC Act
would:
"eliminate overlapping and potentially conflicting
regulatory authority in the savings and loan industry.
Since the enactment of the Federal Trade Commission Act
in 1914 the savings and loan industry has matured and
has become subject to comprehensive Federal regulation.
H.R. 3816 would amend the FTC Act and recognize these
fundamental changes and confer upon savings and loans
the same exemption presently conferred upon commercial
banks".
Attached to Mr. McKinney's letter was an appendix (see
Appendix A attached) which describes Federal Home Loan Bank
Board regulations. In exercising such jurisdiction the
Board has utilized the broad plenary authority contained in
Sections 5(a) and 5(d) of the Home Owners Loan Act, 12
U.S.C. Section 1464 (1976) to support its actions. In
addition the FHLBB's dual function, operation of the FSLIC
(Federal Savings and Loan Insurance Corporation) gives it
jurisdiction over the operations of state chartered savings
and loans. For example, Conflict-of-Interest regulations
which apply to all Federally-insured S&Ls have enabled the
Board to set guidelines concerning the composition of the
boards of directors of insured institutions and misleading
advertising. The Board has issued similarly broad regulations
on discrimination in lending and the amount of give-aways
which savings and loan associations may utilize in connection
with savings campaigns. Regulations have been issued concern-
ing late charges on mortgage loans, payment of interest on
PAGENO="0123"
119
escrow accounts, the use of due-on-sale clauses, loan pro-
curement fees, kickbacks and unearned fees. All of these
matters are discussed in more detail in the Appendix.
Another reason supporting the exemption for S&Ls is the
specialized lending in which they are involved. Unlike
banks, savings and loan associations are not heavily involved
in consumer lending or installment loans. Savings and loans
do not operate bank.-type credit card subsidiaries and make
few unsecured installment loans. Thus they are not active
participants (as are banks) in the consumer lending fields
which are the object of recent FTC proposed rulemaking --
short-term, unsecured installment loans. Home mortgage
lending is a specialized activity and closely regulated by
the Federal Home Loan Bank Board. It should not be subject
to dual and potentially disruptive oversight of more than
one regulatory authority.
D) Effect of Public Law 95-630. Last year, the 95th
Congress expanded the supervisory authority of the Federal
Home loan Bank Board and the banking agencies. This law,
which has been described as the most comprehensive rewrite
of Bank-Savings and Loan supervisory laws of the past 25
years, gives financial institution regulators tremendous new
*authority. In the area of interlocks, it prohibits outright
any interlocks between management officials of depository
institutions within certain geographic areas and of larger
institutions without regard to geographic restriction. With
respect to S&L's, the FHLBB is the primary enforcement
authority. The Justice Department obtained "referral"
authority for any cases not deemed subject to FHLBB juris-
diction. In addition, the Board obtained new authority to
remove officers and directors from boards of directors,
cease and desist authority açainst individuals and the right
to order the termination of holding company activities.
E) The Meaning of the Word "Bank". Finally, there is
an illogical result which will continue if the FTC exemption
for banks is not extended to S&Ls. The term "bank" is un-
defined. It is not entirely clear that it was not intended
to apply to all financial institutions. There are, for
example, numerous laws and regulations in which the term
bank is also deemed to include savings and loan associations.
Also, simple reliance on the word "bank" raises interesting
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questions. Mutual savings banks are thrift institutions
like savings and loan associations, but are insured by the
Federal Deposit Insurance Corporation. They are presumably
exempted from FTC jurisdiction simply because the word
"bank" appears in their title. "Bank" left undefined also
means that Federal insurance of accounts is not required for
the bank exemption. Cooperative banks, thrift institutions
operating in New Hampshire and Massachusetts, which meet the
savings and loan tax definition, are presumably already
exempted as well because the word "bank" appears in their
title. It is not clear whether Congress intended to put
so fine a point on the differences between financial insti-
tutions or whether its intentwas broader -- to divide
regulation along general industry lines. Whatever the
intent of the Act, our hope is to clarify it to provide
parity for bank and savings and loan associations.
We believe it is time that the burdens of joint FTC-
FHLBB regulation be eliminated. The reasons which compelled
the bank exemption in 1914 are more compelling today in the
case of savings and loan associations. I might also observe
that the word "exemption" may not be an accurate description
of bank status. Banks today are subject to indirect FTC
jurisdiction in that the Federal Reserve Board will be
required to write substantially similar trade regulation
rules 60 days after final FTC rules are promulgated. The
S&L business seeks no more than comparable treatment under
the Act for savings and loan associations.
We appreciate the opportunity to present our statement.
Our Appendix, in addition to providing a list of the numerous
regulatory activities affecting the savings and loan business
engaged in by the Federal Home Loan Bank Board also contains
a draft of an amendment to the Federal Trade Commission Act~
-which exempts S&Ls following a pattern identical to that for
banks.
Thank You.
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121
APPENDIX A
Significant FHLBB R~gü1ations Regarding Unfair Methods of
Conp2tition and Unfair or Deceptive Acts or Practices
A. Conflicts of Interest'
The Board'sconflict of I~iterèstregu1ations set forth
guidelines concerning the compôsitioñ of board~.of directors
of insured instItutIons. Thesegü~delineS:;
(1) disáourageofficer or director
interlocks.between ?SLIC. -~
Insured iñ~tiuions and all
other thrift Institutions,
(2) discourage directors and officers:::
of FSLIC-insurédinstitUtuiOns 0
frorn.serving as salaried officers
or employees, of ~a commercial bank
and - .: * - -
(3) suggest limitations on director
interlocks between FSLIC-insured
- - institutuions and commercial banks.
12 C.F.R. ~563.33 (19~17). Failure to c~mply with these
regulatory guidelines, would subject an institution to making
required disclosure `of' such relationships to its voting members.
12 C.F.R. 5563.44 (1977).
B~ Misleading Advertisin
Insured institutions are orohibited fro-n using any type
of advertising or making any representation w~hic'i is inaccurdte
in any m'hrticular or which in any way misrepresents its
services, contracts, investments or financial condition.
12 `C.?.R.' ç56'3.27 (1977)
C. DiscriminatIOn in Lending
* The Board has proposed regulàtio?is to halt redlining and
other discriminatory home lending practices by insured
institutions. 42 Fed. Reg. 58182-86 (Nov.: 8,:1977). The
proposed regulations would:.
