Telemarketing Sales Rule

SUMMARY: The Federal Trade Commission (``Commission'' or ``FTC'')

issues its Statement of Basis and Purpose and Final Rule pursuant to

the telemarketing and Consumer Fraud and Abuse Prevention Act

(``Telemarketing Act'' or the ``Act''). Section 3 of the Act directs

the FTC to prescribe regulations, within 365 days of enactment of the

Act, prohibiting deceptive and abusive telemarketing acts or practices.

EFFECTIVE DATE: The Rule will become effective December 31, 1995.

ADDRESSES: Requests for copies of the Rule and the Statement of Basis

and Purpose should be sent to Public Reference Branch, Room 130,

Federal Trade Commission, 6th Street and Pennsylvania Avenue, NW.,

Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Division of Marketing Practices:

Judith M. Nixon (202) 326-3173, David M. Torok (202) 326-3140, or

Carole I. Danielson (202) 326-3115, Federal Trade Commission,

Washington, DC 20580.

SUPPLEMENTARY INFORMATION: The Rule, in connection with any

telemarketing transaction: (1) Requires clear and conspicuous

disclosures of specified material information, orally or in writing,

before a customer pays for goods or services offered; (2) prohibits

misrepresenting, directly or by implication, specified material

information relating to the goods or services that are the subject of a

sales offer, as well as any other material aspects of a telemarketing

transaction; (3) requires express verifiable authorization before

submitting for payment a check, draft, or other form of negotiable

paper drawn on a person's account; (4) prohibits false or misleading

statements to induce payment for goods or services; (5) prohibits any

person from assisting and facilitating certain deceptive or abusive

telemarketing acts or practices; (6) prohibits credit card laundering;

(7) prohibits specified abusive acts or practices; (8) imposes calling

time restrictions; (9) requires specified information to be disclosed,

truthfully, promptly, and in a clear and conspicuous manner, in an

outbound telephone call; (10) requires that specified records be kept;

and (11) specifies certain acts or practices that are exempt from the

Rule.

Statement of Basis and Purpose

I. Introduction

On August 16, 1994, the President signed into law the Telemarketing

Act,1 which directs the Commission to prescribe regulations,

within 365 days of enactment of the Act, prohibiting deceptive and

abusive telemarketing acts or practices. The first step in meeting the

Congressional directive was to publish a Notice of Proposed Rulemaking

(``NPR'') in the Federal Register.2 The provisions of the

initially proposed Rule published in the NPR were based on the

legislative history of the Telemarketing Act,3 on the Commission's

enforcement experience, and on information informally obtained from law

enforcement and the telemarketing industry. The NPR gave interested

persons 45 days to comment on the proposal. The comment period on the

NPR closed on March 31, 1995. In response to the NPR, the Commission

received over 350 comments from industry, law enforcement, consumer

representatives, individual consumers, and businesses.4

\1\ 15 U.S.C. 6101-08.

\2\ 60 FR 8313-8333 (February 14, 1995).

\3\ H.R. Rep. No. 20, 103rd Cong., 1st Sess.; S. Rep. No. 80,

103rd Cong., 1st Sess. (hereinafter referred to as ``House Report''

and ``Senate Report,'' respectively).

\4\ A list of the commenters to both the NPR and the Revised

Notice of Proposed Rulemaking (``RNPRM''), including the acronyms

used to identify each commenter in this Statement, is attached as an

Appendix.

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From April 18 through 20, 1995, Commission staff conducted a public

workshop conference in Chicago, Illinois, to discuss the issues raised

in the NPR and the comments received in response to the NPR. Twenty

associations or individual businesses were selected to engage in a

roundtable discussion at the conference.5 These participants were

selected based upon (1) their interest in the rulemaking based on the

likely effect the Rule ultimately will have on them or their members,

and (2) their ability to represent others with similar interests.

Participants discussed key aspects of the initially proposed Rule,

addressed each other's comments and questions, and responded to

questions from Commission staff. The conference was open to the public,

and more than 150 observers attended. Time was reserved for oral

comments from members of the public each day, and 37 persons spoke

during the course of the three-day conference. The entire proceeding

was transcribed, and the transcript was placed on the public

record.6

\5\ The selected participants were: AARP, ATA, ATFA, APAC, ANA,

DMA, DSA - Nev., DSA, EMA, ISA, ICTA, MPA, Monex, NAAG, NACAA, NAPA,

NCL, NRF, PMAA, and USPS.

\6\ References to the conference transcript are cited as ``Tr.''

followed by the appropriate page designation. References to comments

are cited as ``[acronym of commenter] at [page number].'' Unless

otherwise indicated, all comment references in this Statement are to

the comments received in response to the RNPRM.

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On May 3, 1995, in an open meeting, Commission staff briefed all

the Commissioners about the rulemaking process, the issues raised in

the written comments and the public workshop conference, and outlined

possible approaches to address the issues commenters raised. The

briefing was transcribed, and the transcript was placed on the public

record.

On June 8, 1995, the Commission published in the Federal Register a

Revised Notice of Proposed Rulemaking (``RNPRM'') 7 for additional

public comment. The revised proposed Rule published in the RNPRM

reflected continued consideration of the Act's legislative history, the

written comments received in response to the NPR, and information

learned at the workshop conference. The public comment period on the

RNPRM closed on June 30, 1995. The Commission received over 350

comments to the RNPRM from interested parties, including industry, law

enforcement, consumer representatives, individual consumers, and

businesses.

\7\ 60 FR 30406-30428 (June 8, 1995).

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Individual consumers who commented favored restricting

telemarketing; some even urged the Commission to prohibit telemarketing

completely. Industry and business comments were generally positive

about the revised proposed Rule. Law enforcement and consumer groups,

however, expressed concern that many of the provisions in the initially

proposed Rule, which, they asserted, provided consumers with much

needed protection, had been eliminated from the revised proposed Rule.

The entire public record to date, including the comments, the

public workshop conference transcript, and the Commission open meeting

transcript is available on CD-ROM. In addition, the public record up

to, but not including the RNPRM and the comments received in response

to the RNPRM, was placed on the Internet.8

\8\ The FTC gopher server address is CONSUMER.FTC.GOV 2416. For

World Wide Web access, the URL is GOPHER://CONSUMER.FTC.GOV:2416.

[[Page 43843]]

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II. Discussion of the Rule

A. Section 310.1: Scope of the Regulations

Section 310.1 of the Final Rule states that this part implements

the Telemarketing Act.

The Commission received a number of comments on the initially

proposed Rule asking that the Commission expressly exempt those

entities that are not subject to the Federal Trade Commission Act

(``FTC Act''), 15 U.S.C. 41 et seq.9 In response to those

comments, the revised proposed Rule added language to this Section that

was intended to clarify that the Rule does not apply to any activity

outside the jurisdiction of the FTC Act. In that regard, the Commission

quoted the Telemarketing Act as follows:

\9\ See, e.g., initial comments: GHAA at 3; AT&T at 6-13; AmEx

at 3; ABA at 1; BOB at 1; ASAE at 2; SCIC at 7.

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[N]o activity which is outside the jurisdiction of (the FTC) Act

shall be affected by this Act.10

\10\ 15 U.S.C. 6105(a).

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After reviewing the record in this rulemaking, the Commission has

decided to delete the additional language from the Final Rule. The

Telemarketing Act makes clear that the Rule does not apply to any

activity excluded from the Commission's jurisdiction; thus, restating

this in the Rule is unnecessary. By deleting this language, the

Commission does not intend to expand or contract its jurisdiction or

the scope of the Rule's coverage. The Commission's jurisdictional

limitations are set forth in section 5(a)(2) of the FTC Act; 11

accordingly, the Rule does not apply to:

\11\ 15 U.S.C. 45(a)(2).

banks, savings and loan institutions described in section

18(f)(3), 12 Federal credit unions described in section

18(f)(4), 13 common carriers subject to the Acts to regulate

commerce, air carriers and foreign air carriers subject to the

Federal Aviation Act of 1958, and persons, partnerships, or

corporations insofar as they are subject to the Packers and

Stockyards Act, 1921, as amended, except as provided in section

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406(b) of said Act.14

\12\ Section 18(f)(3) of the FTC Act, 15 U.S.C. 57(f)(3),

describes ``savings associations as defined in section 3 of the

Federal Deposit Insurance Act,'' 12 U.S.C. 1811 et seq.

\13\ Section 18(f)(4) of the FTC Act, 15 U.S.C. 57(f)(4),

describes ``Federal credit unions under sections 120 and 206 of the

Federal Credit Union Act (12 U.S.C. 1766 and 1786).''

\14\ 15 U.S.C. 45(a)(2).

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In addition, the Rule does not apply to any entity that is not

``organized to carry on business for its own profit or that of its

members.'' 15 Finally, the Rule does not apply to the business of

insurance to the extent that such business is regulated by State

law.16

\15\ See 15 U.S.C. 44.

\16\ See Section 2 of the McCarran-Ferguson Act, 15 U.S.C.

1012(b).

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Other commenters 17 requested that the Final Rule expressly

exclude from coverage those investment entities which were expressly

excluded under the Telemarketing Act.18 Again, the Telemarketing

Act clearly excludes such entities and the Rule need not reiterate the

statutory exclusion.

\17\ See, e.g., CUNA at 3-4.

\18\ As noted in the RNPRM, Sections 3 (d) and (e) of the

Telemarketing Act, 15 U.S.C. 6102 (d) and (e), exclude from Rule

coverage any of the following persons: a broker, dealer, transfer

agent, municipal securities dealer, municipal securities broker,

government securities broker, government securities dealer (as those

terms are defined in Section 3(a) of the Securities and Exchange Act

of 1934, 15 U.S.C. 78c(a)), an investment adviser (as that term is

defined in Section 202(a)(11) of the Investment Advisers Act of

1940, 15 U.S.C. 80b-2(a)(11)), an investment company [as that term

is defined in section 3(a) of the Investment Company Act of 1940, 15

U.S.C. 80a-3(a)), any individual associated with those persons, or

any persons described in section 6(f)(1) of the Commodity Exchange

Act, 7 U.S.C. 8, 9, 15, 13b, 9a.

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The Commission also received comments expressing differing views on

whether parties acting on behalf of organizations exempt under section

5 of the FTC Act should be expressly exempt from the Rule. Some

commenters urged the Commission to exclude agents of exempt

organizations from Rule coverage.19 The Commission does not see a

need to provide broadly for the exemption of agents in the Rule. The

FTC Act itself establishes exemptions from its coverage, and the

Telemarketing Act provides that authority under the Rule may be no

broader than under the FTC Act. Thus, for example, banks and airlines

would not be subject to the Final Rule, because they are exempt under

section 5 of the FTC Act.20 Similarly, section 4 of the FTC Act

exempts corporations that are not acting for their profit or that of

their members.21 However, a nonbank company that contracts with a

bank to provide services on behalf of the bank, and a non-airline

company that contracts with an airline to provide services on behalf of

the airline, are not exempt from the FTC Act.22 Similarly, a

company that is acting for profit would be subject to the FTC Act even

when providing services to a nonprofit corporation. The Commission is

not aware of any reason why the Final Rule should create a special

exemption for such companies where the FTC Act does not do so.

Accordingly, the Final Rule does not include special provisions

regarding exemptions of parties acting on behalf of exempt

organizations; where such a company would be subject to the FTC Act, it

would be subject to the Final Rule as well.

\19\ See, e.g., Chase at 1; AT&T at 5-6; BOA at 1; IBAA at 1;

Consortium at 2; ATFA at 3. See, e.g., initial comments: ABA at 1;

Advanta at 1; Chase at 2; Citicorp at 3; NFN at 2.

\20\ 15 U.S.C. 45(a)(2); FTC v. Miller, 549 F.2d 452 (7th Cir.

1977).

\21\ 15 U.S.C. 44; Community Blood Bank v. FTC, 405 F.2d 1011

(8th Cir. 1969).

\22\ See, e.g., Official Airlines Guides, Inc. v. FTC, 630 F.2d

920 (2d Cir. 1980); FTC v. Miller, 549 F.2d 452 (7th Cir. 1977).

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B. Section 310.2: Definitions

The revised proposed Rule defined the following terms:

``acquirer,'' ``attorney general,'' ``cardholder,'' ``Commission,''

``credit,'' ``credit card,'' ``credit card sales draft,'' ``credit card

system,'' ``customer,'' ``investment opportunity,'' ``material,''

``merchant,'' ``merchant agreement,'' ``outbound telephone call,''

``person,'' ``prize,'' ``prize promotion,'' ``seller,'' ``state,''

``telemarketer,'' and ``telemarketing.'' Only the terms ``investment

opportunity,'' ``material,'' ``seller,'' and ``telemarketing'' elicited

much comment. Additionally, some commenters called for a definition of

the term ``clear and conspicuous,'' as that term is used in Sections

310.3(a)(1) and 310.4(d) of the revised proposed Rule.

In the Final Rule, the Commission has modified the definitions of

``investment opportunity'' and ``seller.'' All other definitions have

been adopted in the Final Rule without change from the revised proposed

Rule. The Commission also has determined that the term

``telemarketing'' needs no further modification.

The Commission considered, but rejects, comments calling for a

further definition of the phrase ``clear and conspicuous.'' 23 The

Commission believes it is unnecessary to define the term ``clear and

conspicuous'' in the Rule because the concept is well-developed in

Commission case law and policy statements.24 Moreover, the

Commission believes that mandating rigid ``clear and conspicuous''

criteria would be inconsistent with the goal of allowing businesses

maximum flexibility as long as customers receive

[[Page 43844]]

the material information they need to make purchasing decisions.

\23\ AARP at 12; CFA at 5-6; NCL at 12-13; USPS at 8.

\24\ See, e.g., Thompson Medical Co., 104 F.T.C. 648, 797-98

(1984); The Kroger Co., 98 F.T.C. 639, 760 (1981); Statement of

Enforcement Policy, ``Clear and Conspicuous Disclosures in

Television Advertising,'' Trade Regulation Reporter (CCH) para.

7569.09 (Oct. 21, 1970); Statement of Enforcement Policy,

``Requirements Concerning Clear and Conspicuous Disclosures in

Foreign Language Advertising and Sales Materials,'' 16 CFR 14.9.

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1. Section 310.2(u): Definition of ``Telemarketing''

The definition of ``telemarketing'' sets the parameters of the

Final Rule. The definition in the Final Rule reflects the statutory

definition set forth by Congress in section 7(4) of the Telemarketing

Act.25

\25\ 15 U.S.C. 6106(4).

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Some commenters requested that the Commission exempt calls made by

consumers in response to written advertisements and promotional

materials sent by financial institutions or their agents that comply

with the disclosure requirements in the Truth in Lending Act

(``TILA''), 15 U.S.C. 1601 et seq., and its implementing Regulation Z

(``Reg. Z''), 12 CFR part 226.26 The Commission has determined

that such a broad exemption is inappropriate. The TILA and Reg. Z

disclosures for credit and charge card solicitations, 15 U.S.C. 1631-

1632; 12 CFR 226.5-226.5a, relate to specific costs and terms of

credit, but do not contain many of the other protections that would be

available to consumers under Secs. 310.3 and 310.4 of this Rule. The

Commission acknowledges, however, that certain credit disclosures

required under sections 1631-1632 of the TILA and Secs. 226.5-226.5a of

Reg. Z are sufficient for compliance with some of the Final Rule's

affirmative disclosures set forth in Sec. 310.3(a)(1). Therefore, the

Final Rule makes clear that compliance with the TILA and Reg. Z will

suffice for purposes of compliance with Sec. 310.3(a)(1)(i) of the

Rule.

\26\ See, e.g., Chase at 2.

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The Commission intends that the phrase ``goods or services''

contained in the definition of ``telemarketing'' cover any tangible and

intangible goods or services including, but not limited to, leases,

licenses, or memberships. Prizes and awards are also included as

``goods or services'' under the definition of ``telemarketing.'' This

is consistent with the legislative history of the Telemarketing Act

27 and reflects the Commission's enforcement experience in this

area.

\27\ See House Report at 11; Senate Report at 8.

