Category: Consumer Protection

Recent Consumer Financial Protection Bureau (CFPB) Developments

Rules Creating Exemptions to the ATR Rule Finalized

The Consumer Financial Protection Bureau (CFPB) recently finalized rules that modified and created specific exemptions to the CFPB’s Ability-to-Repay Rule. The rules have three main effects.

  1. They exempt certain community development lenders and nonprofits—specifically those that lend only to low- and moderate-income consumers, and make 200 or fewer such loans per year—from the ATR Rule.
  2. They facilitate lending by community banks and credit unions that have less than $2 billion in assets, and make 500 or fewer first lien mortgages per year.
  3. They no longer require that compensation paid by a broker or lender to a loan originator counts towards the Dodd-Frank points and fees limits.

These changes to the ATR Rule will take effect on January 10, 2014.

Effective Date of Prohibitions on Financing Credit Insurance Premiums Delayed

The CFPB has delayed the effective date of a regulation prohibiting creditors from financing credit insurance premiums secured by a dwelling. The regulation, previously effective June 1, 2013, has been delayed until January 10, 2014. The CFPB wanted to clarify how the rule applied to transactions other than those where a lump-sum premium was added to the loan amount at closing.

CFBP Seeking Comments on Possible Revisions to the Civil Penalty Rule

The CFPB is seeking comments on possible revisions to the Consumer Financial Civil Penalty Fund Rule. The CFBP uses this fund, established by the Dodd-Frank Act, to deposit civil penalties obtained in judicial or administrative actions under federal consumer financial laws. The fund can be used to pay victims of violations of federal consumer financial laws, or, if victims cannot be found, to educate consumers and provide financial literacy programs. The rule articulates the CFPB’s interpretations of what kind of victim payments are appropriate and how to otherwise allocate the funds. Comments are due on July 8, 2013.

White Paper Concerning Overdraft Practice Concerns Published

The CFPB published a white paper concerning overdraft practice concerns and institutional practices. The paper finds that a large portion of consumer checking account revenue continues to come from overdraft fees. Furthermore, those consumers who choose, let alone use, overdraft coverage have higher costs and a higher chance of having their checking accounts involuntary closed. No action, other than further research, is currently planned.

CFPB Launches New Mortgage Rule Implementation Page

The new mortgage rule implementation page is part of an effort to help lenders comply with the Dodd-Frank Act reforms and CFPB rules. Debtors and potential debtors can find potentially useful information, including quick reference charts, video guides, manuals, etc.—related to the new 2013 mortgage rules. While the CFPB’s intention for the site is to help understand the rules, the materials are not a substitute for the rules themselves.

Ryan C. Fairchild, summer law clerk at Poyner Spruill, co-authored this article.

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The Consumer Financial Protection Bureau, Week in Review: June 10 – June 14, 2013

GT Law

CFPB Launches Regulatory Implementation Page

In an effort to streamline resources and better assist financial institutions implementing the many new rules and policies promulgated by the CFPB, the CFPB announced the launch of its “Regulatory Implementation” webpage, available here. The page is a one-stop shop for financial institutions looking for assistance in understanding some of the more salient differences and requirements of the rules. In addition to a number of quick-reference guides, the page also contains compliance guides for the following rules: (i) Ability to Repay/Qualified Mortgage; (ii) 2013 HOEPA Rule; (iii) Loan Originator Compensation; (iv) ECOA Valuations; (v) TILA HPML Appraisals; (vi) Escrows; and (vii) TILA and RESPA Servicing.

CFPB Examines Impact of Overdraft Practices on Consumers

On June 11, 2013, the CFPB released its “CFPB Study of Overdraft Programs” (the Report), which is available here. The Report was based upon (i) responses the CFPB received to a request for information published in the Federal Register in February 2012, and (ii) aggregate, institution-level information data and random samples of consumer checking accounts. Through the inquiry, the CFPB determined that overdraft programs are costly to consumers, provide substantial sources of checking account revenue for financial institutions, and vary widely across financial institutions.

The Report noted that overdraft practices employed by financial institutions are frequently very complex. Not only do the fees charged for overdraft protection vary, but many other differences exist throughout the industry, including: the number of times a consumer can be charged; whether there are caps on such charges; the amount of such caps; the scope of overdraft protection; and even the order in which transactions are posted. Each of these factors can play a significant role in determining the fees consumers will face. Accordingly, the CFPB’s report raises concerns about consumers’ ability to understand, navigate and anticipate fees.

In light of the Report’s findings, the CFPB has announced its intention to engage in further review of account-level data to better understand how differences in practices affect consumers.

CFPB Proposes New Redress System for Victims of Unlawful Activities

Under Section 1055(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB may obtain various types of monetary relief, such as restitution, refunds and damages, in both judicial and administrative proceedings. The CFPB collectively refers to such relief as “redress”, and can be required to receive such redress from a defendant and then distribute it to victims of unlawful activities. In order to better assist this process, which is known as “Bureau-Administered Redress,” the CFPB is proposing a new system of records that will enable the CFPB to manage distributions to consumers.

Specifically, the new system will enable the CFPB to: (i) track the collection, allocation and distribution of funds in the Civil Penalty Fund and redress monies; (ii) identify and locate victims who may receive such payments; (iii) determine the amounts that the CFPB will distribute to such victims; (iv) maintain associated account and financial information; and (v) develop reports to applicable tax officials regarding such payments.

