# Regulation S-AM: Limitations on Affiliate Marketing > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-19020 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 11, 2009 - **Citation:** 74 FR 40398 ## Text 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”), 1 the Securities Exchange Act of 1934 (the “Exchange Act”), 2 the Investment Company Act of 1940 (the “Investment Company Act”), 3 and the Investment Advisers Act (the “Advisers Act”). 4 1 Public Law 108-159, Section 214, 117 Stat. 1952, 1980 (2003). 2 15 U.S.C. 78q, 78w, and 78mm. 3 15 U.S.C. 80a-30 and 80a-37. 4 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”). 5 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. 5 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. 6 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. 6 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”). 7 The Commission received 15 comments on the proposed rules from financial institutions and their representatives. 8 While a number of commenters generally supported the Commission's proposals, 9 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. 10 A more detailed discussion of the comments is contained in the Section-by-Section analysis below. 7 Limitations on Affiliate Marketing (Regulation S-AM) , Exchange Act Release No. 49985 (July 8, 2004), 69 FR 42302 (July 14, 2004) (“Proposing Release”). 8 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 . 9 See, e.g. , IAA Letter; ICI Letter; Mellon Letter; MetLife Letter. 10 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, 11 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. 11 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. 12 12 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. 13 13 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, 14 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”). 15 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”). 16 14 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. 15 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. 16 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. 17 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. 17 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. 18 18 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. 19 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.” 20 19 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. 20 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. 21 Two commenters suggested that we eliminate the term “corporate” in the Regulation S-AM definition. 22 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”). 23 21 See ACB Letter; FSR Letter; IAA Letter; ICBA Letter; ICI Letter; T. Rowe Price Letter; Wells Fargo Letter. 22 See ICI Letter; T. Rowe Price Letter. 23 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. 24 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. 25 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. 26 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. 24 Section 248.120(a). 25 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. 26 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. 27 The definition incorporates the definition of “broker” in the Exchange Act and excludes notice-registered brokers. 28 27 See § 248.120(b), which was proposed as § 247.3(b). 28 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. 29 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: 29 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. 30 30 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. 31 31 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.” 32 One commenter expressed approval of the proposed definition because of its similarity to the definition of the term found in Regulation S-P. 33 However, other commenters suggested that the definition could give rise to an increased risk of litigation and civil liability for financial institutions. 34 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. 35 Commenters also pointed to the Board's withdrawal of a similar definition in other regulations as support for not including the definition. 36 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. 37 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. 38 32 See ACB Letter; Coalition Letter; IAA Letter; ICBA Letter; Wells Fargo Letter. 33 See IAA Letter. See also 17 CFR 248.3(c)(1) (defining “clear and conspicuous” for purposes of Regulation S-P). 34 See ACB Letter; ICBA Letter; Wells Fargo Letter. 35 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. 36 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. 37 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. 38 See ACB Letter; see also 12 U.S.C. 4301, et seq. Because the FACT Act requires that we provide specific guidance on how to comply with the clear and conspicuous standard, 39 we believe that it is important to both define “clear and conspicuous” in the final rules and provide specific guidance for how to satisfy that standard. 40 The Commission notes that an affiliate sharing opt out notice required under the FCRA, which may be enforced through private rights of action, must be included in a GLBA privacy notice. 41 Therefore, the affiliate sharing opt out notices generally are provided in a manner consistent with the clear and conspicuous standard set forth in the GLBA privacy regulations. 