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The Telemarketing Act and the Final Rule exempt from the definition

of telemarketing all solicitations of sales through the mailing of a

catalog,28 when the person making the solicitation does not call

customers but only receives calls from customers in response to the

catalog and only takes orders during those calls, without further

solicitation. The Commission has determined that the term ``without

further solicitation'' requires interpretation. Applied literally, the

term could bar conduct that would not be deceptive or abusive,

including asking catalog customers who have placed orders whether they

wish to buy another item. There is no reason to suppose that Congress

intended such a result. The Final Rule permits that, when catalog

sellers receive calls from customers, the person taking the order may

provide further information to the customer about, or may try to sell,

any other item included in the same catalog which prompted the

customer's call, or in a substantially similar catalog, without losing

the exemption from the definition of ``telemarketing.'' The

Commission's experience in the area of catalog sales suggests that this

clarification will burden neither legitimate catalog sellers nor expose

their customers to a significant risk of the type of deception or abuse

that the Final Rule is intended to address.

\28\ The Telemarketing Act and the Final Rule require catalogs

to include multiple pages of written descriptions or illustrations

of the goods or services being offered for sale, to include a

business address of the seller, and to be issued not less frequently

than once a year.

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2. Section 310.2(j): Definition of ``Investment Opportunity''

Section 310.2(j) of the Final Rule defines ``investment

opportunity'' as anything, ``tangible or intangible, that is offered,

offered for sale, sold, or traded based wholly or in part on

representations, either expressed or implied, about past, present, or

future income, profit, or appreciation.'' The RNPRM clarified that the

definition of the term ``investment opportunity'' did not include sales

of franchises subject to the Commission's Franchise Rule, 16 CFR part

436. To clarify further that the Rule does not cover such franchise

sales, the Commission has deleted that language from the Final Rule's

definition of ``investment opportunity'' and has created an express

exemption for such transactions in Sec. 310.6(b).

3. Sections 310.2(r) and (t): Definitions of ``Seller'' and

``Telemarketer''

In response to a suggestion from a commenter,29 the Commission

has modified the definition of ``seller'' to clarify that the term

includes not only persons who, in connection with a telemarketing

transaction, provide or offer to provide goods and services to the

customer in exchange for consideration, but also persons who, in

connection with a telemarketing transaction, arrange for others to

provide goods or services to the customer. The Commission made this

change in order to clarify that the Rule's coverage cannot be avoided

by structuring a sale so that someone other than the seller actually

provides the goods or services directly to the customer.

\29\ NASAA at 1.

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Another commenter requested clarification of the definition of

``seller'' with respect to its application to diversified companies or

divisions within one parent organization.30 The Commission intends

that distinct corporate divisions may be considered separate

``sellers.'' The determination as to whether distinct divisions of a

single corporate organization will be treated as separate sellers will

depend on such factors as: (1) whether there exists substantial

diversity between the operational structure of the corporate

organization and the division that is selling the goods or services

that are the subject of the offer, or between that division and the

other divisions of the corporation; or (2) whether the nature or type

of goods or services offered by the division are substantially

different from those offered by other divisions of the corporation or

the corporate organization as a whole.

\30\ Rollins at 1-2.

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Section 310.2(t) of the Final Rule defines ``telemarketer'' as

``any person who, in connection with telemarketing, initiates or

receives telephone calls to or from a customer.'' The Commission

intends that the term ``telemarketer'' apply to persons making a

telephone call to, or receiving a telephone call from, a customer in

connection with the purchase of goods or services.31 It does not

include persons making or receiving customer service calls or similar

tangential telephone contacts, unless a sales offer is made or accepted

during such calls.

\31\ As previously stated in discussing the definition of

``telemarketing,'' the Commission intends that a ``prize,'' as that

term is defined in Sec. 310.2(p), is a good or service for purposes

of this Rule.

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One commenter asserted that sellers and telemarketers should be

held jointly liable under the Rule for the actions of the other.32

NYSCPB stated that, absent legislative history indicating that joint

and several liability is contrary to the intent of Congress, the

Commission should apply joint and several liability.33 NYSCPB

pointed out that in many instances a telemarketer engaging in fraud may

abscond before law enforcers can move against it. NYSCPB expressed

concern that, in such cases, State law enforcers might not be able to

move against others involved in the

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deceptive telemarketing scheme who remain within their reach.

\32\ NYSCPB at 3-4.

\33\ Id.

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The Commission declines to read joint and several liability for

sellers and telemarketers into the Telemarketing Act. The assisting and

facilitating provisions in Sec. 310.3(b) of the Rule more appropriately

provide a basis for an action by State enforcers in the situation

described by NYSCPB.

4. Sections 310.2 (a), (c), (e), (f), (g), (h), (l), and (m): Credit-

Related Definitions

The revised proposed Rule defined various credit-related terms that

come into play primarily in Sec. 310.3(c), which addresses credit card

laundering. These terms are: ``Acquirer,'' ``cardholder,'' ``credit,''

``credit card,'' ``credit card sales draft,'' ``credit card system,''

``merchant,'' and ``merchant agreement.'' The Commission has adopted

these definitions without change in the Final Rule. No further

discussion is necessary in this Statement regarding the definitions of

``acquirer,'' ``cardholder,'' ``merchant,'' and ``merchant agreement.''

Section 310.2(e) defines ``credit'' to mean ``the right granted by

a creditor to a debtor to defer payment of debt or to incur debt and

defer its payment.'' This definition delineates the scope of

Sec. 310.3(c), which prohibits credit card laundering. Several

commenters urged the Commission to extend the scope of Sec. 310.3(c) to

include other payment devices such as debit cards because they believe

such devices can be laundered as easily as credit card

transactions.34 Based on the language of the Telemarketing Act

35 and its legislative history,36 however, the Commission

believes that Congress meant to prohibit credit card laundering

predicated upon the definition of ``credit'' used throughout the

consumer credit statutes, and did not contemplate coverage of all

electronic payment systems. Therefore the definition of ``credit''

tracks the statutory definition of ``credit'' under the TILA.37

\34\ E.g., Citicorp at 2; VISA at 2-4.

\35\ 15 U.S.C. 6102(a)(2).

\36\ See generally House Report at 2; Senate Report at 2, 10.

\37\ 15 U.S.C. 1603(e).

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Section 310.3(f) of the Final Rule defines ``credit card'' as ``any

card, plate, coupon book, or other credit device existing for the

purpose of obtaining money, property, labor, or services on credit.''

This definition is identical to the statutory definition of ``credit

card'' contained in the TILA.38 Again, the Commission has defined

``credit card'' as it is used throughout the consumer credit statutes

for consistency and to clarify that Sec. 310.3(c) does not include

other payment devices.

\38\ 15 U.S.C. 1603(k).

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Section 310.2(g) defines the term ``credit card sales draft'' as

``any record or evidence of a credit card transaction.'' This

definition is designed to be flexible enough to anticipate future

technological changes in how credit card transactions are processed and

handled and, therefore, does not refer to specific forms of records.

This definition is intended to embody the broadest possible range of

recordkeeping formats that will come within the scope of the Rule.

Section 310.2(h) of the Final Rule defines ``credit card system''

as ``any method or procedure used to process credit card transactions

involving credit cards issued or licensed by the operator of that

system.'' This definition does not include any in-house ``system'' that

a seller or telemarketer may put in place. Rather, the Commission

intends that this definition include only a credit card system to

process credit card transactions involving credit cards issued or

licensed by the credit card system operator.

5. Section 310.2(k): Definition of ``Material''

The Final Rule states that the term ``material'' means ``likely to

affect a person's choice of, or conduct regarding, goods or services.''

In the RNPRM, the Commission responded to commenters' requests for

clarification of the term ``material'' by stating that it intended that

term to comport with the Commission's Deception Statement and

established Commission precedent.39 Cliffdale Assocs., 103 F.T.C.

110 (1984); Thompson Medical Co., 104 F.T.C. 648 (1984), aff'd, 791

F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987); and the

Commission's Deception Statement attached as an appendix to Cliffdale

Associates. Nonetheless, several commenters on the revised proposed

Rule requested additional clarification.40 The Commission has

considered these requests, but believes further clarification is

unnecessary given the comprehensive guidance in the cited case law and

policy statement.

\39\ 60 FR at 30410.

\40\ See, e.g., NRF at 5-8; IBM at 11; CC at 1.

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6. Sections 310.2 (p) and (q): Definitions of ``Prize'' and ``Prize

Promotion''

The Final Rule, at Sec. 310.2(p), adopts the revised proposed

Rule's definition of ``prize'' as follows: ``Anything offered, or

purportedly offered, and given, or purportedly given, to a person by

chance.'' Further tracking the revised proposed Rule, the Final Rule

also makes clear that ``chance exists if a person is guaranteed to

receive an item and, at the time of the offer or purported offer, the

telemarketer does not identify the specific item that the person will

receive.'' This ensures that a typical deceptive prize scheme will be

captured in the definition of ``prize.'' In those schemes, consumers

receive a solicitation typically listing four or five items,

guaranteeing that they will receive one of them. Consumers, however,

are not told which specific item they will receive. Because a consumer

is ``guaranteed'' to receive one of the stated items, it could be

construed that there is no element of ``chance'' involved in the offer,

and the item, therefore, is not a ``prize.'' That interpretation is

eliminated by the definition as adopted.

Section 310.2(q) of the Final Rule defines ``prize promotion'' as

either ``(1) a sweepstakes or other game of chance; or (2) an oral or

written express or implied representation that a person has won, has

been selected to receive, or may be eligible to receive a prize or

purported prize.'' This definition makes clear that the representations

about winning may be either express or implied. In this way, the Final

Rule includes in the definition of ``prize promotion'' those deceptive

telemarketing solicitations that are artfully crafted to avoid express

representations while delivering an implied message that a consumer has

won a prize.

7. Sections 310.2 (b), (d), (i), (n), (o), and (s): Other Definitions

The Commission received no comments in response to the RNPRM on the

definitions of ``Attorney General,'' ``Commission,'' ``customer,''

``outbound telephone call,'' ``person,'' or ``State.'' Therefore, these

definitions are adopted unchanged.

C. Section 310.3: Deceptive Telemarketing Acts or Practices

1. Section 310.3(a): Prohibited Deceptive Telemarketing Acts or

Practices

Section 310.3(a) of the Final Rule requires affirmative

disclosures, prohibits misrepresenting material information, requires

express verifiable authorization before submitting for payment a check,

draft, or other form of negotiable paper drawn on a person's account,

and prohibits false or misleading statements to induce payment for

goods or services. In the Final Rule, the Commission has clarified the

applicability of the

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disclosure of ``total cost and quantity'' in transactions involving

credit products. In addition, the Commission has modified the provision

requiring disclosure of refund policies and has included additional

disclosures that are required in connection with prize promotions. The

Commission also has clarified that all required disclosures must be

made before a customer pays for the goods or services that are the

subject of the sales offer. Finally, the Commission has added

requirements for express verifiable authorization for payments.

a. Section 310.3(a)(1): Affirmative Disclosures

Section 310.3(a)(1) requires affirmative disclosure of certain

categories of material information before a customer pays for goods or

services. The Final Rule specifies only that the disclosures be made

``before a customer pays'' and that they be made ``in a clear and

conspicuous manner.'' These disclosures may be made either orally or in

writing.

The timing of the disclosures prompted considerable comment. Two

commenters expressed the view that the revised proposed Rule was

ambiguous regarding when payment occurs in credit card transactions:

Does ``payment'' occur when the customer provides a seller or

telemarketer with his or her credit card information, or when the

customer's credit card account is charged for the goods or services?

41 NCL, for example, expressed concern that telemarketers might

interpret this provision to permit delaying the disclosures until after

the consumer has divulged his or her credit card or bank information

and the funds have been withdrawn or transferred to a merchant credit

card account.42 The Commission intends that the disclosures be

made before the consumer sends funds to a seller or telemarketer or

divulges to a telemarketer or seller credit card or bank account

information. Thus, a telemarketer or seller who fails to provide the

disclosures until the consumer's payment information is in hand

violates the Rule.

\41\ ANA at 4; NCL at 12.

\42\ NCL at 12.

AARP recommended that the Commission require that the disclosures

be made at the time of sale to prevent deceptive telemarketers from

providing the disclosures in a postcard sent to the customer weeks

before making the sales call.43 The Commission intends, by

requiring ``clear and conspicuous'' disclosures, that any outbound

telephone call made after written disclosures have been sent to

consumers must be made sufficiently close in time to enable the

customer to associate the telephone call with the written document.

\43\ AARP at 12. Similarly, CFA suggested that the Rule require

the disclosures be made before a consumer makes a purchasing

decision, rather than before payment is made, in order to ensure

that consumers have all necessary material information before

deciding whether to buy a product or service. CFA at 6-8. The

Commission agrees that consumers should have material information

about the product or service before making their purchasing

decision. However, the Commission believes that ``before a customer

pays'' permits sufficient time for the consumer to consider all of

the material information before making a final decision whether to

purchase and provide payment for the goods or services.

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NAAG expressed a concern that permitting disclosures to be made

``before a customer pays'' will allow important disclosure information

to be delayed until ``after the con artist can so excite and entice the

consumer that, when made, the disclosures become meaningless.'' 44

For example, NAAG stated that under the revised proposed Rule, a seller

or telemarketer could delay making the required disclosures to

consumers until the time that a courier arrives at the customer's door,

ready to pick up payment for the goods or services. The Commission

agrees that such tactics would evade the intent of the Rule that

disclosures be given so as to be meaningful to a customer's purchase

decision. The Commission also recognizes that deceptive telemarketers

use couriers to a large extent and would most likely provide the

required disclosures in the manner described by NAAG. Accordingly, the

Final Rule makes clear, in a footnote to Sec. 310.3(a)(1), that ``when

a seller or telemarketer uses, or directs a customer to use, a courier

to transport payment, the seller or telemarketer must make the

disclosures required by Sec. 310.3(a)(1) before sending a courier to

pick up payment or authorization for payment, or directing a customer

to have a courier pick up payment or authorization for payment.'' All

required disclosures, therefore, must be made before a courier pick-up

of payment or authorization for payment from a customer.45

\44\ NAAG at 10.

\45\ Many law enforcement and consumer representatives urged the

Commission to reinstate, in the Final Rule, the absolute prohibition

on courier pick-ups of customer payments included in the initially

proposed Rule. See, e.g., NAAG at 20; USPS at 5-6; VT AG at 2; IA

DOJ at 11-12; NY DCA at 1; GA OCA at 2; NAPA DA at 1; SD DAG at 2;

MA AG at 4; AARP at 17-21. As stated in the RNPRM, however, the

Commission believes that there is nothing inherently deceptive or

abusive about the use of couriers. In fact, a substantial number of

legitimate businesses use them. See, e.g., initial comments: Monex

at 13-14; DMA at 25; PMAA at 84. While fraudulent telemarketers

often use couriers to obtain quickly the spoils of their deceit,

such telemarketers engage in other acts or practices that clearly

are deceptive or abusive and therefore can be reached through other

provisions of this Rule. Thus, an absolute prohibition of courier

use is outweighed by the undue burden it would impose on legitimate

industry.

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Section 310.3(a)(1)(i) requires disclosure of ``the total costs * *

* and the quantity of, any goods or services that are the subject of

the sales offer.'' In response to numerous comments from

industry,46 the Final Rule, in a footnote to Sec. 310.3(a)(1)(i),

clarifies that, with regard to offers of credit products subject to the

TILA and Reg. Z, compliance with the credit disclosure requirements and

the timing of those disclosures mandated by the TILA and Reg. Z 47

will constitute compliance with the total cost and quantity disclosures

required under Sec. 310.3(a)(1)(i) of the Rule.

\46\ Chase at 2; MBAA at 1; CBA at 2; Citicorp at 3; CUNA at 4;

VISA at 4; NB at 1.

\47\ 15 U.S.C. 1631-1632; 12 CFR 226.5-226.5a.

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Several commenters also pointed out that total cost and quantity is

not ascertainable in those telemarketing sales transactions involving

negative option 48 or continuity plans 49 where the customer

has the option to preview or purchase a series of products over

time.50 Under such plans, separate payments are made for each item

in the series. In addition, the customer controls how many products he

or she accepts and typically can decide to terminate the series at any

time, or after a minimum number of items are purchased. Thus, in both

continuity and negative option plans, neither the seller nor the

customer necessarily knows the quantity of products the customer will

ultimately purchase, or the total cost for those products.