The proposal, which is available here, states that any comments on the proposed system must be received no later than July 11, 2013. The new system will become effective on July 22, 2013, unless comments are received that result in a contrary determination.

CFPB Releases New Training Module to Combat Financial Exploitation of Older Americans

On June 12, 2013, the CFPB along with the Federal Deposit Insurance Corporation (FDIC), released a tool called “Money Smart for Older Adults.” The purpose of the module is to assist older adults (age 62 and older), as well as their caregivers, in avoiding and preventing financial exploitation. In addition, it provides information to educate consumers about planning for a secure financial future and making informed financial decisions.

The module, which consists of a scripted instructor guide, a participant/resource guide and Power Point slides, has been designed to be presented and administered by financial institution representatives, adult protective services agencies, senior advocacy organizations, law enforcement, and similar organizations and agencies.  The module is available, free of charge, on the FDIC website. Click here to view.

CFPB Assistant Director Tells Nonbanks to Quickly Implement Compliance Management Systems

During the American Bankers Association’s Regulatory Compliance Conference on June 12, 2013, Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, urged nonbank entities to implement compliance management systems without delay. She specifically pointed to many payday lenders, consumer reporting agencies, mortgage lenders and servicers, student lenders and debt collectors that have yet to implement these compliance management systems.

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New Data Breach Class Action has Two Million Plaintiffs

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Cyber breaches resulting in the release of personal identifiable information (PII) are increasingly common and now we are starting to see class action lawsuits filed as a result. In what will likely be the beginning of a wave of lawsuits filed as a result of cyber breaches, Schnucks Markets, operator of 100 supermarkets across the Midwest, recently removed a class action lawsuit filed against it to federal court stemming from a data breach that occurred in March in which 2.4 million credit card numbers were stolen.

The Class action complaint alleges Schnucks failed to properly and adequately safeguard its customer’s personal and financial data. In addition to common law negligence and disclosure, the plaintiffs allege a violation of the Illinois Personal Information Protection Act which requires a data collector of personal information to notify individuals in the most expedient manner possible and without unreasonable delay. The complaint alleges Schnucks waited over two weeks to notify its customers and then did so only through a press release as opposed to providing actual notice to individual consumers. Apparently Schnucks struggled to find the source of the breach and this delay may have continued to expose the PII of people who shopped at its stores.

cybercrime graphicSchnuck’s notice of removal to federal court states the grounds for removal include a class size of more than 100 people and damages at issue are greater than $5 million. Schnucks also explains that the data breach was the result of criminals hacking into its electronic payment systems at 23 stores. Further, during the relevant period, 1.6 million credit or debit card transactions took place at these stores. Schnucks calculates that 500,000 unique credit or debit cards were involved thus the putative class has at least 500,000 members.

Damages alleged by the plaintiffs include having their credit card data compromised, incurring numerous hours cancelling their compromised cards, activating replacement cards and re-establishing automatic withdrawal payment authorizations as well as other economic and non-economic harm. Given that data breaches are becoming increasingly common it is likely that there will be more lawsuits filed similar to Schnucks in the near future. Legal counsel experienced in cyber risk and insurance can assist retailers and insurance companies with handling such problems as they arise.

FTC v. Actavis, Inc.: Supreme Court Rules That Reverse Patent Settlements May Violate Antitrust Laws

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On April 29, 2013, the Supreme Court declined to review a decision that had created uncertainty as to when a manufacturer’s customer loyalty program may violate antitrust laws. Most circuits considering the issue have found that companies can use loyalty programs or long-term agreements, as long as the rebates do not price the product below cost. The Third Circuit, however, found that a manufacturer’s customer loyalty program amounted to an unlawful “de facto exclusive dealing contract,” despite the above-cost price of the product. The Supreme Court’s decision to allow the Third Circuit opinion to stand raises many questions as to when manufacturers may use incentive programs and which legal standard will be used to analyze these agreements. Regardless of where a company is located, if the company’s products are sold within the Third Circuit (Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands), then that company may be impacted by this decision.

The case of ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012) cert. denied, ___ U.S. __, 2013 WL 673880 (U.S. Apr. 29, 2013), involved two manufacturers of heavy-duty truck transmissions. The defendant, a leading supplier of these transmissions in North America, signed long-term agreements with its customers. Those agreements provided incentives to its customers, offering rebates to those who purchased a specified percentage of their parts from the defendant manufacturer. The plaintiff, a competitor in the heavy-duty transmission market, brought suit, claiming that the defendant’s long-term agreements constituted illegal exclusive dealing contracts. After trial, a jury found that the agreements stifled competition and violated antitrust laws. The defendant sought to overturn the jury verdict, arguing that its agreements were lawful, because it priced its transmissions above cost. The U.S. District Court for the District of Delaware upheld the jury verdict, however, finding that there was sufficient evidence to conclude that defendant’s conduct unlawfully foreclosed competition. Defendant appealed to the Third Circuit.

On appeal, the defendant urged the Third Circuit to follow the First, Second, Sixth, Eighth, and Ninth Circuits, which apply a “price-cost test” when analyzing long-term agreements which offer above-cost rebates. Under the “price-cost test,” a company is not engaging in anticompetitive conduct if it prices its products above cost. Instead, the Third Circuit applied the “rule of reason” test and found that the customer loyalty program constituted a “de facto exclusive dealing arrangement.” Under the rule of reason, “exclusive dealing arrangements can exclude equally efficient (or potentially equally efficient) rivals, and thereby harm competition, irrespective of below-cost pricing.” Therefore, the Third Circuit upheld the District Court jury verdict, stating that defendant’s  “conduct unlawfully foreclosed a substantial share of the HD transmission market, which would otherwise have been available for rivals.” The defendant then appealed to the Supreme Court, which declined to hear the case, allowing the Third Circuit’s decision to stand.