42 We believe that Covered Persons' experience in providing clear and conspicuous affiliate sharing notices should help them provide clear and conspicuous affiliate marketing notices under Regulation S-AM. 39 See 15 U.S.C. 1681s-3(a)(2)(B) (“Notwithstanding subparagraph (A), the notice required under paragraph (1) shall be clear, conspicuous, and concise * * *. The regulations prescribed to implement this section shall provide specific guidance regarding how to comply with such standards.”). 40 The Commission is providing two types of specific guidance on satisfying the requirement to provide a clear and conspicuous affiliate marketing opt out notice. First, this release and § 248.121(a) describe certain techniques that may be used to make notices clear and conspicuous. Second, the Commission is adopting as part of Regulation S-AM the model forms set forth in the Appendix to Subpart B—Model Forms (“Appendix”) that may, but are not required to, be used to facilitate compliance with the affiliate marketing notice requirements. 41 See 15 U.S.C. 6803(b)(4). 42 See, e.g. , the definition and examples in Regulation S-P at 17 CFR 248.3(c). Accordingly, we are adopting the definition of “clear and conspicuous” as proposed. 43 We urge Covered Persons to consider the guidance discussed above regarding practices and methods for making notices clear and conspicuous. Moreover, like the Agencies, we are adopting model forms that may, but are not required to, be used to facilitate compliance with the affiliate marketing notice requirements. 44 The requirement that a notice be clear and conspicuous would be satisfied by the appropriate use of one of the model forms. Accordingly, use of the model forms, although optional, should help alleviate risks from litigation related to the requirement that notices be clear and conspicuous, about which some commenters expressed concern. 45 43 See § 248.120(c), which was proposed as § 247.3(c). 44 See Appendix to Regulation S-AM. 45 See ACB Letter; ICBA Letter; Wells Fargo Letter. 4. Commission We received no comment on the definition of “Commission” to mean the Securities and Exchange Commission and are adopting it as proposed. 46 46 See § 248.120(d), which was proposed as § 247.3(d). 5. Company We received no comment on the definition of “company” and are adopting the term as proposed. 47 47 See § 248.120(e), which was proposed as § 247.3(e). 6. Concise We received no comment on the definition of “concise” and are adopting it as proposed. 48 Section 248.120(f)(1) defines the term “concise” to mean a reasonably brief expression or statement. Paragraph (f)(2) provides that a notice required by Regulation S-AM may be concise even if it is combined with other disclosures required or authorized by Federal or State law. 49 48 See § 248.120(f), which was proposed as § 247.21(b)(3). The Appendix provides that the requirement for a concise notice would be satisfied by the appropriate use of one of the model forms contained in the Appendix, although use of the model forms is not required. See supra note 40. 49 Such disclosures include, but are not limited to, a GLBA privacy notice, an affiliate-sharing notice under Section 603(d)(2)(A)(iii) of the FCRA, and other consumer disclosures. 7. Consumer Proposed paragraph (f) of § 247.3 defined “consumer” to mean an individual, including an individual acting through a legal representative. 50 Some commenters suggested that the definition of “consumer” used in Regulation S-AM should track the definition in Regulation S-P. 51 Some also asked that the Commission include in the definition the examples that accompany the definition of “consumer” in Regulation S-P. 52 50 The proposed definition follows the statutory definition of Section 603(c) of the FCRA. See 15 U.S.C. 1681a(c). 51 See ACB Letter; IAA Letter; T. Rowe Price Letter. 52 See IAA Letter; T. Rowe Price Letter. The Commission is aware of the narrower definition of “consumer” in the privacy regulations enacted under Title V of the GLBA. 53 However, we believe that the use of distinct definitions of “consumer” reflects differences in the scope and objectives of the two statutes. Accordingly, we are adopting the definition of “consumer” as proposed. 54 For purposes of this definition, an individual acting through a legal representative would qualify as a consumer. 53 See Proposing Release at 69 FR 42305. 54 See § 248.120(g). 8. Control We are adopting the definition of “control” as proposed. 55 Two commenters supported the proposed definition, indicating it was consistent with the one found in Regulation S-P and the GLBA. 56 For purposes of Covered Persons, “control” means the power to exercise a controlling influence over the management or policies of a company, whether through ownership of securities, by contract, or otherwise. 57 Ownership of more than 25 percent of a company's voting securities would create a presumption of control of the company. 58 As the Proposing Release explained, this definition would be used to determine when companies are affiliated 59 and would result in financial institutions being considered affiliates regardless of whether the control is exercised by a company or an individual. 60 55 See § 248.120(h), which was proposed as § 247.3(g). 56 See IAA Letter; T. Rowe Price Letter. 57 Section 248.120(h). This definition is consistent with definitions of control found elsewhere under the securities laws. See, e.g., 17 CFR 240.19g2-1(b)(2); 17 CFR 248.3(i); 15 U.S.C. 80a-2(a)(9); 15 U.S.C. 80b-2(a)(12). 58 This presumption may be rebutted by evidence, but in the case of an investment company, will continue until the Commission makes a decision to the contrary according to the procedures described in Section 2(a)(9) of the Investment Company Act. 15 U.S.C. 80a-2(a)(9). 