Regulation S-AM: Limitations on Affiliate Marketing

Federal RegisterAug 11, 2009

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 248

[Release Nos. 34-60423, IC-28842, IA-2911; File No. S7-29-04]

RIN 3235-AJ24

Regulation S-AM: Limitations on Affiliate Marketing

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting Regulation S-AM to implement Section 624 of the Fair Credit Reporting Act as amended by Section 214 of the Fair and Accurate Credit Transactions Act of 2003, which required the Commission and other Federal agencies to adopt rules implementing limitations on a person's use of certain information received from an affiliate to solicit a consumer for marketing purposes, unless the consumer has been given notice and a reasonable opportunity and a reasonable and simple method to opt out of such solicitations. The final rules implement the requirements of Section 624 with respect to investment advisers and transfer agents registered with the Commission, as well as brokers, dealers and investment companies.

DATES:

Effective Date:

September 10, 2009.

Compliance Date:

Compliance will be mandatory as of January 1, 2010.

FOR FURTHER INFORMATION CONTACT:

For information regarding the regulation as it relates to brokers, dealers, or transfer agents, contact Brice Prince, Special Counsel, or Ignacio Sandoval, Attorney, Office of Chief Counsel, Division of Trading and Markets, (202) 551-5550, or regarding the regulation as it relates to investment companies or investment advisers, contact Penelope Saltzman, Assistant Director, Office of Regulatory Policy, Division of Investment Management, (202) 551-6792, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission today is adopting Regulation S-AM, 17 CFR 248.101 through 248.128, under the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”),

the Securities Exchange Act of 1934 (the “Exchange Act”),

the Investment Company Act of 1940 (the “Investment Company Act”),

and the Investment Advisers Act (the “Advisers Act”).

Public Law 108-159, Section 214, 117 Stat. 1952, 1980 (2003).

15 U.S.C. 78q, 78w, and 78mm.

15 U.S.C. 80a-30 and 80a-37.

15 U.S.C. 80b-4 and 80b-11.

Table of Contents

I. Background

II. Overview of Comments Received and Explanation of Regulation S-AM

A. Overview of Comments Received

B. Explanation of Regulation S-AM

III. Section-by-Section Analysis

A. Section 248.101 Purpose and Scope

B. Section 248.102 Examples

C. Section 248.120 Definitions

1. Affiliate

2. Broker

3. Clear and Conspicuous

4. Commission

5. Company

6. Concise

7. Consumer

8. Control

9. Dealer

10. Eligibility Information

11. FCRA

12. GLBA

13. Investment Adviser

14. Investment Company

15. Marketing Solicitation

16. Person

17. Pre-Existing Business Relationship

18. Transfer Agent

19. You

D. Section 248.121 Affiliate Marketing Opt Out and Exceptions

1. Section 248.121(a)

2. Section 248.121(b)

3. Sections 248.121(c) and (d)

4. Relation to Affiliate-Sharing Notice and Opt Out

E. Section 248.122 Scope and Duration of Opt Out

1. Section 248.122(a)

2. Section 248.122(b) Duration and Timing of Opt Out

3. Section 248.122(c)

F. Section 248.123 Contents of Opt Out Notice; Consolidated and Equivalent Notices

1. Section 248.123(a)

2. Coordinated, Consolidated, and Equivalent Notices

G. Section 248.124 Reasonable Opportunity To Opt Out

1. Section 248.124(a)

2. Section 248.124(b)

H. Section 248.125 Reasonable and Simple Methods of Opting Out

I. Section 248.126 Delivery of Opt Out Notices

J. Section 248.127 Renewal of Opt Out Elections

K. Section 248.128 Effective Date, Compliance Date, and Prospective Application

1. Section 248.128(a) and (b)

2. Section 248.128(c)

IV. Appendix to Subpart B-Model Forms

V. Cost-Benefit Analysis

VI. Paperwork Reduction Act

A. Collection of Information

B. Use of Information

C. Respondents

D. Total Annual Reporting and Recordkeeping Burdens

E. Retention Period for Recordkeeping Requirements

F. Collection of Information Is Mandatory

VII. Final Regulatory Flexibility Analysis

A. Need for the Rule

B. Description of Small Entities to Which the Final Rules Will Apply

C. Projected Reporting, Recordkeeping, and Other Compliance Requirements

D. Identification of Other Duplicative, Overlapping, or Conflicting Federal Rules

E. Agency Actions To Minimize Effects on Small Entities

VIII. Consideration of Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation

IX. Statutory Authority

X. Text of Final Rules

I. Background

Section 214 of the FACT Act added Section 624 to the Fair Credit Reporting Act (“FCRA”).

This new section of the FCRA gives consumers the right to restrict a person from making marketing solicitations to them using certain information about them obtained from the person's affiliate. Section 214 also required the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision, the National Credit Union Administration (“NCUA”) (collectively, the “Banking Agencies”) and the Federal Trade Commission (“FTC”) (collectively with the Banking Agencies, the “Agencies”), and the Commission, in consultation and coordination with one another, to issue rules implementing Section 624 of the FCRA.

See

Public Law 108-159, Section 214, 117 Stat. 1952, 1980 (2003); 15 U.S.C. 1681s-3 and note. The FCRA sets standards for the collection, communication, and use of information bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.

A portion of Section 214 of the FACT Act amended the FCRA to add a new Section 624, while other provisions of Section 214 were not incorporated into the FCRA. Throughout this release, references to “Section 214” or “Section 624 of the FCRA” are used depending on whether the reference is to Section 624 or to a portion of Section 214 not incorporated into the FCRA.

Commission staff consulted and coordinated with staff of the Agencies in drafting rules to implement Section 624. As required by Section 214 of the FACT Act, Regulation S-AM is, to the extent possible, consistent with and comparable to the implementing regulations adopted by the Agencies.

Regulation S-AM contains rules of general applicability that are substantially similar to the rules that have been adopted by the Agencies. Regulation S-AM also contains examples that illustrate the application of the general rules. These examples differ from those used by the Agencies in order to provide more meaningful guidance to financial institutions subject to the Commission's jurisdiction.

See

Banking Agencies,

Fair Credit Reporting Affiliate Marketing Regulations

, 72 FR 62910 (Nov. 7, 2007) (“Joint Rules”). Citations to particular

provisions of the “Joint Rules” refer to the numbering system used in the Board's final rules.

See

12 CFR 222.1 to 222.28.

See also

FTC,

Affiliate Marketing Rule

, 72 FR 61424 (Oct. 30, 2007) (“FTC Rule”).

II. Overview of Comments Received and Explanation of Regulation S-AM

A. Overview of Comments Received

On July 8, 2004, the Commission proposed Regulation S-AM (the “proposal” or “proposed rules”).

The Commission received 15 comments on the proposed rules from financial institutions and their representatives.

While a number of commenters generally supported the Commission's proposals,

others expressed concerns regarding particular provisions of the proposed rules. The most significant areas of concern raised by the commenters related to: (1) Proposed restrictions on “constructive sharing”; (2) which affiliate would be responsible for providing the notice; (3) the proposed definitions for terms such as “affiliate,” “eligibility information,” “clear and conspicuous,” “pre-existing business relationship,” and “marketing solicitation”; and (4) the scope of certain proposed exceptions to the proposed rules' notice and opt out requirements.

A more detailed discussion of the comments is contained in the Section-by-Section analysis below.

Limitations on Affiliate Marketing (Regulation S-AM)

, Exchange Act Release No. 49985 (July 8, 2004), 69 FR 42302 (July 14, 2004) (“Proposing Release”).

The Securities Industries Association, n/k/a the Securities Industry and Financial Markets Association (“SIFMA”) submitted two comment letters. We consider these letters to be one comment.

See

Letters from Alan E. Sorcher, Vice President and Associate General Counsel, SIFMA to Jonathan G. Katz, Secretary, Commission (Aug. 13, 2004) (“SIFMA Letter I”) and from Alan E. Sorcher, Vice President and Associate General Counsel, SIFMA to Jonathan G. Katz, Secretary, Commission (Aug. 18, 2004) (“SIFMA Letter II”) (together “SIFMA Letters”). Unless otherwise noted, all letters referred to below were addressed to the Secretary of the Commission.

See

Letter from Michael E. Bleier, General Counsel, Mellon Financial Corporation (July 26, 2004) (“Mellon Letter”); Letter from Ira Friedman, Senior Vice President, Chief Privacy Officer and Special Counsel, Metropolitan Life Insurance Company (Aug. 3, 2004) (“MetLife Letter”); Letter from Larkin Fields, Senior Vice President and Chief Privacy Officer, United Services Automobile Association (Aug. 11, 2004) (“USAA Letter”); Letter from Jeffrey A. Tassey, Executive Director, Coalition to Implement the FACT Act (Aug. 12, 2004) (“Coalition Letter”); Letter from Monique S. Botkin, Counsel, Investment Counsel Association of America, Inc., n/k/a Investment Adviser Association (Aug. 12, 2004) (“IAA Letter”); Letter from Robert G. Rowe, III, Regulatory Counsel, Independent Community Bankers of America (Aug. 12, 2004) (“ICBA Letter”); Letter from Peter L. McCorkell, Senior Counsel, Wells Fargo & Company (Aug. 12, 2004) (“Wells Fargo Letter”); Letter from Roberta B. Meyer, Senior Counsel, Risk Classification, American Council of Life Insurers (“ACLI”) (Aug. 13, 2004) (“ACLI Letter”); Letter from Tamara K. Salmon, Senior Associate Counsel, Investment Company Institute (“ICI”) (Aug. 13, 2006) (“ICI Letter”); Letter from Henry H. Hopkins, Chief Legal Counsel, and Karen Nash-Goetz, Associate Legal Counsel, T. Rowe Price Associates, Inc. (Aug. 13, 2004) (“T. Rowe Price Letter”); Letter from J. Stephen Zielezienski, Vice President & Associate General Counsel, American Insurance Association (“AIA”) (Aug. 15, 2004) (“AIA Letter”); Letter from Beth L. Climo, Executive Director, American Bankers Association Securities Association (“ABASA”) (Aug. 16, 2004) (“ABASA Letter”); Letter from Robert C. Drozdowski, Vice President, Payments and Technology Policy, America's Community Bankers (“ACB”) (Aug. 16, 2004) (“ACB Letter”); Letter from Richard M. Whiting, Executive Director and General Counsel, The Financial Services Roundtable (“FSR”) (Aug. 16, 2004) (“FSR Letter”). Each of these letters is available at

http://www.sec.gov/rules/proposed/s72904.shtml

See, e.g.

, IAA Letter; ICI Letter; Mellon Letter; MetLife Letter.

See infra

Part III.D.

B. Explanation of Regulation S-AM

Regulation S-AM will allow a consumer, in certain limited situations, to block affiliates of a person subject to Regulation S-AM that the consumer does business with from soliciting the consumer based on certain “eligibility information” (

i.e.

, certain financial information, such as information regarding the consumer's transactions or experiences with the person) received from the person. Unlike Regulation S-P, the Commission's privacy rule,

Regulation S-AM does not prohibit the

sharing

of information with another entity. Instead, Regulation S-AM prohibits a company from

using

eligibility information received from an affiliate to make marketing solicitations to consumers, unless: (1) The potential marketing use of the information has been clearly, conspicuously, and concisely disclosed to the consumer; (2) the consumer has been provided a reasonable opportunity and a simple method to opt out of receiving the marketing solicitation; and (3) the consumer has not opted out. Regulation S-AM also provides that a notice and opt out required under Regulation S-AM can be combined with other disclosures required by law, such as the initial and annual privacy notices required by Regulation S-P. Regulation S-AM also contains a number of exceptions to its notice and opt out requirements, such as when an affiliate making a marketing solicitation has a pre-existing business relationship with the consumer, or provides marketing material in response to an affirmative request by the consumer or in response to a communication initiated by the consumer. In addition, the Appendix to Regulation S-AM provides model forms that, when used properly, satisfy Regulation S-AM's requirement that an affiliate marketing notice be clear, conspicuous, and concise. Regulation S-AM also includes examples illustrating the applicability of the final rules to certain situations. The facts and circumstances of each individual situation, however, will determine whether compliance with an example, to the extent applicable, constitutes compliance with the final rules.

