PAGENO="0001" ~? ~ `:~ 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 ~ )c ~ ~ -~ L s~ób MENT PRINTING OFFICE 47-917 0 WASHINGTON : 1979 ~ (/-~) PAGENO="0002" 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) PAGENO="0003" 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) PAGENO="0004" Iv 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 PAGENO="0005" 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) PAGENO="0006" 2 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:] PAGENO="0007" 3 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 PAGENO="0008" 4 2 1 September 30, 1980; and not to exceed $80,000,000 for the 2 fiscal year ending September 30, 1981.". PAGENO="0009" 5 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 PAGENO="0010" 6 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 PAGENO="0011" 7 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; PAGENO="0012" 8 4 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". PAGENO="0013" 9 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. PAGENO="0014" 10 6 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.". PAGENO="0015" 11 7 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- PAGENO="0016" 12 8 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- PAGENO="0017" 13 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 PAGENO="0018" 14 10 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. PAGENO="0019" 15 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 PAGENO="0020" 16 12 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 PAGENO="0021" 17 13 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. PAGENO="0022" 18 14 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 PAGENO="0023" 19 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 PAGENO="0033" 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 PAGENO="0035" 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 PAGENO="0036" 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 PAGENO="0082" 78 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 PAGENO="0083" 79 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 PAGENO="0084" 80 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 PAGENO="0085" 81 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: PAGENO="0086" 82 -- 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 PAGENO="0087" 83 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. PAGENO="0088" 84 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 PAGENO="0089" 85 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. PAGENO="0090" 86 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. PAGENO="0091" 87 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" 88 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 PAGENO="0093" 89 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--- PAGENO="0094" 90 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" H CD CD S *~ H o ~ ~ cD CD ci, Cs cJQ ci~ -~ C H C - Cs ~d - cIQ -. Cs - CD CD ci, t C ttl C z ~Co c,~tT1 ~cI) cr~Z 0 H C z ~TT7~1T :::~~i P :1 EL ELi *Y ~ F~Yt, cz ~: c I: i'~*y~*~ :?~*4~1 -~ `4 Co a 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 PAGENO="0110" 106 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 PAGENO="0111" 107 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 PAGENO="0112" 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. PAGENO="0115" 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. PAGENO="0118" 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:] PAGENO="0119" 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. PAGENO="0120" 116 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. PAGENO="0121" 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: PAGENO="0122" 118 "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 PAGENO="0124" 120 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. PAGENO="0125" 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:. PAGENO="0126" 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. PAGENO="0127" 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. PAGENO="0132" 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. PAGENO="0135" 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" ~jo 22 20 ~