59 See supra Part III.C.1; Proposing Release at 69 FR 42305. 60 In § 222.3(i) of their Joint Proposal, the Banking Agencies and the NCUA defined “control” as ownership of 25 percent of a company's voting securities, control over the election of a majority of the directors, trustees or general partners of the company, or the power to exercise a controlling influence over management or policies of a company, as determined by the particular agency. See Banking Agencies and NCUA, Fair Credit Reporting Affiliate Marketing Regulation; Proposed Rules, 69 FR 42502 (July 15, 2004) (“Joint Proposal”). However, as we emphasized in the Proposing Release, the definition of “control” in the proposed rules differed from the Agencies' definition in the Joint Proposal. See Proposing Release at 69 FR 42305. The Joint Rules incorporate the definition of “control” to mean “common ownership or common corporate control” as in the Agencies' final FCRA medical information rules. See Joint Rules at 72 FR 62913 (citing 70 FR 70664 (Nov. 22, 2005)). 9. Dealer We received no comments on the definition of “dealer” and are adopting it as proposed. 61 Section 248.120(i) defines “dealer” to have the same meaning as in Section 3(a)(5) of the Exchange Act, 62 regardless of whether the dealer is registered under Section 15(b) of the Exchange Act. 63 The term includes a municipal securities dealer as defined in Section 3(a)(30) of the Exchange Act, 64 other than a bank (as defined in Section 3(a)(6) of the Exchange Act), 65 regardless of whether it is registered under Section 15(b) or 15B(a)(2) of the Exchange Act. 66 In addition, the term includes a government securities dealer as defined in Section 3(a)(44) of the Exchange Act, 67 regardless of whether it is registered under Section 15(b) or 15C(a)(2) of the Exchange Act. 68 The definition specifically excludes notice-registered broker-dealers. 69 61 See § 248.120(i), proposed as § 247.3(h). 62 15 U.S.C. 78c(a)(5). 63 15 U.S.C. 78 o (b). 64 15 U.S.C. 78c(a)(30). 65 15 U.S.C. 78c(a)(6). 66 15 U.S.C. 78 o (b), 78 o -4(a)(2). 67 15 U.S.C. 78c(a)(44). 68 15 U.S.C. 78 o (b), 78 o -5(a)(2). 69 See discussion of the inapplicability of Regulation S-AM to notice-registered broker-dealers supra note 16 and accompanying text. 10. Eligibility Information We are adopting the proposed definition of “eligibility information” to mean any information, the communication of which would be a consumer report, if the statutory exclusions from the definition of “consumer report” in Section 603(d)(2)(A) of the FCRA, for transaction or experience information and for “other” information that is subject to the affiliate-sharing opt out, did not apply. 70 As under the proposal, eligibility information would include a Covered Person's own transaction or experience information, such as information about a consumer's account history with that Covered Person, and “other” information under Section 603(d)(2)(A)(iii), such as information from consumer reports or applications. 71 70 See § 248.120(j). 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). 71 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. 72 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. 72 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. 73 Others suggested that the Commission should provide examples to illustrate the common types of information that would and would not constitute eligibility information. 74 One commenter requested examples specifically relevant to the securities industry. 75 Another commenter offered an alternative definition, stating that the proposed definition was unnecessarily complex and difficult to apply. 76 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. 77 The commenter expressed concern that the divergence may signal some other interpretation, but did not provide an example of a secondary interpretation. 73 See FSR Letter; SIFMA Letter I. 74 See ICI Letter; T. Rowe Price Letter. 75 See ICI Letter. 76 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.” 77 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. 78 78 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. 79 79 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. 80 80 See § 248.120( l ), proposed as § 247.3(k). 13. Investment Adviser We received no comment on the definition of “investment adviser” and are adopting it as proposed. 81 This definition incorporates the definition of “investment adviser” in the Investment Advisers Act. 81 See § 248.120(m), proposed as § 247.3( l ). 14. Investment Company We received no comment on the definition of “investment company” and are adopting it as proposed. 82 This definition incorporates the definition of “investment company” in the Investment Company Act. 82 See § 248.120(n), proposed as § 247.3(m). 15. Marketing Solicitation We are adopting the definition of “marketing solicitation,” with modifications discussed below. 83 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. 84 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.” 85 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. 83 See § 248.120( o ), proposed as § 247.3(n). 84 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). 85 15 U.S.C. 1681s-3(d)(2). Seven commenters addressed the definition of “marketing solicitation.” 