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122
* (1) prohibit denial of a mortgage loan
application because of the age of
the dwelling or the neighborhood in
which it is located,
* (2) require institutions to review their.
advertising*and marketing practices
to ascertain that they are serving
adequately all segments of their
- **: communities,. -
(3) require institutions to develop written
standards.to be used in processing loans
* and
(4) require institutions to consider all
relevant factors in making loan decisions
* without giving undue consideration to
arrest records, educational level, lack
of previous homeownership or a history
of numberous jobs.
D. Give-Aways
Federal associations are restricted from offering give-
aways on condition of the recipient's possessing, opening
or adding to a savings account, or maintaining a minimum
balance in such an account. 12 C.F.R. 5545.5 (1977)
5. Payment of Interest on Escrow Accounts
Federal-associations are required to-pay interest on any
esctow account maintained in connection with a bàn on the
security of-a single-family dwelling occupied by theborrower
in States where State-chartered in~titutions are required
to pay interest~ - :. * - - -
F-. LateCharges- -. -
Federal associations are prohibited from assessing late
charges on any periodic installment payment re~eived within -
15 days after the due date of such -installment, in an amount
exceed ing 5 percent of the aggregate amount of the periodic
installment, where.* the late charges had not been disclosed,
or more than once. 12 C.F.R. 5545.6-Il.
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123
C. Due-on-Sale Clauses -
Federal associations are prohibited from exercising their
rights under a due-on-sale clause based upon creation of a
lien subordinate to that of the association, creation of a
purchase ooney security interest for household appliances,
tran3afer by devise, descent or by operation of law u?on the
death of a joint tenant, or t1'~e granting of any leasehold
interest of three years or less not containing an option
to purchase. No Federal association may impose a prepayment
charge in connection with the exercise of its rights under
a due-on-sale clause. 12 C.F.R. ~545.6-ll (1977).
H. Loan Payments
The regulation governs t1~e'timingànd disposition of
periodic installment payment~bn conventio'nal home mortgage
loans. Federal associations are prohibited from charging
prepayment penalties to borrowers who prepay up to 20 per-
cent of the original amount of a loan during a 12-month period.
12 C.F.R. 5545.6-12 (1977)-.
I. Form of Accourts
Forms for: all types of savings accounts and cortificatas
offered by insured institutions must be approved by the FSLIC.
12 C F R S563 1 ~977)
J. Tie iflS
No, insured instutution may grant a loan on the prior
condition that trie borrower contract with any soecific `merson
or organization for insurance services building materials
construction services, legal services, brokeràg~e services
or property management services. In addition, reimbursement
that may be charged a borrower *or legal services is limited.
12 C.F.R. S563.33 (1977).
Loan Procurement Fees, gickbacks and Unearned Fees -.
No person affilia~ted wi~h an insured instUtution nay
receive a loan procurement fee, kickback or unearned fee.
l2C.F.R.S563.'4(1977).
RHL:PNB:cppl/4/78
PAGENO="0128"
124
APPENDIX A
S~L EXEMPTION FROM FTC .IURISV1CTION
(a) Section 5(a)(~) of the Federdi Trade Commission Act (15
~ .4b(a)(2)) is amended by inserting after "banks," the following:
"savings and loan institutions described in section 18(f)(5),".
(b)(1) Section 6(a) of the Federal Trade Commission Act (15 U.S.C.
46(a) is amended by tnserting after "banks" the following: ", savings
and loan institutions described in section 18(0(8) ,".
(~) Section 6(b) of the Federal Trade Commission Act (15 U.S.C.
46(b)) is amended by inserting after "banks," the following: "savings and
loan institutions described in section 18(0(8),".
(3) The proviso at the end of section 6 of the Federal Trade Commission
Act (15 u.sa46) is amended-~ -
(A) by inserting after "banks" the following: ", savings and
loan institutions described in section 18(f)(8),"; and
* (B) by inserting ", in &usiness as a savings and loan insti-
tution," after "banking".
(c)(1) Section 18(0(1) of the Federal Trade Commission Act (15
U.S.C. 57a(f)(1)) is amended-
(A) tn the first sentence thereof-.. - :.
(i) by inserting "or savtngs and loan institutions describeclin
* paragraph (5)" after "banks" each place `at appears therein;
and
(it) by inserting "or (5)" after "(5)";
(B) in the 8econd sentence thereof, by tnserting after "~ystem" the
following: "(with respect to banks) and the Federal Home Loan Bank*
Board (with respect to savings and loan institutions described in
paraqraph (8))"; and
(C) in the last sentence thereof-
(t) by inserting "each" l~fore "such Board)' the first place it
appears there zn;
: (it) by striking out "such Board finds that (A)" and inserting
in lieu thereof "(A) either such Board finds that~';
* (iii) by inserting "or savings and loan institutions described
in paragraph (~)~ as the case may be," after "banks" the first
place it ap~ears therein; -
(iv) by inserting after "or (B)" the following: "the Board
of Governors of the Federal Reserve System finds"; and
* (v) by striking out "the Board" and inserting in lieu thereof
"such Board".
(2) Section 18(f) of the Federal Trade Commission Act (15 U.S.C.
57a(f)) is amended by redesignating paragraphs (5), (4), and (5) thereof
as paragraphs (4), (5), and (6), respectively, and by inserting after
paragraph (2) thereof the followin~q new paraqraph:
"(5) Compliance with regulations prescrited under this subsection
shall be enforced under section 5 of the Home Owners' Loan Act of 1958
(12 U.S.C. 1464) with respect to ~edera2 savings and loan associations,
section 407 of the National -Housing Act (12 U.S.C. 1780) with r~pect
to insured institutions and sections 6(i) and 17 of the Federal Home
Loan Bank Act (12 n.S.a. 1456(t), 1487) with respect to savings and
loan institutions which are members of a Federal Home Loan Bank, by
a division of consumer affairs to be established by the Federal Home
Loan Bank Board pursuant to the Federal Home Bank Act.".
PAGENO="0129"
125
Mr. RINALDO. I just have one question and perhaps directed to
Mr. Williams or either of you, or both of you can answer it. Has
either the League or your association ever done or had done any
sort of cost-benefit analysis of the removal of FTC jurisdiction?
In other words, what we really have here is a case of duplicate
jurisdiction which certainly costs the taxpayers money and costs
the savings and loans money. I have in mind such things as man
hours saved, filing of duplicative forms, not having to appear in
proceedings before the FTC, and things of that nature.
And if not, do you think such an analysis would be helpful? Do
you anticipate having anything done? Could you give me some idea
of the savings that would accrue by getting rid of unnecessary and
duplicative regulation?.
Mr. WILLIAMS. That is a good question, Mr. Rinaldo. I think the
answer from the National League's standpoint is we have not done
any such study primarily because it was not until recently-in fact
in 1975 or 1976-that we were aware that the Federal Trade Com-
mission was asserting jurisdiction against the savings and loan
industry.