In refusing to consider the Third Circuit’s decision, the Supreme Court has failed to resolve a conflict in the circuits as to how long-term agreements containing rebates or other incentives will be analyzed by the courts. This conflict removes the predictability of a single “price-cost” standard applied across all circuits and creates uncertainty for manufacturers who wish to offer loyalty programs to their customers. In the future, manufacturers hoping to offer such programs may want to ensure that their agreements can withstand both the price-cost test and rule of reason analysis.

Financial Services Legislative and Regulatory Update – Week of June 10, 2013

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Leading the Past Week

And the beat goes on… Another week with the White House dealing with another issue, this time news that the national security apparatus is collecting and combing through telephone record metadata.  The widespread revelation about a data mining program that would make any hedge fund quant jealous drowned out more positive news of the week, including that the U.S. recovery continues its sluggish, yet positive pace with 175,000 jobs added in May.

And in an interesting comparison, as noted by the extraordinary team at Davis Polk, while the agencies were silent during the Month of May, and did not announce any new implementations of the Dodd-Frank Act, last week, three major implications of the implementation were announced.  First, the SEC publicly released its much anticipated and long awaited money market mutual fund rules.  Second, the Fed announced an almost equally anticipate interim final “push out” rule that provided significant relief to foreign-based banks with operations in the United States.  Finally, the FSOC made its first round of non-bank systemically important financial institutions (“SIFIs”) designations.

Legislative Branch

Senate

As Administration Announces New Iran Sanctions, Senate Banking Members Skeptical of their Effectiveness

On June 4th, the Senate Banking Committee held a hearing to review sanctions against Iran. Witnesses and lawmakers were split regarding the efficacy of the sanctions, some arguing that their effectiveness has been proved by Iran’s continued inability to fund nuclear enrichment and other arguing that the sanctions have not had the desired result of fundamentally changing the governance of the country. Specifically, Ranking Member Mike Crapo (R-ID) and Senators Bob Corker (R-TN), Bob Menendez (D-NJ), and Chuck Schumer (D-NY) all expressed concerns that the sanctions have not measurably changed Iran’s behavior. Witnesses included: David Cohen, Under Secretary for Terrorism and Financial Intelligence for the Treasury; Wendy Sherman, Under Secretary for Political Affairs with the Department of State; and Eric Hirschhorn, Under Secretary for Industry and Security with the Department of Commerce. The hearing comes as the Administration announced a new set of sanctions against the country. An Executive Order released June 3rd takes aim at Iran’s currency and auto sector in addition to expanding sanctions against private business supporting the government of Iran.

Senate Finance Committee Releases Income and Business Entities Tax Reform Working Paper

On June 6th, the Senate Finance Committee released the latest in a series of options papers outlining tax reform options for individual and business income taxes and payroll taxes. The proposal outlines three options for tackling the integration of individual and corporate taxes, such as making the corporate tax a withholding tax on dividends and adjusting capital gains taxes for businesses to match the individual Code. In addition, the paper discusses ways in which to reach a long-term solution for taxing derivatives.

Senate Banking Approves Nomination to Ex-Im Bank

On June 6th, the Senate Banking Committee voted 20 to 2 in favor of Fred Hochberg to continue to head the Export-Import Bank. Senator Tom Coburn (R-OK) and Senator Patrick Toomey (R-PA) both voted against the nomination. Hochberg’s nomination now moves to the full Senate where, though he is expected to be confirmed, he must be approved before July 20th or else the bank would lose its quorum for voting on items.  During the same executive session, the Committee approved by voice vote the National Association of Registered Agents and Brokers Reform Act of 2013 (S. 534) which would make it easier for insurance agents to sell state-regulated insurance in multiple states.

Senator Brown Calls on CFPB to Target Debt Collectors

On June 4th, Senator Sherrod Brown (D-OH) wrote to the CFPB, urging the Bureau to enact rules to curb customer abuses by debt collectors. In a statement accompanying the letter, Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, said he intends to hold a hearing in the next month which will shine a light on bad practices and consumer abuses in the industry. The Dodd-Frank Act gives the CFPB authority to enforce and enact rules under the Fair Debt Collection Practices Act (FDCPA). Brown’s letter urged Director Cordray to pursue debt collectors as soon as possible, as the Bureau would lose its oversight authority in this space should Cordray’s nomination expire and a director not be in place.

Senate Banking Committee To Consider Flood Insurance As Soon As July

In remarks made on June 6th, Chairman of the Banking Committee Tim Johnson (D-SD) said the panel will hold hearings as soon as July to consider national flood insurance affordability. The announcement comes as a number of lawmakers express concerns that rate increases in the 2012 reauthorization are not affordable.

Senate Banking Subcommittee Looks into the State of the Middle Class

On June 6th, the Senate Banking Subcommittee on Economic Policy held a hearing titled “The State of the American Dream: Economic Policy and the Future of the Middle Class.” It was Senator Jeff Merkley’s first hearing as Chair of the Subcommittee, he said he wanted to feature witnesses whose voices were not normally heard in committee hearings and public policy debates. The witnesses included: Ms. Diedre Melson; Mr. John Cox; and Ms. Pamela Thatcher, who were subjects of the documentary movie American Winter; Dr. Atif Mian, Professor of Economics and Public Policy at Princeton University; Ms. Amy Traub, Senior Policy Analyst for Demos; Mr. Nick Hanauer with Second Avenue Partners; and Mr. Steve Hill, Executive Director of Nevada Governor’s Office of Economic Development.