\48\ Under a negative option plan, the customer agrees to

purchase a specific number of items in a specified time period. The

customer receives periodic announcements of the selections; each

announcement describes the selection, which will be sent

automatically and billed to the customer unless the customer tells

the company not to send it. See also the Commission's Rule governing

``Use of Negative Option Plans by Sellers in Commerce,'' 16 CFR part

425.

\49\ ``Continuity plans'' offer subscriptions to collections of

goods. Customers are offered an introductory selection and agree to

receive selections on a regular schedule until they cancel their

subscription. Unlike negative option plans, customers do not agree

to buy a specified number of additional items in a specified time

period, but may cancel their subscription at any time. Continuity

plans resemble negative option plans in that customers are sent

announcements of selections and those selections are shipped

automatically to the customer unless the customer advises the

company not to send it. Unlike negative option plans, however,

customers are not billed for the selection when it is shipped, but

only if they do not return the selection within the time specified

for the free examination period.

\50\ CHC at 2-4; ANA at 4; Time Warner at 3; DMA at 2.

[[Page 43847]]

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The Commission recognizes that a seller or telemarketer may not be

able to provide total cost and quantity information under such

circumstances. Accordingly, in the case of negative option or

continuity plans, the disclosures required under Sec. 310.3(a)(1)(i)

are satisfied if the seller or telemarketer discloses, before a

customer pays for any of the goods or services offered, the total costs

and quantity of goods or services that are part of the initial offer of

the plan, the total quantity of additional goods or services, if any,

that the customer must purchase over the duration of the plan, and the

cost, or range of costs, to purchase each individual additional good or

service.

Section 310.3(a)(1)(ii) requires sellers and telemarketers to

disclose ``all material restrictions, limitations, or conditions to

purchase, receive, or use the goods or services that are the subject of

the sales offer.'' A number of industry commenters expressed concern

that this requirement was ambiguous and asked the Commission to provide

clarification.51 For example, SCIC states that, absent a clear

definition of ``material,'' prudent business practice would require the

disclosure of all terms and conditions, which would not be practical in

connection with the telemarketing of service contracts. The Commission

does not intend that sellers and telemarketers disclose all terms and

conditions, but only those that are material. The Commission believes

that the Final Rule's definition of ``material'' provides sufficient

guidance regarding those factors which must be evaluated in determining

which restrictions, limitations, or conditions must be disclosed.

\51\ See, e.g., BSA at 4-6; ACRA at 5; SCIC at 2.

Section 310.3(a)(1)(iii) requires disclosure of a seller's refund,

cancellation, exchange, or repurchase policies under certain

circumstances. The Final Rule tracks the revised proposed Rule by

requiring disclosure, before the customer pays, of all material terms

and conditions of such policies only if the seller or telemarketer

makes a representation relating to such policies. Section

310.3(a)(1)(iii) also requires a customer to be informed if there is a

policy of not making refunds, cancellations, exchanges, or repurchases.

Many law enforcement and consumer groups urged the Commission to

broaden this provision to require a disclosure of the seller's refund,

cancellation, exchange, or repurchase policies in all telemarketing

transactions.52 These commenters were concerned that this

provision might create an incentive for sellers and telemarketers to

remain silent about their refund policies in order to avoid triggering

the disclosure requirement. Law enforcement and consumer groups

asserted that information regarding these policies is material to the

consumer's purchasing decision, particularly because consumers

generally assume that an unconditional refund is available from sellers

if they are dissatisfied.53

\52\ CFA at 8; USPS at 6; NJ DCA at 2-3; San Diego at 1; NACAA

at 3; NCL at 13.

\53\ For example, NJ DCA pointed out that the New Jersey

Consumer Fraud Act requires retailers to post return policies in

such a fashion that the consumer will be aware of such policies

before they tender their money. N.J. Stat. Ann. 56:82.14 et seq. NJ

DCA at 3.

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Historically, the Commission has not required sellers or

advertisers to disclose material limitations or conditions applicable

to a satisfaction guarantee or similar policy unless a solicitation

mentions such a satisfaction guarantee or policy. The Commission's

longstanding policy on this issue is set forth in the ``Guides for the

Advertising of Warranties and Guarantees,'' which states:

An advertisement that mentions a ``Satisfaction Guarantee'' or a

similar representation should disclose, with such clarity and

prominence as will be noticed and understood by prospective

purchasers, any material limitations or conditions that apply to the

``Satisfaction Guarantee'' or similar representation.54

\54\ 16 CFR 239.3(b).

Therefore, the Commission has retained in the Final Rule the

requirement that all material terms and conditions of such policies be

disclosed only if the seller or telemarketer makes a representation

relating to a refund, cancellation, exchange, or repurchase

policy.55 Industry pointed out that many companies have a variety

of refund, cancellation, exchange and repurchase policies, only some of

which are referred to in advertising. The Commission does not intend

that the seller or telemarketer disclose all of a seller's possible

policies, but only the policies that relate to the specific goods or

services that are the subject of the sales offer.

\55\ A seller or telemarketer ``makes a representation about a

refund, cancellation, exchange or repurchase policy'' if the seller

or telemarketer introduces this subject or discusses it in response

to a customer's inquiry about such policies. If asked, the seller or

telemarketer must disclose the material terms or conditions of its

policy.

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AARP suggested that, at a minimum, the Rule should require an

affirmative disclosure if no refunds, exchanges, or cancellations are

available.56 AARP pointed out that this information is

particularly important in the context of telemarketing sales because of

the lack of direct contact between the seller and the consumer and

because the consumer has no opportunity to examine the goods or

services offered at the time of sale.57 The Commission agrees that

consumers may be misled if a seller fails, in a telemarketing

transaction, to disclose that the sale is final. Therefore, the

Commission has modified Sec. 310.3(a)(1)(iii) of the Final Rule to

require that the customer be informed if there is a policy of not

making refunds, cancellations, exchanges, or repurchases.

\56\ AARP at 12-13.

\57\ See also NM AG at 4.

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Finally, Sec. 310.3(a)(1) (iv) and (v) require a seller or

telemarketer to disclose certain information in connection with prize

promotions. Under the revised proposed Rule, sellers who offered a

prize promotion were required to disclose only that no purchase was

necessary to win. Law enforcement and consumer groups strongly urged

the Commission to require disclosure of additional items of information

to consumers.58 They noted that deceptive prize promotions give

rise to a large number of complaints, that they generate a very large

amount of consumer injury, and that many State laws already require

affirmative disclosure of more information than the revised proposed

Rule required, including the odds of winning, the no-purchase method of

entering, and the value of prizes. These commenters also noted that

such State laws have provided law enforcement with a valuable tool in

reaching deceptive prize promotions. In addition, several of these

commenters noted that the disclosure ``no purchase is necessary'' is

meaningless without requiring that the seller or telemarketer disclose

the method for entering without a purchase.59 Finally, USPS noted

that the required disclosure should include, in addition to ``no

purchase is necessary,'' that ``no payment is necessary'' to enter a

prize promotion or to win a prize. According to USPS, such a disclosure

will cover those scams where the seller or telemarketer will not ask

the customer to purchase goods or services in connection with the prize

promotion, but instead will ask for some type of

[[Page 43848]]

payment in order to enter or win a prize.60

\58\ See, e.g., NJ DCA at 3; NACAA at 3; NCL at 13; USPS at 7;

NAAG at 14-15; IA DOJ at 14-15.

\59\ See, e.g., USPS at 7; NAAG at 15.

\60\ USPS at 2.

The Commission's law enforcement experience is replete with

examples of sellers and telemarketers using deceptive prize promotions

to ``hook'' unsuspecting victims. Upon consideration of these comments,

the Commission is persuaded that additional disclosures are needed to

ensure that consumers are not misled by the promise of a prize or

award. The Commission agrees that disclosure of the no-purchase/no-

payment method of entry would serve to emphasize the message that no

purchase or payment is necessary in order to participate in a prize

promotion or to win a prize. If that disclosure were absent, the fact

that no purchase or payment is necessary could more easily become

``lost'' in a sales pitch or promotional piece. The Commission is

mindful, however, of the burden of making extensive disclosures and has

attempted to provide industry with flexibility in making this

disclosure to consumers. Therefore, for all telemarketing of prize

promotions, the Final Rule requires, in addition to a statement that no

purchase or payment is necessary to win, that sellers and telemarketers

also disclose the no-purchase or no-payment method of entering the

prize promotion by either providing full instructions on how to

participate or by providing an address or local or toll-free telephone

number that a customer may contact to obtain details.

The Commission is also persuaded that consumers should be made

aware of the odds of being able to receive a specific prize. A truthful

statement of the odds of receiving a prize helps to dispel the illusion

that the consumer has been ``specially selected'' or is ``guaranteed''

to receive a particular prize. A statement of the odds also provides

some indication of the value of each prize, since it is likely that the

most valuable prizes would be awarded to the fewest people and the

least valuable prizes would go to the most people. The Commission

recognizes that in some prize promotions, sellers and telemarketers may

not be able to calculate the odds in advance. Therefore, the Final Rule

requires that the seller or telemarketer disclose the odds of being

able to receive a prize, and if the odds are not calculable in advance,

they must disclose the factors used in calculating the odds, such as a

truthful statement that the odds depend on the number of entries

received.

Finally, the Commission's enforcement history includes numerous

examples of prizes whose value has been limited by the additional costs

or conditions that were necessary to receive or redeem the prize. For

example, these ``prizes'' included vacation certificates that required

consumers to spend substantial amounts of money on airfare or other

expenses, or that had extensive restrictions on use. Therefore, in

Sec. 310.4(a)(1)(v), the Final Rule requires that the seller or

telemarketer disclose all material costs or conditions to receive or

redeem a prize.61

\61\ Although legitimate awards, prizes, and prize promotions do

not require a person to make a payment or purchase to enter a prize

promotion or to win, there are instances when a person may be

required to pay certain fees to receive or redeem a prize or award

that they have already won.

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Several commenters urged the Commission to require affirmative

disclosures in connection with investment opportunities.62 The

Commission believes that the affirmative disclosures required under

Sec. 310.3(a)(1) are sufficient to cover the information relating to

the sale of investment opportunities, which if undisclosed would be

deceptive. These include the total costs to purchase, receive, or use

the goods or services, and the material restrictions, limitations, or

conditions to purchase, receive, or use the goods or services. Although

some commenters urged the Commission to include specific affirmative

disclosures relating to investment characteristics such as risk,

profitability, liquidity, and earnings potential, the Commission

declines to do so. Based on the Commission's enforcement experience, it

believes the deception involving disclosure of investment information

relating to risk, profitability, liquidity, or earnings potential can

be addressed under Sec. 310.3(a)(2)(vi) of the Final Rule. Therefore,

the Commission has determined that additional affirmative disclosures

for investment opportunities are unnecessary.

\62\ See, e.g., CFA at 9; MA AG at 4; NJ DCA at 3.

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b. Section 310.3(a)(2): Prohibited Misrepresentations

Section 310.3(a)(2) prohibits misrepresentations of several

categories of material information. The information deemed material

under Sec. 310.3(a)(2) is based on established case law and the

Commission's policy statement on deception.63 Several commenters

urged the Commission to reinstate the list of specific prohibited

practices that was contained in Sec. 310.3(a)(2) of the initially

proposed Rule.64 Each of these prohibited misrepresentations was

based on allegations in complaints filed in recent years by the

Commission under section 13(b) of the FTC Act.65 These commenters

asserted that such a list provided the type of ``bright line'' guidance

to industry, law enforcement, and consumers that Congress had directed

the FTC to provide in the Rule. They also believed that the revised

proposed Rule did not address several of the specific

misrepresentations included in the initially proposed Rule and deleted

in the revised proposed Rule, such as misrepresenting the non-profit or

charitable status of a seller or telemarketer, or the purpose for which

the seller or telemarketer will use a person's checking, savings,

share, or similar account number, credit card account number, social

security number, or related information.

\63\ The Commission's Deception Statement, first set out in a

letter to the Honorable John D. Dingell, Chairman, Subcommittee on

Oversight and Investigations, Committee on Energy and Commerce, is

attached as an appendix to Cliffdale Associates, 103 F.T.C. 110

(1984).

\64\ See, e.g., NACAA at 3-4; NJ DCA at 4; USPS at 2; GA OCA at

2; MA AG at 3; SC DCA at 2-3.

\65\ 15 U.S.C. 53(b).

The Commission has determined that it is unnecessary to enumerate

the specific prohibited misrepresentations set forth in the initially

proposed Rule. The enumerated misrepresentations in the initially

proposed Rule are subsumed in the general prohibitions against

misrepresentations set forth in Sec. 310.3(a)(2) of the Final Rule. No

inference should be drawn that these omissions from the Final Rule in

any way alter the Commission's view that the misrepresentations set

forth in Sec. 310.3(a)(2) of the initially proposed Rule would violate

the FTC Act as well as the Final Rule. The Commission believes that

this more concise regulatory approach effectuates Congress's

legislative intent. The Commission also believes that broad

prohibitions will give law enforcement agencies the necessary

flexibility to adapt to the changes that the deceptive telemarketing

industry will undergo as a result of increased regulation.

Although some commenters requested that additional prohibited

misrepresentations be included under Sec. 310.3(a)(2),66 few

commenters raised concerns about or requested changes in the language

of Sec. 310.3(a)(2) as it appeared in the RNPRM. As a result,

Secs. 310.3(a)(2)(i)-(iv), (vi), and (vii) are adopted as set forth in

the RNPRM. Sections 310.3(a)(2)(i)-(ii) prohibit misrepresenting

certain information required to be disclosed under

[[Page 43849]]

Sec. Sec. 310.3(a)(1)(i) and (ii): total costs, quantity, and material

restrictions, limitations, or conditions. Section 310.3(a)(2)(iii)

specifies that a misrepresentation of ``any material aspect of the

performance, efficacy, nature, or central characteristics of goods or

services that are the subject of the sales offer'' violates the Rule.

Commission case law and policy are clear that such information is

likely to affect a person's choice of, or conduct regarding, the

purchase of goods or services. Similarly, representations about a

seller's refund, cancellation, exchange, or repurchase policies are

likely to affect a person's purchase decision. Section 310.3(a)(2)(iv),

therefore, prohibits misrepresenting information regarding the material

aspects of these policies.

\66\ See, e.g., USPS at 1-3; GA OCA at 2; AARP at 13-14; NACAA

at 4; MA AG at 4; CFA at 9; NJ DCA at 3.

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Section 310.3(a)(2)(v) of the Final Rule prohibits misrepresenting

``any material aspect of a prize promotion, including but not limited

to, the odds of being able to receive a prize, the nature or value of a

prize, or that a purchase or payment is required to win a prize or

participate in a prize promotion.'' This provision is adopted in

substantially the same form as it appeared in the revised proposed

Rule. The provision enumerates specific examples of material aspects of

a prize promotion that are frequently misrepresented by deceptive

telemarketers. The Commission has targeted misrepresentation of these

aspects of prize promotions in a number of complaints filed against

deceptive telemarketers under section 13(b) of the FTC Act.67 The

Commission believes that a separate Rule provision is needed

specifically prohibiting misrepresentations regarding prize promotions,

given the great number of deceptive prize promotions and the distinct

characteristics associated with such promotions.68 The legislative

history clearly shows that Congress specifically intended that the Rule

cover prizes or awards.69 The Commission intends that the

telemarketing of prize promotions is not only subject to the

prohibitions in Sec. 310.3(a)(2)(v), but also to the other prohibitions

against misrepresentations set forth in Sec. 310.3(a)(2).

\67\ 15 U.S.C. 53(b).

\68\ Almost 32% of the 141 telemarketing cases brought by the

Commission since 1991 related to deceptive prize promotions.

\69\ See Senate Report at 2, 8.