Mr. SCHEUER. For how long a period of time did they not assert
jurisdiction, and on how many occasions have they done so since?
Mr. WILLIAMS. Not since the Home Owners Loan Act of 1973.
Mr. SCHEUER. How many cases have they brought?
Mr. WILLIAMS. Just one. So their intrusion into the savings and
loan industry has been recent, so we would not have any cost data.
I am sure the legal fees of Perpetual would be substantial.
Mr. SCHEUER. For that one case. How about the rest of the
industry? How will they be affected by that one case or the asser-
tion of jurisdiction?
Mr. WILLIAMS. That is hard to measure. We do not know what is
in the back of the minds of the Commission.
Mr. SCHEUER. To the extent there are duplicative filings and so
forth, how does that work? How onerous are those filings, how
extensive?
Mr. WILLIAMS. We do not have any filing requirements yet.
Mr. SCHEUER. I heard talk here of duplicative filings. Maybe we
should ask Congressman Rinaldo what he had in mind.
Mr. WILLIAMS. What we are talking about is the potential.
Mr. SCHEUER. Wait, Congressman, are you talking about poten-
tial duplicative filings or duplicative filings that exist in fact in the
real world?
Mr. RINALDO. Let me ask this: I will reframe that part of it. Are
there duplicative filings now or is it merely that you anticipate
them?
Second, I think as the situation now stands, the whole point you
are trying to make is that because of the sudden FTC incursion
into savings and loans, the savings and loans are being treated in a
discriminatory fashion.
Mr. SCHEUER. Excuse me, Congressman Rinaldo. I have to meet
the distinguished speaker of the New York State Assembly.
[Discussion off the record.]
Mr. SCHEUER. Could I impose on you, Congressman Rinaldo, to
take over the remainder of this hearing.
Mr. RINALDO. Perhaps better yet, I will conclude.
47-9170-79-9
PAGENO="0130"
126
Mr. SCHEUER. I think we should have an exhaustive inquiry into
the matter of duplicative filings.
Mr. RINALDO. I would like Mr. Williams to answer the question
and to point out what I think is the core of the matter, the fact
they are being treated in a discriminatory fashion vis-a-vis other
banking institutions.
So, then you can be convinced that this is a good provision in
this bill before you leave.
Mr. WILLIAMS. I think the present state of laws is discriminatory
in that with commercial banks or the Federal Reserve Board is
required to consider promulgating a trade regulation rule for banks
within a certain time after FTC promulgates its rules.
The savings and loans do not have that privilege of having their
own regulator with relevant expertise follow the same procedure.
That is what we are saying. Yet the Bank Board decides whether a
trade regulation really is needed for the savings and loan industry.
Mr. SCHEUER. I wish you would submit for the record-I must
leave now-a brief statement on what the actual burdens are, the
cost to you, to the industry of this duplicative jurisdiction. I do not
have a clear idea in my mind as to what is required or even to the
extent that you have volunteered to undertake filings and so forth.
If you would give us a clear statement of what the costs are to
you of this alleged duplication, I think it would help clarify things.
Mr. CIRONA. If I might say from the perspective of an operating
person that we have extensive filings that we do for the Federal
Home Loan Bank Board. If we were to add more reporting require-
ments, we of course would comply with those requirements.
But you have to keep in mind that we do not pay the cost. Our
customers pay the cost.
Mr. SCHEUER. But you have not been asked to, I take it.
Mr. CIRONA. We have not at this point been asked to.
Mr. SCHEUER. So, I do not get the extent of this burden of
duplicative filings. I am fuzzy on it.
Mr. CIRONA. We are anticipating what would be required.
Mr. SCHEUER. Is there any evidence that it is going to be re-
quired?
Mr. GusTINI. If I may, Mr. Chairman, give you an example, not
of duplicative filing because the FTC's involvement, as Mr. Wil-
liams said with respect to the savings and loan business, is in its
nascent stages. There are, however, two FTC trade regulation rules
that are pending which have an effect on S. & L.'s. But the intru-
sion of the FTC into the savings and loan business is right now in
the stage that we discussed.
Mr. SCHEUER. Why isn't your interest in the nascent stages too?
Mr. GuSTINI. We are vigorously pursuing the exemption because
even the nascent stages of FTC involvement, it has been costly to
several institutions and to the U.S. League of Savings Associations
as a whole.
Mr. SCHEUER. If you could give us a brief statement on what that
burden has been, we would appreciate that.
[The following information was received for the record:]
PAGENO="0131"
127
UNITED STATES LEAGUE of SAVINGS ASSOCIATIONS WASHINGTON OFFICE
V ØpI~" 1709 NEW YORK AVENUE, N.W. / WASHINGTON, D.C. 20006 / TEL (202) 785.9150
RAYMOND J. GUSTINI
April 30, 1979
The Honorable James H. Scheüer
U. S. House of Representatives
2402 Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Scheuer:
During the hearings at which we appeared last month
testifying on behalf of an exemption for savings and loan
associations from FTC jurisdiction, we indicated we would
provide additional information on the Federal Trade Com-
mission involvement in the savings and loan business. We
said in our testimony that FTC involvement was confined to a
few areas. Nonetheless, th~e extent of FTC interest and
involvement in the savings and loan business demonstrates
clearly to us that future action will grow and be even more
costly and time consuming for savings and loan associations.
Let me provide several examples.
In May of 1976 the Fedederal Trade Commission filed its
complaint against Perpetual Federal Savings and Loan of
Washington, D.C. alleging that Perpetual's Board of Directors
was comprised of interlocks which violated "per se" Section 5
of the FTC Act. Shortly thereafter, on August 23, 1976, the
Commission issued a statement of policy which said that as
of January 1, 1977 savings and loan association directors
would be charged "individually" in complaints challenging
unlawful interlocks. At that time the Perpetual case had
not been heard by the Commission's AU. However, shortly
after the complaint was filed, the policy statement allegedly
affecting all S&L directors was issued by the Commission.
Subsequently, a Florida-based savings and loan association
sued the Commission to obtain clarification of the statement.
In oral argument the FTC conceded what it would not concede
or clarify publicly -- despite many inquiries from S&L
directors - - that not all bank-S&L interlocks were illegal
and that the statement of policy had no legal effect in and
of itself and that it was not enforceable. It was unfortunate
that costly, time consuming legal proceedings had to be
instituted before routine clarification of the statement
could be issued.