House of Representatives

House to Consider Multiple Financial Services Bills Next Week

Next week the House is set to consider and vote on four separate bills dealing with the Financial Industry.  Three of the these bills, The Business Risk Mitigation and Price Stabilization Act (H.R. 634), The Reverse Mortgage Stabilization Act (H.R. 2167), the Swap Data Repository and Clearing House Indemnification Correction Act (H.R. 742) will be brought up on the suspension calendar, which is generally used for non-controversial measures.  The other bill, the Swap Jurisdiction Certainty Act (H.R. 1256) will be brought forward under a rule, which may allow for amendments to the bill that directs the SEC and CFTC to issue joint rules on swaps and security-based international swaps.  All are expected to pass the House.

Financial Services Subcommittee Examines Role of Proxy Advisory Firms

On June 5th, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises met to examine the growing reliance on proxy advisory firms in proxy solicitations and corporate governance. Specifically, the Subcommittee sought to investigate the effect proxy advisory firms have on corporate governance standards, the market power of these firms, potential conflicts of interest, and SEC proposals seeking to modernize corporate governance standards. During the hearing Subcommittee Chairman Scott Garrett (R-NJ) voiced concern that institutions are overly reliant on proxy advisory firms in determining how to cast shareholder votes and questioned whether conflicts of interest and voting recommendations based on one-size-fits all policies affect shareholder value.

Witnesses at the hearing included: former SEC Chairman Harvey Pitt,  Timothy Bartl, President of the Center on Executive Compensation, Niels Holch, Executive Director of Shareholder Communications Coalition, Michael McCauley, Senior Offices for Investment Programs and Governance of the Florida State Board of Administration, Jeffrey Morgan, President and CEO of the National Investor Relations Institute, Darla Stuckey, Senior Vice President of the Society of Corporate Secretaries & Governance Professionals, and Lynn Turner, Managing Director of LitiNomics. The hearing comes as SEC Commission Daniel Gallagher recognized that lawmakers and regulators need to re-examine the role of advisory firms in the corporate governance matters as “no one should be able to outsource their fiduciary duties.”

Lawmakers Introduce Legislation Targeting Foreign Cyber Criminals

On June 6th, House Intelligence Committee Chairman Mike Rogers (R-MI) along with Representative Tim Ryan (D-OH) and Senator Ron Johnson (D-WI) introduced legislation that would impose visa and financial penalties on foreign cyber criminals who target American businesses. Specifically, the measure would deny foreign agents engaged in cybercrime from apply for visas or, if they reside in the U.S., would revoke visas and freeze financial assets. The bill also calls for the Department of Justice to bring more economic espionage criminal cases against offending foreign actors.

Online Gambling Legislation Introduced

On June 6th, Representative Peter King (R-NY) introduced legislation to create broad federal Internet gambling regulations and allow all online gambling with the exception of betting on sports and where Indian tribes opt not to participate. The legislation would also establish an office of Internet gaming housed within the Treasury. Following a 2011 ruling by the Justice Department that the 1961 Wire Act does not ban online gambling, several states, including Delaware, New Jersey, and Nevada, have moved forward with creating intra-state online gaming operations.  The movement at the state level has taken some of the momentum out of federal legalization efforts.

Executive Branch

Treasury

FSOC Selects First Group of Non-Banks to be SIFIs

On June 3rd, the Financial Stability Oversight Council (FSOC) voted on the preliminary list of systemically important financial institutions (SIFIs) which will be subject to additional regulation by the Fed. This additional regulation will include new stress tests to monitor stability, additional capital requirements, and the need to create living wills in the event of resolution. While the Council did not release the names or the number of non-banks that have been selected, several firms have announced that they have received notice from the FSOC regarding their designation, including GE Capital, Prudential Financial, and AIG. Now that designations have been made, companies selected will have 30 days to request a hearing to contest the designation. While Secretary Jack Lew called the designations an “important step forward,” Chairman of the House Financial Services Committee Jeb Hensarling criticized the move, saying perpetuating non-banks as “too big to fail” will only put taxpayers on the hook for another bailout.

Federal Reserve

Fed Approves Final Rule Clarifying Treatment of Foreign Banks Under Push-Out Rule

On June 5th, the Fed approved an interim final rule clarifying the treatment of uninsured U.S. branches of foreign banks under the Dodd-Frank Act swaps push-out measure. Dodd-Frank calls for banks to separate certain swap trading activities from divisions that are backed by federal deposit insurance or which have access to the Fed discount window. Under the clarification, the Fed states uninsured U.S. branches of foreign banks will be treated as insured depository institutions and that entities covered by the rule, including U.S. branches of foreign banks, can apply for a transition period of up to 24 months to comply with the push out provisions. The interim final rule also states that state member banks and uninsured state branches of foreign banks may apply for the transition period. The Institute of International Bankers, which represents international banks operating in the U.S., praised the Fed for offering clarity on a “widely acknowledged drafting error in the original legislation.”