86 Some expressed concern that the proposed definition was not the same as the definition in Section 214 of the FCRA 87 and suggested including the phrase “of a product or service” in the introductory language to be consistent. 88 Other commenters favored the exclusion from the definition of marketing solicitation, solicitations made to the general public. 89 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. 90 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. 91 86 See Coalition Letter; FSR Letter; ICBA Letter; ICI Letter; MetLife Letter; SIFMA Letter I; Wells Fargo Letter. 87 See FSR Letter; SIFMA Letter I. 88 Id. One commenter indicated that the lack of this phrase raised the possibility that the definition could be misinterpreted. See FSR Letter. 89 See Coalition Letter; ICBA Letter; Wells Fargo Letter. 90 See Coalition Letter. 91 See Wells Fargo Letter. Several commenters also addressed Internet-based marketing and generally opposed including it in this rulemaking. 92 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. 93 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. 94 92 See Coalition Letter; FSR Letter; MetLife Letter. 93 See Coalition Letter; MetLife Letter. 94 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. 95 95 See ICI Letter. The revised definition tracks the statutory language more closely by encompassing the marketing “of a product or service.” 96 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. 97 96 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. 97 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. 98 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. 98 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. 99 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. 99 See § 248.120(p), proposed as § 247.3( o ). 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 supra text accompanying notes 125 and 126. 133 See MetLife Letter. We are adopting seven examples of a pre-existing business relationship set out in § 248.120(q)(2). 134 In § 248.120(q)(3) we have provided three examples of the absence of a pre-existing relationship. 135 134 Section 248.120(q)(2)(i) provides an example of a pre-existing business relationship based on a consumer's open account with a brokerage firm. Section 248.120(q)(2)(ii) provides a similar example of a pre-existing business relationship with a registered investment adviser. Section 248.120(q)(2)(iii) provides an example in which a pre-existing business relationship is established for 18 months after the date a consumer who was the record owner of investment company securities redeems all of those securities. Section 248.120(q)(2)(iv) provides an example in which a consumer applies for a product or service, but does not obtain the product or service for which she applied, and a pre-existing business relationship is established for three months after the date of the application. Contact information is not mentioned in this example because the consumer presumably would have supplied it on the application. Section 248.120(q)(2)(v) provides an example in which a consumer makes a telephone inquiry about a product or service offered by a brokerage firm and provides contact information to the institution, but does not obtain a product or service from or enter into a financial transaction with the institution. As noted earlier, we do not believe that, by itself, an institution's capture of a consumer's telephone number during a telephone conversation with the consumer about the institution's products or services is sufficient to create an inquiry. In these circumstances, to ensure that an inquiry has been made, the institution should ask the consumer to provide his or her contact information. Section 248.120(q)(2)(vi) provides an example in which pre-existing business relationships are established for three months after the date a consumer makes an e-mail inquiry to a broker-dealer about one of its affiliated investment company's products or services without providing any contact information other than the consumer's e-mail address. Unlike telephone communications, e-mail communications do not provide institutions with an opportunity to ask for additional contact information at the time of a consumer's initial request for information. Section 248.120(q)(2)(vii) provides an example in which a pre-existing business relationship between a consumer and a broker-dealer is established for three months by a consumer's telephone call to a centralized call center for the broker-dealer and an affiliated investment company with which the consumer has an existing relationship, and the consumer provides contact information to the call center and inquires about products and services offered by the broker-dealer, but does not obtain any products or services. 135 Section 248.120(q)(3)(i) is similar to § 248.120(q)(2)(vii) except that the consumer does not inquire about an affiliate's products or services but about an existing account with the broker-dealer. In this situation, a pre-existing business relationship with an affiliate of the broker-dealer is not established. Section 248.120(q)(3)(ii) is substantively similar to the example in proposed § 247.20(d)(2)(iii), whereby a pre-existing business relationship is not created by simply requesting information about retail hours and locations. Section 248.120(q)(3)(iii) illustrates that a call in response to an advertisement for a free promotional item is not an inquiry about a product or service that would establish a pre-existing business relationship. 