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128
The FTC also has a pending rule on credit collection
practices. The record comprising its proposed rule has now
reached some 25,000 pages. The primary purpose of the
Commission's proposal was to curb aggressive, sometimes
abusive collection practices of small loan and consumer
finance companies. However, the rule was drawn in the
broadest possible terms. Thus, when the League first re-
viewed the FTC's proposed rule, we were concerned that on
its face it applied to loans secured by liens on real estate
which comprise over 84~ of savings and loan assets. We
raised this issue with FTC staff members and were assured
orally that the rule was not intended to apply to such
loans. However, despite our requests we were never able to
secure any clarification or opinion which would alleviate
this concern. Accordingly, to make certain that loans
secured by real estate are not covered by the rule, the
League has already incurred high legal fees and spent a
number of man-hours on the project.
We are also very concerned with a recent press report
(attached) which indicates a growing interest by the FTC in
housing and related areas. One area of interest directly
affecting savings and loans is the Community Reinvestment
Act enforced for our institutuions by the Federal Home Loan
Bank Board. CRA provides that the record of a financial
institution in meeting "community credit needs" will be
considered in connection with approval of branch applications,
merger applications and the like. The interest of the
Commission in CRA is puzzling since regulations have been
final for only six months giving the enforcing agencies
modest CRA enforcement experience at best. It is therefore
difficult to visualize how the Commission can suggest (not-
withstanding questionable jurisdiction) that it would consider
intervening in CRA matters with the agencies and Congress.
The first branch application rejected for CRA purposes was
reported last week when the FDIC took this action against a
New York Savings Bank. Therefore, the Commission's interest
in a very new law, where the agencies designated by Congress
have had very little time to work with the existing regula-
tions appears premature and ill advised.
PAGENO="0133"
129
I hope that these examp1es~have helped to illustrate
our concern and that they have been helpful to you. Again,
thank you for the opportunity which you afforded Mr. Cirona
and I last month to appear before the Subcommittee.
Very truly our
Raymond J C tini
Assistant Washington Counsel
RJG:cac
cc: Members of the Subcommittee
Jim Cirona
PAGENO="0134"
130
National Savings and Loan League
1101 Fifteenth Street NW
Washington, DC 20005
202 331-0270 Cable: NATLISA
Harding deC. Williams
GeneralCounsei April 5, 1979
The Honorable James H. Scheuer
Chairman
Subcommittee on Consumer Protection
and Finance
Committee on Interstate and Foreign
Commerce
U. S. House of Representatives
3275 Annex 2
Washington, D. C. 20515
Dear Mr. Scheuer:
RE: H.R. 2367, a bill to amend the Federal Trade
Commission Act; Exemption of Savings and Loan
Associations from the FTC Act
This letter is the response of the National Savings and
Loan League to a request for additional information on a
question raised at the hearings before your Subcommittee
on February 27, 1979, on the above bill.
Section 2 of that bill would exempt savings and loan
associations from the FTC Act in the same manner as banks
are now exempt.
We were asked to provide information on the burden to
the savings and loan industry which have been caused by its
coverage under Section 18 of the Federal Trade Commission Act.
I wish to state at the outset that our position on
savings and loan exemptions from the FTC Act is based primarily
on the problems which will inevitably result in the future
from the subjection of our industry to the overlapping
jurisdiction of the FTC, the Federal Home Loan Bank Board
and state regulatory agencies. Our coverage under that section
has been, as you know, of relatively short duration since it
was a part of the Magnuson-Moss Act, which was enacted in 1975.
There has already been, however, sufficient evidence
since 1975, of the expense and uncertainty caused by this
dual coverage, and alleged dual coverage, to warrant adoption
of Section 2 of the above bill on the basis of that experience
alone.
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131
Since 1975, the Commission has issued two Trade Regulation
Rules which have caused considerable confusion in the savings
and loan industry because of the difficulty in securing an
interpretation of the application of such rules to residential
mortgages nade by Federally-insured savings and loan associations.
The first was the proposed rule on "Credit Practices"
published on April 11, 1975, 40 FR 16347. The National League
wrote the Cornraission on May 30, 1975, and again on August 16, 1977,
seeking a clarification of thescope of this rule, since, by its
terms, its application to residential mortgages was not clear.
To date, we have received no answer from the Commission on this
question.
The second Rule was that on "Preservations of Consumers'
Claims and Defenses", known as the "holder in due course" Rule
published on November 18, 1975, 40 FR 53506. This Rule, again,
did not specify its impact on the closely-regulated savings and
loan industry. A staff interpretation does spell out that the
Rule does not cover residential first mortgages, but this is not
binding on the Commission. More to the point, however, is the
fact that the FTC apparently believed that it had the power to
affect rights of subsequent holders of such mortgages. The
exercise of such power would have severely disrupted the secondary
market in such mortgages -- with little corresponding protection
for the home purchaser -- and would have adversely affected that
market, which is designed to stabilize the flow of funds into
housing and to tap capital markets for additional sources of
such funds.
This market consists of institutional and private investors,
other financial institutions, and the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Corporation, and the
Government National Mortgage Corporation. These latter three
agencies carefully monitor appraisal and underwriting standards
of lenders who sell loans to them, and along with savings and
loan associations, do not require overlapping regulation.
The FTC's action against Perpetual Federal Savings and Loan
Association (Docket No. 9083) in May, 1976, demonstrates the
potential for harm which exists when one agency intrudes into
aspects of a regulated industry which have been the subject of
careful evaluation and action by the primary regulator. As pointed
out in our statement before the Subcommittee, the Perpetual case
involved a challenge to relationships which the FTC had not
addressed since the enactment of the FTC Act in 1914, and which
had been under the jurisdiction of the FHLBB since 1933.
PAGENO="0136"
132
On August 23, 1976, the Comnission issued a Statement of
Policy, 41 FR 35572, which was obviously designed to `scare"
persons who were serving as a director of a bank and a savings
and loan association into resigning, without legal action being
brought against then and while the Perpetual case was still before
the Administration's Law Judge.
The statement provided in pertinent part:
* the Commission will henceforth in
appropriate situations adhere to its
customary practice of naming individuals
as well as corporations in interlock com-
plaints subject to the Commission's juris-
diction. The Commission recognizes, however,
that, in view of the apparent ubiquity of
savings and loan association interlocks with
banks, immediate resignations by interlocking
directors might be dIsruptive. The Com
mission, therefore, believes that a short
grace period~ii~ay be appropriEis a matter
of policy. It is the Commission's intention,
however, that after January 1, 1977, savings
and loan association directors will be charged
individually in complaints which may from time
to time issue challenging allegedly unlawful
interlocks of this nature which it has reason
to believe remain in existence on or after
that date." (emphasis supplied)
This statement was interpreted as having legal effect in
many quarters and many directors did in fact resign.