Fed Vice Chairman Appears to Support Stronger Capital Rules for Large Banks

Speaking in Shanghai last week, Fed Vice Chairman Janet Yellen said that it may be necessary for regulators to impose capital requirements even higher than those set forth in the Basel III agreement. Agreeing with Fed Governors Daniel Tarullo and Jeremy Stein, Yellen said “fully offsetting any remaining “too big to fail” subsidies and forcing full internalization of the social costs of a SIFI failure may require either a steeper capital surcharge curve or some other mechanism for requiring that additional capital be held by firms that potentially pose the greatest risks to financial stability.” To that end, Yellen noted that the Fed and FDIC are “considering the merits” of requiring systemically significant firms to hold minimum levels of long-term unsecured debt to absorb losses and support orderly liquidation. Yellen who, is seen by many as the frontrunner for Fed Chairman following Bernanke’s term, is starting to generate a lot more attention as we come closer to the end of Bernanke’s reign.  However, she is not the only member of the Fed espousing this policy.  In a speech later in the week, Philadelphia Fed President Charles Plosser echoed Yellen’s sentiments, saying Dodd-Frank and other efforts to end “too big to fail” may not be “sufficient.” Plosser argued that current capital requirements should be made more stringent but also simpler by relying on a leverage ratio rather than the current practice of risk weighting.

SEC

SEC Proposes Long-Anticipated Money Market Mutual Fund Overhaul

On June 5th, the SEC released a proposal which would change the way the $2.6 trillion money market mutual fund industry is regulated. After months of internal disagreement within the SEC, the Commission voted unanimously to propose the plan. The goal of the proposal is to avoid future runs on the market, like that which occurred during the financial crisis, in tandem with ensuring that the industry still function as a viable investment vehicle. The Commission’s proposal sets out two alternative options for reform which could be enacted alone or in combination. The first would require institutional prime money market funds to operate with a floating net asset value (NAV). Notably, retail and government funds would still be allowed to operate with a fixed-NAV. The second alternative would require nongovernment funds whose liquid assets fell below 15 percent of total assets to impose a 2 percent liquidity fee on all redemptions. If this were to occur, a money market fund’s board would be permitted to suspend redemptions for up to 30 days. The proposal also calls for prompt public disclosure if a fund dips below the 15 percent weekly liquid asset threshold.

Coalition of Investment and Consumer Interests Call for Strong Uniform Fiduciary Standard

In a letter sent to the SEC on June 4th, a coalition of investment and consumer groups called on the Commission to enact a uniform fiduciary standard that would require broker-dealers and investment advisers to act in consumers’ best interest. The letter, signed by organizations such as AARP, the Consumer Federation of America, and the Investment Adviser Association, is in response to an SEC request for information (RFI) requesting input on regarding the possible extension of a fiduciary duty to broker-dealers. The groups assert that, the fiduciary standard set forth in the RFI is weak compared to current law and “seems to contemplate little more than the existing suitability standard supplemented by some conflict of interest disclosures.”

District Court Hears Challenge to SEC Critical Minerals Rule

On June 7th, the Court of Appeals for the D.C. Circuit heard a challenge brought on behalf of the American Petroleum Institute, the Chamber of Commerce, and others to the SEC’s critical minerals rule which requires companies to disclose payments made to foreign governments. Industry argues that the rule is overly burdensome and could result in proprietary information being shared with competitors. However, supporters of the rule, including Oxfam America, assert that the measure will increase transparency and help combat human rights abuses.

FDIC

FDIC Approves Non-Bank Resolution Final Rule

On June 4th, the FDIC approved a final rule establishing the criteria which will be used to determine which non-bank financial firms will be required to comply with the FDIC’s authority to liquidate large failing companies. The rule, which lays out factors used to determine if a company is “predominately engaged in financial activity,” requires companies where at least 85 percent of revenues are classified as financial in nature by the Bank Holding Company Act to comply. The FDIC’s rule closely resembles a final proposal by the Fed which established criteria for non-banks to be flagged for additional supervision under Dodd-Frank.

CFPB

CFPB Finalizes Ability-to-Repay Rule Amendments

On May 29th, the CFPB finalized rules designed to increase access to credit through exemptions and modifications to the Bureau’s ability-to-repay rule. The ability-to-repay rule, which was finalized in January 2013, requires that new mortgages comply with basic consumer protection requirements that are meant to ensure consumers do not take out loans they cannot pay back through Qualified Mortgages (QMs). In response to public and Congressional concerns about the scope of the rule, the Bureau’s finalized rules exempt certain nonprofit creditors and community-based lenders who service low- and moderate-income borrowers, facilitate lending by small creditors, banks and credit unions with less than $2 billion in assets and which make 500 or fewer mortgages loans per year, and establish how to calculate loan origination compensation. In announcing the amendments, the CFPB also delayed the effective date of provisions prohibiting creditors from financing certain credit insurance premiums in connection with certain mortgage loans. Currently, the effective date is January 10, 2014; however, the Bureau plans to solicit comment on an appropriate effective date for proposed credit insurance clarifications.

Bureau Issues Mortgage Rule Exam Guidelines

On June 4th, the CFPB issued an update to its exam procedures based on the new Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) mortgage regulations finalized in January. The guidance addresses questions about how mortgage companies will be examined such as for: setting qualification and screening standards for loan originators; prohibiting steering incentives; prohibiting “dual compensation,” protecting borrowers of higher-priced loans; prohibiting the waiver of consumer rights; prohibiting mandatory arbitration; requiring lenders to provide appraisal reports and valuations; and prohibiting single premium credit insurance.