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Although supportive of treating prize promotions separately in this

Section, several commenters urged the Commission to expand the list of

specific aspects relating to prize promotions that sellers or

telemarketers may not misrepresent, especially that a person has been

specially selected to receive a prize or that a premium is a

prize.70 The Commission believes that the current list of specific

aspects adequately covers those concerns. As discussed in connection

with the affirmative disclosures for prize promotions, supra, a

truthful statement of the odds of receiving a prize should help dispel

the illusion that the consumer has been ``specially selected'' or is

``guaranteed'' to receive a particular prize. Furthermore, a principal

distinction between a ``premium'' and a ``prize'' is that while

premiums are given only in connection with the purchase of goods or

services, no such purchase is required to receive a prize. Therefore,

the prohibition against misrepresenting that purchase or payment is

required to receive a prize should also cover misrepresenting that a

premium is a prize. Finally, the Commission's use of the language

``including but not limited to'' is intended to indicate that the list

of material aspects of a prize promotion is illustrative, but should

not be considered exhaustive. Misrepresentations of other material

aspects of a prize promotion not listed here are also prohibited.

\70\ See, e.g., AARP at 13; NACAA at 4; GA OCA at 2; NJ DCA at

3.

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One minor change in wording has been adopted in

Sec. 310.3(a)(2)(v), namely, the phrase ``the odds of winning'' has

been changed to ``the odds of being able to receive a prize.'' This

wording is intended to be broader and more general, and is based upon

similar usage employed by the Commission in provisions of the Pay-Per-

Call Rule, 16 CFR Part 308, that govern solicitations for 900-number

services involving sweepstakes or games of chance.71 Another minor

change is the addition of the language ``or payment.'' This addition is

consistent with similar language added to Sec. 310.3(a)(1)(v).

\71\ 16 CFR 308.3(c).

Similarly, Sec. 310.3(a)(2)(vi) prohibits misrepresenting material

aspects of an investment opportunity. This Section remains unchanged

from the RNPRM. The legislative history of the Telemarketing Act

reflects Congress' recognition that deceptive investment opportunities

account for a considerable percentage of deceptive

telemarketing.72 In fact, since 1991, deceptive investment scams

account for approximately 43% of the Commission's telemarketing cases.

The amount at risk for a consumer is generally far greater in

investment scams than in deceptive schemes involving other types of

consumer goods or services. Thus, investment opportunities are an area

of heightened concern for consumers and the Commission. The Final Rule

includes Sec. 310.3(a)(2)(vi), prohibiting misrepresentation of

specified material aspects of investment opportunities, including risk,

liquidity, earnings potential, or profitability. This provision is

included to obviate any possible construction that might exclude

investment opportunities from the scope of Secs. 310.3(a)(2)(i)-(iii)--

the general provisions of the Rule that center on purchase, receipt or

use, or upon ``performance, efficacy, nature, or central

characteristics'' of a limitless range of goods and services. The

Commission believes that a separate provision, Sec. 310.3(a)(2)(vi), is

necessary to cover distinct attributes that are material to an

investment decision, such as risk, liquidity, earnings potential, or

profitability. The Commission intends that the telemarketing of

investment opportunities is not only subject to the prohibitions in

Sec. 310.3(a)(2)(vi), but also to the prohibitions contained in other

provisions set forth in Sec. 310.3(a)(2).

\72\ See Senate Report at 8.

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Several commenters urged the Commission to expand the list of

prohibited misrepresentations relating to specific aspects of

investment opportunities to include markup over acquisition costs, past

performance, marketability, and value.73 The Commission's use of

the language ``including but not limited to'' is intended to indicate

that the list of prohibited material aspects of an investment

opportunity that must not be misrepresented is illustrative, not

exhaustive. Misrepresentations of other material aspects of an

investment opportunity not listed are also prohibited.

\73\ See, e.g., CFA at 9; MA AG at 4; NJ DCA at 3.

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Finally, the Commission maintains Sec. 310.3(a)(2)(vii) as it was

proposed in the revised proposed Rule. This section prohibits

misrepresenting ``a seller's or telemarketer's affiliation with, or

endorsement by, any government or third-party organization.'' The

Commission believes that this Section is necessary based on its own

experience in law enforcement actions against deceptive telemarketers,

as well as the information State law enforcement agencies provided.

Deceptive telemarketers often bolster their credibility by

misrepresenting that they are endorsed by, or affiliated with,

charitable, police, civic, or similar organizations. A separate

category is required because these types of

[[Page 43850]]

misrepresentations, again, could be construed as outside the apparent

scope of Secs. 310.3(a)(2)(i)-(iii). However, the prohibition contained

in Sec. 310.3(a)(2)(vii) is in addition to, not in lieu of, the

prohibitions contained in the other provisions under Sec. 310.3(a)(2).

Several commenters asked the Commission to include specific

prohibitions against misrepresenting the non-profit or charitable

status of a seller or telemarketer.74 The Commission intends that

many of these misrepresentations will be covered by the prohibition in

Sec. 310.3(a)(2)(vii) against misrepresenting affiliation or

endorsements.

\74\ See, e.g., NACAA at 4; MA AG at 4.

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Several commenters asked the Commission to include specific

prohibitions against misrepresenting that a seller can improve a

consumer's credit rating, or can recover money lost by a consumer to a

``dishonest'' telemarketer.75 The Commission believes that these

misrepresentations are subsumed under the prohibition in

Sec. 310.3(a)(2)(iii) against misrepresenting any material aspect of

the performance, efficacy, nature, or central characteristics of the

goods or services.

\75\ See, e.g., NACAA at 4; MA AG at 4.

In the initially proposed Rule there was a prohibition, omitted

from the revised proposed Rule, against misrepresenting the purpose for

which the seller or telemarketer will use a person's checking, savings,

share, or similar account number, credit card account number, social

security number, or related information. Several commenters on the

revised proposed Rule urged the Commission to reinstate that

prohibition, noting that it did not appear to be subsumed under the

other prohibitions set out in Sec. 310.3(a)(2).76 The Commission,

however, believes that such misrepresentations are covered under

Sec. 310.3(a)(4), which prohibits a seller or telemarketer from making

a false or misleading statement to induce a person to pay for goods or

services.

\76\ See, e.g., USPS at 2; AARP at 14.

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c. Section 310.3(a)(3): Verifiable Authorization

Section 310.3(a)(3) addresses the use of demand drafts, the

practice of obtaining funds from a person's bank account without that

person's signature on a negotiable instrument. Section 310.3(a)(4) of

the initially proposed Rule required written authorization before a

seller or telemarketer could take any funds from a consumer's checking,

savings, or similar account. This provision was dropped from the

revised proposed Rule because information provided in comments to the

initially proposed Rule and in oral workshop conference presentations

tended to refute the proposition that demand drafts are characteristic

solely of deceptive telemarketers.77

\77\ See generally initial comments: NAPA; Autoscribe; Olan.

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In response to the NPR, the Commission received a number of

comments from members of the automated payment industry--those

companies that prepare demand drafts and submit such drafts to

financial institutions for payment from consumers' bank accounts. These

commenters noted that over 70 million Americans do not have credit

cards.78 Demand drafts can provide a means for those consumers to

enjoy the same benefits of expeditious telephone transactions that use

of a credit card provides.79 Commenters noted that Fortune 500

companies, airlines, car rental companies, insurance companies, and

other businesses characterized by quick turn-around transactions now

use demand drafts because they recognize that not everyone has a credit

card.80 The automated payment industry also pointed out that

requiring express written authorization for a demand draft is

inconsistent with authorization requirements pertaining to an analogous

payment method, electronic funds transfer.81 As commenters noted,

the Electronic Funds Transfer Act (title IX of the Consumer Credit

Protection Act) (``EFTA''), 15 U.S.C. 1601 et seq., and its

implementing Regulation E (``Reg. E''), 12 CFR part 205, permit

authorization of electronic funds transfers by telephone, thereby

permitting oral authorization.82 Commenters asserted that imposing

more rigid authorization standards on the legitimate automated payment

industry, an industry in its formative stages, could unduly hinder its

development, restrain legitimate competition, and deprive consumers of

benefits afforded by this payment method.83

\78\ See initial comments: TCPS at 1; NBR at 1-2. See generally

NAPA 2-4; Tr. at 64.

\79\ NBR stated that in 1994, eighty-five percent of all

consumer transactions were made by cash or check compared to fifteen

percent by credit and debit cards. NBR initial comment at 2. TCPS

similarly noted that nine of the current twenty service bureaus

process approximately 38,000 demand drafts weekly, totalling over

five million dollars for over 700 business clients throughout the

country. TCPS initial comment at 1. Accelerated Payment Systems

stated that it processes half a billion dollars a year through

demand drafts. Tr. at 547.

\80\ See initial comments: TCPS at 1-2; NAPA at 2; Olan at 9.

Examples of businesses that use demand drafts include two of the

baby Bells, GEICO, Citicorp, Telecheck, Equifax, Bank of America,

Discovery Card, Dunn and Bradstreet, and First of America Bank. See

Tr. at 547, 550-51.

\81\ See initial comments: ATA at 6; Olan at 10; DMA at 21-22.

\82\ 12 CFR 205(g).

\83\ See Tr. at 544-49 (Accelerated Payment Systems), 557-58

(TCPS), 578-80 (Check-Debit). See also initial comments: NAPA at 7-

9; Olan at 10.

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In dropping the written authorization from the revised proposed

Rule, the Commission noted in the RNPRM that the prohibition on any

false or misleading statements to induce a person to pay for goods or

services would address problems in this area.84 In their comments

on the revised proposed Rule, however, law enforcement and consumer

groups strongly urged the Commission to reinstate restrictions on the

use of demand drafts.85

\84\ 60 FR at 30413. That prohibition is found in

Sec. 310.3(a)(4) of the Final Rule and was found in Sec. 310.3(a)(3)

of the revised proposed Rule.

\85\ See, e.g., NACAA at 4; IA DOJ at 10; AARP at 15-16; FRB-SF

at 8; VBA at 1; NCL at 9; NJ DCA at 3; San Diego at 2.

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Law enforcement and consumer groups pointed out that demand drafts

do not provide consumers with the same level of protection as credit

cards, nor is there widespread awareness among consumers about the

dangers of this payment method.86 For example, in many instances

deceptive telemarketers induce consumers to disclose certain bank

account information, after which they withdraw funds from the

consumers' bank accounts without the consumers authorizing such

withdrawals or realizing that such withdrawals are occurring. In fact,

the USPS pointed out that, as it became more difficult for deceptive

telemarketers to access the credit card system, demand drafts have

surfaced as the most frequent form of payment in deceptive

telemarketing over the past two to three years.87 In addition, the

Federal Reserve Bank of San Francisco (``FRB-SF'') strongly opposed

deleting the prohibition, questioning whether a general ``do not

mislead'' standard would prevent abuses.88 FRB-SF noted that laws

prohibiting misleading statements are already on the books, but have

been of limited effectiveness. It also noted that any protections

consumers might have under the current Uniform Commercial Code

provisions 89 are illusory. FRB-SF stated that, in reality, banks

have a pronounced disincentive to accept claims by a consumer that he

or she did not authorize a particular draft because the banks must bear

the loss of the amount of any draft that was unauthorized.

[[Page 43851]]

FRB-SF described a variety of ways that banks can and do avoid

authorizing a refund of a draft claimed by a consumer to be

unauthorized. For example, banks may allege that consumers were

negligent in giving out their bank information, or allege that

consumers who have given such information have given apparent authority

to issue any number of drafts in any amount.

\86\ AARP at 15; NJ DCA at 3-4.

\87\ USPS at 3.

\88\ See generally FRB-SF.

\89\ See UCC 1-201(39), 3-103(a)(6), 3-104(a), 3-401(a), 3-

401(b), 3-402(a), 4-401 (1990 version).

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Based on the extensive use of demand drafts by legitimate

companies, the Commission is persuaded that demand drafts, in and of

themselves, are not necessarily harmful, and, in fact may produce real

benefits for consumers. The Commission also believes that requiring

prior written authorization could be tantamount to eliminating this

emerging payment alternative. Moreover, the Commission believes that it

would be inconsistent to impose upon demand drafts a more stringent

authorization mechanism than that imposed on electronic funds transfers

under the EFTA and Reg. E. The Commission, however, is also persuaded

by the comments on the revised proposed Rule that consumers need

additional protections from abuse of this increasingly popular payment

method. Therefore, the Final Rule includes certain restrictions on the

use of demand drafts.

Section 310.3(a)(3) balances the benefits to consumers that may

flow from the use of demand drafts against the costs arising from the

known abuses of this payment method by deceptive telemarketers. Section

310.3(a)(3) requires ``express verifiable authorization'' before any

seller or telemarketer obtains or submits ``for payment a check, draft,

or other form of negotiable paper drawn on a person's checking,

savings, share, or similar account.'' To prevent deceptive

telemarketers from abusing this mode of authorization, the Commission

has included in the Final Rule specific requirements to establish what

constitutes ``verifiable authorization'' under the Rule.

An authorization will be deemed verifiable if any of the following

means are employed: (1) Express written authorization by the customer;

(2) express oral authorization which is tape recorded 90 and made

available to a customer's bank upon request, and which clearly

evidences both the customer's authorization of payment for the goods or

services that are the subject of the sales offer and the customer's

receipt of six specific items of information during the tape recording;

91 or (3) written confirmation of the transaction sent to the

customer, prior to submitting the draft for payment, containing the

same six items of information required under the tape recording option.

The written confirmation method also requires a seller or telemarketer

to have in place, and to disclose to the customer in the confirmation,

the procedures by which the customer can obtain a refund from the

seller or telemarketer in the event the written confirmation is

inaccurate. The Commission recognizes that the latter method of

verifiable authorization may be susceptible to manipulation by

deceptive sellers and telemarketers. However, any misrepresentation of

the nature or terms of the refund policy will be actionable under

Sec. 310.3(a)(2)(iv), prohibiting misrepresentation of a seller's

refund policy. The Final Rule also incorporates FRB-SF's suggestion

that the taped verifiable authorization be made available to the

customer's bank upon request.92 The Commission will monitor the

effectiveness of this provision in preventing the deceptive use of

demand drafts.

\90\ FRB-SF supported a requirement for tape recording

customers' oral authorizations as an alternative to prior written

authorization. See FRB-SF at 8-9.

\91\ The six items of information are: ``(A) Date of the

draft(s); (B) the amount of the draft(s); (C) the payor's name; (D)

the number of draft payments (if more than one); (E) a telephone

number for customer inquiry that is answered during normal business

hours; and (G) the date of the customer's oral authorization.''

\92\ FRB-SF at 8-9.

d. Section 310.3(a)(4): False or Misleading Statements To Induce

Payment

Section 310.3(a)(4) generally prohibits ``[m]aking a false or

misleading statement to induce any person to pay for goods or

services.'' The few comments on this Section questioned whether a

general prohibition is an adequate substitute for a provision requiring

express authorization for demand drafts: Unauthorized access often

involves no inducement or purchase; the money is simply taken.93

The Commission believes the Final Rule's express verifiable

authorization requirement, Sec. 310.3(a)(3), sufficiently addresses

this concern.

\93\ See, e.g., AARP at 15.

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Section 310.3(a)(4) also prohibits sellers and telemarketers from

gaining access to consumers' money through false and misleading

statements, regardless of the type of payment system used. This

provides law enforcement with flexibility to address new ways that

sellers and telemarketers engaged in fraud might attempt to take

consumers' money.

2. Section 310.3(b): Assisting and Facilitating

Section 310.3(b) of the revised proposed Rule received substantial

attention from commenters. Law enforcement objected to the inclusion of

a requirement that the requisite substantial assistance or support be

``related to the commission or furtherance'' of a core rule

violation.94 NAAG viewed this as an unnecessary additional element

of proof that would burden law enforcement, and feared that it could

result in assisters and facilitators evading liability on the ground

that their assistance was not ``related to'' an unlawful act, even

where required showings of knowledge and substantial assistance could

be made.95 The Commission has determined that the ``related to''

requirement may be susceptible to the misapplication NAAG foresees, and

has therefore deleted this requirement from the Final Rule. The

Commission notes that knowledge of, and substantial assistance to,

another's wrongdoing are a sufficient basis for liability in

tort,96 and were so in cases brought under the Securities and

Exchange Act of 1934 97 until the recent Supreme Court decision in

Central Bank of Denver v. Interstate

[[Page 43852]]

Bank of Denver.98 The Commission further believes that the

ordinary understanding of the qualifying word ``substantial''

encompasses the notion that the requisite assistance must consist of

more than mere casual or incidental dealing with a seller or

telemarketer that is unrelated to a violation of the Rule.