It took a lawsuit by a National League member to secure an
admission by the FTC staff -- which was made only during oral
argument on the case in Federal district court -- that the Policy
Statement had no legal effect. Arthur H. Courshon, et al, v.
FTC (No. 76-2308, D.D.C., January 28, 1977).
Perpetual Federal and the National League, the U. S. League
of Savings Associations, the Federal Home Loan Bank Board (with
numerous amicus briefs) and Mr. Courshon spent substantial amounts
of time and money dealing with a lawsuit which should never have
been brought in the first place -- on a subject that was clearly
within the exclusive purview of the Federal Home Loan Bank Board.
The above actions by the FTC and affecting the savings and
loan industry, we submit, has not brought one iota of benefit
PAGENO="0137"
133
to savings and loan depositions and borrowers. They are well
protected by the agencies which regulate savings and loan
associations.
Congress should acknowledge this fact and reaffirm the
exemptions for savings and loan associations which were approved
by both the House and Senate in 1978.
Since ely,
/nVarding/aeC. Williams
General! Counsel
Mr. RINALDO. We would like an appraisal of the burden national-
ly, not just on one institution. We are not in the business of
legislating in terms of individual institutions, but to meet national
needs and national problems.
Could I amend that to include also, as a result of incurring
potential costs, a comparison of your situation with that of other
banking institutions.
Mr. SCHEUER. Thank you very much. Thank all of you.
The hearing is hereby adjourned until 10 tomorrow morning, in
the same room.
[Whereupon, at 1:30 p.m. the subcommittee adjourned; to recon-
vene Thursday, March 1, 1979, 10 a.m.]
PAGENO="0138"
PAGENO="0139"
AUTHORIZATIONS FOR, THE FEDERAL TRADE
COMMISSION AND GENERAL OVERSIGHT
ISSUES
THURSDAY, MARCH 1, 1979
Housi~ OF REPRESENTATIVES,
SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCE,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
Washington, D.C.
The subcommittee met at 10 a.m., pursuant to notice, in room
2322, Rayburn House Office Building Hon. James H. Scheuer,
chairman, presiding.
Mr. SCHEUER. We will now commence the second hearing of the
Consumer Protection and Finance Subcommittee on the authoriza-
tion bill for the Federal Trade Commission.
This morning we are going tO hear a very interesting panel on
the legislative veto. In the last Congress two Federal Trade Com-
mission conference reports were debated in the House and defeated
largely because of the failure to include a legislative veto provision
that was not subject itself to Presidential veto.
Furthermore H.R. 2367, sponsored by Mr. Rinaldo and Mr. Broy-
hill, also contains a legislative eto. So there seems to be a consid-
erable bipartisan support for a legislative veto.
Today we have a very distinguished panel of witnesses who will
appear before us. It is, perhaps, the most credible and thoughtful
that has ever been collected at one place at one time. The issue
involves enormously important~ constitutional issues as well as very
important public policy issues. In the past there has been far too
much heat generated on this issue as compared to the light that
has been focused on it. -
I am sure this morning's hearings will be of interest to all
concerned.
With that let us invite to join us at the table Congressman Bob
Eckhardt, our distinguished colleague on this committee and chair-
man of the distinguished Oversight and Investigations Subcommit-
tee and former chairman of this subcommittee: the Honorable El-
liott Levitas, very distinguished and thoughtful colleague who has
been the prime mover in Congress of the legislative veto; Prof.
Bernard Schwartz of New York University School of Law, a distin-
guished scholar and social critic; and Mark Green, director of Con-
gress Watch.
If you will all come up to the table.
(135)
PAGENO="0140"
136
STATEMENTS OF HON. BOB ECKHARDT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS; HON. ELLIOTT H.
LEVITAS, A REPRESENTATIVE IN CONGRESS FROM THE
STATE OF GEORGIA; MARK GREEN, DIRECTOR, CONGRESS
WATCH; AND BERNARD SCHWARTZ, PROFESSOR, NEW YORK
UNIVERSITY SCHOOL OF LAW
Mr. SCHEUER. We are going to ask each of you to speak more or
less briefly on your position on the subject. We will then, I am
sure, have a great deal of questioning to do. We will keep it very
informal. I have suggested to my two colleagues here that if either
of them have questions or comments to make as you are testifying,
it is not written in the stars that they must wait until the end of
your testimony.
We may break in from time to time to express astonishment,
chagrin or even agreement. So with these preliminary words we
are happy to hear you and let me first ask my colleague Jim
Broyhill if he has a word?
Mr. BROYHILL. No. I am just delighted to see each of these
witnesses here and you have already pointed out I am a supporter
of the concept of the legislative veto and have included that con-
cept in a bill that Mr. Rinaldo and I introduced that would author-
ize appropriations for the operations of the Federal Trade Commis-
sion for the next 3 years along with other amendments that we
have included.
With that we can proceed.
Mr. SCHEUER. My colleague from North Carolina, Rich Preyer.
Mr. PREYER. No comment.
I too want to welcome this distinguished panel. I look for light
and possibly some heat.
Mr. SCHEUER. If they don't provide the heat I am sure we will.
Congressman Eckhardt, you may proceed.
Mr. ECKHARDT. Thank you, Mr. Chairman.
I am in a somewhat unusual position in this subcommittee today
but I enjoy being here.
Mr. SCHEUER. Let us say you are here in quite a few categories.
You are here as former chairman of the subcommittee. You are
here as chairman of a distinguished sister subcommittee and you
are also here because you are by far the most distinguished and
credible constitutional expert in the House of Representatives and
you have proven that over your four or five terms of service on
many, many issues.
We value you not only as a thoughtful public policy critic in the
House, one of our most thoughtful, but as the single most authori-
tative constitutional commentator in the House. We are happy to
have you in all those categories.
Mr. ECKHARDT. It is possible I got that reputation because I have
little trepidation in getting into a field that is thorny with prob-
lems.
At the outset I would like to say that I feel that under the
precise language of the Constitution--
Mr. SCHEUER. Excuse me, Bob, I made a mistake. I meant to ask
Elliott Levitas to start off, because he is a supporter of the legisla-
tive veto. I think that makes a little more sense in terms of the
way the debate should go. I apologize for being thoughtless. I don't
PAGENO="0141"
137
know why I was thinking about Eckhardt. Elliott, I apologize to
you.
This basically is your proposal. I think it probably would make
sense for us to hear the case for it and then we will hear some
comments by Bob Eckhardt. Then we will go to Bernard Schwartz
and we will end up with Mark Green. That is the way we had this
structured.