CFPB Announced Further Study on Pre-Dispute Arbitration in Financial Products

In a notice and request for comment published on June 7th, the CFPB announced it will conduct phone surveys of credit card holders as part of its study of mandatory pre-dispute arbitration agreements. While Dodd-Frank gave the CFPB authority to ban the use of arbitration in mortgages, Section 1028(a) of the Dodd-Frank Act requires the Bureau to conduct a study before taking additional action to limit arbitration in other financial products. According to the notice, the survey will investigate “the extent of consumer awareness of dispute resolution provisions in their agreements with credit card providers” and consumers’ assessments of these tools.

International

IMF Working Paper Calls for Taxes on Large Banks to Level Playing Field, End “Too Big to Fail”

In a working paper published at the end of May, the International Monetary Fund (IMF), suggesting that large banks in advanced economies have more incentive to take risks due to cheaper funding sources, proposed taxing large banks to “extract their unfair competitive advantage.” The authors of the paper argue that such as tax would level the playing field from the perspective of competitive policy and reduce excess incentives of banks to grow, reducing the problem of “too big to fail” and increasing financial stability. Specifically, the paper found that the implicit guarantee that “too big to fail” banks will be bailed out in the event of failure or crisis can lead to a funding advantage of up to 0.8 percent a year. In related news, On June 5th, Representative Michael Capuano (D-MA) introduced legislation (H.R. 2266) which would require certain systemically important institutions to account for the financial benefit they receive as a result of the expectations on the part of shareholders, creditors, and counterparties that the government will bail them out in the event of failure.

Upcoming Hearings

On Wednesday, June 12th at 10am, in 1100 Longworth, the Trade Subcommittee of House Ways and Means Committee will hold a hearing titled “U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges.”

On Wednesday, June 12th at 10am, in 2128 Rayburn, the House Financial Services Committee will hold a hearing titled “Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees.”

On Wednesday, June 12th at 2pm, in 2128 Rayburn, the Capital Markets and Government Sponsored Enterprises Subcommittee of House Financial Services Committee will hold a hearing on proposals intended to support capital formation.

On Thursday, June 13th at 10am, in 538 Dirksen, the Senate Banking, Housing, and Urban Affairs Committee will hold a hearing titled “Lessons Learned From the Financial Crisis Regarding Community Banks.”

On Thursday, June 13th at 10am, in 2128 Rayburn, the Monetary Policy and Trade Subcommittee of House Financial Services Committee will hold a hearing on changes to the Export-Import Bank.

On Thursday, June 13th at 1pm, in 2128 Rayburn, the Housing and Insurance Subcommittee of House Financial Services Committee will hold a hearing on international insurance issues.

The “Reasonable” Perils of Data Security Law

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The following is drawn from the materials to be presented at the 17th Annual America’s Claims Event 2013 conference in the “Cyber-Liability and Data Loss Claims: A Case Study from Notice of Occurrence Through Conclusion” session on June 20, 2013 in Austin, Texas.

NEGLIGENCE. “The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do.”1

“When we think about data breaches, we often worry about malicious minded computer hackers exploiting software flaws, or perhaps Internet criminals seeking to enrich themselves at our expense. But the truth is that errors and negligence within the workplace are a significant cause of data breaches that compromise sensitive personal information.”2

According to a recent privacy institute study by the Ponemon Institute, only 8% of the surveyed data breach incidents were due to external cyber attack, while 22% could be attributed in part to malicious employees or other insiders. Loss of laptops or other mobile devices containing sensitive data topped the survey, while mishandling of data “at rest” or “in motion” were also major contributors.3 A later study showed that 39% of surveyed organizations identified negligence as the root cause of their data breaches, while 37% were attributed to malicious or criminal attack.4

Negligent document disposal is a clear source of preventable negligence. On December 7, 2012, at least eight garbage bags were left unattended on a dirt road in Hudson, Florida, containing credit applications to Rock Bottom Auto Sales with names, driver’s license information, and Social Security numbers. Three days later, in Pittsburgh, Pennsylvania, job placement documents were found in a dumpster from the West Pittsburgh Partnership, all containing names and SSN’s.5 For that matter, the Internal Revenue Service in 2008 was found to have disposed of taxpayer documents in regular waste containers and dumpsters, and that a follow-up investigation revealed that IRS officials failed to consistently verify whether contract employees who have access to taxpayer documents had passed background checks.6

Convincing users to back up their laptops has been difficult enough in practice; getting them to encrypt them voluntarily is much more daunting a task. A 2010 Ponemon Institute study, admittedly biased towards large corporations, concluded that of those surveyed typically 46% of the laptops held confidential data, while only 30% had their contents encrypted. A startlingly low 29% of the laptops had backup/imaging software installed, which implies that more than two thirds of all laptops if lost or stolen would leave no backup of work in progress.7

Even though more devices are coming to market with built-in encryption capabilities, these features may simply be left switched off by their users despite the fact that lost laptops, tablets, smartphones, USB “thumb” drives and other portable devices with unencrypted contents continue to provide a wealth of information to identity thieves.

On March 22, 2013, a laptop used by clinicians at the University of Mississippi Medical Center was discovered to be missing. It contained patient names, social security numbers, addresses, diagnoses, birthdates and other personal information, protected only by a password.8

On January 8, 2013, an unencrypted flash drive was stolen from a Hephzibah Georgia middle school teacher’s car, containing student SSN’s and other information.9 TD Bank had two unencrypted backup tapes with customer and their dependent names, SSN’s, addresses, account, credit and debit card numbers go missing while being transported between two TD Bank offices in March 2012, but public notice was not made until March 4, 2013.10

An examination of reported data security incidents with potential or actual data privacy breaches reveals that the scope of what is deemed “reasonable” ranges from ordinary care in the disposal of documents containing personally identifiable information (“PII”) and personal health information (“PHI”), to sophisticated data encryption, access authentication and other highly technical data security practices that the “reasonably prudent” persons, companies and governmental agencies are now expected to employ to protect the personal data that they have collected.