18. Transfer Agent We received no comment on the definition of “transfer agent” and are adopting it as proposed. 136 The rule defines “transfer agent” to have the same meaning as in Section 3(a)(25) of the Exchange Act. 137 136 See § 248.120(r), proposed as § 247.3(q). 137 15 U.S.C. 78c(a)(25). 19. You We received no comment on the definition of “you” and are adopting it substantially as proposed. 138 The one difference is that the final definition does not include notice-registered broker-dealers. 139 138 See § 248.120(s), proposed as § 247.3(r). 139 See supra note 16. D. Section 248.121 Affiliate Marketing Opt Out and Exceptions Proposed § 247.20 set forth the requirement that a consumer be provided with notice and a reasonable opportunity to opt out before a receiving affiliate uses eligibility information to make marketing solicitations to the consumer. Proposed paragraphs (a) and (b) bifurcated duties between the “communicating affiliate” and “receiving affiliate” to resolve what we perceived as an ambiguity in the FCRA with regard to which affiliate was to provide the opt out notice to the consumer. 140 Proposed paragraph (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, and paragraph (d) illustrated those exceptions with examples. Proposed paragraph (e) provided that Regulation S-AM would not be applicable to marketing solicitations that were based on information received by an affiliate prior to the proposed mandatory compliance date. 141 Proposed paragraph (f) clarified the relationship between sharing information and becoming a credit reporting agency. The final rules modify many of these proposed provisions as discussed below. 140 In the proposed rules, we differentiated between affiliates by referring to an affiliate that communicated eligibility information to an affiliate as the “communicating affiliate” and to the affiliate receiving the eligibility information as the “receiving affiliate.” 141 This section, redesignated as § 248.128(c), is discussed below. See infra Part III.K.2. 1. Section 248.121(a) Under proposed § 247.20(a)(1), before a receiving affiliate could use eligibility information to make or send marketing solicitations to a consumer, the communicating affiliate would have had to provide a notice to the consumer stating that the information may be communicated to and used by the receiving affiliate for marketing purposes. The consumer also would have had to have a reasonable opportunity to opt out through some simple method before the receiving affiliate could make a marketing solicitation. The notice and opt out requirements would have applied only if a receiving affiliate would use eligibility information for marketing purposes. 142 Proposed paragraph (a)(2) included two “rules of construction” to give further guidance regarding how affiliate marketing notices might be provided to consumers. 143 142 Proposed paragraph (a)(1) would not have applied if no eligibility information was communicated to affiliates, or if no receiving affiliate would use eligibility information to make marketing solicitations. In the proposal, we provided an example in which paragraph (a) was inapplicable. In the example, a financing company affiliated with a broker-dealer asked the broker-dealer to include financing-company marketing materials in periodic statements sent to consumers by the broker-dealer without regard to eligibility information. 143 The first rule of construction would have permitted the notice to be provided either in the name of a person with which the consumer currently did or previously had done business, or by using one or more common corporate names shared by members of an affiliated group of companies that included the common corporate name used by that person. This rule of construction also would have provided three alternatives regarding the manner in which the notice could have been given. First, a communicating affiliate could have provided the notice to the consumer directly. Second, a communicating affiliate could have used an agent to provide the notice, so long as the agent provided the notice in the name of the communicating affiliate or by using a common corporate name. When using an agent however, the communicating affiliate would have remained responsible for any failure of the agent to fulfill the affiliate's notice obligations. Third, a communicating affiliate could have provided a joint notice with one or more of its affiliates. Of course, if the agent was an affiliate of the person that provides the notice, that affiliate could not have included any marketing solicitations of its own on or with the notice, unless one of the exceptions in paragraph (c) of proposed § 247.20 applied. Even if the agent sending the notice were not an affiliate, the agent would have been permitted to use the information only for limited purposes under Regulation S-P. See 17 CFR 248.11. The second rule of construction would have discussed how to avoid issuing duplicate notices when Affiliate A communicated information to Affiliate B, who in turn communicated information to Affiliate C. Proposed § 247.20(b) set forth the general duties of a receiving affiliate. In particular, a receiving affiliate could not have used the eligibility information it received from its affiliate to make marketing solicitations to a consumer unless, prior to such use the consumer had: (1) Been provided an opt out notice (as described in proposed paragraph (a) of § 247.20) that applied to that affiliate's use of eligibility information; (2) received a reasonable opportunity to opt out of that use through one or more simple methods; and (3) not opted out. The Commission solicited comment on these provisions. In addition, the Commission also solicited comment on whether there were situations where oral notices and opt outs should be allowed and, if so, how the statute's clear and conspicuous standard could be satisfied. 