\94\ NAAG at 23; NACAA at 5.

\95\ NAAG at 23.

\96\ Section 876(b) of the Restatement of Torts provides: ``For

harm resulting to a third person from the tortious conduct of

another, one is subject to liability if he knows that the other's

conduct constitutes a breach of duty and gives substantial

assistance or encouragement to the other so as to conduct himself. *

* *'' Restatement (Second) of Torts Sec. 876(b) (1977).

\97\ See, e.g., Schatz v. Rosenburg, 943 F.2d 485, 495 (4th Cir.

1991), cert. denied, 503 U.S. 936 (1992); National Union Fire Ins.

Co. v. Turtur, 892 F.2d 199, 206-07 (2d Cir. 1989); DCD Programs,

Ltd. v. Leighton, 833 F.2d 183, 188 (9th Cir. 1987); Moore v. Fenex,

809 F.2d 297, 303 (6th Cir. 1987), cert. denied, 483 U.S. 1006

(1987); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11th

Cir. 1986), cert. denied, 480 U.S. 946 (1987); Metge v. Baehler, 762

F.2d 621, 624-25 (8th Cir. 1985), cert. denied, 474 U.S. 1057

(1986); Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004,

1009 (11th Cir. 1985); Cleary v. Perfectune, Inc., 700 F.2d 774, 777

(1st Cir. 1983); Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir.

1983); Harmsen v. Smith, 693 F.2d 932, 943 (9th Cir. 1982), cert.

denied, 464 U.S. 822 (1983); Stokes v. Lokken, 644 F.2d 779, 782-83

(8th Cir. 1981); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980);

Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.

1978), cert. denied, 439 U.S. 930 (1978); Woodward v. Metro Bank of

Dallas, 522 F.2d 84, 94 (5th Cir. 1975).

Many of these cases base their analysis upon the test laid down

in SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied,

420 U.S. 908 (1975):

A person may be held as an aider and abettor only if some other

party has committed a securities law violation, if the accused party

had general awareness that his role was part of an overall activity

that was improper, and if the accused aider-abettor knowingly and

substantially assisted the violation.

\98\ 114 S. Ct. 36, ______ U.S. ______ (1994). The Supreme Court

held that there is no private cause of action for aiding and

abetting under Rule 10(b) because the Securities and Exchange Act of

1934 does not expressly create such a cause of action. The Court's

decision did not address the soundness of the rationale for the

elements of aiding and abetting as developed in the cases. The

Telemarketing Act, on the other hand, expressly authorizes

``assisting and facilitating'' as a violation of the Rule.

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Law enforcement and consumer groups also generally opposed the

``knows or consciously avoids knowing'' standard in this Section,

arguing that it imposed a higher burden of proof on law enforcement

than the ``knows or should know'' standard in the initially proposed

Rule, and requires proof of the wrongdoer's mental state.99 These

commenters recommended that the Commission return to the ``knows or

should know'' standard. At the other end of the spectrum, industry

comments continued to raise concerns that the proposed knowledge

standard was too vague or harsh.100

\99\ See, e.g., NJ DCA at 4; NACAA at 5; AARP at 16; NCL at 11;

USPS at 12.

\100\ See, e.g., NAA at 2; MSSC at 4; HII at 2.

As noted above, both in the law of tort and in a substantial body

of pre-Central Bank of Denver aider and abettor case law developed

under the Securities and Exchange Act of 1934, knowledge is a

prerequisite for liability.101 The Commission recognizes that

proving actual knowledge could be a formidable hurdle in some

cases.102 The ``knows or should know'' standard is certainly the

appropriate standard to use in framing allegations of third-party

liability for unfair or deceptive acts or practices, in violation of

section 5 of the FTC Act,103 or in violation of State ``Little

FTC'' Acts. However, in a situation where a person's liability to pay

redress or civil penalties 104 for a violation of this Rule

depends upon the wrongdoing of another person, the ``conscious

avoidance'' standard is correct.105

\101\ The level of knowledge required for aider and abettor

liability under the Securities and Exchange Act of 1934 varied from

circuit to circuit. For example, the standard enunciated in SEC v.

Coffey (general awareness of impropriety, plus knowing and

substantial assistance) applied in the Sixth Circuit, whereas actual

knowledge or reckless disregard was required in the Ninth Circuit.

Levine v. Daimanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991).

The Second Circuit held that ``something closer to an actual intent

to aid in a fraud'' must be demonstrated. Edwards & Hanly v. Wells

Fargo Sec. Clearance Corp., 602 F.2d 478, 485 (2d Cir. 1979), cert.

denied, 444 U.S. 1045 (1980). See W. H. Kuehnle, Secondary Liability

Under the Federal Securities Laws--Aiding and Abetting, Conspiracy,

Controlling Person, and Agency: Common-Law Principles and the

Statutory Scheme, 14 J. Corp. L. 313, 322 (1988); Note, Liability

for Aiding and Abetting Violations of Rule 10b-5: The Recklessness

Standard in Civil Damage Actions, 62 Tex. L. Rev. 1087 (1984).

\102\ The Commission noted in the RNPRM that case law under

Section 13(b) of the FTC Act has developed a knowledge standard in

the context of an analogous type of liability: individual liability

to pay restitution to consumers for injury resulting from law

violations of a corporation controlled by the individual. The

Commission has sought, and the courts have ordered, payment of

consumer redress from individual defendants for injury resulting

from law violations of corporations controlled by such individuals

only where the Commission could show either that these individuals

had actual knowledge of the unlawful practices of the corporation,

were recklessly indifferent to such practices, or had an awareness

of a high probability of fraud coupled with an intentional avoidance

of the truth. FTC v. American Standard Credit Systems, Inc., No. CV

93-2623 LGB (JRx) (C.D. Cal. Aug. 15, 1994); FTC v. Amy Travel

Serv., 875 F.2d 564, 573-74 (7th Cir.), cert. denied, 493 U.S. 954

(1989); FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282, 1292 (D.

Minn. 1985); FTC v. International Diamond Corp., 1983-2 Trade Cas.

(CCH) para. 65,725 at 69,707 (N.D. Cal. 1983).

\103\ See, e.g., Citicorp Credit Services, Inc., FTC Dkt. No. C-

3413 (Consent Order, Feb. 4, 1993).

\104\ It is noteworthy that Section 5(m)(1)(A) of the FTC Act,

15 U.S.C. 45(m)(1)(A), specifies that imposition of civil penalties

for an act prohibited by a rule requires a showing of ``actual

knowledge or knowledge fairly implied on the basis of objective

circumstances that such act is unfair or deceptive and is prohibited

by such rule.''

\105\ Proof of conscious avoidance is widely accepted in

criminal cases as fulfilling the requirement for proof of knowledge.

See, e.g., United States v. Beech-Nut Nutrition Corp., 871 F.2d

1181, 1195-1196 (2d Cir.), cert. denied, 493 U.S. 933 (1989); United

States v. Diaz, 864 F.2d 544, 549 (7th Cir.), cert. denied, 490 U.S.

1070 (1989); United States v. Manriquez Arbizo, 833 F.2d 244, 248

(10th Cir. 1987); United States v. Rothrock, 806 F.2d 318, 323 (1st

Cir. 1986); United States v. Jewell, 532 F.2d 697, 700 (9th Cir.),

cert. denied, 426 U.S. 951 (1976).

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The ``conscious avoidance'' standard is intended to capture the

situation where actual knowledge cannot be proven, but there are facts

and evidence that support an inference of deliberate ignorance 106

on the part of a person that the seller or telemarketer is engaged in

an act or practice that violates Secs. 310.3(a) or (c), or Sec. 310.4

of this Rule.

\106\ U.S. v. Williams, No. 90-3389, 1995 U.S. App. LEXIS 23546

(7th Cir. Aug. 26, 1994).

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Some commenters recommended that the Commission reinstate the

examples of ``assisting and facilitating'' that had been in

Sec. 310.3(b)(2) of the initially proposed Rule.107 The Commission

has declined to list in the Rule examples of substantial assistance,

but still considers the acts or practices enumerated in former

Sec. 310.3(b)(2) of the initially proposed Rule to be illustrative of

those that can constitute substantial assistance to Rule violators when

coupled with knowledge or conscious avoidance of knowledge of a

violation of Secs. 310.3 (a) or (c) or Sec. 310.4. These include:

Providing lists of contacts to a seller or telemarketer that identify

persons over the age of 55, persons who have bad credit histories, or

persons who have been victimized previously by deceptive telemarketing

or direct sales; providing any certificate or coupon which may later be

exchanged for travel related services; providing any script,

advertising, brochure, promotional material, or direct marketing piece

used in telemarketing; or providing an appraisal or valuation of a good

or service sold through telemarketing when such an appraisal or

valuation has no reasonable basis in fact or cannot be substantiated at

the time it is rendered.

\107\ See, e.g., AARP at 17.

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3. Section 310.3(c): Credit Card Laundering

Section 310.3(c) of the Final Rule prohibits credit card

laundering, the practice of depositing into the credit card system a

sales draft that is not the result of a credit card transaction between

the cardholder and a merchant.108 The Commission received very few

comments that offered changes or that were critical of this section.

Those comments that did address this section suggested that it be

expanded to include other payment devices, such as debit cards, because

such devices can be laundered as easily as credit card

transactions.109 The Commission has rejected such an expansion for

the reasons stated supra in the discussion regarding the definition of

``credit.''

\108\ As defined in Sec. 310.2(l), a merchant is the person who

is under a contractual agreement with an acquirer to honor or accept

credit cards, or to transmit or process for payment credit card

payments, for the purchase of goods or services.

\109\ E.g., Citicorp at 2; Mastercard at 2-4.

The Act expressly cited credit card laundering as a type of

assisting and facilitating that the Rule could prohibit.110 Credit

card laundering is a pernicious practice because it enables deceptive

telemarketers access to the credit card system that they would

otherwise be unable to obtain. In order to obtain payment by credit

card, a seller (``merchant'' as is defined in Sec. 310.2(l)) must first

have established an account with a financial institution (``acquirer''

as is defined in Sec. 310.2(a)) that is authorized to accept credit

card payments. A seller must have a written contract (``merchant

agreement'' as defined in Sec. 310.2(m)) with the financial institution

to be able to access the credit card system and obtain payment from a

consumer's credit card account. When the seller accepts a credit card

for

[[Page 43853]]

payment, the seller generates what is known as a credit card sales

draft (as defined in Sec. 310.2(g)). The seller then deposits the

credit card sales draft into the seller's account with the financial

institution and obtains the cash amount of the deposited drafts. The

financial institution sends the credit card sales draft through the

particular credit card system, e.g., Visa, which will post the charge

to the consumer's credit card account.

\110\ 15 U.S.C. 6102(a)(2).

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Most deceptive telemarketers are unable to establish a merchant

account with an acquirer. Therefore, to be able to accept payment by

credit card, they must gain access to the credit card system through

another's merchant account. Obtaining access to the credit card system

through another merchant's account without the authorization of the

financial institution is credit card laundering. Credit card laundering

facilitates deceptive telemarketing acts or practices by providing

telemarketers engaged in fraud with ready access to cash through the

credit card system. Credit card laundering also costs legitimate credit

card companies over $300 million per year as a result of telemarketing

fraud involving payment by credit card.111

\111\ Senate Report at 2.

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The underlying purpose of Sec. 310.3(c) is to delineate clearly, in

accordance with legitimate industry standards, those persons who are

deemed to have proper access to the credit card system. The Commission

believes that the distinction between persons who are ``launderers''

and persons who legitimately use credit card systems rests on whether

the credit card system permits such persons access to its system. In

their comments to the initially proposed Rule, Visa and MasterCard

recommended that access be permitted under the Rule if it is expressly

permitted by the applicable credit card system.112 Therefore, the

Commission proposed in the revised proposed Rule language to the

preamble of Sec. 310.3(c), that ``except where expressly permitted by

the applicable credit card system ...'' and added similar language to

the end of Sec. 310.3(c)(3). In the absence of comments on this section

in the RNPRM, the Final Rule adopts Sec. 310.3(c) without change.

\112\ See initial comments: MasterCard at 10-11.

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Section 310.3(c) of the Final Rule is divided into three parts.

Section 310.3(c)(1) deals with merchants who engage in credit card

laundering. Under this Section, it is a deceptive telemarketing act or

practice, and a violation of the Rule, for a merchant to present to, or

deposit into, the credit card system for payment, a credit card sales

draft generated by a telemarketing transaction that is not the result

of a telemarketing credit card transaction between the cardholder and

that merchant. It is also a deceptive act or practice for a merchant to

cause another person to present to, or deposit into, the credit card

system for payment such a credit card sales draft.

Section 310.3(c)(2) of the Final Rule deals with telemarketers,

brokers, or others who employ merchants to engage in credit card

laundering. This Section states that it is a deceptive telemarketing

act or practice, and a violation of the Rule, for ``any person to

employ, solicit, or otherwise cause a merchant or an employee,

representative, or agent of the merchant, to present to or deposit into

the credit card system for payment, a credit card sales draft generated

by a telemarketing transaction that is not the result of a

telemarketing credit card transaction between the cardholder and the

merchant.''

Finally, Sec. 310.3(c)(3) prohibits credit card laundering by means

of joint ventures or other business relationships with a merchant.

Specifically, this section prohibits any person from obtaining ``access

to the credit card system through the use of a business relationship or

an affiliation with a merchant, when such access is not authorized by

the merchant agreement or the applicable credit card system.''

D. Section 310.4: Abusive Telemarketing Acts or Practices

1. Section 310.4(a): Abusive Conduct Generally

Section 310.4(a) of the Final Rule prohibits any seller or

telemarketer from engaging in four enumerated abusive acts or

practices. Each of these practices will be discussed in turn.113

\113\ Section 310.4(a) remains unchanged from the RNPRM.

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a. Section 310.4(a)(1): Threats, Intimidation, or the Use of Profane or

Obscene Language

Section 310.4(a)(1) of the Final Rule prohibits any seller or

telemarketer from engaging in threats, intimidation, or the use of

profane or obscene language. The legislative history of the

Telemarketing Act indicates that the Commission should consider

prohibiting such practices, and should ``draw upon its experience in

enforcing standards established under the Fair Debt Collection

Practices Act (``FDCPA''), 15 U.S.C. 1692, in defining these terms.''

114 The FDCPA includes a number of prohibitions on various types

of threats,115 and a specific prohibition on the use of profane or

obscene language.116 The Commission believes such prohibitions are

equally appropriate in this Rule.

\114\ See, e.g., House Report at 8.

\115\ See FDCPA section 806(1), 15 U.S.C. 1692d(1) (``the use or

threat of use of violence or other criminal means to harm the

physical person, reputation, or property of any person''); Section

807(5), 15 U.S.C. 1692e(5) (``the threat to take any action that

cannot legally be taken or that is not intended to be taken''); and

section 808(6), 15 U.S.C. 1692f(6) (``taking or threatening to take

any nonjudicial action to effect dispossession or disablement of

property'' in certain situations).

\116\ Section 806(2) of the FDCPA, 15 U.S.C. 1692d(2).

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This Section covers all types of threats, including threats of

bodily injury and financial ruin, and threats to ruin credit. It also

prohibits intimidation, including acts which put undue pressure on a

consumer, or which call into question a person's intelligence, honesty,

reliability, or concern for family. Repeated calls to an individual who

has declined to accept an offer may also be an act of intimidation.

b. Section 310.4(a)(2): Credit Repair Services

Section 310.4(a)(2) of the Final Rule is intended to limit the

telemarketing of deceptive credit repair services. Typically, these

services promise consumers that, for a fee paid in advance, they will

improve the consumer's credit record by removing negative information

from that record. Once the fee is paid, however, the seller fails to

deliver the promised services or achieve the promised results, and the

consumer's credit record does not improve.