Currently, Regulation S-P is codified at 17 CFR Part 248. With the adoption of Regulation S-AM, we are redesignating Regulation S-P as Subpart A of Part 248, and adopting Regulation S-AM as Subpart B of Part 248. We are also adopting technical and conforming amendments to Regulation S-P to reflect this change as detailed

infra

Part X. In particular, we are changing the current subpart designations within Regulation S-P to undesignated center headings, revising all references in Regulation S-P to “this part” to read “this subpart,” and for consistency with the term used in Regulation S-AM, revising all references to “G-L-B Act” to read “GLBA.” We are consolidating Regulation S-P and Regulation S-AM in Part 248 because both regulations address information sharing and safekeeping.

As adopted, Regulation S-AM differs from the proposed rules in several significant ways. First, an affiliate communicating eligibility information is not responsible for providing an affiliate marketing notice. Instead, the notice may be provided by any affiliate identified in the notice that has, or has previously had, a pre-existing business relationship with the consumer to whom the notice is provided. Second, the final rules do not apply to “constructive sharing” scenarios, as considered in the Proposing Release. Third, the Commission requested and received comment on the use of oral notices, and after careful consideration of the comments, the final rules provide that notices cannot be delivered orally, but instead, must be delivered electronically or in writing. While consumers can elect to opt out orally after receipt of the notice, they may not orally revoke their opt out. Fourth, unlike the proposal which referred to “making or sending” marketing solicitations, the final rules eliminate the reference to “send” because we concluded, based on comments, that “sending” and “making” marketing solicitations are different activities. Fifth, the final rules clarify that an opt

out notice may apply to eligibility information obtained in connection with one or more continuing relationships the consumer establishes with an entity or its affiliates, as long as the notice adequately describes the relationships covered by the notice. Sixth, the final rules include a new section describing the conditions under which a service provider for both an entity that has a pre-existing business relationship with a consumer and the entity's affiliate would be acting for the entity rather than its affiliate whose products or services are being marketed. Finally, the definition of “affiliate,” “control,” “marketing solicitation,” and “pre-existing business relationship” have been revised to reflect comments we received.

These and other changes are discussed in greater detail

infra

Part III.

III. Section-by-Section Analysis

While the Proposing Release placed Regulation S-AM in 17 CFR 247.1-247.28, the final rules are located in 17 CFR 248.101 through 248.128.

See supra

note 11. This numbering system differs slightly from the one used by the Agencies, but is still consistent with the Joint Rules—Regulation S-AM uses section numbers that are higher by 100 than those used in the Joint Rules. For example, references to § 22 of the Joint Rules would correspond to § 122 of Regulation S-AM. In addition, the Commission believes that placing Regulation S-AM in the same part of the CFR as the Commission's privacy rules (

i.e.

, Regulation S-P) will provide persons subject to the rules with an easier point of reference, especially since we expect that these persons would consolidate the notice and opt out requirements of the affiliate marketing rules together with those of the privacy rules.

A. Section 248.101 Purpose and Scope

We received no comments on proposed § 247.1, which identifies the purposes and scope of the rules, and we are adopting it as proposed, redesignated as § 248.101. Paragraph (a) of § 248.101 of Regulation S-AM provides that the purpose of Regulation S-AM is to implement the affiliate marketing provisions of Section 624 of the FCRA. Paragraph (b) of § 248.101 lists the entities to which the final rules apply. Although the FACT Act does not specifically identify the entities that are to be subject to the rules prescribed by the Commission,

Congress's inclusion of the Commission as one of the agencies required to adopt implementing regulations suggests that Congress intended that our rules apply to those entities that the Commission regulates,

i.e.

, brokers, dealers, and investment companies, as well as to investment advisers and transfer agents that are registered with the Commission (respectively, “registered investment advisers” and “registered transfer agents,” and, collectively, with brokers, dealers, and investment companies, “Covered Persons”).

These entities are referred to as “you” throughout Regulation S-AM. We have excluded from the scope of the regulation broker-dealers registered by notice with the Commission under Section 15(b)(11) of the Exchange Act for the purpose of conducting business in security futures products (“notice-registered broker-dealers”).

Section 214(b) of the FACT Act directed that regulations implementing Section 624 of the FCRA be prescribed by the “Federal banking agencies, the National Credit Union Administration, and the [Federal Trade] Commission, with respect to the entities that are subject to their respective enforcement authority under Section 621 of the Fair Credit Reporting Act [15 U.S.C. 1681s] and the Securities and Exchange Commission * * * .”

See

15 U.S.C. 1681s-3 note. Section 621(a)(1) of the FCRA grants enforcement authority to the FTC for all persons subject to the FCRA “except to the extent that enforcement * * * is specifically committed to some other government agency under subsection (b)” of Section 621. 15 U.S.C. 1681s(a)(1). The Commission is not one of the agencies included under subsection (b). The Commission was added to the list of Federal agencies required by Section 214(b) to adopt regulations implementing Section 624 of the FCRA in conference committee. There is no legislative history on this issue.

The term “Covered Persons” is used for the purposes of this release and is not a defined term in Regulation S-AM. The application of Regulation S-AM to investment companies, brokers, dealers (other than notice-registered broker-dealers), and registered transfer agents and investment advisers is consistent with Regulation S-P. Not all transfer agents, investment companies or investment advisers are required to register with the Commission. Section 17A(c) of the Exchange Act requires that transfer agents register with the appropriate regulatory agency, which can be the Commission, the Board, the OCC or the FDIC. 15 U.S.C. 78c(a)(34) (defining “appropriate regulatory agency”); 15 U.S.C.78q-1(c) (describing the registration requirements for transfer agents). Section 6(f) of the Investment Company Act (15 U.S.C. 80a-6(f)) provides an exemption from registration for a closed-end investment company that elects to be regulated as a business development company pursuant to Section 54 of the Act (15 U.S.C. 80a-53). Sections 203 and 203A of the Advisers Act govern the registration of investment advisers with the Commission.

See

15 U.S.C. 80b-3 and 80b-3a.

See

discussion of definitions of “broker” and “dealer”

infra

Parts III.C.2 and III.C.9. Notice-registered broker-dealers are subject to primary oversight by the Commodity Futures Trading Commission (“CFTC”) and are exempted from all but the core provisions of the laws administered by the Commission. We interpret Congress's exclusion of the CFTC from the list of financial regulators required by Section 214(b) of the FACT Act to prescribe regulations implementing Section 624 of the FCRA to mean that Congress did not intend for the Commission's rules under the FACT Act to apply to entities subject to primary oversight by the CFTC.

B. Section 248.102 Examples

We are adopting as proposed § 247.2, which clarifies the effect of the examples used in the rules and model forms, redesignated as § 248.102. Given the wide range of possible situations covered by Section 624 of the FCRA, Regulation S-AM includes general rules, provides more specific examples, and includes model opt out notice forms. The examples, which are not exclusive, provide guidance concerning the rules' application in ordinary circumstances. The facts and circumstances of each individual situation, however, will determine whether compliance with an example, to the extent applicable, constitutes compliance with this subpart.

Examples in a paragraph illustrate only the issue described in the paragraph and do not illustrate any other issue that may arise under this subpart. Similarly, the examples do not illustrate any issues that may arise under other laws or regulations. We received no comment on this section.

The Joint Rules and the FTC Rule provide that, to the extent applicable, compliance with an example constitutes compliance with the Joint Rules and the FTC Rule, respectively.

See, e.g.

, 12 CFR 222.2. The examples in our final rules, however, do not provide the same safe harbor. The examples in Regulation S-AM are intended to describe the broad outlines of situations illustrating compliance with the applicable rule. However, the specific facts and circumstances relating to a particular situation will determine whether compliance with an example constitutes compliance with the rules.

C. Section 248.120 Definitions

As noted, for consistency and ease of reference, Regulation S-AM generally follows the section numbering used in the Joint Rules and the FTC Rule. Therefore, the defined terms proposed under § 247.3 are now located in § 248.120. In addition, the examples corresponding to the definition of “pre-existing business relationship,” in proposed § 247.20(d)(1), are now included in the definition of “pre-existing business relationship,” which is redesignated as § 248.120(q)(2) in the final rules.

See supra

note 13.

1. Affiliate

We are revising the proposed definition of “affiliate” in response to issues raised by commenters. The proposal defined “affiliate” of a Covered Person as any person that is related by common ownership or common corporate control with the Covered Person. The proposed rule also provided that a Covered Person is considered an affiliate of another person for purposes of Regulation S-AM if: (1) The other person is regulated under Section 214 of the FACT Act by one of the Agencies; and (2) the rules adopted by that Agency treat the Covered Person as an affiliate of the other person.

The proposed

definition followed the definition of “affiliates” in Section 2 of the FACT Act, which encompasses “persons that are related by common ownership or affiliated by corporate control.”

Proposed § 247.3(a)(1)-(2). This provision was designed to prevent the disparate treatment of

affiliates within a holding company structure that are regulated by different Federal regulators and to make this provision of Regulation S-AM consistent with comparable provisions of the Agencies.

Several FCRA provisions apply to information sharing with persons “related by common ownership or affiliated by corporate control,” “related by common ownership or affiliated by common corporate control,” or “affiliated by common ownership or common corporate control.”

See, e.g.

, FCRA Sections 603(d)(2), 615(b)(2), and 625(b)(2). Each of these provisions was enacted as part of the 1996 amendments to the FCRA. Similarly, Section 2(4) of the FACT Act defines the term “affiliate” to mean “persons that are related by common ownership or affiliated by corporate control.” In contrast, the Gramm-Leach-Bliley Act (“GLBA”) defines “affiliate” to mean “any company that controls, is controlled by, or is under common control with another company.”

See

15 U.S.C. 6809(6).

Commenters noted with approval the proposed definition's general consistency with the definition of “affiliate” in the GLBA and Regulation S-P, but some suggested the definitions should be made more consistent.

Two commenters suggested that we eliminate the term “corporate” in the Regulation S-AM definition.

In addition, two commenters suggested that the Commission adopt the approach to the definition of affiliate taken under California's Financial Information Privacy Act (“California Privacy Law”).

See

ACB Letter; FSR Letter; IAA Letter; ICBA Letter; ICI Letter; T. Rowe Price Letter; Wells Fargo Letter.

See

ICI Letter; T. Rowe Price Letter.

See

FSR Letter; Mellon Letter. These commenters noted that the California law places no restriction on information sharing among affiliates if they: (1) Are regulated by the same or similar functional regulators; (2) are involved in the same broad line of business, such as banking, insurance, or securities; and (3) share a common brand identity.

See

Cal. Financial Code Section 4053(c).

After considering the comments, we are revising the definition of “affiliate” to eliminate the term “corporate” from the definition.

The final definition harmonizes the various FCRA and FACT Act formulations, and the GLBA definition, by defining “affiliate” to mean “any person that is related by common ownership or common control with” another person. While Section 2 of the FACT Act contains the term “corporate,” we did not include it in the final rule in recognition of other types of control relationships that may give rise to affiliation under the rule.

In contrast to the other regulators, we did not replace the term “person” with “company” in the definition because certain of our Covered Persons are natural persons. For example, some brokers-dealers and some investment advisers registered with the Commission are sole proprietors. In contrast, banking charters are held by entities other than natural persons. This change to the definition of “affiliate” is intended to promote consistency in the Commission's rules and to prevent gaps in the coverage of Regulation S-AM. We do not believe that there is a substantive difference between the definitions of “affiliate” in the FACT Act and in Section 509 of the GLBA.

We are not, however, incorporating elements of the California Privacy Law into the definition. To do so would be beyond our congressional mandate, especially given that Congress itself could have incorporated those elements when amending the FCRA.

Section 248.120(a).

As discussed below, “control” is defined in Regulation S-AM to include control relationships that go beyond those based on corporate control.

See infra

Part III.C.8.

This approach is also consistent with the Agencies' final rules.

See

Joint Rules at 72 FR 62912; FTC Rule at 72 FR 61426.

2. Broker

We received no comments on the proposed definition of “broker” and are adopting it as proposed.

The definition incorporates the definition of “broker” in the Exchange Act and excludes notice-registered brokers.

See

§ 248.120(b), which was proposed as § 247.3(b).

See supra

note 16.