144 144 The proposal also contemplated that the opt out notice would be provided to the consumer in writing or, if the consumer agreed, electronically. See Proposing Release at 69 FR 42308. Five commenters addressed the duties of the communicating affiliate and the receiving affiliate. 145 Some commenters supported having the communicating affiliate provide the notice and opt out, indicating that consumers may be more likely to expect a notice from the communicating affiliate and could unknowingly miss the opportunity to opt out if they do not have a pre-existing relationship with the company that is sending the notice and opt out. 146 Other commenters disagreed with the provision in the proposal that would have required the communicating affiliate provide the notice and opt out. 147 One commenter viewed the statute's lack of direction regarding which entity must provide the notice and opt out as evidence of Congressional intent to permit companies to structure the notice and opt out in a manner that meets their unique needs and situations. 148 Another commenter stated that the FCRA contemplates that the receiving affiliate would provide the notice, and that to require the communicating affiliate to provide it would create a basis for civil liability if a communicating affiliate does not provide notice and an opportunity to opt out before a receiving affiliate uses eligibility information to make a marketing solicitation. 149 145 See ACLI Letter; ICBA Letter; ICI Letter; T. Rowe Price Letter; Wells Fargo Letter. 146 See ICI Letter; T. Rowe Price Letter. 147 See ACLI Letter; ICBA Letter; Wells Fargo Letter. 148 See ACLI Letter. One commenter also suggested allowing companies to decide the best method of providing the notice. See ICBA Letter. 149 See Wells Fargo Letter. Six commenters addressed oral notices and supported permitting their use. 150 One commenter indicated that the use of oral notices would be an easier method by which consumers could exercise their rights under the proposed rules. 151 This commenter indicated that this was especially so for consumers who primarily conduct business over the telephone, suggesting that when information is provided over the phone, a consumer is less likely to disregard a privacy notice. 152 Another commenter generally noted the changing technological landscape and stated that limiting delivery of the notice to written form could create a barrier to improved customer service. 153 Another commenter asserted that the FTC, in its TSR, has permitted clear and conspicuous oral notices without any enforcement difficulties. 154 One commenter also stated that the clear and conspicuous standard could be more easily met with oral notices through the use of scripts or lists of frequently asked questions. 155 150 See Coalition Letter; IAA Letter; ICBA Letter; ICI Letter; T. Rowe Price Letter; Wells Fargo Letter. 151 See ICI Letter. 152 See ICI Letter. One commenter suggested that the regulation permit the notice to be given by an affiliate while the consumer is being called with a marketing solicitation. See Wells Fargo Letter. Another commenter suggested that delivery of the notice would be better effectuated if the affiliate representative and consumer engaged in a dialogue. See IAA Letter. 153 See ICBA Letter. 154 See Coalition Letter. 155 See IAA Letter. After considering these comments regarding proposed paragraphs (a) and (b), the Commission is adopting these paragraphs, redesignated as § 248.121(a), with modifications. Section 248.121(a)(1) sets forth the general rule and contains the three conditions that must be met before a Covered Person may use eligibility information about a consumer that it receives from an affiliate to make a marketing solicitation to the consumer. First, it must be clearly and conspicuously disclosed to the consumer in writing or, if the consumer agrees, electronically, in a concise notice that the Covered Person may use shared eligibility information to make marketing solicitations to the consumer. Second, the consumer must be provided a reasonable opportunity and a reasonable and simple method to opt out of the use of that eligibility information to make marketing solicitations to the consumer. Third, the consumer must not have opted out. Section 248.121(a)(2) provides an example of the general rule. The Commission has eliminated as unnecessary the rules of construction in proposed paragraph (a)(2) as well as the provisions in the proposal relating to notice provided by an agent. General agency principles, however, continue to apply. An affiliate that has a pre-existing business relationship with the consumer may direct its agent to provide the opt out notice on its behalf. In light of one commenter's concern about civil liability, the final rules do not impose duties on any affiliate other than the affiliate that intends to use shared eligibility information to make solicitations to the consumer. Although an opt out notice must be provided by or on behalf of an affiliate that has a pre-existing business relationship with the consumer (or as part of a joint notice), that affiliate has no duty to provide such a