On October 10, 2012, the South Carolina Department of Revenue was informed of a potential cyber attack involving the personal information of taxpayers.11 The origin of the attack was traced to a state Department of Revenue employee who clicked on an embedded link in a “salacious” email and compromised his computer.12 The subsequent investigation revealed that “outdated computers and security flaws at the state’s Department of Revenue allowed international hackers to steal 3.8 million tax records”, according to Governor Nikki R. Haley. Apparently South Carolina did not encrypt Social Security Numbers, and once the outer perimeter security was compromised the hackers were able to log in as tax officials and read the data.13

Users of online services will routinely provide personal information as a matter of course to shop or obtain other services, all of which gets recorded and tracked. Data privacy laws are intended to promote and enforce a number of fair information practices to give individuals the ability to find out what personal information is being kept and by whom, opportunities to correct or remove such information, assurances that reasonable measures will be undertaken to protect such information from disclosure and to properly dispose of such information when appropriate, and may include remedial measures to be undertaken in the event of a data breach.

In the United States, there is no single comprehensive statute for data privacy laws.14 Instead, a number of sector-specific federal laws have been enacted to address the particular sensitivity of information generally recorded by companies in that market sector, and forty six states have enacted data breach notification statutes. If there is a data breach, you may be liable under state law to provide notice to those affected.15 In some jurisdictions, you may be required to provide notice to all consumer credit reporting agencies as well.16

The financial exposure to a data breach by a company may be insurable to some degree using various forms of “cyber liability” insurance, which expand and supplement many forms of more standard insurance coverages underwritten today. Policy premiums for such policies, however, are dependent upon the extent of data security practices implemented.

Conducting a data security risk assessment before encountering a data breach should identify measures that can be taken at the corporate level to provide additional protection not only to sensitive data, but also mitigate the consequences of a security incident where company data is disclosed, lost or stolen. Encrypted data in many cases may not be considered “exposed” for purposes of mandated notice to affected individuals.

In the event of a data security incident, please consider obtaining a data forensic team to not only identify the source and extent of the breach, but to preserve evidence in the event that a potential prosecution may be possible.

We will discuss a data breach case study from inception through enforcement, resolution and potential mitigation through cyber liability insurance at our presentation at ACE 2013. We hope to see you then.

1 BLACK’S LAW DICTIONARY 1184 (4th ed. 1968).

2 Privacy Rights Clearinghouse, Are the Businesses You Frequent or Work For Exposing You to an Identity Thief?, (Mar. 6, 2012), https://www.privacyrights.org/workplace-identity-theft-quiz-alert-2012

3 The Human Factor in Data Protection, 3 PONEMON INSTITUTE LLC (January 2012), available athttp://www.ponemon.org/local/upload/file/The_Human_Factor_in_data_Protection_WP_FINAL.pdf.

4 2011 Cost of Data Breach Study: United States, 7 PONEMON INSTITUTE LLC (March 2012),available at http://   www.ponemon.org/local/upload/file/2011_US_CODB_FINAL_5.pdf.

5 http://www.privacyrights.org/data-breach/new (check Breach Type “PHYS”, Organization Type “BSR” and Year “2012”).

6 Increased Management Oversight of the Sensitive but Unclassified Waste Disposal Process Is Needed to Prevent Inadvertent Disclosure of Personally Identifiable Information, TREASUR INSPECTOR GENERAL FOR TAX ADMINISTRATION (May 8, 2009), http://www.treas.gov/tigta/auditreports/2009reports/200930059fr.pdf.

7 The Billion Dollar Lost Laptop Problem 6 PONEMON INSTITUTE LLC (Sept. 30, 2010), availableat http://newsroom.intel.com/servlet/JiveServlet/download/1544-8-3132/The_Billion_Dollar_Lost_Laptop_Study.pdf.

8 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

9 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

10 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “BSF” and Year “2013”).

11 Kara Durrette, SC Department of Revenue hacked; millions of SC residents affected, http://www.midlandsconnect.com/sports/story.aspx?id=817902#.UVyOdheYu7w (posted Oct. 26, 2012, updated Oct. 27, 2012).

12 Matthew J. Schwartz, How South Carolina Failed To Spot Hack Attack, INFORMATION WEEK, Nov. 26, 2012, http://www.informationweek.com/security/attacks/how-south-carolina-failed-to-spot-hack-a/240142543.

13 Robbie Brown, South Carolina Offers Details of Data Theft and Warns It Could Happen Elsewhere, N.Y. TIMES, Nov. 20, 2012, available at http://www.nytimes.com/2012/11/21/us/more-details-of-southcarolina-hacking-episode.html?_r=0.

14 PETER P. SWIRE & KENESA AHMAD, FOUNDATIONS OF INFORMATION PRIVACY AND DATA PROTECTION 41 (International Association of Privacy Professionals) (2012).

15 NYC Administrative Code § 20-117(c) (2013); NY CLS State Technology Law § 208(2) (NY state residents only); 73 Pa. Stat. § 2303 (PA residents).