3. Clear and Conspicuous

We are adopting the definition of “clear and conspicuous” as proposed to mean reasonably understandable and designed to call attention to the nature and significance of the information presented.

Persons may wish to consider a number of methods to make their notices clear and conspicuous, including those described below. Institutions are not required to implement any particular method or combination of methods to make their disclosures clear and conspicuous. Rather, the particular facts and circumstances will determine whether a disclosure is clear and conspicuous. Consistent with the Proposing Release, a notice or disclosure may be made reasonably understandable through various methods that include:

See

§ 248.120(c), proposed as § 247.3(c).

• Using clear and concise sentences, paragraphs, and sections;

• Using short explanatory sentences;

• Using bullet lists;

• Using definite, concrete, everyday words;

• Using active voice;

• Avoiding multiple negatives;

• Avoiding legal and highly technical business terminology; and

• Avoiding explanations that are imprecise and readily subject to different interpretations.

See

Proposing Release at 69 FR 42305.

A notice or disclosure could also use various design methods to call attention to the nature and significance of the information in it, including but not limited to:

• Using a plain-language heading;

• Using a typeface and type size that are easy to read;

• Using wide margins and ample line spacing; and

• Using boldface or italics for key words.

Id.

Persons who choose to provide the notice or disclosure by using an Internet Web site may use text or visual cues to encourage the reader to scroll down the page, if necessary, to view the entire document. Persons may also take steps to ensure that other elements on the Web site (such as text, graphics, hyperlinks, or sound) do not distract attention from the notice or disclosure.

If a notice or disclosure required under Regulation S-AM is combined with other information, methods for designing the notice or disclosure to call attention to the nature and significance of the information in it may include distinctive type sizes, styles, fonts, paragraphs, headings, graphic devices, and appropriate groupings of information. However, there is no need to use distinctive features, such as distinctive type sizes, styles, or fonts, to differentiate an affiliate marketing opt out notice from other components of a required disclosure. For example, the notice could be included in a GLBA privacy notice that combines several opt out disclosures in a single notice. Moreover, nothing in the clear and conspicuous standard requires segregation of the affiliate marketing opt out notice when it is combined with a GLBA privacy notice or other required disclosures.

We recognize that it will not be feasible or appropriate to incorporate all of the methods described above with respect to every affiliate marketing notice. We recommend, but do not require, that institutions consider the methods described above in designing their notices. We also encourage the use of consumer or other readability testing to devise notices that are understandable to consumers.

Five commenters addressed the proposed definition of “clear and

conspicuous.”

One commenter expressed approval of the proposed definition because of its similarity to the definition of the term found in Regulation S-P.

However, other commenters suggested that the definition could give rise to an increased risk of litigation and civil liability for financial institutions.

While these commenters recognized that the proposed definition was derived from the GLBA privacy regulations, they noted that compliance with the GLBA privacy regulations is enforced exclusively through administrative actions and not through private litigation. One commenter suggested the definition was unnecessary to ensure that consumers receive a clear and conspicuous notice as required by Section 624 of the FCRA, noting that other affiliate sharing notice and opt out requirements have operated in the FCRA for several years without a regulatory definition.

Commenters also pointed to the Board's withdrawal of a similar definition in other regulations as support for not including the definition.

In the alternative, one commenter suggested that the Commission and the Agencies issue questions and answers or non-exclusive examples indicating that compliance with one of these examples would satisfy the rule's requirements.

Another commenter suggested outlining reasonable expectations for what would be considered “clear and conspicuous” and suggested including reasonable protections against liability and administrative penalties when unintentional errors occur.

See

ACB Letter; Coalition Letter; IAA Letter; ICBA Letter; Wells Fargo Letter.

See

IAA Letter.

See also

17 CFR 248.3(c)(1) (defining “clear and conspicuous” for purposes of Regulation S-P).

See

ACB Letter; ICBA Letter; Wells Fargo Letter.

See

Coalition Letter. The FCRA contains “affiliate

sharing”

notice and opt out provisions that are distinct from the “affiliate

marketing”

provisions of Regulation S-AM. Section 603(d)(2)(A)(iii) of the FCRA provides that a person may communicate information that is not transaction or experience information among its affiliates without that information becoming a consumer report if the sharing is clearly and conspicuously disclosed to the consumer and the consumer is given an opportunity to opt out of the sharing. In contrast, Regulation S-AM limits the

use

of information by affiliates for marketing purposes, not the

sharing

of information among affiliates.

See

Coalition Letter; Wells Fargo Letter. These commenters cited the Board's decision to withdraw a similar proposal to define “clear and conspicuous” for purposes of Regulations B, E, M, Z, and DD, in part because of concerns over civil liability.

See

ICBA Letter. One commenter urged us to make clear that a person does not have to use specific terms for opt out and that this should be included as part of the account opening process.

See

SIFMA Letter I.

See

ACB Letter;

See also

15 U.S.C. 1681a(d)(2)(A)(iii). Under the FCRA, the term “consumer report” is defined to include any communication of information from a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living that is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for credit or insurance to be used primarily for personal, family or household purposes, employment purposes, or other purposes authorized elsewhere in the FCRA. 15 U.S.C. 1681a(d)(1).

See

§ 248.120(j).

We have revised the definition of “eligibility information” to clarify that the term does not apply to aggregate or blind data that does not contain personal identifiers.

Examples of personal identifiers listed in the definition include account numbers, names or addresses, and also could include Social Security numbers, driver's license numbers, telephone numbers, or other types of information that, depending on the circumstances or when used in combination, could identify the individual or individuals to whom the data relates. Other types of personal identifiers could include passwords, screen names, user names, e-mail addresses, or Internet Protocol addresses.

Id.

We recognized in the Proposing Release that it might be burdensome for Covered Persons to determine and track whether consumer report information is (1) “eligibility information” and thus subject to the notice and opt out provisions of Section 624 or (2) information that might be shared with affiliates under other exceptions to the FCRA (to which the notice and opt out provisions of Section 624 do

not

apply). We invited comment on whether the proposed definition of “eligibility information” appropriately reflected the scope of coverage of the FACT Act and provided meaningful guidance to Covered Persons.

Some commenters indicated that the proposed definition did not provide enough meaningful guidance as to what sort of information is covered.

Others suggested that the Commission should provide examples to illustrate the common types of information that would and would not constitute eligibility information.

One commenter requested examples specifically relevant to the securities industry.

Another commenter offered an alternative definition, stating that the proposed definition was unnecessarily complex and difficult to apply.

Another commenter noted that, unlike the Agencies, the Commission did not provide in the Proposing Release that the term was designed to “facilitate discussion, and not change the scope of the information covered by Section 624(a)(1)” of the FCRA.

The commenter expressed concern that the divergence may signal some other

interpretation, but did not provide an example of a secondary interpretation.

See

FSR Letter; SIFMA Letter I.

See

ICI Letter; T. Rowe Price Letter.

See

ICI Letter.

See

ICBA Letter. The commenter proposed to define eligibility information as “any information that bears on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for credit or insurance to market products and services for personal, family or household purposes to that person.”

See

Coalition Letter.

The Commission believes that further clarification of, or exclusions from, the term “eligibility information” would implicate the definitions of “consumer report” and “consumer reporting agency” in Sections 603(d) and (f), respectively, of the FCRA. The Commission does not define the terms “consumer report” and “consumer reporting agency” in this rulemaking or construe terms therein, such as “transaction or experience” information. We note that financial institutions have relied on these statutory definitions for many years. Providing examples of information that would or would not be eligibility information would not necessarily reduce the complexity of the definition, and could create greater uncertainty with regard to information that is not covered by an example. The definition of “eligibility information” in Regulation S-AM is the same as the one found in the Joint Rules adopted by the Banking Agencies.

In adopting their final rules, the Banking Agencies stated that they anticipate addressing the definitions of “consumer report” and “consumer reporting agency” in a separate rulemaking after the required FACT Act rules have been completed.

See

Joint Rules at 72 FR 62915.

11. FCRA

We received no comment on the term “FCRA” and are adopting it as proposed to mean the Fair Credit Reporting Act.

See

§ 248.120(k), which was proposed as § 247.3(j).

12. GLBA

The proposed rule defined “GLB Act” to mean the Gramm-Leach-Bliley Act. We received no comment on this definition but are changing the term to “GLBA” to be more consistent with the way the Agencies refer to the Gramm-Leach-Bliley Act.

See

§ 248.120(

), proposed as § 247.3(k).

13. Investment Adviser

We received no comment on the definition of “investment adviser” and are adopting it as proposed.

This definition incorporates the definition of “investment adviser” in the Investment Advisers Act.

See

§ 248.120(m), proposed as § 247.3(

14. Investment Company

We received no comment on the definition of “investment company” and are adopting it as proposed.

This definition incorporates the definition of “investment company” in the Investment Company Act.

See

§ 248.120(n), proposed as § 247.3(m).

15. Marketing Solicitation

We are adopting the definition of “marketing solicitation,” with modifications discussed below.

The proposed rule defined “marketing solicitation” to mean marketing initiated by a Covered Person to a particular consumer that is based on eligibility information communicated to that Covered Person by its affiliate, and that is intended to encourage the consumer to purchase or obtain a product or service. The definition included any form of communication, such as a telemarketing call, direct mail, or electronic mail that is directed to a specific consumer based on that consumer's eligibility information. It did not include communications that are directed at the general public without regard to eligibility information, even if those communications are intended to encourage consumers to purchase products and services. We noted in the Proposing Release that the definition tracked the definition in Section 624 of the FCRA but did not follow the statute exactly to prevent confusion with the term “solicitation” in the context of the Federal securities laws.

Although Section 624 also authorizes the Commission to exclude other communications from the definition of “marketing solicitation,” we did not propose to do so, but rather, sought comment on whether any other communications should be excluded from the statutory definition of “solicitation.”

We also requested comment on whether, and to what extent, various tools used in Internet-based marketing, such as pop-up ads, could constitute marketing solicitations as opposed to communications directed at the general public.

See

§ 248.120(

), proposed as § 247.3(n).

See

Proposing Release at 69 FR 42306. In particular, Regulation S-AM uses the term “marketing solicitation” rather than “solicitation.” Although “solicitation” is a defined term in Section 624 of the FACT Act, the operative phrase in Section 624(a) is “solicitation for marketing purposes.”

See

15 U.S.C. 1681s-3(a).

15 U.S.C. 1681s-3(d)(2).

Seven commenters addressed the definition of “marketing solicitation.”

Some expressed concern that the proposed definition was not the same as the definition in Section 214 of the FCRA

and suggested including the phrase “of a product or service” in the introductory language to be consistent.

Other commenters favored the exclusion from the definition of marketing solicitation, solicitations made to the general public.

However, one commenter believed that the phrase “distributed without the use of eligibility information communicated by an affiliate” inadvertently misstated the types of general marketing that would not be marketing solicitations.

Another commenter asked the Commission to clarify that any communications directed at the general public are not marketing solicitations regardless of whether they were developed using specific eligibility information.

See

Coalition Letter; FSR Letter; ICBA Letter; ICI Letter; MetLife Letter; SIFMA Letter I; Wells Fargo Letter.

See

FSR Letter; SIFMA Letter I.

Id.

One commenter indicated that the lack of this phrase raised the possibility that the definition could be misinterpreted.

See

FSR Letter.

See

Coalition Letter; ICBA Letter; Wells Fargo Letter.

See

Coalition Letter.

See

Wells Fargo Letter.

Several commenters also addressed Internet-based marketing and generally opposed including it in this rulemaking.

Some expressed the view that discussion of a particular delivery mechanism would be counterproductive and contrary to congressional intent, noting that the Internet was not specifically addressed in this legislation.

Another suggested that Internet issues should be addressed in a separate process to ensure that notice and opportunity to be heard are given to the parties affected.

See

Coalition Letter; FSR Letter; MetLife Letter.

See

Coalition Letter; MetLife Letter.

See

MetLife Letter.

The commenter also opined that pop-up ads that appear automatically without the use of eligibility information or information from other affiliates are communications directed at the general public, and that a consumer visiting an Internet Web site is effectively making an inquiry which is tantamount to an affirmative request for information. In addition, the commenter asked for clarification that pre-recorded messages played while consumers are on hold when calling a call center should be construed as general marketing solicitations. Another commenter asked for a similar clarification for advertisements that appear on password-protected Web sites.