notice. Instead, the final rules provide that absent such a notice, an affiliate must not use shared eligibility information to make solicitations to the consumer. Proposed paragraph (b) of § 247.20 has been deleted and replaced with paragraph (a)(3) in § 248.121. Section 248.121(a)(3) provides that the initial opt out notice must be provided either by an affiliate that has a pre-existing business relationship with the consumer, or as part of a joint notice from two or more members of an affiliated group of companies, provided that at least one of the affiliates on the joint notice has a pre-existing business relationship with the consumer. This follows the general approach taken in the proposal to ensure that the notice would be provided by an entity known to the consumer. While we used the terms “communicating affiliate” and “receiving affiliate” in the proposal and continue to use these terms in this release, the final rule text does not include these terms in order to avoid potential confusion. 156 The Commission has considered the comments regarding oral notices and opt outs and concluded that the opt out notice may not be provided orally. The Commission is required, under the FACT Act, to consider the affiliate-sharing notification practices employed on the date of enactment and to ensure that notices and disclosures may be coordinated and consolidated in promulgating regulations. Any affiliate-sharing notice required under Section 603(d)(2)(A)(iii) of the FCRA generally must be included in a GLBA privacy notice, which must be provided in writing, or if the consumer agrees, electronically. We find it consistent with existing affiliate-sharing notification practices to require the affiliate marketing opt out notice to be provided in writing, or if the consumer agrees, electronically. The Commission believes that this will promote coordination and consolidation of the FCRA affiliate marketing and sharing notice with the GLBA privacy notices. We are not persuaded that there are any circumstances in which an oral opt out notice would be necessary. While oral opt out notices are not permitted, a number of key exceptions to the initial notice and opt out requirement may be triggered by an oral communication with the customer. These include the: (1) Pre-existing business relationship exception; (2) consumer-initiated communication exception; and (3) consumer authorization or request exception. We understand that some Covered Persons currently require consumers to provide their Social Security numbers when exercising their existing GLBA or FCRA opt out rights. To combat identity theft and prevent “phishing,” however, consumers have been advised not to provide sensitive personal information such as Social Security numbers to unknown entities. Furthermore, as one of the Federal agencies participating in the President's Identity Theft Task Force, the Commission has made a commitment to examine and recommend ways to limit the private sector's use of Social Security numbers. The approach recommended by some industry commenters would allow an entity unknown to the consumer to not only provide the affiliate marketing opt out notice, but also to require the consumer to reveal his or her Social Security number to that unknown entity in order to exercise the opt out. The Commission notes that requiring that a consumer reveal his or her Social Security number to an unknown entity in order to exercise his or her opt out right would send conflicting messages to consumers about providing Social Security numbers to unknown entities. This approach would be inconsistent with the Commission's current joint efforts with the Agencies to develop a comprehensive record on the uses of the Social Security number in the private sector and evaluate their necessity, as recommended by the President's Identity Theft Task Force. 157 156 The Commission continues to believe that the statute's silence with regard to which affiliates may provide the opt out notice makes the statute ambiguous on this point. We agree with the commenters who indicated that consumers are less likely to disregard a notice provided by a person known to the consumer. We are concerned that a notice provided by an entity unknown to the consumer may not provide meaningful or effective notice because consumers are more likely to ignore or discard these notices. However, we note that while an agent unknown to the consumer may provide a notice, the notice itself would have to clearly indicate that it is on behalf of either the company the consumer has or had a pre-existing relationship with or be a joint notice from two or more members of an affiliated group of companies so long as one of the companies on the joint notice has or had a pre-existing relationship with the consumer. See § 248.121(a)(3). 157 See Combating Identity Theft: A Strategic Plan at 26-27 (April 2007) (available at http://www.idtheft.gov ). 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. 163 163 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. 174 174 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. 175 175 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. 176 176 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. 177 177 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). 178 178 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. 180 180 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 infor [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-19020. Public record. Not legal advice.