As the foremost and most thoughtful and eloquent exponent of
the legislative veto, Mr. Levitas, we are very happy to hear your
statement of the case and please go forward.
STATEMENT OF HON. ELLIOTT H. LEVITAS
Mr. LEVITAS. Thank you Mr. chairman.
As I look around this table I think that perhaps we are setting
up the first session of the Camp David on legislative veto issue. I
hope that we will be able to bring about accord and harmony with
much more certainty and dispatch than apparently we have been
able to accomplish between Israel and Egypt. I think this discus-
sion is good, and I commend the committee and you, Mr. Chair-
man, for this type of format which brings together at one point and
in one place the varying points of view rather than each of us
going out and taking our own positions without the benefit of
critical response in either direction which is needed to get to the
bottom of any issue.
I have a prepared statement which I would like to be made a
part of the record.
Mr. SCHEUER. It is so ordered.
Mr. LEVITAS. I will refer to it without trying to read it in its
entirety. However, I would like to point out in addition to the
specific legislation which your subcommittee is considering with
respect to the Federal Trade Commission, there has also been
introduced legislation, H.R. 1776, which will provide for legislative
veto on all regulations issued by the agencies of Government.
It is the same as H.R. 12048 that was favorably reported by the
Judiciary Committee in the 94th Congress.
Although the enactment of, comprehensive legislation providing
for congressional veto of administrative rules and regulations is my
primary goal, I believe that we need to deal with the problems
each regulatory agency presents as we go along. If you are out in
the wilderness and in danger of exposure, you can't wait until a
house is built to your specifications. While you are building, you
must shelter yourself and protect yourself whatever way you can.
This is the sort of serious danger in which I see this country
slipping because of overexposure to Government regulations, and
we cannot wait until comprehensive legislation is passed. The sepa-
rate efforts will complement the comprehensive effort.
I do not intend at this juncture to discuss at length the issue of
constitutionality of the legislative veto nor its various forms,
whether it is a one-House veto, a two-House concurrent resolution,
a modified one-House or the form that was in the legislation which
the House passed in the last session with respect to the Federal
Trade Commission. I think we will probably get into that, and I
invite discussion. I am prepared to deal with these questions. I
PAGENO="0142"
138
prefer the form that was in the legislation which the House passed
in the last session with respect to the Federal Trade Commission.
I will simply say this, though, on that subject of constitutionality.
The constitutional issue is not going to be decided by this subcom-
mittee, by me, by Bob Eckhardt, by the Attorney General, or by
others who advocate a particular position. Ultimately the constitu-
tionality is going to be decided. by the Supreme Court of the United
States. I have heard some good arguments on both sides of the
issue, some more ingenuous arguments on some side of the issue
but I think--
Mr. SCHEUER. Which side of the issue were the ingenuous argu-
ments on?
Mr. LEVITAS. I may be identifying individuals so I would rather
not say. I would leave that aside and say at the heart of this issue
of legislative veto of administrative rules and regulations is the
simple but serious question: Who makes the laws in this country?
Is it the elected representatives of the people, or the unelected
bureaucrats?
FTC rules are in effect, laws. They have the same force and
effect of statutory law. The FTC deals with the same breadth of
economic policy as Congress itself. The question becomes then: Are
we going to continue to let unelected bureaucrats continue to pass
laws without effective congressional control?
The legislative veto mechanism is perhaps most appropriate
when applied to FTC rules. The FTC has very broad and awesome
powers to write rules and regulations governing virtually every
aspect of the economy and commerce in this country.
The FTC derives this broad and awesome rulemaking authority
from one section of the Federal Trade Commission Act, section 5,
which states that the FTC has the power to adopt rules to elimi-
nate unfair and deceptive trade practices. That is all that it says.
From that point forward, these unelected bureaucrats make law.
On the basis of this authority, the FTC has engaged in rulemak-
ing proceedings covering such diverse groups as hearing aid manu-
facturers, funeral home directors, doctors and dentists, physical
fitness center operators, franchisors, and food processors, to name a
few.
The Agency has promulgated rules or is in the process of propos-
ing rules on holder-in-due-course commercial notes, used car sales
and television advertising aimed at children. It has adopted an
optical advertising regulation which essentially repeals laws passed
by elected legislatures of 40 States-an FTC regulation written by
unelected bureaucrats which can repeal the laws passed by duly
elected members of 40 State legislatures.
I cite these examples of FTC proceedings to illustrate the vast
scope of the FTC's authority. The action of the FTC itself has best
demonstrated the breadth of its power to the public and the need
for a congressional veto control it.
I am not quarreling here with the outcome of each of these
rulemaking proceedings. Some of the regulations may be good, and
others are surely bad. I am arguing for accountability. The FCC
can promulgate far ranging regulations which have the force and
effect of statutory law. Five commissioners, or in some cases, two
commissioners, at the FTC can make law.
PAGENO="0143"
139
I dare say that most of the Members of Congress-perhaps even
some Members here today-cannot even name the FTC Commis-
sioners, yet they are making law, just like Congress. Not one of
them, however, has suffered the inconvenience of running for
public office nor are they accountable for their legislative acts at
the polls a year from next November.
Of course, Congress has delegated to the FTC the authority to
promulgate regulations. In giving the FTC the right to engage in
such broad rulemaking, Congress has the responsibility to guaran-
tee that the Agency exercises this authority in a responsible
manner. Congressional veto of FTC regulations provides us with an
effective mechanism to guarantee that the Commission's interpre-
tation of what constitutes unfair and/or deceptive trade practices,
does not run far afield from Congress intent in enacting the FTC
Act.
Not only is the scope of the FTC rulemaking authority broad, but
it is a so-called independent agency. The FTC is not an executive
branch agency. It does "belong" to the President. It is really a
creature or an extension of the Congress. As such, the FTC maii~i-
tains that it is not subject to control by the President. If it can
object to such simple directives, from the elected President as writ-
ing regulations in plain English, how will it deal with more contro-
versial White House initiatives such as cost/benefit analyses.
If the elected President cannot exercise any control over FTC
rulemaking, and Congress cannot exercise any control over FTC
rulemaking, the result is that the FTC is a freewheeling minilegis-
lative, not answerable to anyone. In the words of Judge Lee Loe-
vinger, an attorney who was an FCC Commissioner himself, the
FTC has all the independence Of the judiciary but with the power,
not exercised by the judiciary, to legislate. At this point, Mr. Chair-
man, I would like to make part of your record a letter which Mr.