See

ICI Letter.

The revised definition tracks the statutory language more closely by encompassing the marketing “of a product or service.”

To ensure consistency with the definition of “pre-existing business relationship,” the definition applies to marketing intended to encourage the consumer to purchase

“or obtain” a product or service. In this way, the definition includes marketing for the rental or lease of goods or services, financial transactions, and financial contracts. The Commission is not adopting the reference to communications “distributed without the use of eligibility information communicated by an affiliate” in the exclusion for marketing directed at the general public because we do not believe it is necessary. Marketing that is undertaken without the use of eligibility information received from an affiliate is not covered by the affiliate marketing rules. Moreover, there is no restriction on using eligibility information received from an affiliate in marketing directed at the general public, such as radio, television, general circulation magazine, billboard advertisements, or publicly available Web sites that are not directed to particular consumers.

For purposes of this release and the final rule, we interpret and use the term “products and services” to include shareholder investments in investment companies.

See supra

text accompanying note 90. Similarly, visiting a publicly available Web site should not, by itself, constitute an “inquiry” for purposes of the pre-existing business relationship exception.

The definition of “marketing solicitation” does not distinguish among different delivery methods or media. A determination of whether a marketing communication in any medium constitutes a marketing solicitation depends upon the facts and circumstances. The Commission declines to exclude categorically from the definition of “marketing solicitation,” pre-recorded messages played while a consumer is on hold with a call center, or advertisements that appear solely on password-protected Web sites. Marketing delivered by such media may constitute a marketing solicitation if it is targeted to a particular consumer based on eligibility information received from an affiliate. For example, a pre-recorded message played while a consumer is on hold with a call center would be a marketing solicitation if it is targeted to a particular consumer based on eligibility information received from an affiliate, but would not be a marketing solicitation if it is played for all consumers who are on hold with the call center.

We note that the Agencies declined to exclude educational seminars, customer appreciation events, focus group invitations, and similar forms of communication from the definition of “solicitation” in their final rules.

While we received no comments on these types of activities, like the Agencies, we believe that such activities must be evaluated according to the facts and circumstances, and that some of these activities may be coupled with, or a prelude to, a marketing solicitation. For example, an invitation to a financial educational seminar when the invitees are selected based on eligibility information received from an affiliate may be a marketing solicitation if the seminar is used to solicit the consumer to purchase or obtain investment products or services.

See

Joint Rules at 72 FR 62919; FTC Rule at 72 FR 61432.

16. Person

We received no comment on the definition of “person,” and we are adopting it as proposed.

The proposed rule defined “person” to mean any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity. A person could act through an agent, such as a licensed agent (in the case of an insurance company), a trustee (in the case of a trust), or any other agent. For purposes of Regulation S-AM, actions taken by an agent on behalf of a person that are within the scope of the agency relationship will be treated as actions of that person.

See

§ 248.120(p), proposed as § 247.3(

17. Pre-Existing Business Relationship

a. Definition

We are adopting the definition of “pre-existing business relationship” substantially as proposed,

100

with the modifications discussed below. The proposed rule contained a three-part definition of “pre-existing business relationship.” Under the first part, a “pre-existing business relationship” would exist when there is a financial contract in force between a Covered Person and a consumer.

101

Under the second part, a “pre-existing business relationship” would exist when a consumer purchased, rented, or leased a Covered Person's goods or services, or entered into a financial transaction (including holding an active account or a policy in force or having another continuing relationship) with a Covered Person during the 18-month period immediately preceding the date on which a marketing solicitation is made.

102

Under the third part, a “pre-existing business relationship” would exist when, in certain circumstances, a consumer inquired about, or applied for, a product or service offered by a Covered Person during the three-month period immediately preceding the date on which a marketing solicitation is made to the consumer.

103

In the Proposing Release, we noted that the proposed definition tracked the definition in Section 624 of the FCRA but did not follow the statute exactly.

104

We also noted that while Section 624 authorizes the Commission to recognize any other circumstances that would constitute a pre-existing business relationship, we did not propose to exercise this authority.

105

100

See

§ 248.120(q)(1), proposed as § 247.3(p).

101

See

Proposed § 247.3(p)(1).

102

See

Proposed § 247.3(p)(2).

103

See

Proposed § 247.3(p)(3).

104

See

Proposing Release at 42306 (citing 15 U.S.C. 1681s-3(d)(1)).

105

Id.

(citing 15 U.S.C. 1681s-3(d)(1)(D)).

Ten commenters addressed the definition of “pre-existing business relationship.”

106

Several commenters noted that the statutory reference to “a person's licensed agent” was not in the rule.

107

One commenter expressed the view that Congress intended the phrase to be included in any implementing rule because it is in the statute.

108

Two commenters noted the importance of licensed agents in the insurance industry, and stated that independent, licensed agents frequently act as the main point of contact between a consumer and an insurance company.

109

In light of these comments and to more closely track the statute, we have added the phrase “or a person's licensed agent” in the final definition of “pre-existing business relationship.” For example, a person who is both a licensed agent for an insurance company and a registered representative for a broker-dealer may sell to a consumer a variable annuity issued by the insurance company. The licensed agent may use eligibility information that it obtains in connection with selling the variable annuity to the consumer to market the insurance company's life insurance policies to the consumer for the duration of the pre-existing business relationship without offering an opt out opportunity.

106

See

ABASA Letter; ACB Letter; ACLI Letter; AIA Letter; Coalition Letter; FSR Letter; ICBA Letter; MetLife Letter; Wells Fargo Letter; SIFMA Letter I.

107

See

ACB Letter; ACLI Letter; Coalition Letter; FSR Letter; ICBA Letter; MetLife Letter; SIFMA Letter I.

108

See

Coalition Letter.

109

See

ACLI Letter; MetLife Letter. The ACLI Letter also noted that this type of role played by licensed agents would have implications for not only life insurers who issue variable life insurance and variable annuity contracts but also the broker-dealers who sell these products.

Some commenters questioned the requirement in the first part of the definition that a financial contract be in force “on the date on which the consumer is sent a marketing

solicitation.”

110

In their view, delays between the time when information is processed and prepared for a marketing solicitation and the time a marketing solicitation is made or sent would create an undue burden of having to synchronize the sending of the marketing solicitation with a contract that is in force. They recommended that a contract should only have to be in force when the information is prepared for a marketing solicitation and not when the marketing solicitation is made. We do not agree with these comments and are adopting the second part of the definition as proposed. This approach is consistent with the approach used in the other two parts of the statutory definition.

111

We also note that the second part of the definition alleviates these synchronization problems since a pre-existing business relationship would continue to exist for another 18 months after a financial contract ceases to be in force.

110

See

ACLI Letter; SIFMA Letter I; Wells Fargo Letter.

111

See

15 U.S.C. 1681s(d)(1)(A)-(C). As noted earlier, the definition of “pre-existing business relationship” in Regulation S-AM tracks the statutory definition. Although the statutory definition does not contain the term “sent” for the provision dealing with a contract that is in force (15 U.S.C.1681s(d)(1)(A)), the other two parts of the statutory definition do contain the term “sent” (15 U.S.C. 1681s(d)(1)(B)-(C)). Accordingly, we believe that the statutory definition is best implemented by including this concept in all three parts of the definition in Regulation S-AM.

Some commenters addressed various parts of the second part of the definition.

112

One commenter suggested that “any account with outstanding contractual responsibilities on either side of an account relationship should be considered an active account, regardless of whether the individual transactions occur or do not occur under the account.”

113

We decline to interpret an “active account” in this way. Section 603(r) of the FCRA defines an “account” to have the same meaning as in Section 903 of the Electronic Fund Transfer Act (“EFTA”).

114

Section 903 of the EFTA defines the term “account” to mean a demand deposit, savings deposit, or other asset account established primarily for personal, family, or household purposes.

115

In addition, our view regarding the term “account” is analogous to the views expressed by the Agencies.

112

See

Coalition Letter; Wells Fargo Letter.

113

See

Wells Fargo Letter.

114

See

15 U.S.C. 1681a(r)(4).

115

See

15 U.S.C. 1693(a)(2).

One commenter stated that when consumers pay in advance for future services, the 18-month exemption under the second part of the definition should not begin until after the last payment or shipment of the product.

116

Another commenter suggested that the 18-month period should begin at the time that all contractual responsibilities expire.

117

The Commission declines to adopt these suggestions because they could lead to consumers receiving marketing solicitations long after closing or transferring an account. For purposes of the final rule, a pre-existing business relationship terminates when an investor redeems or sells investment company shares or closes or transfers an account, and not when the investor receives the last statement relating to the account or when an obligation assumed by a Covered Person in an account opening document expires. The final rule includes examples to help clarify the scope of this part of the definition of a pre-existing business relationship.

118

116

See

Coalition Letter.

117

See

Wells Fargo Letter.

118

See

§§ 248.120(q)(2) and 248.120(q)(3).

Two commenters discussed the third part of the definition of “pre-existing business relationship”—an inquiry or application by the consumer regarding a product or service offered by the person during the preceding three months.

119

These commenters generally stated that the exception should not depend on consumers providing contact information or on a consumer's expectations. One commenter indicated that an e-mail inquiry, a return address on an envelope, or the captured phone number of a consumer requesting information about products or services should qualify as a “pre-existing business relationship.”

120

119

See

Coalition Letter; Wells Fargo Letter.

120

See

Wells Fargo Letter.

Certain elements of the definition of “pre-existing business relationship” are substantially similar to the definition of “established business relationship” under the FTC's Telemarketing Sales Rule (“TSR”).

121

The TSR definition was informed by Congress's intent that the “established business relationship” exemption to the “do not call” provisions of the Telephone Consumer Protection Act

122

should be grounded on the reasonable expectations of the consumer.

123

Congress's incorporation of similar language in the definition of “pre-existing business relationship”

124

suggests that it is appropriate to consider the reasonable expectations of the consumer in determining the scope of this exception. For purposes of Regulation S-AM, an inquiry would include any affirmative request by a consumer for information after which the consumer would reasonably expect to receive information from the affiliate about its products or services.

125

A consumer would not reasonably expect to receive information from an affiliate if the consumer did not request information from or provide contact information to the affiliate. For this reason, the Commission does not believe that an automatically captured telephone number of a consumer is sufficient to create an inquiry, particularly when the financial institution could easily ask the consumer for contact information during the telephone call that captured the consumer's telephone number. Similarly, we do not believe that information such as an Internet Protocol address or data contained in an Internet “cookie” that is automatically collected about a consumer visiting a Covered Person's Web site is, by itself, sufficient to create an inquiry. We understand that industry practice in the case of telephone calls is to ask the consumer to provide or confirm his or her contact information.

126

To provide additional guidance to industry, we have provided additional examples in the definition that deal with consumer calls and e-mails.

127

These examples, along with other examples, are discussed below. One commenter urged the Commission to clarify that all three parts of the definition of “pre-existing business relationship” include a transaction-based relationship between a consumer and a securities affiliate regardless of the issuer of the security purchased by the consumer.

128

This commenter

asserted that a consumer whose securities and investment transactions are managed through a bank-owned securities affiliate would not be surprised, and may later expect, to receive marketing solicitations for other securities products based on eligibility information the securities affiliate has received from the affiliated bank. Another commenter urged the Commission to expand the definition to include relationships arising out of the ownership of servicing rights, a participation interest in lending or other similar relationships.

129

Another commenter suggested that the definition should apply to manufacturers that make sales through dealers, such as an automobile manufacturer that sells vehicles not directly to consumers, but through franchised dealers.

130

The commenter urged the Commission to consider the relationship between a manufacturer and a consumer as a pre-existing business relationship based on the purchase, rental, or lease of the manufacturer's goods.

121

See

16 CFR 310.2(n).

122

47 U.S.C. 227,

et seq.

123

H.R. Rep. No. 102-317, at 14-15 (1991).

See also

FTC, Telemarketing Sales Rule, 68 FR 4580, 4591-94 (Jan. 29, 2003) (“TSR Adopting Release”).

124

149 Cong. Rec. S13,980 (daily ed. Nov. 5, 2003) (statement of Senator Feinstein) (noting that the “pre-existing business relationship” definition “is the same definition developed by the Federal Trade Commission in creating a national `Do Not Call' registry for telemarketers.”).