This section of the Final Rule states that, in selling any goods or

services represented to remove derogatory information from, or improve,

a person's credit history, credit record, or credit rating, a seller or

telemarketer is prohibited from requesting or receiving payment of any

fee or consideration until two events occur. First, the time frame

within which the seller has represented that all of the goods or

services will be provided to the purchaser must have expired.117

Second, the promised results must have been achieved. In order to

ensure the achievement of the promised results, the Final Rule requires

the seller to provide

[[Page 43854]]

the purchaser with a consumer report from a consumer reporting agency

that was issued more than six months after the results were

achieved.118

\117\ A seller or telemarketer can make such representations

about the time for delivery of the credit repair goods or services

either orally or in writing, including in the contract for the

services. If any discrepancy exists between various representations

by a credit repair seller, the longest time frame represented will

determine when payment may be requested or received.

\118\ The Fair Credit Reporting Act (``FCRA''), 15 U.S.C. 1681,

specifies certain permissible purposes for which a consumer report

may be furnished. The Final Rule states that nothing in this Rule

should be construed to affect those requirements set forth in the

FCRA.

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A number of commenters stated that this section should not apply to

the offering of secured credit cards.119 According to these

commenters, secured credit cards often are marketed as credit products

that can improve a consumer's credit history, if properly used. The

abusive practice against which Sec. 310.4(a)(2) is directed is the

deceptive marketing and sale of bogus credit repair services; it is not

directed at the nondeceptive telemarketing of secured credit

cards.120 In addition, the Commission does not intend that this

Section apply to legitimate credit monitoring services.

\119\ See, e.g., Mastercard at 6-7; BOA at 1-2.

\120\ However, all other parts of this Rule, including all

required disclosures and prohibitions against misrepresentations,

apply to the telemarketing of secured credit cards.

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c. Section 310.4(a)(3): Recovery Room Services

The next abusive practice prohibited by the Final Rule involves

recovery room scams. In these operations, a deceptive telemarketer

calls a consumer who has lost money, or who has failed to win a

promised prize, in a previous scam. The recovery room telemarketer

falsely promises to recover the lost money, or obtain the promised

prize, in exchange for a fee paid in advance. After the fee is paid,

the promised services are never provided. In fact, the consumer may

never hear from the telemarketer again.

The Final Rule, at Sec. 310.4(a)(3), prohibits any seller or

telemarketer from ``requesting or receiving payment of any fee or

consideration from a person, for goods or services represented to

recover or otherwise assist in the return of money or any other item of

value paid for by, or promised to, that person in a previous

telemarketing transaction, until seven business days after such money

or other item is delivered to that person.'' This prohibition does not

apply, however, to goods or services provided by a licensed attorney.

As stated in the RNPRM, the Commission does not wish to hinder

legitimate activities by licensed attorneys to recover funds lost by

consumers through deceptive telemarketing, and thus does not believe

this prohibition should be applied to their services.

The Commission also intends that this Section not cover debt

collection practices, since debt collection is not ``conducted to

induce the purchase of goods or services,''--a prerequisite for Rule

coverage as dictated by the definition of ``telemarketing'' in

Sec. 310.2(u). Furthermore, this section is applicable only to recovery

services that promise the return of money or other items of value paid

for or promised to the consumer in a previous telemarketing

transaction. Thus, this Section will not apply to attempts to recover

money or items lost outside of telemarketing.

d. Section 310.4(a)(4): Advance Fee Loans

Section 310.4(a)(4) of the Final Rule prohibits any seller or

telemarketer from requesting or receiving payment of any fee or

consideration in advance of obtaining a loan or other extension of

credit when the seller or telemarketer has guaranteed or represented a

high likelihood of success in obtaining or arranging a loan or other

extension of credit for a person.121 This section is intended to

prevent ``advance fee loan'' scams, in which a telemarketer promises to

obtain a loan for a consumer, regardless of that consumer's credit

history or credit record, in exchange for a fee, paid in advance. As

with recovery room scams, after the consumer pays the fee, the promised

services typically are not provided.

\121\ By using the terms ``loans or other extensions of

credit,'' the Final Rule makes clear that this section does not

apply to other types of credit services, such as monitoring or

counseling services.

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Two commenters stated that non-bank telemarketers may make

``prescreened,'' unconditional offers of home equity credit lines or

other forms of mortgage credit and urged that the Rule should not

prohibit non-bank telemarketers from collecting, in connection with

legitimate ``prescreened'' offers of credit, an application fee, credit

report fee, and/or appraisal fee before the loan actually

closes.122 Section 310.4(a)(4) is not directed at firm offers of

credit by a creditor who properly uses a prescreened list in accordance

with the FTC staff commentary on the FCRA.123 Making an authentic

firm offer of credit to every consumer on a prescreened list is not

equivalent to the specious type of transaction involved in advance fee

loan scams where a seller or telemarketer offers to obtain or arrange a

loan or other extension of credit for a person.

\122\ BOA at 2; P&C-1 at 2-3.

\123\ Statement of General Policy or Interpretation; Commentary

on the Fair Credit Reporting Act, 55 FR 18804, 18815 (May 4, 1990).

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2. Section 310.4(b): Pattern of Calls

The Telemarketing Act directs the Commission to include in this

Rule ``a requirement that telemarketers may not undertake a pattern of

unsolicited telephone calls which the reasonable consumer would

consider coercive or abusive of such consumer's right to privacy.''

124 Section 310.4(b) of the Final Rule sets forth two prohibitions

on sellers and telemarketers which are intended to effectuate this

requirement of the Act.

\124\ 15 U.S.C. 6102(a)(3)(A).

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First, Sec. 310.4(b)(1)(i) prohibits causing any telephone to ring,

or engaging any person in telephone conversation, repeatedly or

continuously with intent to annoy, abuse, or harass any person at the

called number. Such a prohibition is included in the FDCPA,125 and

the legislative history of the Telemarketing Act states that the

Commission should consider the FDCPA in establishing prohibited abusive

acts or practices.126

\125\ 15 U.S.C. 1692d(5).

\126\ See, e.g., House Report at 8.

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Several comments on the RNPRM suggested that this Section should be

keyed to a reasonable consumer's belief of what is annoying, abusing,

or harassing, rather than the caller's intent.127 The Commission

has taken this prohibition virtually verbatim from the FDCPA, and finds

no reason to alter this language. The staff commentary to the FDCPA

states that ``continuously'' means ``making a series of telephone

calls, one right after the other,'' and that ``repeatedly'' means

``calling with excessive frequency under the circumstances.'' 128

The Commission believes that if a telemarketer calls a consumer

continuously or repeatedly, as those terms have been defined, it is

presumed that the caller's intent was to annoy, abuse, or harass the

person being called. The few courts that have ruled on this provision

of the FDCPA have been silent on the intent requirement, ultimately

deciding the case simply on the repeated nature of the calls.129

\127\ See SD DAG at 2; AARP at 22-23.

\128\ Statements of General Policy or Interpretation; Staff

Commentary on the Fair Debt Collection Practices Act, 53 FR 50097,

50105 (Dec. 13, 1988).

\129\ See, e.g., Bingham v. Collection Bureau, Inc., 505 F.

Supp. 864 (D.N.D. 1981); Venes v. Professional Service Bureau, 353

N.W.2d 671 (Minn. Ct. App. 1984).

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The second prohibition in the Final Rule intended to limit

unsolicited telephone calls is the ``do not call'' requirement set

forth in Sec. 310.4(b)(1)(ii). This section prohibits any telemarketer

from initiating, or any seller to cause a telemarketer to initiate, an

outbound telephone call to a person when that person previously has

stated that he or

[[Page 43855]]

she does not wish to receive such a call made by or on behalf of the

seller whose goods or services are being offered.

The Telephone Consumer Protection Act (``TCPA'') 130 and the

regulations of the Federal Communications Commission (``FCC'')

implementing that Act 131 include a similar ``do not call''

prohibition. A number of commenters asked the Commission to clarify

that compliance with the TCPA's ``do not call'' procedures will

constitute compliance with this section of the Telemarketing Sales Rule

as well.132 The Commission cannot make such a blanket

pronouncement due to the differences in enforcement of the TCPA and

this Rule,133 and the slight variations in the safe harbor

provisions, discussed infra. On the other hand, in order to lessen

compliance burdens, the Commission wishes to clarify that in order to

comply with both the TCPA and this Rule, sellers and telemarketers need

compile only one list of consumers who request not to be called by that

seller or telemarketer.134

\130\ 47 U.S.C. 227.

\131\ 47 CFR 64.1200(e).

\132\ See, e.g., Citicorp at 2; DMA at 4-5; NRF at 8; Mastercard

at 7; Chase at 2-3.

\133\ The Telemarketing Sales Rule will be enforced by the

Commission, the States, and any person who suffers more than $50,000

in actual damages caused by violations of this Rule. See 15 U.S.C.

6102(c), 6103, 6104. On the other hand, the TCPA ``do not call''

provisions may be enforced only in State court by a private person

who receives more than one telephone call within any 12-month period

by or on behalf of the same entity in violation of the FCC's

regulation. See 47 U.S.C. 227(c)(5).

\134\ In the RNPRM discussion of the effective date of the Rule,

the Commission stated that the ``do not call procedures'' adopted by

telemarketers under the TCPA would comply with this section of the

revised proposed Rule as well. 60 FR at 30424. The ``procedures''

mentioned in that section of the RNPRM consist of the compiling of

the list of consumers who request not to be called by the seller or

telemarketer.

One commenter asked the Commission to modify this Section of the

Final Rule to focus the ``do not call'' prohibition on a particular

good or service, rather than on a seller.135 For example, this

commenter stated that if it calls a consumer to sell termite control,

and the consumer asks it not to call any more, the Final Rule should

permit that same seller to call the consumer in the future to offer a

deck treatment. The Commission disagrees. Once a consumer states that

he or she does not wish to receive any additional calls from a

particular seller, that seller may not call the consumer to sell any

other product or service whatsoever. On the other hand, in the

discussion of the definition of ``seller,'' 136 the Commission has

made clear that it will consider distinct corporate divisions to be

separate sellers. Thus, if a consumer tells one division of a company

not to call again, a distinct corporate division of that company may

make another telemarketing call to that consumer.

\135\ Rollins at 2.

\136\ See supra text accompanying Sec. 310.2(r) and (t)

(discussing definitions of ``seller'' and ``telemarketer'').

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Another commenter asked the Commission to clarify what consumers

must tell a seller to indicate they do not want additional calls,

whether that request must be in writing, and how quickly the seller

must act upon the caller's request.137 Any form of request that

the consumer does not wish to receive calls from a seller will

suffice.138 An oral statement as simple as ``Do not call again''

is effective notice. Finally, although the Rule is silent on the time

frame within which the seller must act upon the consumer's request,

such actions must be taken in a reasonably expeditious manner.

\137\ Milligan at 1.

\138\ This includes a statement by consumers that they are

revoking their prior consent to receive calls by that seller. See GA

OCA at 3.

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Section 310.4(b)(2) of the Final Rule provides a limited safe

harbor against liability for violating the ``do not call'' prohibitions

included in Sec. 310.4(b)(1)(ii). The safe harbor states that a seller

or telemarketer will not be liable for such violations if: (1) It has

established and implemented written procedures to comply with the ``do

not call provisions''; (2) it has trained its personnel in those

procedures; (3) the seller, or the telemarketer acting on behalf of the

seller, has maintained and recorded lists of persons who may not be

contacted; and (4) any subsequent call is the result of error.

One commenter maintained that this Section should mandate that a

seller or telemarketer meet the requirements of the safe harbor in a

reasonable manner in order to successfully assert the defense.139

Another stated that a seller or telemarketer who makes repeated calls

as the result of ``error,'' despite its adoption of the requisite

procedures outlined in this Section, should be on notice of its error

and should not be allowed to repeatedly violate the ``do not call''

provision.140 The Commission agrees that a rule of reasonableness

should prevail in determining application of the safe harbor provision.

If a company is complying in a reasonable manner with the requirements

of the safe harbor, any true error should be excused. On the other

hand, numerous purportedly ``erroneous'' calls to consumers who

previously had asked not to be called may be a sign that the seller's

adopted procedures are ineffective, and that the safe harbor should no

longer be available.

\139\ NYSCPB at 4-5.

\140\ AARP at 23. See also Gardner at 1.

3. Section 310.4(c): Calling Time Restrictions

In the Final Rule, the Commission adopts the RNPRM's prohibition,

in Sec. 310.4(c), against any telemarketer engaging in outbound

telephone calls to a person's residence, without the prior consent of

the person, at any time other than between 8 a.m. and 9 p.m. local time

at the called person's location. This provision is included in response

to the Telemarketing Act's directive that the Rule should include

``restrictions on the hours of the day and night when unsolicited

telephone calls can be made to consumers.'' 141

\141\ 15 U.S.C. 6102(a)(3)(B).

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This provision of the Rule struck a responsive chord with

individual consumers. A number of individuals maintained that

telemarketers be prohibited from calling them at all.142 Others

suggested multiple different time restrictions, for many different

reasons.143 On the other hand, the FCC has established calling

time hours of 8 a.m. to 9 p.m. in its regulations implementing the

TCPA.144 By altering those permitted calling hours, the Commission

would introduce a conflict in the federal regulations governing

telemarketers. The record contains no compelling evidence to support a

change that would produce such a result. Thus, this section of the

Final Rule will be adopted as proposed.

\142\ See, e.g., Broadbent at 1; Tiegs at 1; Dander at 1; Beaver

at 1; Lombard at 1; Shore at 1.

\143\ See, e.g., GA OCA at 3 (to protect older victims who are

home alone during the day, restrict calls to businesses between 8:00

a.m. to 5 p.m., and calls to residences between 5 p.m. and 9 p.m.);

Dick at 1 (from 11 a.m. to 5 p.m. daily, with no calls on holidays

and weekends); Rice at 1 (9 a.m. to 7 p.m., in respect for families

with children); Stritchko at 1 (8 a.m. to 6 p.m., so a person can

relax in the evening); Durkee at 1 (11 a.m. to 8 p.m., to respect

those working nights or second shift); Kempf at 1 (10 a.m. to 2

p.m.); Joseph at 1; Tucker at 1; Magnuson at 1; Reymann at 1 (8 a.m.

or 9 a.m. to 5 p.m.).

\144\ See 47 CFR 64.1200(e)(1).

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4. Section 310.4(d): Required Oral Disclosures

The Telemarketing Act requires the Commission to include in this

Rule the following:

A requirement that any person engaged in telemarketing for the

sale of goods or services shall promptly and clearly disclose to the

person receiving the call that the purpose of the call is to sell

goods or services and make

[[Page 43856]]

other such disclosures as the Commission deems appropriate.145

\145\ 15 U.S.C. 6102(a)(3)(C).

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The Final Rule requires all telemarketers, in outbound telephone

calls, to disclose promptly and in a clear and conspicuous manner to

the person receiving the call the following four items of information:

(1) The identity of the seller; (2) that the purpose of the call is to

sell goods or services; (3) the nature of the goods or services; and

(4) that no purchase or payment is necessary to win if a prize

promotion is offered.

The Final Rule adheres to the statutory requirement that the

disclosures be prompt and clear. Industry representatives generally

supported this requirement.146 On the other hand, many law

enforcement and consumer representative commenters maintained that the

Commission should return to the language in the initially proposed

Rule, requiring such disclosures to occur ``at the beginning'' of the

telephone call.147 One commenter noted that it is important that

calls begin with a statement of the call's purpose to provide ``an

important protection against the usual strategy of prize promoters,

which is to seduce consumers with visions of cars and cash before ever

revealing that the caller's main purpose is to sell something.''

148 Another stated that the Commission's failure to define the

term ``promptly'' will ``invite shady promoters to shoot for the grey

area, and to provoke litigation over its meaning.'' 149

\146\ See RNPRM at 30418.

\147\ See, e.g., NAAG at 13-14; NY DCA at 1; GA OCA at 1; AARP

at 23-25; NAPA DA at 1.

\148\ VT AG at 2-3.

\149\ USPS at 6.

The Final Rule adopts the statutory language, requiring the

disclosures to be ``prompt.'' Intending to permit some flexibility in

the seller's telemarketing presentation, the Commission has opted not

to include in the Rule a definition of the term ``prompt.'' 150

However, to respond to some of the concerns raised by commenters, the

Commission intends that the Final Rule not permit the disclosure of the

identity of the seller and the promotional purpose of the call at the

end of the sales pitch.151 At a minimum, the Commission agrees

with commenters that ``prompt'' disclosures should be made prior to the

time any substantive information about a prize, product, or service is

conveyed to the consumer.152

\150\ The Commission believes that the usual meaning of the term

should apply. ``Prompt'' is defined as ``done, performed, delivered,

etc., at once or without delay.'' Webster's Encyclopedic Unabridged

Dictionary of the English Language at 1151 (Portland House 1989).

