A correction has been added to this story. See below for details.
NEW YORK (AdAge.com) -- Even as President Barack Obama was making his pitch for financial reform in New York today, the advertising industry was crying out against a provision in the bill that could extend FTC power to levels not seen since the 1970s.
The American Association of Advertising Agencies, the Direct Marketing Association and the American Advertising Federation are among 30 groups that delivered a letter to the U.S. Senate and took out a full-page ad in the influential Capitol Hill newspaper, Roll Call, this morning, spearheading an effort to prevent the Federal Trade Commission from once again becoming the "nation's nanny."
The groups say a "hidden" provision in the already-passed House of Representatives' version of the Financial Reform Bill (H.R. 4173) would expand FTC power and restore the broad rule-making and enforcement authority the agency enjoyed prior to 1975, when Congress imposed restrictions on the FTC with the passage of the Magnuson-Moss Warranty Act.
"It would be the FTC on steroids," Dick O' Brien, exec VP-government relations for the 4A's, told AdAge.com.
The Senate is in the midst of drafting its version of the "Restoring American Financial Stability Act," also known as the Wall Street Reform and Consumer Protection Act, and there has been serious talk on the Hill of including the FTC provision so that it will agree with the House bill.
The 4A's, DMA and others believe the provision that would grant the FTC greater power over unfair and deceptive ad practices has no business in a financial reform bill.
In a letter delivered this morning to Senate Majority Leader Harry Reid, D-Nevada, and Republican Leader Mitch McConnell, Kentucky, the group wrote:
The proposed expansion of FTC authority envisioned in H.R. 4173 would reverse the considered decisions of two earlier Congresses, granting such sweeping powers that the Commission could essentially act as an unelected legislature, governing industries and sectors that had nothing to do with the financial crisis. ... Granting the Federal Trade Commission broad new authority across all but a few sectors of the American economy is not a necessary or relevant response to the causes of the recent recession. ... We strongly urge the Senate to focus its current debate on restructuring the financial regulatory system, and not rush to make changes to the FTC that would have a fundamental impact on a broad segment of the business community."The ad in Roll Call is heavy on text and features phrases including "Advertisers do not make credit default swaps" and "Retailers have not asked for tax-payer bailouts."
"It's scary because this provision is just buried in the bill and it would give the FTC just an amazing breadth of authority," Linda Woolley, exec VP-government relations, told AdAge.com.
How provision will change process
The FTC is currently required to hold hearings on proposed rules, prepare a statement of basis and purpose that includes the economic impact of a rule, and identify any harm that a proposed rule is designed to address. It is generally agreed that while the FTC oversees numerous industries, it has little power of enforcement.
The provision in the bill would change that, with three major initiatives that include expedited rule-making; the issuance of fines for those deemed to create false and deceptive advertising; and an "aiding and abetting" rule in which fines can be levied on those who assist in false and misleading ads -- an ad agency, for example.
"Right now, the process does take a long time. It's the equivalent of a trial, and that would all be taken away. You literally would go from years to days to adjudicate," Mr. O' Brien said. "And ad agencies have to be concerned about aiding and abetting. Today, if a client comes to an agency and says we're going to make this claim and here's the substantiation from our scientists and experts, the agency does the work. Now, the new legislation is basically saying to ad agencies that if something is deemed to be wrong, you're liable. The first added cost is the agencies may no longer be able to rely on the substantiation of the client. In theory, they would have to duplicate it themselves, at their own costs before going forward, to have their own peace of mind."
Currently, companies previously found to have run deceptive ads are subject to fines of up to $16,600 per viewer.* Under the proposed provision in the House version of the bill, the FTC would also be able to fine agencies that did the work and, ostensibly, media outlets that broadcast or display the ad.
Back to 'national nanny'?
Many fear the FTC would go back to its roots of heavy-handed regulation with the new powers, such as what it tried with manufacturing standards and children's TV advertising in the 1970s, which prompted the Washington Post to write that the FTC was acting like "a great national nanny" in a March 1978 editorial.
NetChoice, an e-commerce trade group, put the proposal at the top of its "iAwful" 10 worst legislative proposals. The FTC has been pushing hard to require opt-in permission for data collection, which could affect targeted advertising on the web.
But University of Wyoming associate dean and professor of law Dee Pridgen testified last month before the Senate Commerce Committee's Subcommittee on Consumer Protection, Product Safety and Insurance and, along with Edward Mierzwinski, consumer program director of the U.S. Public Interest Research Group, is in favor of sweeping FTC change.
In a blog post, Ms. Pridgen wrote: "I favor these proposals because the current Magnuson-Moss rulemaking procedures are so cumbersome that they have become a 'dead letter.' ... I point out that the law of unfair and deceptive trade practices has been constrained and tempered since Magnuson Moss was passed in 1975. ... Times have changed and the FTC needs the tools that other agencies have to issue binding rules in consumer protection."
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CORRECTION: The FTC states that it can only seek a civil penalty or fine against a company for running deceptive ads if the company has previously been charged with violating the law and is now subject to an FTC order. In those circumstances, the company may be liable for up to $16,000 for each violation of the order. A previous version of the story failed to make that distinction.