125

See

TSR Adopting Release at 68 FR 4594.

126

Similarly, the Commission does not believe that a return address on an envelope is sufficient to constitute an affirmative request by a consumer for information about a person's products or services. A consumer would not have a reasonable expectation of being contacted about products and services simply by providing a return address on an envelope. In our view, a consumer provides a return address on an envelope to ensure that if a piece of mail is undeliverable, it is returned to the consumer and not because they are seeking to establish a business relationship. Accordingly, we consider a return address on an envelope analogous to an automatically captured telephone number.

127

See

§§ 248.120(q)(2)(v)-(vii) and (q)(3).

128

See

ABASA Letter (stating that the proposed rule supports the conclusion that a pre-existing business relationship exists between a securities affiliate and a consumer when the consumer purchases a proprietary securities product like a bank's own mutual fund and expressing concern that the purchase of non-proprietary securities products from the securities affiliate could be

considered to be outside of the first two provisions of the definition of a pre-existing business relationship).

129

See

Wells Fargo Letter.

130

See

FSR Letter. The commenter further indicated that vehicle financing may be arranged through a manufacturer's captive finance company or independent sources of financing, and noted that manufacturers often provide consumers with information about warranty coverage, recall notices, and other product information. This commenter stated that manufacturers also send solicitations to consumers about their products and services, drawing in part on transaction or experience information from the captive finance company.

Like the Agencies, the Commission believes it is not necessary to add any additional bases for a pre-existing business relationship. Paragraph (q)(2)(i) of § 248.120 provides an example of a brokerage firm with a pre-existing business relationship using eligibility information from an affiliate to make marketing solicitations about products or services. This example should provide Covered Persons with sufficient guidance regarding a securities affiliate's use of eligibility information.

b. Examples

Paragraph (d)(1) of proposed § 247.20 provided four examples to illustrate the pre-existing business relationship exception. Proposed paragraphs (d)(1)(i) through (iii) contained examples illustrating each of the three parts of the definition.

131

Proposed paragraph (d)(1)(iv) provided an example of a consumer calling a centralized call center for a group of affiliated companies to inquire about the consumer's existing securities account with a broker-dealer, and indicated that such a call would not establish a pre-existing business relationship between the consumer and the broker-dealer's affiliates. We requested comment on these examples.

131

See

Proposed §§ 247.20(d)(1)(i) (illustrating the first part), (d)(1)(ii) (illustrating the second part) and (d)(1)(iii) (illustrating the third part).

One commenter generally expressed approval of the examples we provided, other than the example in proposed § 247.20(d)(1)(iii).

132

Another commenter requested that the Commission provide further examples dealing with consumer calls to call centers to clarify what would and would not be considered subject to Regulation S-AM's opt out notice requirement.

133

132

The example in proposed § 247.20(d)(1)(iii) illustrated that a pre-existing business relationship would exist with a Covered Person's affiliate when a consumer made an inquiry about, or applied for, a product or service offered by the affiliate during the three-month period immediately preceding the date on which a marketing solicitation is made to the consumer based on eligibility information received from the Covered Person. The Coalition Letter stated that a consumer should not be required to provide contact information as part of an inquiry in order to establish a pre-existing business relationship. As stated above, however, we do not believe that a consumer would reasonably expect to have established a pre-existing business relationship in the absence of providing contact information.

See also

Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information, Exchange Act Release No. 57427 (Mar. 4, 2008); 73 FR 13692 (Mar. 13, 2008).

2. Section 248.121(b)

a. Making Marketing Solicitations

The proposed rules referred to “making or sending” marketing solicitations. One commenter urged us not to address “sending” marketing solicitations.

158

The commenter indicated that by making a reference to “sending” marketing solicitations, it appears that the rule encompasses entities that send a marketing solicitation on behalf of another entity. The general rule in Section 624(a)(1) of the FCRA, along with the duration provisions in Section 624(a)(3) and the pre-existing business relationship exception in Section 624(a)(4)(A), refer to “making” or “to make” a marketing solicitation. Other provisions of the FCRA, such as the consumer choice provision in Section 624(a)(2)(A), the service provider exception in Section 624(a)(4)(C), the non-retroactivity provision in Section 624(a)(5), and the definition of “pre-existing business relationship” in Section 624(d)(1), refer to “sending” or “to send” a marketing solicitation. The verb “to send,” as used in the statute, refers to a ministerial act that a service provider, such as a mail house, performs for the person making

the marketing solicitation,

159

or indicates the time after which marketing solicitations are no longer permitted.

160

158

See

Wells Fargo Letter.

159

See

15 U.S.C. 1681s-3(a)(4)(C).

160

See

15 U.S.C. 1681s-3(d)(1)(B) and (C).

The Commission concludes that “making” and “sending” marketing solicitations are different activities and that the focus of the FCRA is primarily on the “making” of marketing solicitations.

161

Accordingly, the final rules refer to “making” a marketing solicitation, except where the FCRA specifically refers to “sending” a marketing solicitation. The FCRA, however, does not describe what a person must do in order “to make” a marketing solicitation. The legislative history is silent on this point. Nevertheless, the Commission believes it is important to provide clear guidance regarding what activities constitute making a marketing solicitation.

161

For example, a service provider may send a marketing solicitation to a consumer on behalf of another entity, but it is the entity on whose behalf the marketing solicitation is sent that is making the marketing solicitation and thus, is subject to the general prohibition on making a marketing solicitation without first giving the consumer an affiliated marketing notice and an opportunity to opt out.

The Commission has added new § 248.121(b) in the final rules to clarify what constitutes “making” a marketing solicitation for purposes of Regulation S-AM. Section 248.121(b)(1) provides that a Covered Person makes a marketing solicitation to a consumer if: (1) It receives eligibility information from an affiliate; (2) it uses that eligibility information to identify the consumer or type of consumer to receive a marketing solicitation, establish the criteria used to select the consumer to receive a marketing solicitation, or decide which of its products or services to market to the consumer or tailor its marketing solicitation to that consumer; and (3) as a result of its use of the eligibility information, the consumer is provided a marketing solicitation.

The Commission understands that several common business practices may complicate application of this provision. Affiliated groups sometimes use a common database as the repository for eligibility information obtained by various affiliates, and information in that database may be accessible to multiple affiliates. In addition, affiliated companies sometimes use the same service providers to perform marketing activities, and some of those service providers may provide services for a number of different affiliates. Moreover, an affiliate may use its own eligibility information to market the products or services of another affiliate. Paragraphs (b)(2)-(5) of § 248.121 address these issues.

Section 248.121(b)(2) clarifies that a Covered Person may receive eligibility information from an affiliate in various ways, including by the affiliate placing that information into a common database that a Covered Person may access. Of course, receipt of eligibility information from an affiliate is only one element of making a marketing solicitation. In the case of a common database,

use

of the eligibility information will be important in determining whether a person has made a marketing solicitation.

To clarify the application of the concept of “making” a marketing solicitation in the context of a Covered Person using a service provider, § 248.121(b)(3) generally provides that a person receives or uses an affiliate's eligibility information if a service provider acting on behalf of the Covered Person receives or uses that information on the Covered Person's behalf.

162

Section 248.121(b)(3) also provides that all relevant facts and circumstances will determine whether a service provider is acting on behalf of a Covered Person when it receives or uses an affiliate's eligibility information in connection with marketing the Covered Person's products or services.

162

The service provider's activities would be those described in §§ 248.121(b)(1)(i) and (b)(1)(ii), discussed above. Section 248.121(b)(5), as discussed below, provides an exception to this general rule.

b. Constructive Sharing and Service Providers

In § 248.121(b)(4), we address the concept of “constructive sharing.” In the proposing release, we illustrated the constructive sharing concept with an example in which a consumer has a pre-existing business relationship with a broker-dealer that is affiliated with a financing company. In the example, the financing company would provide the broker-dealer with specific eligibility criteria, such as consumers who have a margin loan balance in excess of $10,000, for the purpose of having the broker-dealer make marketing solicitations on behalf of the financing company to consumers that meet those criteria. A consumer who meets the eligibility criteria would contact the financing company after receiving the financing company marketing materials in the manner specified in those materials. We contemplated that the consumers' responses would provide the financing company with discernable eligibility information, such as through a coded response form that would identify a consumer as an individual who meets the specific eligibility criteria.

163

See

Proposing Release at 69 FR 42307.

We solicited comment on whether, given the policy objectives of Section 214 of the FACT Act, the notice and opt out requirements of these rules should apply to circumstances that involve a constructive sharing of eligibility information to make marketing solicitations.

Commenters consistently opposed inclusion of the concept of constructive sharing in the final rules.

164

One commenter argued that inclusion of the proposed example of constructive sharing would restrict the ability of financial institutions to market products to their own customers.

165

Others stated that including the example was inconsistent with many of the exceptions provided in the proposed rules.

166

In general, commenters argued that constructive sharing was outside the scope of Regulation S-AM because the rules should address the making of marketing solicitations and not the sharing of information.

167

164

See

ABASA Letter; ACB Letter; Coalition Letter; FSR Letter; ICBA Letter; ICI Letter; MetLife Letter; SIFMA Letter I; T. Rowe Price Letter; Wells Fargo Letter.

165

See

T. Rowe Price Letter.

166

See

Coalition Letter; FSR Letter; ICBA Letter; Wells Fargo Letter; SIFMA Letter I.

167

See

Coalition Letter; ICBA Letter; SIFMA Letter I; Wells Fargo Letter. Although the Commission did not receive comment from consumer groups, consumer groups argued to the Agencies that constructive sharing would contravene the intent of Congress and would amount to a loophole that should be fixed.

After carefully considering the comments, we conclude that the FCRA only covers situations in which a person

uses

eligibility information that it received from an affiliate to make a marketing solicitation to the consumer about its products or services. In a constructive sharing scenario like that described in the proposal and above,

168

a pre-existing business relationship is established between the consumer and the financing company when the consumer contacts the financing company to inquire about or apply for products or services as a result of the consumer's receipt of the financing company's marketing materials from the broker-dealer. Thus, a pre-existing business relationship is established before the financing company uses any shared eligibility information to make marketing solicitations to the consumer. Because the financing company does not use shared eligibility information to make marketing solicitations to the consumer before it establishes a pre-existing business relationship with the

consumer, the FCRA's affiliate marketing notice and opt out requirement does not apply.

168

See supra

note 163 and accompanying text.

The Commission acknowledges that the FCRA's affiliate marketing provisions only limit the use of eligibility information received from an affiliate to make marketing solicitations to a consumer. Separately, the affiliate sharing notice and opt out provisions of the FCRA (Section 603(d)(2)(A)(iii)) regulate the sharing of eligibility information other than transaction or experience information among affiliates and prohibit the sharing of such information among affiliates, unless the consumer is given notice and an opportunity to opt out.

169

The FCRA does not restrict the sharing of transaction or experience information (other than medical information) among affiliates.

170

169

Section 603(d)(2)(A)(iii) of the FCRA operates independently of FCRA's affiliate marketing provisions. Thus, the existence of a pre-existing business relationship between a consumer and an affiliate that seeks to use shared eligibility information, such as credit scores or income, to market to that consumer (or the applicability of another exception to these affiliate marketing rules) does not relieve the entity sharing the eligibility information from the requirement to comply with the affiliate sharing notice and opt out provisions of Section 603(d)(2)(A)(iii) of the FCRA before it shares with its affiliate eligibility information other than transaction or experience information.

See

15 U.S.C. 1681a(d)(2)(A)(iii).

170

Information sharing occurs if a reference code included in marketing materials reveals one affiliate's information about a consumer to another affiliate upon receipt of a consumer's response.

Section 248.121(b)(4) describes two situations in which a Covered Person has

not

made a solicitation subject to Regulation S-AM. Both situations assume that the Covered Person has not used eligibility information received from an affiliate in the manner described in § 248.121(b)(1)(ii). In the first situation, the affiliate uses its own eligibility information that it obtained in connection with a pre-existing business relationship that it has or had with the consumer to market the Covered Person's products or services to the affiliate's consumers.