\151\ See MD AG at 2.

\152\ IA DOJ at 4.

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The comments also raised a number of questions about when the

required oral disclosures must be made in ``multiple purpose calls''--

calls involving the sale of goods or services and some other activity,

such as conducting a prize promotion or market research, or determining

customer satisfaction. Law enforcement commenters noted the importance

of requiring the mandated disclosures early in the call, to avoid

consumer confusion about the call's purpose.153 In addition, the

legislative history of the Telemarketing Act noted the problem of

deceptive telemarketers contacting potential victims under the guise of

conducting a poll, survey, or other type of market research.154 To

address these problems, the Commission believes that in any multiple

purpose call where the seller or telemarketer plans, in at least some

of those calls, to sell goods or services, the disclosures required by

this section of the Rule must be made ``promptly,'' during the first

part of the call, before the non-sales portion of the call takes place.

Only in this manner will the Rule assure that a sales call is not being

made under the guise of a survey research call, or a call for some

other purpose.

\153\ See, e.g., NAAG at 13-14; VT AG at 2-3; AARP at 23-25.

\154\ See Senate Report at 9-10.

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To clarify this point, the following two examples, taken from the

comments, are offered. On the one hand, a seller may call a customer to

determine if that customer is satisfied with a previous purchase of

goods or services. The seller plans, during the course of that call, to

move into a sales presentation if the seller determines that the

customer is satisfied. If the seller determines that the customer is

not satisfied, however, the seller plans to terminate the call.155

In this example, since the seller plans to make a sales presentation in

at least some of its calls, the seller is required to disclose promptly

the information required by this part of the Rule during the initial

portion of the call, before the seller makes lengthy inquiries about

customer satisfaction.

\155\ See Rollins at 2.

On the other hand, a seller may make calls to welcome new customers

and to inquire whether everything about recently-purchased goods or

services is satisfactory. The seller does not plan, during any of these

calls, to sell anything to those customers. However, during such calls

the customer may ask about other purchase opportunities, to which the

seller will respond by presenting those opportunities.156 Since

the seller initially has no plans to sell goods or services during

these calls, no prompt disclosures are required.

\156\ See Citicorp at 2.

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As for the content of the required oral disclosures, the only

significant comments concerned the ``no purchase necessary''

disclosure, in Sec. 310.4(d)(4), required for calls offering a prize

promotion. As stated in the RNPRM, the Commission believes that this

disclosure is so critical to consumer protection in a prize promotion

that it should be stated during an outbound telephone call. The USPS

expressed concern in its comment that this disclosure may not cover

scams where the marketer will not ask the consumer to purchase a prize,

but instead will ask for payment of shipping charges, taxes, or other

fees in order to enter or win a prize.157 The Commission believes

this is a valid concern, and therefore is amending this portion of the

Final Rule to require the disclosure that ``no purchase or payment is

necessary to win'' a prize. This disclosure is designed to counteract

the false impression created by deceptive prize promotion telemarketers

that a consumer must purchase some item, or make some other type of

payment, in order to win the ``fabulous'' prize offered.158 This

disclosure carries the message to consumers that a true, legitimate

prize promotion does not require any purchase or payment to participate

or to win.159

\157\ See USPS at 2.

\158\ One commenter asked if an announcement, during a

telemarketing call, that the consumer ``has been entered free'' into

a sweepstakes would satisfy the disclosure requirement that no

purchase or payment is necessary to win a prize. See ITI at 2-3. The

Commission does not believe this disclosure would suffice, since the

mere entry into a promotion may be different from actually having a

chance of winning a prize.

\159\ See 18 U.S.C. 1301.

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The revised proposed Rule required this disclosure to be made

before the prize is described to the person called. A number of

industry commenters requested some timing flexibility here, suggesting

that this disclosure be required ``before or in immediate conjunction

with'' the description of the prize.160 The Commission agrees that

such a change will ensure that this key disclosure is linked directly

to the prize described. This modification is designed to prohibit

deceptive telemarketers from separating the disclosure from the

description of the prize, thereby

[[Page 43857]]

negating or diluting its salutary effect.161 In addition, in order

to make the ``no purchase or payment'' disclosure meaningful, the Final

Rule also requires telemarketers to disclose the no-purchase/no payment

entry method for the prize promotion, if requested by the person

called.

\160\ See, e.g., DMA at 5-6; ITI at 3; PCH at 2-3.

\161\ The statement in the Final Rule that this disclosure must

be made before or in conjunction with the description of the prize

does not alter the requirement that this disclosure must also be

made ``promptly.''

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Many law enforcement and consumer representative commenters

suggested that additional oral disclosures be required in every

outbound telephone call involving a prize promotion.162 The USPS

comment included the most concise statement on this issue, noting that

``the fraud and deception caused by prize promotions are so great that

any extra expense associated with making [such] oral disclosures * * *

is a necessary cost of creating much-needed balance between

telemarketers (who have all the information) and consumers (who will

know only what the telemarketer tells them).'' 163 While the

Commission is aware of the extensive amount of telemarketing fraud that

occurs with deceptive prize promotions, it also is mindful that

required oral disclosures increase both the length and the cost of

telemarketing calls. Moreover, as stated in the RNPRM, the Commission

is doubtful of the consumer benefit to be derived from repeated

disclosures of the same information. Under Secs. 310.3(a)(1) (iv) and

(v) of the Final Rule, all sellers and telemarketers must disclose,

before a customer pays for goods and services, the odds of receiving a

prize (or the factors used in calculating the odds, if the odds cannot

be calculated in advance), that no purchase or payment is necessary to

receive a prize or to participate in a prize promotion, and the no

purchase/no payment method of entry with either instructions on how to

enter or an address or local or toll-free telephone number the

customers may contact for information. In addition, all sellers and

telemarketers must disclose the material costs or conditions to receive

or redeem a prize. The Commission believes that mandating the repeated

oral disclosure of this information in every outbound telephone call

involving a prize promotion is unnecessary.

\162\ NAAG at 15 (``at a minimum, the Rule must require

meaningful oral disclosures of the method of free entry, the odds of

winning the prizes described, and the restrictions and conditions

associated with the use of the prize''); VT AG at 3 (all of the

above plus verifiable retail sales price should be disclosed); MD AG

at 1 (require disclosure of the odds of winning, the nature and

value of prizes, and the conditions on receiving the prizes); MA AG

at 5 (value and odds); USPS at 7 (sales price and odds); AARP at 26-

27 (free method of entry and prize value); IA DOJ at 14 (prize

value); NAPA DA at 2 (prize value).

\163\ USPS at 7.

E. Section 310.5: Recordkeeping

Section 310.5 requires sellers or telemarketers to keep certain

records relating to telemarketing activities for 24 months from the

date the record is produced.164 Failure to keep the records is a

violation of the Rule.

\164\ The Telemarketing Act authorizes the Commission to include

recordkeeping requirements in the Rule. 15 U.S.C. 6102(a)(3).

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A record retention requirement is necessary to enable law

enforcement agencies to ascertain whether sellers and telemarketers are

complying with the requirements of the Final Rule, to identify persons

who are involved in any challenged practices, and to identify customers

who may have been injured. A 24-month record retention period is

necessary to provide adequate time for the Commission and State law

enforcement agencies to complete investigations of noncompliance.

Consumers who complain to a law enforcement agency about alleged

deceptive or abusive telemarketing practices often fail to do so

immediately. Thus, there may be substantial ``lag time'' between the

occurrence of violations and the time law enforcement learns of the

alleged violations. A two-year record retention period allows law

enforcement agencies time to gather information needed to pursue law

enforcement actions and identify victims.

The Commission is mindful, however, of the burden on legitimate

business in maintaining these records. For example, commenters from the

office supplies industry suggested that recordkeeping compliance costs

would increase costs to dealers and, ultimately, consumers because of

increased paperwork, computer usage and storage, and filing

space.165 The Final Rule, therefore, strikes a balance between

minimizing the recordkeeping burden on industry and retaining the

records necessary to pursue law enforcement actions and identify

customers who have been injured. The Final Rule requires retaining

records that most businesses already maintain during the ordinary

course of business.

\165\ See, e.g., Decora, Hall, Knobe, Mansfield, Way.

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Section 310.5(a) sets out the records that must be maintained.

Section 310.5(b) specifies that the records may be kept ``in any

form.'' Sellers and telemarketers may maintain the records in any

manner, format, or place as they keep such records in the ordinary

course of business, including in electronic storage. Several law

enforcement and consumer groups expressed concern that permitting

electronic storage would increase the ease with which deceptive

telemarketers could quickly destroy data.166 Electronic storage

and other non-paper recordkeeping pose the danger that deceptive

telemarketers or sellers may quickly erase or otherwise destroy

potential evidence. However, the Commission believes this risk is

outweighed by the cost to legitimate businesses of maintaining hard

copies of documents for two years. Electronic storage and other storage

formats (other than paper) are increasingly used in both the public and

private sectors to conserve space, paper, and personnel resources.

\166\ See, e.g., NAAG at 25; NACAA at 7; AARP at 27.

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Moreover, if a deceptive telemarketer or seller were to destroy

records, law enforcement agencies still would be able to charge them

with violating Sec. 310.5(b), which makes the failure to maintain all

the required records a violation of the Rule.

Under Sec. 310.5(a)(1), sellers and telemarketers must retain only

substantially different advertising, brochures, telemarketing scripts,

and promotional materials. Sellers and telemarketers need only retain a

specimen copy of each advertising or promotional piece or script that

is substantially different from other advertisements or scripts. They

need not keep copies of documents that are virtually identical but for

immaterial variations. If no scripts or other advertising or

promotional materials are used in connection with the telemarketing

activity, then no such materials would need to be retained. NAAG opined

that telemarketers and sellers should not have sole discretion to

determine what constitutes ``substantially different,'' in view of the

fact that what is ``substantially different'' in the consumer

protection context can be problematic, and that changing a few words in

a telemarketing script can have a tremendous impact.167

\167\ NAAG at 25-26.

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The Commission agrees that reasonable people may differ as to

whether a particular document is ``substantially different'' from

another document. However, the Commission also recognizes that, in the

legitimate telemarketing industry, scripts can change frequently, often

with only minor alterations, and advertisements or promotional

materials may differ only in minor respects from other versions.

[[Page 43858]]

Retention of each and every script, advertisement, or other promotional

piece would likely enhance efforts of law enforcers to build cases

against deceptive telemarketers; but the Commission is unwilling to

burden legitimate business with a requirement to maintain such a huge

volume of records, much of which may be worthless or redundant from a

law enforcement standpoint.

In the revised proposed Rule, Sec. 310.5(a)(2) required sellers and

telemarketers to maintain records of the name and last known address of

each prize recipient and the prize awarded where the prizes have a

value of $25 or more. Several commenters stated that requiring records

of prize recipients only with regard to prizes having a value of more

than $25 will not provide the type of documentation needed by law

enforcement.168 These commenters pointed out that many of the

abuses found in prize promotions involve items valued under $25, but

represented to be valued much higher. Further, by its very nature, a

deceptive prize promotion involves prizes sent to consumers that are

virtually worthless. In order to address this valid concern, but not

increase the burden on legitimate prize promoters, the Commission has

revised Sec. 310.5(a)(2) to require that records be maintained for all

prizes represented, directly or by implication, to have a value of $25

or more. Sellers and telemarketers do not have to maintain records on

prize recipients and prizes awarded for prizes that are represented to

have a value of less than $25. The Commission believes that this change

in wording should not increase the recordkeeping burden on legitimate

business because such telemarketers and sellers would be expected to

accurately represent prize values. Although in the Commission's

experience, there is often at least an implied representation of value

in deceptive prize promotions, there may be times when a prize

promotion is silent as to value. Therefore, in those instances where no

direct or implied representations have been made as to a prize's value,

a seller or telemarketer must keep records for prizes that cost the

seller or telemarketer more than $25 to purchase.

\168\ AARP at 27-28; IA DOJ at 5.

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Section 310.5(a)(3) requires that records be kept of customer

transactions, including the name and last known address of the

customer, the goods or services purchased, the date such goods or

services were shipped or provided, and the amount paid by the customer

for the goods or services. Only records relating to actual sales need

be maintained; sellers and telemarketers are not required to keep

records of all customer contacts, if those customers do not make a

purchase.

Several commenters from the magazine sales industry noted that

neither the seller nor telemarketer in the magazine sales industry has

knowledge of, or control over, the dates of shipment, nor would they

have records of such as required by Sec. 310.5(a)(3); 169 records

reflecting the date(s) of shipment would be kept by the contracted

``fulfillment house.'' These commenters noted, however, that sellers

and telemarketers would have the date the order was placed with the

fulfillment house or the date that the service was to commence. In

connection with magazine sales, either of these dates will be

sufficient for purposes of compliance with Sec. 310.5(a)(3).

\169\ See, e.g., MPA at 3; MSSC at 3; DMT&H at 1; HEARSTCO at 2.

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Section 310.5(a)(4) requires sellers and telemarketers to keep

certain records on current and former employees who are directly

involved in telephone sales: name, any fictitious name used, the last

known home address and telephone number, and job title. Any records

relating to current and former employees are required only for those

persons who are or became employees on or after the effective date of

the Final Rule.

IA DOJ recommended that, if callers use fictitious ``desk'' names,

sellers and telemarketers should not allow more than one person to use

the same alias and should maintain current information on the name and

address of any employee who has used an alias. If such requirements

were included, IA DOJ opined, law enforcement would be able to request

and obtain the information from a seller or telemarketer expeditiously.

IA DOJ stated that these requirements are necessary to identify and

locate individuals responsible for deceptive telemarketing

sales.170

\170\ IA DOJ at 6.

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The Commission agrees with the concerns raised by IA DOJ and has

revised Sec. 310.5(a)(4) to require that, if fictitious names are used

by employees, the name must be traceable to a specific employee. This

revision should eliminate the confusion that would result if more than

one employee were using the same desk name.

The Commission believes, however, that it would be overly

burdensome and inappropriate to require businesses to continue updating

records on persons who no longer work for them. Businesses must

maintain up-to-date information on current employees, and last-known

information on former employees, but the Final Rule does not place an

affirmative duty on the seller or telemarketer to update information on

former employees.

Section 310.5(a)(5) requires sellers and telemarketers to retain

copies of any verifiable authorizations required under Sec. 310.3(a)(3)

of the Rule.171 Sellers and telemarketers should retain records of

the verifiable authorization for each transaction. These records may be

in any form, manner, or format consistent with the methods of

authorization permitted under Sec. 310.3(a)(3).

\171\ Section 310.3(a)(3) requires express verifiable

authorization before submitting a demand draft for payment.

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NASAA suggested that the Final Rule expressly provide law

enforcement with access to records upon reasonable notice for the

purpose of reviewing and copying.172 The Commission has decided

not to include a provision requiring that the records be provided upon

reasonable notice. The Commission does not believe that such a

provision would appreciably enhance tools currently at the disposal of

law enforcement authorities to obtain such information, if it is

required to be maintained. Moreover, the Commission's own law

enforcement experience indicates that such a provision could be

construed to hamper its ability to obtain such information quickly,

especially through ex parte temporary restraining orders against

deceptive telemarketers.

\172\ NASAA at 2.

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Section 310.5(b) states that ``[f]ailure to keep all records

required by Sec. 310.5(a) shall be a violation of this Rule.'' Sections

310.5 (c) and (d) minimize the burden of maintaining duplicate records.

Under Sec. 310.5(c), the seller and telemarketer need not keep

duplicative records if they allocate between themselves, by written

agreement, responsibility for complying with the recordkeeping

requirements. Absent a written agreement between the parties, or if the

written agreement is unclear as to who must maintain the required

records, the seller is responsible for complying with

Secs. 310.5(a)(1)-(3) and (5), and the telemarketer is responsible for

complying with Sec. 310.5(a)(4) (the Section dealing with records about

current and former employees). Several commenters on the initially

proposed Rule supported Sec. 310.5(c),173 noting that it strikes a

reasonable balance between maintaining necessary documentation and

avoiding overly burdensome

[[Page 43859]]

requirements, as well as noting that it is consistent with the

contractual nature of the relationship between sellers and

telemarketers.174

\173\ This provision was included in Sec. 310.5(b) of the

initially proposed Rule.