Loevinger wrote me which I introduced into the Congressional
Record last year on the subject~
Mr. SCHEUER. Without objection, it is so ordered. [See p. 147.]
Mr. LEVITAS. If that assessment is correct and the FTC is not
subject to executive or congressional control, who then is it ac-
countable to?
In our system of government, a system of checks and balances,
such a situation should not exist. Simply because it has existed in
the past does not mean that we should continue it. Congress, as the
creator of the FTC, must take this situation in hand. Congress, who
delegated rulemaking authority to the FTC, must exercise some
sort of control over it.
Legislative veto of FTC regulations is a way to achieve this.
Since Congress has the authority to delegate rulemaking power to
the FTC, it can delegate less than all that power or it can condition
or limit that power by making it subject to a congressional veto.
This is nothing new. It has been done before. There are numer-
ous statutes providing for legislative review or executive action. In
fact, it is not even radical. Attorney General Griffin Bell, in a
recent speech at the University of Kansas, proposed abolishing the
rulemaking authority of all the independent regulatory commis-
sions. In comparison, legislative veto is a mild remedy for an
overwhelming problem.
PAGENO="0144"
140
Since 1932, approximately 159 different acts of Congress with 214
separate provisions mandating some sort of congressional approval
or disapproval of executive implementation of those laws, have
been passed. Even in the last Congress, President Carter signed
into law 38 bills containing congressional approval or disapproval
provisions or amendments to such provisions previously enacted.
Section 1013 of Jefferson's Manual for the 95th Congress lists the
many laws providing various procedures whereby Congress has
reserved to itself the right to review, by approval or disapproval,
certain actions of the executive branch or independent agencies,
and in one case, rules of evidence recommended by the Supreme
Court.
Congressional veto would give us a measure of control over the
FTC. Not only would it serve to guarantee greater accountability to
Congress and congressional intent in passing the FTC Act, it would
also provide a mechanism to make the FTC more accountable to
individual citizens. If the agency regulators know that Congress is
ready and willing to review and veto rules, we would find more
carefully drafted rules, as well as more attention being paid to the
views of citizens during the comment period.
The public would be a beneficiary of such a provision. How many
times have you heard from your constituents that the bureaucracy
has gone too far-that there must be some control over the bu-
reaucracy. This is what legislative veto is all about. It is your
opportunity to say that something is being done about controlling
the bureaucracy.
Mr. Chairman, I want to emphasize the House has expressed
itself very strongly in favor of legislative veto of FTC regulations.
When the House originally considered the FTC authorization bill
in the 95th Congress, a legislative veto amendment was passed by a
2-to-i vote, 272 to 139.
I might say it was done by means of a motion to recommit with
instructions, which is perhaps the most difficult way to do it,
because a lot of Members simply come in and vote against the
motions to recommit, so it was done the most difficult way with a
vote of almost 2 to 1.
Thereafter on two separate occasions, the House voted to reject
the FTC conference report because it did not contain a legislative
veto of FTC regulations. This first vote was 146 to 255; the second
vote was 175 to 214. That two-time rejection of a conference report
constituted unprecedented action by the House.
I have every reason to believe that in the 96th Congress, support
for the legislative veto is even stronger. I also have reason to
believe that the Senate is now ready to look at this proposal more
favorably. In light of this, I strongly urge you to report an FTC
reauthorization bill which contains a strong legislative veto provi-
sion. I am sure you are aware of the sentiments which the House
has on this issue and will not work to stymie those sentiments.
Whatever your personal views are on this issue, it must be recog-
nized that the House has overwhelmingly exressed itself on three
occasions on this very issue and on this very bill. As a Committee
of the House, I am confident that you will give the House the
opportunity to do it again.
Thank you, Mr. Chairman.
[Testimony resumes on p. 148.]
[Mr. Levitas' prepared statement and attachments follow:]
PAGENO="0145"
141
STATEMENT OF HON. ELLIOrr H. LEVITAS, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF GEORGIA
Mr. Chairman, I wish to express my appreciation to you and the other MeiTbers
of this Subcarmittee for inviting me to testify on the subject of legislative or
Congressional veto. As you knoa, since caning to Congress in 1975, I. have directed
a great deal of attention to this issue of legislative veto, particularly with respect
to rules and regulations. In this Congress, I am the principal sponsor of canprehen-
sive legislation, H.R. 1776, amending the Administrative Procedures Act, to provide
for legislation veto of all administrative rules and regulation. lb date, this bill
has over 150 cosponsors in the House. I expect that it will be passed by the House
during the 96th Congress. The Rules Camnittee has pranised to hold hearings on H.R.
1776, and it is identical to a bill reported in the 94th Congress by the Judiciary
Ccmrnittee to which H.R. 1776 has been jointly referred.
Although the enactment of caprehensive legislation providing for Congres-
sional veto of administrative rules and regulations is my prirrary goal, I believe that
we need to deal with the probleiss each regulatory agency presents as we go along. If
you are out in the wilderness ard in danger of exposure, you can't wait until a house
is built to your specifications. While you are building, you must shelter yourself
and protect yourself whatever way you can. This is the sort of serious danger in
which I see this country slipping because of over-exposure to government regulations,
end we cannot wait until ccxnprehensivé legislation is passed. The separate efforts will
cairpliment the ccmprehensive effort.
I am pleased that you have decided to devote a full day of the hearings on
the PlC re-authorization to the subject of legislative veto of PlC regulations. As you
may recall, when the House considered the second conference report on the PlC Act Amend-
ments last Septerrber, one of the reasons I urged its defeat was that I felt this issue
was so irrportant that it needed to be thoroughly examined and debated without the pres-
sure of passing a conference report in the closing days of the 95th Congress that would
have pet the PlC off limits for the next three years. I am delighted, then, to have
this opportunity to participate on this distinguished panel to discuss this subject.
I would like to point out that my statement does not address the issue of constitu-
tionality of the legislative veto, nor the various forms legislative veto may take
such as one-House, two-House, nradified one-House, or the form that was contained in
47-917 0 - 79 - 10
PAGENO="0146"
142
in the second conference report last year. However, I invite discussion on these
matters, and will be happy to answer any questions.
At the heart of this issue of legislative veto of administrative rules and
regulations is the simple, but serious question: Who rrakes the laws in this country?
Is it the elected representatives of the people, or the unelected bureaucrats?
FIC rules are, in effect, laws. They have the sane force and effect of statu-
tory law. The FIC deals with the sane breadth of econcrnic policy as Congress itself.
The question beccrnes then: Are we going to continue to let unelected bureaucrats
continue to pass laws without effective Congressional control?