171

In the second situation, which builds on the first, a Covered Person's affiliate directs its service provider to use the affiliate's own eligibility information to market the Covered Person's products or services to the affiliate's consumer, and the Covered Person does not communicate directly with the service provider regarding that use of the eligibility information.

171

As an example, a broker-dealer that sells investment company shares to a consumer has a pre-existing business relationship with the consumer (as does the investment company if the consumer is the record owner of its shares). The broker-dealer may make a marketing solicitation for an investment in an affiliated investment company based on eligibility information the broker-dealer obtained in connection with its pre-existing business relationship with the consumer.

The core concept is that the affiliate that obtained the eligibility information in connection with a pre-existing business relationship with the consumer controls the actions of the service provider using that information. Therefore, the service provider's use of the eligibility information should not be attributed to the Covered Person whose products or services will be marketed to consumers. In such circumstances, the service provider is acting on behalf of the affiliate that obtained the eligibility information in connection with a pre-existing business relationship with the consumer, and not on behalf of the Covered Person whose products or services will be marketed to that affiliate's consumers.

In addition, the Commission recognizes that there may be situations in which the Covered Person whose products or services are being marketed

does

communicate with the affiliate's service provider.

172

To address these situations, the Commission has added § 248.121(b)(5) which describes the conditions under which a service provider would be deemed to be acting on behalf of the affiliate with the pre-existing business relationship, rather than the Covered Person whose products or services are being marketed, notwithstanding direct communications between the Covered Person and the service provider.

173

172

For example, a service provider may perform services for various affiliates relying on information maintained in and accessed from a common database. In certain circumstances, the person whose products or services are being marketed may communicate with the service provider of the affiliate with the pre-existing business relationship, yet the service provider is still acting on behalf of the affiliate when it uses the affiliate's eligibility information in connection with marketing the person's products or services.

173

This section builds upon the concept of control of a service provider and thus is a natural outgrowth of § 248.121(b)(4). Under the conditions set forth in § 248.121(b)(5), the service provider is acting on behalf of an affiliate that obtained the eligibility information in connection with a pre-existing business relationship with the consumer because, among other things, the affiliate controls the actions of the service provider in connection with the service provider's receipt and use of eligibility information.

Section 248.121(b)(5) provides that a Covered Person does not make a marketing solicitation subject to Regulation S-AM if a service provider (including an affiliated or third-party service provider that maintains or accesses a common database that the Covered Person may access) receives and uses eligibility information from the Covered Person's affiliate to market the Covered Person's products or services to the affiliate's consumer, so long as five conditions are met.

First,

the Covered Person's affiliate must control access to and use of its eligibility information by the service provider (including the right to establish specific terms and conditions under which the service provider may use such information to market the Covered Person's products or services). This requirement must be set forth in a written agreement between the Covered Person's affiliate and the service provider. The Covered Person's affiliate may demonstrate control by, for example, establishing and implementing reasonable policies and procedures applicable to the service provider's access to and use of its eligibility information.

174

See

§ 248.121(b)(5)(i)(A).

Second,

the Covered Person's affiliate must establish specific terms and conditions under which the service provider may access and use that eligibility information to market the Covered Person's products or services (or those of affiliates generally) to the affiliate's consumers, and periodically evaluates the service provider's compliance with those terms and conditions. These terms and conditions may include the identity of the affiliated companies whose products or services may be marketed to the affiliate's consumers by the service provider, the types of products or services of affiliated companies that may be marketed, and the number of times the affiliate's consumers may receive marketing materials. While the specific terms and conditions established by the Covered Person's affiliate must be set forth in writing, they are not required to be set forth in a written agreement between the affiliate and the service provider. If a periodic evaluation by the Covered Person's affiliate reveals that the service provider is not complying with those terms and conditions, the Commission expects the Covered Person's affiliate to take appropriate corrective action.

175

See

§ 248.121(b)(5)(i)(B).

Third,

the Covered Person's affiliate must require the service provider to implement reasonable policies and procedures designed to ensure that the service provider uses the affiliate's eligibility information in accordance with the terms and conditions established by the affiliate relating to the marketing of the Covered Person's products or services. This requirement must be set forth in a written agreement between the Covered Person's affiliate and the service provider.

176

See

§ 248.121(b)(5)(i)(C).

Fourth,

the Covered Person's affiliate must be identified on or with the marketing materials provided to the consumer. This requirement will be construed flexibly. For example, the affiliate may be identified directly on the marketing materials, on an introductory cover letter, on other documents included with the marketing materials such as a periodic statement, or on the envelope that contains the marketing materials.

177

See

§ 248.121(b)(5)(i)(D).

Fifth,

the Covered Person must not directly use the affiliate's eligibility information in the manner described in § 248.121(b)(1)(ii).

178

See

§ 248.121(b)(5)(i)(E).

Under these conditions, the service provider is acting on behalf of an affiliate that obtained the eligibility information in connection with a pre-existing business relationship with the consumer because, among other things, the affiliate controls the actions of the service provider in connection with the service provider's receipt and use of the eligibility information.

179

The five conditions together are intended to ensure that the service provider is acting on behalf of the affiliate that obtained the eligibility information in connection with a pre-existing business relationship with the consumer because that affiliate controls the service provider's receipt and use of that affiliate's eligibility information.

179

This provision is designed to minimize uncertainty that may arise from the application of the facts and circumstances test in § 248.121(b)(3) to situations that involve direct communications between a service provider and a Covered Person whose products and services will be marketed to consumers.

To provide additional guidance to Covered Persons, § 248.121(b)(6) provides six illustrative examples of the rules relating to making marketing solicitations.

3. Sections 248.121(c) and (d)

Proposed § 247.20(c) contained exceptions to the requirements of Regulation S-AM and incorporated each of the statutory exceptions to the affiliate marketing notice and opt out requirements that are set forth in Section 624(a)(4) of the FCRA. The Commission has revised the preface to the exceptions for clarity to provide that Regulation S-AM does not apply to “you” if a Covered Person uses eligibility information that it receives from an affiliate in certain circumstances. In addition, each of the exceptions has been moved to § 248.121(c) in the final rules and is discussed below.

180

One commenter requested that the Commission delete the phrase “if you use eligibility information you receive from an affiliate” in the introductory words to Proposed § 247.20(c). The Commenter stated that this could inadvertently and mistakenly expose companies that share information with affiliates to potential liability.

See

SIFMA Letter II. That concern was addressed in the constructive sharing discussion above.

See supra

Part III.D.2.b.

a. Pre-Existing Business Relationship Exception

Proposed paragraph (c)(1) of § 247.20 clarified that the notice and opt out requirements of proposed Regulation S-AM would not apply when the receiving affiliate has a pre-existing business relationship with the consumer. We are adopting § 247.20(c)(1) substantially as proposed,

181

deleting the word “send” for the reasons discussed above and eliminating, as unnecessary, the cross-reference to the location of the definition of “pre-existing business relationship.”

182

Commenters' views, and the scope of this exception, have been addressed above.

183

However, to help clarify the scope of the “pre-existing business relationship” exception, § 248.121(d)(1) provides an example to illustrate a situation in which the pre-existing business relationship exception would apply.

184

181

Proposed § 247.20 (d)(1) provided examples of the pre-existing business relationship exception. As explained above, we have revised the examples from proposed § 247.20(d)(1) in the final rule and included them as examples of the definition of “pre-existing business relationship” rather than as examples of exceptions from the application of the rule.

See

§ 248.120(q)(2);

See also

discussion of “pre-existing business relationship” and corresponding examples

supra

Part III.C.17.

182

See

§ 248.121(c)(1).

183

See supra

Part III.C.17.

184

See

§§ 248.120(q)(2)-(3) for examples illustrating situations in which a pre-existing business relationship exists and situations in which a pre-existing business relationship does not exist.

b. Employee Benefit Plan Exception

Proposed § 247.20(c)(2) provided that Regulation S-AM would not apply to an affiliate using the information to facilitate communications to an individual for whose benefit the affiliate provided employee benefit or other services under a contract with an employer related to and arising out of a current employment relationship or an individual's status as a participant or beneficiary of an employee benefit plan. One commenter stated that the exception should be revised to permit communications “to an affiliate about an individual for whose benefit an entity provides employee benefit or other services pursuant to a contract with an employer related to and arising out of the current employment relationship or status of the individual as a participant or beneficiary of an employee benefit plan.”

185

This commenter also suggested deleting the phrase “you receive from an affiliate” in the introduction to proposed § 247.20(c). In this commenter's view, the proposed exception should have permitted an employer or plan sponsor to share information with its affiliates in order to offer other financial services, such as brokerage accounts or IRAs, to its employees. This commenter also requested clarification on whether the exception applies only if related to products offered as an employee benefit.

185

See

FSR Letter.

We decline to adopt the changes suggested by this commenter and adopt the employee benefit exception, redesignated as § 248.121(c)(2), as proposed. The focus of the rule is on facilitating communications “to an individual for whose benefit the [Covered Person] provides employee benefit or other services,” which more closely tracks the statutory language than the alternative language proposed by the commenter.

Moreover, we note that the only type of Covered Person to whom Section 624 of the FCRA might apply is one that receives eligibility information from an affiliate.

186

The FCRA thus makes clear that the exceptions in Section 624(a)(4) were meant to apply to persons that otherwise would be subject to Section 624. In the case of the employee benefit exception, the person using the information is also “the person provid[ing] employee benefit or other services pursuant to a contract with an employer.”

187

Therefore, this exception, like the other provisions of Regulation S-AM, should apply only to a Covered Person that uses eligibility information it receives from an affiliate to make marketing solicitations to consumers about its products or services.

188

186

The statutory preface to the exceptions provides that “[t]his section shall not apply to a person” using information to do certain enumerated things.

See

15 U.S.C. 1681s-3(a)(4).

187

15 U.S.C. 1681s-3(a)(4)(B).

188

There is no corresponding example for this provision.

c. Service Provider Exception

Proposed § 247.20(c)(3) provided that the notice and opt out requirements of Regulation S-AM would not apply when the eligibility information is used to perform services for another affiliate. The exception would not have applied if the other affiliate was not permitted to make or send marketing solicitations on its own behalf, for example as a result of the consumer's prior decision to opt out. Thus, under the proposal, when the notice has been provided to a consumer and the consumer has opted out, a receiving affiliate subject to the

consumer's opt out election could not circumvent the opt out by instructing the communicating affiliate or another affiliate to make or send marketing solicitations to the consumer on its behalf.

189

Similarly, this exception would not permit a service provider to make marketing solicitations on its own behalf if eligibility information is communicated and the FCRA's affiliate marketing notice and opt out provisions otherwise would apply.

One commenter urged the Commission to adopt this exception.

190

Others suggested conforming it to the statutory provision by deleting the references to marketing solicitations on behalf of service providers.

191

One of these commenters maintained that these references would impose additional burdens and costs on companies that use a single affiliate to provide various administrative services to other affiliates and would make it more difficult to provide general educational materials to consumers.

192

One commenter also asked the Commission to clarify that the limitation in FCRA Section 624(a)(4)(C) only applies to the service provider exception.

193

190

See

ICBA Letter.

191

See

FSR Letter; MetLife Letter.

192

See

FSR Letter.

193

See

MetLife Letter.

We are adopting the service provider exception, redesignated as § 248.121(c)(3), substantially as proposed. We have eliminated the references to marketing solicitations made by a service provider on its own behalf. The general rule in § 248.121(a)(1) prohibits a service provider from using eligibility information it received from an affiliate to make marketing solicitations to a consumer about its own products or services unless the consumer is given notice and an opportunity to opt out and has not opted out, or unless one of the other exceptions applies. The service provider exception simply allows a service provider to do what the affiliate on whose behalf it is acting may do, such as using shared eligibility information to make marketing solicitations to consumers to whom the affiliate is permitted to make such marketing solicitations.

194

Nothing in the service provider and pre-existing business relationship exceptions will prevent an affiliate that has a pre-existing business relationship with the consumer from relying upon the service provider exception, as long as the arrangement satisfies the requirements of the rule and applicable exceptions. To help clarify the scope of the service provider exception, § 248.121(d)(2) provides two examples.

195

194

As discussed above, the final rule does not include the word “make” because “making” and “sending” solicitations are distinct activities and this provision of the statute uses the verb “to send.”