\174\ See, e.g., initial comments: NRF at 41; ARDA at 37-38.

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On the other hand, NAAG feared that a seller could use contractual

provisions to shift its recordkeeping responsibility to another ``fly-

by-night,'' and most likely ``judgment proof,'' telemarketer. NAAG

stated that the Rule's failure to provide joint and several

responsibility for recordkeeping exacerbated the danger of deceptive

telemarketers quickly destroying data.175 NAAG asked that the

Final Rule require that records be kept by an entity which will not

benefit by their loss. The Commission has considered this suggestion,

but since both sellers and telemarketers are liable for violations of

the provisions of the Rule, it is unclear where such a

``disinterested'' recordkeeping entity might be found. Moreover, the

Commission believes the risk that NAAG identified is outweighed by the

cost to legitimate sellers and telemarketers of maintaining duplicate

copies of documents for two years.

\175\ NAAG at 25.

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Finally, Sec. 310.5(d) sets out the parties responsible for

maintaining records at the end of, or after a change in ownership of,

the seller's or telemarketer's business. In the event of dissolution or

termination of such business, the principal of the seller or

telemarketer is required to maintain these records. On the other hand,

in the event of any sale, assignment, or other change in ownership of

the seller's or telemarketer's business, the successor business is

required to maintain the records.176

\176\ One commenter suggested requiring that any agreement

between the parties established under Sec. 310.5(c) would also

govern who is to maintain the records in the event of a dissolution.

BSA at 7. The Commission believes that the division of

responsibilities set forth in the Final Rule appears to be the most

appropriate with regard to the types of records to be maintained.

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F. Section 310.6 Exemptions

Section 310.6 of the Rule exempts certain types of activities from

the Rule's coverage. This section prompted considerable RNPRM comments,

as it did in the initially proposed Rule. In their comments to the

RNPRM, law enforcement and consumer groups once again cautioned against

any exemptions because of the potential danger that deceptive

telemarketers will seize upon any perceived loophole to avoid coverage

under the Rule.177 These groups argued that exemptions only lead

to confusion as to who is covered under the Rule and will cause law

enforcement agencies to expend considerable resources to determine

whether a telemarketer is subject to the Rule. They further maintained

that, since only catalog sales are exempted from the Act, Congress

intended for all telemarketers to be covered by the Rule and did not

intend the Commission to include a broad list of specific

exemptions.178 The business community once again suggested that

the Commission set out exemptions that will allow legitimate

telemarketers to operate without the restraints of additional

regulation.179

\177\ See, e.g., NCL at 16; NACAA at 8; NAAG at 23-25.

\178\ See, e.g., NCL at 16.

\179\ See, e.g., ACRA at 6-7; IBM at 19-23; FFF; BPIA at 10-12.

The Commission has concluded that it is vested by the Telemarketing

Act with discretion both in determining what constitutes

``telemarketing'' under the Act and in defining deceptive and abusive

practices. In exercising that discretion, the Commission has decided

that narrowly-tailored exemptions are necessary to prevent an undue

burden on legitimate businesses and sales transactions. Section 310.6

enumerates these exemptions. The Commission determined the advisability

of each exemption after examining the Act and considering the following

factors: (1) Whether Congress intended that a certain type of sales

activity be exempt under the Rule; (2) whether the conduct or business

in question already is regulated extensively by Federal or State law;

(3) whether, based on the Commission's enforcement experience, the

conduct or business lends itself easily to the forms of deception or

abuse that the Act is intended to address; and (4) whether requiring

businesses to comply with the Rule would be unduly burdensome when

weighed against the likelihood that sellers or telemarketers engaged in

fraud would use an exemption to circumvent Rule coverage.

One commenter suggested an exemption for providers of funeral goods

and services who are subject to the Commission's Funeral Rule, 16 CFR

part 453.180 The Commission believes that most telephone sales by

funeral providers covered by the Funeral Rule will not be completed

until after a face-to-face sales presentation. Such transactions would

be exempt under Sec. 310.6(c), discussed below. It is therefore

unnecessary to specifically exempt those transactions from the

provisions of this Rule.

\180\ See generally MFDA.

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Other commenters requested that the Commission reconsider its

decision not to exempt prior business relationships or established

businesses.181 The Commission is not persuaded that exemptions

defined in such a manner would be workable, nor does the Commission

believe they are necessary, given the changes elsewhere in the Rule

that focus it more narrowly. Indeed, one of the commenters on the

initially proposed Rule that strongly advocated a ``safe harbor''

provision for established businesses has indicated that such an

exemption is unnecessary because the revised proposed Rule was more

narrowly and appropriately focused.182

\181\ IBM at 19-23; ACRA at 6-7.

\182\ Time Warner at 2-3.

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Section 310.6(a) exempts pay-per-call services subject to the

Commission's 900-number Rule, 16 CFR part 308, since that Rule's

extensive requirements and prohibitions governing these transactions

already provide customers with substantial protections regarding the

deceptive or abusive practices that are the subject of the

Telemarketing Sales Rule.

Section 310.6(b) exempts the sales of franchises subject to the

Commission's Franchise Rule, 16 CFR part 436. As discussed supra, the

revised proposed Rule had defined the term ``investment opportunity''

in Sec. 310.2(j) to exclude franchise sales. In order to make it clear

that such transactions are not covered by the Telemarketing Sales Rule,

the Commission has decided to add a separate exemption in Sec. 310.6(b)

for sales of franchises covered by the Franchise Rule, rather than to

rely upon the definition of ``investment opportunity'' to accomplish

this result. The Commission's Franchise Rule contains requirements and

prohibitions that apply to the sale of franchises and business

opportunities and that already provide customers with substantial

protections. Subsequent to the publication of the NPR in this

proceeding, the Commission issued a request for comments on the

Franchise Rule as part of its periodic regulatory review of Commission

trade regulation rules and guides.183 The Commission believes it

is more appropriate to consider within the framework of that review

process whether any further action is needed to address the sale of

franchises, including those employing telemarketing. Following this

approach, the Commission ensures that any new requirement or

prohibition applicable to franchises will be codified in one

regulation--the Franchise Rule--rather than spread out over two

separate Rules.

\183\ 60 FR 17656 (April 7, 1995).

One commenter (DSA) maintained that business ventures that are not

[[Page 43860]]

covered by the Franchise Rule should be exempted from the definition of

investment opportunities as well.184 The Commission disagrees.

When a business venture is not covered by the Franchise Rule, then

consumers do not receive the protection afforded by that Rule's pre-

sale disclosure requirements. Therefore, it is appropriate that

telephone sales of such ventures should be covered by this Rule, so

that consumers may receive the benefit of its protections.185

\184\ DSA at 2.

\185\ DSA at 3-4. DSA was prompted to raise this suggestion by

its concern that the recruitment of persons to engage in the direct

sale of goods or services might be considered a ``business

opportunity'' which may be covered by this Rule. However, this

concern is unfounded given the exemption of face-to-face sales from

coverage of this Rule, included in Sec. 310.6(c).

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Section 310.6(c) exempts ``telephone calls in which the sale of

goods or services is not completed, and payment or authorization for

payment is not required, until after a face-to-face sales presentation

by the seller.'' This exemption reflects the Commission's enforcement

experience that the occurrence of a face-to-face meeting limits the

incidence of telemarketing deception and abuse. The paradigm of

telemarketing fraud involves an interstate telephone call in which the

customer has no other direct contact with the caller. The Commission

has deleted the language in the revised proposed Rule which would have

required the consumer to have an opportunity to examine the goods or

services offered. Many commenters pointed out that consumers would not

be able to examine an intangible service, nor would they be able to

examine each item that was described in a catalog used by the seller in

a sales presentation.186 Furthermore, DSA pointed out that the

requirement that a consumer be given the opportunity to examine the

good or service was contrary to most State telemarketing laws and might

preempt a large body of existing State law.187

\186\ DSA at 5-7; ACA at 2; DMT&H at 1; HEARSTCO at 2-3; MSSC at

4.

\187\ DSA at 5-7.

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This exemption also covers those sales that begin with a face-to-

face sales presentation and are later completed in a telephone call.

The emphasis in this exemption is on the face-to-face contact between

the buyer and seller, which distinguishes these transactions from those

of telemarketing that are completed without face-to-face contact

between buyer and seller.

Section 310.6(d) exempts calls initiated by a customer that are not

the result of any solicitation by a seller or telemarketer. Such calls

are not deemed to be part of a telemarketing ``plan, program, or

campaign * * * to induce the purchase of goods or services'' under the

Act.188 This exemption covers incidental uses of the telephone

that are not in response to a direct solicitation, e.g., calls from a

customer to make hotel, airline, car rental, or similar reservations,

to place carry-out or restaurant delivery orders, or to obtain

information or customer technical support.

\188\ See Senate Report at 8.

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Section 310.6(e) exempts calls initiated by a customer in response

to general media advertisements, other than direct mail solicitations,

unless the calls are in response to an advertisement relating to

investment opportunities, credit repair, recovery rooms, or advance fee

loans. This exemption applies to calls in response to television

commercials, infomercials, home shopping programs, magazine and

newspaper advertisements, and other forms of mass media advertising and

solicitations. This exemption also covers calls from a customer in

response to a business listing in the Yellow Pages or similar general

directory listing. The Commission does not intend that telephone

contacts in response to general media advertising be covered under the

Rule. In the Commission's experience, calls responding to general media

advertising do not typically involve the forms of deception and abuse

the Act seeks to stem. Deceptive general media advertising will

continue to be subject to enforcement actions under the FTC Act.

On the other hand, the Commission knows that some deceptive sellers

or telemarketers use mass media or general advertising to entice their

victims to call, particularly in relation to the sale of investment

opportunities, specific credit-related programs, and recovery rooms.

Given the Commission's experience with the marketing of these deceptive

telemarketing schemes through television commercials, infomercials,

magazine and newspaper advertisements, and other forms of mass media

advertising, the Commission has excluded these activities from the

general media advertising exemption.

USPS recommended that the Commission designate prize promotions as

one of the types of telemarketing that will not be entitled to claim a

general media advertising exemption.189 USPS pointed out that

deceptive telemarketers have proven to be very adaptable and that the

general media advertising exemption may be a major loophole for those

with a ``gift for developing `new and improved' frauds.'' USPS

cautioned that deceptive telemarketers may take advantage of the

exemption by fashioning false and deceptive print and broadcast media

ads instead of using direct mail. The Commission agrees that deceptive

telemarketers are adept at circumventing regulations. However, it is

impossible to predict accurately the manner in which their

resourcefulness will manifest itself. The Commission's law enforcement

experience relating to deceptive telemarketing has not identified a

problem with general media advertising of prize promotions, unlike the

problems that have arisen with the enumerated telemarketing businesses

that have been excluded from the exemption. In fact, it would likely be

much more difficult to persuade consumers that they have been

``specially selected'' to receive a prize if the solicitation relating

to the prize were to be publicized on the television, in a magazine, or

through other mass media. Therefore, the Commission has decided to

retain the exemption for mass media advertising of prize promotions.

The Commission will reconsider that position if general advertising of

prize promotions becomes a problem after the Final Rule has been in

effect.

\189\ USPS at 10.

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Section 310.6(f) of the Final Rule exempts calls from a customer in

response to a direct mail solicitation that clearly, conspicuously, and

truthfully discloses all material information listed in

Sec. 310.3(a)(1) of this part for any item offered in the direct mail

solicitation. In the Commission's experience, such solicitations are

not uniformly related to the forms of deception and abuse the Act seeks

to stem, nor are they uniformly unrelated to such misconduct. Rather,

in certain discrete areas of telemarketing, such solicitations often

provide the opening for subsequent deception and abuse. The Commission

has drawn upon its enforcement experience, identified those problem

areas, and excluded them from this exemption. The exemption does not

apply to calls initiated by a customer in response to a direct mail

solicitation relating to any of several categories of goods or

services: investment opportunities, credit repair, recovery rooms,

advance fee loans, or prize promotions.

Many commenters from law enforcement and consumer groups strongly

recommended that the Commission also exclude direct mail solicitations

involving prize promotions from this exemption.190 They pointed

out that direct mail solicitations of prize promotions are a major

source of

[[Page 43861]]

consumer complaints and consumer injury, and should remain within the

Rule's coverage. The Commission is persuaded that abuse in direct mail

prize promotions has been such a major source of consumer injury that

an exemption no matter how carefully crafted, might provide loopholes

which deceptive promoters might exploit to evade the Rule. Therefore,

the Commission has added prize promotions to the list of telemarketing

areas that are excluded from the direct mail solicitation exemption.

\190\ Mass AG at 5-6; IA DOJ at 7; USPS at 10-11.

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In excluding prize promotions from the direct mail solicitation

exemption, the Commission has been mindful of the burdens this action

might place on legitimate prize promoters. However, the Commission

believes that the changes elsewhere in the Rule have reduced

substantially the burden on legitimate industry by providing maximum

flexibility to business as long as customers receive the necessary

information and protections. Furthermore, the Commission believes that

any increased burden will be minimal. Based on information provided

during the comment periods and the public workshop, the legitimate

prize promotion industry already complies substantially with most of

the Rule's provisions. For example, legitimate prize promoters do not

misrepresent the prize promotion or the goods and services offered;

they do not debit customer's accounts without express verifiable

authorization; and they maintain the required records.

Several commenters also pointed out that the wording of the

exemption in the revised proposed Rule would allow direct mail

solicitors to claim an exemption even if a direct mail solicitation

were totally deceptive, since the exemption was predicated solely on

making the disclosures required under Sec. 310.3(a)(1).191 The

exemption did not require that the disclosures be truthful, only that

disclosures be made. It was not the Commission's intent to allow an

exemption predicated upon untruthful Sec. 310.3(a)(1) disclosures.

Therefore, Sec. 310.6(f) of the Final Rule specifies that the

disclosures be made truthfully, in addition to being made clearly and

conspicuously.

\191\ IA DOJ at 7; Mass AG at 5-6; USPS at 10-11.

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IBM noted that the Rule's exemptions for general media advertising

in Sec. 310.6(e) and direct mail solicitations in Sec. 310.6(f) are

broader and do not contain the prohibitions against further

solicitation during calls from consumers that the Telemarketing Act

places on catalog sales.192 The commenter stated that ``this

produces the potentially perverse result of regulating most intensely

the marketing medium that provides the greatest indicia of legitimacy

and the most information for the consumer.'' This is an illusory

problem since catalogs, being ``direct mail solicitations,'' are exempt

from the Rule, through Sec. 310.6(f), if they clearly, conspicuously,

and truthfully disclose all material information required in

Sec. 310.3(a)(1).

\192\ IBM at 15-17. The Telemarketing Act exempts solicitation

of sales through the mailing of a catalog as long as the seller or

telemarketer ``does not solicit customers by phone but only receives

calls initiated by customers in response to the catalog and during

those calls takes orders only without further solicitation.''

Sec. 6106(4).

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Section 310.6(g) exempts ``telephone calls between a telemarketer

and any business, except calls involving the retail sale of nondurable

office or cleaning supplies.'' Several industry commenters suggested

that a ``business-to-business'' exemption was defensible only if

provided on an across-the-board basis, without exceptions.193

Industry also asked that any exemption be expanded to include entities

other than businesses, e.g., government agencies and educational

institutions.194 Numerous office and cleaning supplies businesses

also expressed strong dissatisfaction with being covered by the Rule,

arguing that the burden of complying with the Rule will fall on

legitimate sellers and telemarketers, while the deceptive operators

will simply ignore the requirements.195

\193\ See, e.g., DMA at 6-7; AAP at 3; BPIA at 4-7.

\194\ E.g., AAP at 3.

\195\ See, e.g., Allard, Allied, B&D, BESCO, Cook, Cornerstone,

Daisy, Decora, Guernsey, Jud, MBR, Midesha, Pelican, Sablatura,

Total, Way.

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Enforcement and consumer agencies, on the other hand, cautioned

against providing any business-to-business exemption because of the

pot

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