The legislative veto mechanion is perhaps nest appropriate when applied to
FIC rules. The FIC has very broad enS awesome powers to write rules and regulations
governing virtually every aspect of the econarrr' and carrnerce in this country. The FIC
derives this broad and awesare rulemaking authority fran one section of the Federal
Trade Carinission Act, Section 5, which states that the FIC has the power to adopt
rules to eliminate "unfair and deceptive trade practices." That is all that it says.
From that point forward, these unebected bureaucrats make law.
On the basis of this authority, the FIC has engaged in rulemaking proceedings
covering such diverse groups as hearing aid manufacturers, funeral hare directors,
doctors and dentists, physical fitness center operators, franchisors, and food
processors, to name a few. The agency has pranulgated rules or is in the process of
proposing rules on balder-in-due-course ccrnmercial notes, used cars sales and television
advertising aimed at children. It has adopted an optical advertising regulation
which essentially repeals laws passed by elected legislatures of forty States -- an
FIC regulation written by unelected bureaucrats which can repeal the laws passed by
duly-elected machers of forty State legislatures.
I cite these examples of FIC proceedings to illustrate the vast scope of the
FIC' s authority. The action of the Fit itself has best derronstrated the breadth of its
power to the public and the need for a Congressional veto to control it.
I am not quarreling here with the outenre of each of these rulemaking pro-
ceedings. Sane of the regulations may be good, and others are surely bad. I an
arguing for accountability. The FtC can prarrilgate far-ranging regulations which
have the force and effect of statutory law. Five cczrrnissioners at the FIC can
sake law. I daresay that nest of the Masters of Congress cannot even name the FIC
Camrissioners, yet they are making law, just like Congress. Not one of than,
however, has suffered the inconvenience of running for public office nor are they
accountable for their legislative acts at the polls a year fran next Noverrter.
PAGENO="0147"
143
Of course, Congress has delegated to the FTC the authority to prasilgate
regulations. In giving the FTC the right to engage in such broad rulemaking, Congress
has the responsibility to guarantee that the agency exercises this authority in a re-
sponsible manner. Congressional veto of FTC regulations provides us with an effective
machanism to guarantee that the Cttrrnission s interpretation of what constitutes "unfair
and deceptive trade practices" does not run far afield fran Congress' intent in enacting
the FTC Act.
Not only is the sccpe of the FTC rulemaking authority broad, but it is a so-
called independent agency. The FTC is not an executive branch agency. It does not
"belong" to the President. It is really a creature or an extension of the Congress.
As such, the FTC maintains that it is not subject to control by the President. If
it can object to such simple directives fran the elected President as writing regulations
in plain English, how will it deal with sure controversial Nhite House initiatives
such as cost/benefit analyses.
If the elected President cannot exercise any control over FTC rulemaking, and
Congress cannot exercise any control, the result is that the FTC is a free-wheeling
mini-legislature, not answerable to anyone. In the wards of Judge Lee Loevinger, an
attorney who was an FCC Ccssnissioner himself, the FTC has "all the independence of the
judiciary but with the power, not exercised by the judiciary, to legislate." (I wauld
ask at this time that the entire text of Judge loevinger ` s letter be made part of
the record.)
If that assessment is correct and the FTC is not subject to executive
or Congremsional control, who then is it accountable to?
In our system of governirent, a system of checks and balances, such a situation
should not exist. Sirrply because it has existed in the past does not sean that we
should continue it. Congress, as the creator of the FTC, must take this situation in
hand. Congress, who delegated rulemaking authority to the FTC, must exercise saTe sort
of control over it. Legislative veto of FTC regulations is a way to achieve this.
Since Congress has the authority to delegate rulemaking power to the FTC, it can
delegate less than all that power or it can condition or limit that power by making
it subject to a Congressional veto.
This is nothing new. It has been done before. There are nnirerous statutes
providing for legislative review or executive action. In fact, it is not even radical.
Attorney General Griffin Bell, in a recent speech at the University of Kansas, pro~osed
abolishing the rulemaking authority of all the independent regulatory carmissions.
In carparison, legislative veto is a mild remedy for an overwhelming problem.
PAGENO="0148"
144
Since 1932, approximately 159 different Acts of Congress with 214 separate
provisions mandating saie sort of Congressional approval or disapproval of executive
iirpbeeodtation of those laws, have been passed. Even in the last Congress, President
Carter sigmad into law 38 bills containing Congressional approval or disapproval
provisions or amenthents to such provisions previously enacted. Section 1013 of
Jefferson's Manual for the 95th Congress lists the many laws providing various
procedures whereby Congress has reserved to itself the right to review, by approval
or disapproval, certain actions of the executive branch or independent agencies, and,
in one case, rules of evidence recarrrended by the Supreme Court.
Congressional veto would give us a rreasure of control over the F'IC. Not only
would it serve to guarantee greater accountability to Congress and Congressional intent
in passing the FIC Act, it would also provide a mechanism to make the F1i sure
accountable to individual citizens. If the agency regulators knew that Congress is
ready and willing to review and veto rules, we would find core carefully drafted roles,
as well as core attention being paid to the views of citizens during the camrent period.
The public would be a beneficiary of such a provision. How many times have
you heard fran your constituents that the bureaucracy has gone too far -- that there
must be scsre control over the bureaucracy. This is what legislative veto is all
about. It is your opportunity to say that sarething is being done about controlling
the bureaucracy.
Mr. Caairrran, the House has expressed itself very strongly in favor of
legislative veto of FTC regulations. Hnen the House originally considered the F1i
authorization bill in the 95th Congress, a legislative veto arrendrrent was passed by
a 2 to 1 vote, 272 to 139. On two separate occasions, the House voted to reject the
FTC conference report because it did not contain a legislative veto of FTC regulations.
This first vote was 146 to 255; the second vote was 175 to 214. That two-time
rejection of a conference report constituted unprecedented action by the House.
I have every reason to believe that in the 96th Congress, support for the
legislative veto is even stronger. I also have reason to believe that the Senate
is now ready to look at this proposal core favorably. In light of this, I strongly
urge you to report an FTC re-authorization bill which contains a strong legislative
veto provision. I am sure you are aware of the sentiments which the House has on this
issue and will not work to stymie those sentinrents. Nhatever your personal views
are on this issue, it must be recognized that the House has overwhelmingly expressed
itself on three occasions on this very issus and on this very bill. As a Carmittee
of the House, I am confident that you will give the House the opportunity to do it
again.
I ccrrrreod you, Hr. Cnairrran, for holding these hearings and giving this
issue the attention it deserves.
PAGENO="0149"
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