See supra

Part II.B.

195

Sections 248.121(b)(4) and 248.121(b)(5) are consistent with comparable provisions of the Joint Rules and the FTC Rule, 72 FR 62922-24 and 72 FR 61435-37, respectively.

d. Consumer-Initiated Communication Exception

Proposed paragraph (c)(4) of § 247.20 provided that the notice and opt out requirements would not have applied when eligibility information was used in response to a communication initiated by the consumer. This exception could have been triggered by an oral, electronic, or written communication initiated by the consumer. To be covered by the proposed exception, any use of eligibility information would need to be responsive to the communication initiated by the consumer. Paragraph (d)(2) of the proposed rule provided three examples of situations that would and would not meet the exception.

196

Proposed § 247.20(d)(2)(i) provided that the exception would apply when a consumer holding an account with an institution calls the institution's affiliate for information about the affiliate's products and services, leaving contact information with the affiliate. Proposed § 247.20(d)(2)(ii) provided that the exception would not apply when a consumer did not initiate a communication but rather called an affiliate back after the affiliate made an initial marketing call and left a message for a consumer. Proposed § 247.20(d)(2)(iii) provided that the exception would not apply when a consumer called an affiliate asking for retail locations without asking about the affiliate's products and services.

Five commenters addressed this exception.

197

One commenter suggested that the Commission delete the phrase “orally, electronically, or in writing,”

198

while another suggested modifying it to read “whether orally, electronically, or in writing.”

199

Other commenters objected to requiring the use of eligibility information to be “responsive” to the communication initiated by the consumer.

200

In their view, the concept of “responsiveness” would create a vague standard and encourage a narrow reading of the exception. Another commenter stated that the Commission did not and could not provide a clear definition of what would be “responsive” and opined that this standard would cause a Covered Person to be uncertain as to their compliance.

201

One commenter asserted that consumers may not be familiar with the various types of products or services available to them and the different affiliates that offer those products or services and may rely on the institution to inform them about available options.

202

For this reason, the commenter maintained that the exception should not limit an affiliate from responding with solicitations about any product or service. This commenter also stated that the Senate bill that preceded the FACT Act used more restrictive language in this exception than the final legislation passed by Congress.

197

See

Coalition Letter; ICBA Letter; SIFMA Letter I; Wells Fargo Letter; USAA Letter.

198

See

Coalition Letter.

199

See

ICBA Letter.

200

See

Wells Fargo Letter; USAA Letter.

201

See

Coalition Letter.

202

See

Wells Fargo Letter.

Some commenters objected to the example in proposed § 247.20(d)(2)(ii), stating that a consumer responding to a call-back message should qualify as a consumer-initiated communication and noting that the consumer has the option of not returning the call.

203

One commenter expressed concern about the example in proposed paragraph (d)(2)(iii) regarding the consumer who calls to ask for retail locations and hours, and stated that this would create a vague standard that would be difficult to apply and subject to differing interpretations.

204

203

See

SIFMA Letter I; Wells Fargo Letter; Coalition Letter.

204

See

ICBA Letter. The commenter, however, did not explain why it thought the example was vague.

After considering the comments, we are adopting paragraphs (c)(4) and (d)(2) of proposed § 247.20 with some modifications, redesignated as §§ 248.121(c)(4) and (d)(3), respectively. The final rule eliminates the reference to oral, electronic, or written communications. Any form of communication may come within the exception as long as the consumer initiates the communication, whether in-person or by mail, e-mail, telephone, facsimile, or through other means.

Section 248.121(c)(4) provides that the communications covered by the exception must be consumer-initiated and must concern a Covered Person's products or services. The FCRA requires a person relying on the exception to use eligibility information only “in response to” a communication initiated by a consumer.

205

The Commission believes that the exceptions should be construed narrowly to avoid undermining the general rule requiring notice and opt out. Thus, consistent with the purposes of the FCRA, the Commission does not believe that a consumer-initiated

communication unrelated to a Covered Person's products or services should trigger the exception. A rule that allowed any consumer-initiated communication, no matter how unrelated to a Covered Person's products or services, to trigger the exception would not give meaning to the phrase “in response to” and could produce incongruous results. For example, if a consumer calls a broker-dealer to ask about retail locations and hours, but does not request information about its products or services, the broker-dealer may not use eligibility information it receives from an affiliate to make marketing solicitations to the consumer because the consumer-initiated communication does not relate to the broker-dealer's products or services. The use of eligibility information received from an affiliate would not be responsive to the communication, and the exception would not apply.

205

See

15 U.S.C. 1681s-3(a)(4)(D). The Commission believes this statutory language contemplates that the consumer-initiated communications will relate to a Covered Person's products or services, and that the marketing solicitations covered by the exception will be those made in response to that communication.

However, the Commission recognizes that if a consumer-initiated conversation turns to a discussion of products or services the consumer may need, marketing solicitations may be responsive if the consumer agrees to receive marketing materials and provides or confirms contact information by which he or she can receive those materials. For example, if a consumer calls a broker-dealer to ask about retail locations and hours, the broker-dealer's customer service representative asks the consumer if there is a particular product or service about which the consumer is seeking information, the consumer responds affirmatively and expresses an interest in mutual funds offered by the broker-dealer, the customer service representative offers to provide that information by telephone and mail additional information to the consumer, and the consumer agrees and provides or confirms contact information for receipt of the materials to be mailed, the broker-dealer may use eligibility information it receives from an affiliate to make marketing solicitations to the consumer about mutual funds because such marketing solicitations would respond to the consumer-initiated communication about mutual funds.

Likewise, if a consumer who has opted out of an affiliate's use of eligibility information to make marketing solicitations calls the affiliate for information about a particular product or service, (

i.e.,

life insurance), marketing solicitations regarding that specific product or service could be made in response to that call, but marketing solicitations regarding other products or services could not. Because marketing solicitations will likely be made quickly, we do not believe it is appropriate to adopt a specific time limit for making solicitations following a consumer-initiated communication about products or services.

We are adopting the example in proposed § 247.20(d)(2)(i), redesignated as § 248.121(d)(3)(i), and modified to delete the references to a telephone call as the specific form of communication and the reference to providing contact information. As discussed above and illustrated in the examples in §§ 248.120(q)(2)(v) and (vi), the need to provide contact information may vary depending on the form of communication used by the consumer. A new example in § 248.121(d)(3)(ii) illustrates a situation involving a consumer-initiated communication in which a consumer does not know exactly what products, services, or investments he or she wants, but initiates a communication to obtain information about investing for a child's college education. We are adopting the call-back example in proposed § 247.20(d)(2)(ii), redesignated as § 248.121(d)(3)(iii) and modified to illustrate that when a Covered Person makes an initial marketing call without using eligibility information received from an affiliate and leaves a message that invites the consumer to receive information about the Covered Person's products and services by calling a toll-free number, the consumer's response qualifies as a consumer-initiated communication about a product or service. The modified example is intended to avoid requiring Covered Persons to track which calls are call-backs.

206

Although the Commission received no specific comment regarding tracking call-backs, we have revised § 248.121(d)(3)(iii) in order to be consistent with the changes made by the Agencies in response to comments they received.

We are adopting the retail hours example in proposed § 247.20(d)(2)(iii) substantially as proposed and redesignated as § 248.121(d)(3)(iv). We are also adopting a new example in § 248.121(d)(3)(v) to address the situation where a consumer calls to ask about retail locations and hours and a call center representative, after eliciting information about the reason the consumer wants to visit a retail location, offers to provide information about products of interest to the consumer by telephone and mail, and the consumer agrees and provides or confirms contact information. This example demonstrates how a conversation may develop to the point where making marketing solicitations would be responsive to the consumer's call.

e. Consumer Authorization or Request Exception

Proposed § 247.20(c)(5) provided that the notice and opt out requirements would not apply when the information is used to make marketing solicitations that have been affirmatively authorized or requested by the consumer.

207

We contemplated that this provision could be triggered by an oral, electronic, or written authorization or request by the consumer but indicated that a pre-selected check box would not constitute an affirmative authorization or request.

208

In addition, we noted that boilerplate language in a disclosure or contract would not have constituted an affirmative authorization.

209

The exception in proposed paragraph (c)(5) could have been triggered, for example, if a consumer opens a securities account with a broker-dealer and authorizes or requests marketing solicitations about insurance from an insurance affiliate of the broker-dealer. Under the proposed exception, the consumer could have provided the authorization or made the request either through the Covered Person with whom he or she has a business relationship or directly to the affiliate that would make the marketing solicitation.

210

The duration of the authorization or request would have depended on the facts and circumstances. Proposed § 247.20(d)(3) provided an example of the affirmative authorization or request exception.

207

See

Proposing Release at 69 FR 42309.

208

Id.

209

Id.

210

Nothing in this exception supersedes the restrictions on telemarketing contained in rules of self-regulatory organizations, the Federal Communications Commission, or in the TSR, including the operation of the “Do-Not-Call List” established by the FTC and the Federal Communications Commission.

Some commenters noted that the proposed exception would have required an “affirmative” authorization or request but that the FCRA did not.

211

One commenter indicated that the proposal did not indicate how the authorization would be affirmative.

212

Another commenter indicated that inclusion of the term “affirmative” in the exception would have introduced uncertainty as to what would constitute an authorization or request by the consumer, and stated that the term should be deleted.

213

Other commenters asserted that a pre-selected check box should be sufficient to evidence a consumer's authorization or request for

marketing solicitations.

214

In their view, a consumer's decision not to deselect a pre-selected check box should constitute a knowing act of the consumer to authorize or request marketing solicitations if the boxes are properly used.

215

Other commenters stated that preprinted language in a disclosure or contract should be sufficient to evidence a consumer's authorization or request for marketing solicitations.

216

Another commenter requested that the Commission clarify that a consumer's authorization or request does not have to refer to a specific product or service or to a specific provider of products or services in order for the exception to apply.

217

211

See

ACLI Letter; SIFMA Letter I; Wells Fargo Letter.

See also

15 U.S.C. 1681s-3(a)(4)(E).

212

See

Wells Fargo Letter.

213

See

SIFMA Letter I. However, the commenter did not provide an example of how this would create uncertainty.

214

See

ICBA Letter; USAA Letter; Wells Fargo Letter.

215

See

USAA Letter; Wells Fargo Letter.

216

See

Coalition Letter. This commenter cited case law and FTC informal staff opinion letters relating to a consumer's written instructions to obtain a consumer report pursuant to Section 604(a)(2) of the FCRA as support for allowing boilerplate language to constitute authorization or request.

217

See

Wells Fargo Letter.

We are adopting § 247.20(c)(5), redesignated as § 248.121(c)(5), substantially as proposed but without the word “affirmative.” This change does not affect the meaning of the exception and the consumer still must take steps to “authorize” or “request” marketing solicitations. The GLBA and the implementing privacy rules include an exception to permit the disclosure of nonpublic personal information “with the consent or at the direction of the consumer.”

218

Section 624 of the FCRA creates an exception to permit the use of shared eligibility information “in response to solicitations authorized or requested by the consumer.” The Commission interprets the “authorized or requested” provision in the FCRA exception to require the consumer to take affirmative steps in order to trigger the exception despite deletion of the term from the rule. The Commission construes this exception, like the other exceptions, narrowly and in a manner that does not undermine Regulation S-AM's general notice and opt out requirement. In this regard, affiliated companies cannot avoid use of the FCRA's notice and opt out requirement by including preprinted boilerplate language in the disclosures or contracts they provide to consumers, such as a sentence (or a pre-selected box next to a sentence) stating that by applying to open an account, the consumer authorizes or requests to receive marketing solicitations from affiliates. Such an interpretation would permit the exception to swallow the rule, a result that cannot be squared with the intent of Congress to give consumers notice and an opportunity to opt out of marketing solicitations. We are adopting the consumer authorization or request example in proposed § 247.20(d)(3), redesignated as § 248.121(d)(4)(i), with conforming changes in light of the changes made to § 248.121(c)(5). In addition, to provide more guidance, we are adopting three additional examples. The example in § 248.121(d)(4)(ii) illustrates how a consumer can authorize or request solicitations by checking a blank check box. The examples in §§ 248.121(d)(4)(iii) and (iv) illustrate that preprinted boilerplate language and a pre-selected check box would not meet the authorization or request requirement. The Commission does not believe it is appropriate to set a fixed time period for an authorization or request. As noted in the proposal, the duration of the authorization or request depends on what is reasonable under the facts and circumstances.

219

Of course, an authorization to make marketing solicitations to the consumer terminates if the consumer revokes the authorization.

218

See

15 U.S.C. 6802 (e)(1)(A); 17 CFR 248.14(a)(1).

219

See

Proposing Release at 69 FR 42310.

For the reasons discussed in connection with the consumer-initiated communication exception, we omitted the reference to oral, electronic, or written communications from this exception. We do not believe it is necessary to clarify the elements of an authorization or request. Section 624(a)(4)(E) of the FACT Act clearly refers to “solicitations authorized or requested by the consumer.” The facts and circumstances will determine what marketing solicitations have been authorized or requested by the consumer.

f. Compliance With Applicable Laws Exception

Proposed § 247.20(c)(6) clarified that the provisions of Regulation S-AM would not apply to an affiliate if compliance with the requirements of Section 624 by the affiliate would prevent that affiliate from complying with any provision of State insurance law pertaining to unfair discrimination in a State where the affiliate is lawfully doing business.

220

The Commission received no comments on this provision and is adopting it as proposed, redesignated as § 248.121(c)(6). There is no corresponding example for this exception.

220

See

FCRA Section 624(a)(4).

4. Relation to Affiliate-Sharing Notice and Opt Out

Proposed paragraph (f) of § 247.20 clarified the relationship between the affiliate-sharing notice and opt out opportunity required under Section 603(d)(2)(A)(iii) of the FCRA and the affiliate marketing notice and opt out opportunity required by new Section 624 of the FCRA.

221

Specifically, proposed paragraph (f) provided that nothing in proposed Regulation S-AM would have limited the responsibility of a company to comply with the notice and opt out provisions of Section 603(d)(2)(A)(iii) of the FCRA before it shares information other than transaction and experience information with affiliates if it wishes to avoid becoming a consumer reporting agency.

221

In general, Section 603(d)(2)(A) of the FCRA governs the sharing of creditworthiness and similar information among affiliates. As discussed in note 5 above, the FCRA sets standards for the collection, communication, and use of information bearing on a consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. The FCRA provides that a person who communicates these forms of information to others could become a “consumer reporting agency,” which is subject to substantial statutory obligations. However, a person may communicate information about its own “transactions or experiences” with a consumer without becoming a consumer reporting agency. This transaction and experience information may be communicated among affiliated persons without any of them becoming a consumer reporting agency.

See

FCRA Sections 603(d)(2)(A)(i) and (ii); 15 U.S.C. 1681a(d)(2)(A)(i) and (ii).

The FCRA provides that a person may communicate to its affiliates information other than transaction and experience information without becoming a consumer reporting agency if the person first gives the consumer a clear and conspicuous notice that such information may be communicated to its affiliates and an opportunity to “opt out,” or block the person from sharing the information.

See

FCRA Section 603(d)(2)(A)(iii); 15 U.S.C. 1681a(d)(2)(A)(iii). There is some overlap between this “affiliate sharing” provision of the FCRA and the “affiliate marketing” rules that we are adopting. The two provisions are distinct, however, and they serve different purposes. Nothing in these rules regarding the limitations on affiliate marketing under Section 624 of the FCRA supersedes or replaces the affiliate sharing notice and opt out requirement contained in Section 603(d)(2)(A)(iii) of the FCRA.

One commenter urged the Commission to delete this provision as unnecessary.

222

In the alternative, this commenter asked the Commission to confirm that Section 603(d)(2)(A)(iii) of the FCRA applies to the sharing of information that would otherwise meet the definition of a “consumer report,” and that the sharing affiliate does not automatically become a consumer reporting agency, but risks becoming a consumer reporting agency.

223

In response, the Commission is clarifying that the FCRA, not Regulation S-AM,

establishes the standard for defining a person as a consumer reporting agency. Accordingly, we are adopting proposed § 247.20(f), redesignated as § 248.121(e) and modified to replace the reference to becoming a consumer reporting agency with the phrase “where applicable,” in order to highlight this clarification.

222

See

Coalition Letter.

223

Id.

E. Section 248.122 Scope and Duration of Opt Out

1. Section 248.122(a)

The scope of the opt out was addressed in various sections of the proposal. Proposed § 247.21(c) provided that the notice could have allowed a consumer to choose from a menu of alternatives when opting out, such as opting out of receiving marketing solicitations from certain types of affiliates, or from receiving marketing solicitations that use certain types of information or are delivered using certain methods of communication. If a Covered Person provided a menu of alternatives, one of the alternatives would have had to allow the consumer to opt out with respect to all affiliates, all eligibility information, and all methods of delivering marketing solicitations. Proposed § 247.25(d) described how the termination of a consumer relationship would have affected the consumer's opt out. Under the proposal, if a consumer's relationship with a Covered Person terminated for any reason when the consumer's opt out election was in force, the opt out would have continued to apply indefinitely unless revoked by the consumer. The Proposing Release indicated that the opt out would have been tied to the consumer, rather than to the information used for the marketing solicitations.

224

See

Proposing Release at 69 FR 42311.

Some commenters were critical of the provision requiring Covered Persons that provide a menu of alternatives, to provide the consumer with the ability to opt out with respect to all affiliates, all eligibility information, and all methods of delivery.

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One commenter stated that this requirement should be eliminated, arguing that this requirement does not appear in the FCRA.

226

Another commenter indicated that the reference to “all eligibility information” made the provision confusing because it implied that there were various forms of eligibility information.

227

One commenter opined that this universal opt out was not Congress's intent and stated that a notice should allow opt outs on an account basis rather than an individual basis.

228

Several commenters generally opposed the indefinite opt out requirement for consumers that terminate a relationship with a person.

229

225

See

ACLI Letter; Coalition Letter; FSR Letter.

226

See

ACLI Letter.

See also

15 U.S.C. 1681s-3(a)(2).

227

See

FSR Letter. Another commenter also indicated that the “option for all eligibility information” could be interpreted to mean all eligibility information pertaining to the consumer in perpetuity. This commenter sought clarification.

See

Coalition Letter.

228

See

Coalition Letter.

229

See

ACLI Letter; Coalition Letter; FSR Letter; ICBA Letter; SIFMA Letter I.

After considering the comments, we are adopting the provision relating to the scope of the opt out, with modifications, as § 248.122(a) of Regulation S-AM. Under this section, which is modeled on Section 624(a)(2)(A) of the FCRA, the scope of the opt out depends upon the content of the opt out notice. Under § 248.122(a)(1), except as otherwise provided in that section, a consumer's election to opt out prohibits any affiliate covered by the opt out notice from using the eligibility information received from another affiliate as described in the notice to make marketing solicitations to the consumer.

Section 248.122(a)(2)(i) clarifies that, in the context of a continuing relationship, an opt out notice may apply to eligibility information obtained in connection with a single continuing relationship, multiple continuing relationships, continuing relationships established subsequent to delivery of the opt out notice, or any other transaction with the consumer. Section 248.122(a)(2)(ii) provides examples of continuing relationships. These examples are substantially similar to the examples used in the GLBA privacy rules, with added references to relationships between consumers and affiliates.

230

See, e.g.

, 17 CFR 248.4(c)(3).

Section 248.122(a)(3)(i) limits the scope of an opt out notice that is not connected with a continuing relationship. This section provides that if there is no continuing relationship between a consumer and a Covered Person or its affiliate, and if the Covered Person or its affiliate provides an opt out notice to a consumer that relates to eligibility information obtained in connection with a transaction with the consumer, such as an isolated transaction or a credit application that is denied, the opt out notice only applies to eligibility information obtained in connection with that transaction. The notice cannot apply to eligibility information that may be obtained in connection with subsequent transactions or a continuing relationship that may be subsequently established by the consumer with the Covered Person or its affiliate. Section 248.122(a)(3)(ii) provides examples of isolated transactions.

Section 248.122(a)(4) provides that a consumer may be given the opportunity to choose from a menu of alternatives when electing to prohibit marketing solicitations. An opt out notice may give the consumer the opportunity to elect to prohibit marketing solicitations from certain types of affiliates covered by the opt out notice but not other types of affiliates covered by the notice, marketing solicitations based on certain types of eligibility information but not other types of eligibility information, or marketing solicitations by certain methods of delivery but not other methods of delivery, so long as one of the alternatives is the opportunity to prohibit all marketing solicitations from all of the affiliates that are covered by the notice. We continue to believe that Section 624(a)(2)(A) of the FCRA requires the opt out notice to contain a single opt out option for all marketing solicitations within the scope of the notice. The Commission recognizes that consumers could receive a number of different opt out notices, even from the same affiliate. Accordingly, we anticipate monitoring industry notice practices and evaluating whether further action is needed.

Section 248.122(a)(5)(i) contains a special rule that explains the obligations with respect to notice following the termination of a continuing relationship. Under this rule, a consumer must be given a new opt out notice if, after all continuing relationships with a person or its affiliate have been terminated, the consumer subsequently establishes a new continuing relationship with that person or the same or a different affiliate and the consumer's eligibility information is to be used to make a marketing solicitation.

231

This will afford the consumer and the Covered Person a fresh start following termination of all continuing relationships by requiring a new opt out notice if a new continuing relationship is subsequently established. The new opt out notice must apply, at a minimum, to eligibility information obtained in connection with the new continuing relationship. The new opt out notice may apply more broadly to information obtained in connection

with a terminated relationship and give the consumer the opportunity to opt out with respect to eligibility information obtained in connection with both the terminated and the new continuing relationships. A consumer's failure to opt out does not override a prior, but still in-effect, opt out election made by the consumer and applicable to eligibility information obtained in connection with a terminated relationship. The prior opt out would still be in effect regardless of whether the new opt out notice provided to the consumer applies to eligibility information that was obtained in connection with the terminated relationship.

232

Section 248.122(a)(5)(ii) contains an example of this special rule. The Commission notes, however, that when a consumer was not given an opt out notice in connection with the initial continuing relationship because eligibility information obtained in connection with that continuing relationship was not shared with affiliates for use in making marketing solicitations, an opt out notice provided in connection with a new continuing relationship would have to apply to any eligibility information obtained in connection with the terminated relationship that is to be shared with affiliates for use in making future marketing solicitations.

231

This provision was designed to address comments regarding consumers that terminate a continuing relationship with a Covered Person.

See

supra note 229.

232

The Agencies received comment that it was inappropriate to tie the opt out to the consumer, rather than to the information used for making marketing solicitations. Upon further examination, we conclude that tying the opt out to the consumer could have had unintended consequences. For example, if the opt out were tied to the consumer, a Covered Person would have to track the consumer indefinitely, even if the consumer's relationship with the Covered Person terminated and a new relationship with that Covered Person was not established until years later. We do not believe that Covered Persons should be required to track consumers indefinitely following termination of a relationship.

2. Section 248.122(b) Duration and Timing of Opt Out

Proposed § 247.25 addressed the duration and effect of a consumer's opt out election. Section 247.25(a) provided that a consumer's election to opt out is effective for the opt out period, which is a period of at least five years beginning as soon as reasonably practicable after the consumer's opt out election is received. Nothing in the paragraph limited the ability of Covered Persons to set an opt out period of longer than five years, including an opt out period that does not expire unless revoked by the consumer. We also stated that if for some reason, a consumer elects to opt out again while the opt out period remains in effect, a new opt out period of at least five years would begin upon receipt of each successive opt out election.

Proposed § 247.25(b) provided that a receiving affiliate could not make or send marketing solicitations to a consumer during the opt out period based on eligibility information it receives from an affiliate, except as provided in the exceptions in proposed § 247.20(c) or if the consumer had revoked his or her opt out.

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The proposal would have tied the opt out to the consumer, not to the information.

234

Proposed § 247.25(c) clarified that a consumer could opt out at any time. Thus, even if the consumer did not opt out in response to the initial opt out notice or if the consumer's election to opt out was not prompted by an opt out notice, the consumer could still have opted out. Regardless of when the consumer opted out, the opt out would be effective for at least five years.

233

As discussed above, proposed § 247.20(c) provided exceptions from Regulation S-AM's not

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