16 73 Pa. Stat. § 2305; NY CLS State Technology Law §208(7)(b).

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HIPAA Omnibus Rule Effective March 26, 2013

The National Law Review recently featured an article, HIPAA Omnibus Rule Effective March 26, 2013, written by the Health Care & Health Care Finance group with Vedder Price:

VedderPriceLogo

 

The omnibus final rule that amends the privacy, security and enforcement rules1 promulgated under the Health Insurance Portability and Accountability Act of 1996 (the statute and rules, together, HIPAA) requires that Covered Entities revise and redistribute their notice of privacy practices (NPP). As described below, this will generally involve updating NPPs for legally required changes and redistributing the NPPs, whether by posting on an intranet site or distributing hard copies, by September 23, 2013.

The final rule became effective on March 26, 2013; however, Covered Entities have until September 23, 2013 (the compliance date), unless otherwise excepted, to bring their NPPs into compliance. Many of the changes to the NPPs are required pursuant to statutory enactments under the Health Information Technology for Economic and Clinical Health Act (HITECH Act) and the Genetic Information Nondiscrimination Act (GINA). Most new requirements are generally applicable to all Covered Entities, as defined under HIPAA, but certain requirements apply specifically to health plan Covered Entities and health care provider Covered Entities as summarized below.

New Requirements for Covered Entities’ NPPs

A Covered Entity must update its NPP to include these additional elements:

  1. A statement that certain uses and disclosures of protected health information (PHI) require an authorization from the subject individual, specifically psychotherapy notes (if recorded or maintained by the Covered Entity), PHI for marketing purposes and PHI in instances constituting the sale of PHI;
  2. A statement that uses and disclosures not addressed within the NPP require a written authorization;
  3. An acknowledgment that the individual may revoke any authorization granted for uses and disclosures requiring such authorization; and
  4. A notice of the individual’s rights following a breach of unsecured PHI, which can be sufficiently accomplished with a statement that the individual has a right to or will receive notification of a breach of his or her unsecured PHI.

Covered Entities that seek to contact individuals to raise funds for themselves must also include a notice of such intentions and of the individual’s right to opt out of such communications. However, the mechanism for opting out of fundraising communications does not need to be included in the NPP.

Specific Requirements for Health Care Providers’ NPPs

Tangential to new rights created by the final rule for individuals to restrict access to PHI, each health care provider must notify individuals of such new rights through its NPP.

  1. Notice Elements. In addition to those provisions discussed above, health care providers must include in their NPPs a statement notifying the individual of the individual’s right to restrict—and a health care provider’s affirmative obligation to agree to restrict—disclosures of PHI to the individual’s health plan where the individual has paid for the items or services out-of-pocket and in full.
  2. Distribution Methods. The final rule did not amend those provisions relating to the distribution of NPPs for health care providers; however, the preamble to the final rule did clarify the manner in which health care providers are expected to distribute NPPs by the compliance date. NPPs must be available at the delivery site, but health care providers may choose to post a summary of the policy with copies of the entire policy readily available at the patient’s request, with the exception of new patients, who must be given a complete copy and must return a good faith acknowledgment of receipt.

Specific Requirements for Health Plans’ NPPs

  1. Notice Elements. In addition to the above requirements, a health plan that uses PHI for underwriting purposes must include in its NPP a disclosure that the health plan may not use or disclose PHI that is genetic information for underwriting purposes.
  2. Distribution Methods. A health plan that currently posts its NPP on the company’s intranet site must (i) post the revised NPP (or the material changes to the NPP) on the website by September 23, 2013 and (ii) within the next annual mailing, provide the revised NPP or information about the material changes to the NPP and instructions for obtaining a copy of the revised NPP.

Alternatively, for those health plans that do not provide access to the NPP on the company’s intranet site, either (i) the revised NPP or (ii) information regarding the material change in the policy and instructions on how to obtain a copy of the revised notice must be distributed to individuals covered by the subject plan of the NPP within 60 days of such material revision. Distribution may be made via regular mail, hand delivery or, if applicable, electronic means. We anticipate many health plans will distribute a revised NPP as part of open enrollment.

Excepted Entities

The final rule exempts certain entities from specific aspects of the revised NPP provisions. Issuers of long-term care policies do not need to include notice of the restrictions on the use and disclosure of genetic information for underwriting purposes, as GINA did not apply such restrictions to these plans. As discussed above, health care providers are not required to disclose the protections afforded to individuals under GINA in NPPs, as health care providers may continue to disclose genetic information, subject to the minimum necessary requirements and in reliance upon a patient’s health plan’s exclusive obligation to comply with GINA’s restrictions on its use of and requests for such information.

Lastly, those health plans that have previously distributed NPPs in compliance with the final rule (as a result of the statutory enactment of such requirements under GINA and the HITECH Act) do not need to redistribute NPPs by the compliance date.

Action Items

Before September 23, 2013, Covered Entities should revise NPPs to be compliant with the final rule and distribute such revised NPPs in accordance with the specified distribution methods applicable to the Covered Entity. Furthermore, those health plans that have previously distributed NPPs to comply with GINA and the HITECH Act should ensure that all of the elements of the final rule, including those applicable to all Covered Entities, have been satisfied before determining that the exception granted under the final rule applies.

1 45 C.F.R. parts 160 and 164, subparts A and E, 45 C.F.R. parts 160 and 164, subparts A and C, and 45 C.F.R. parts 160, subparts C through E, respectively.

© 2013 Vedder Price

Service of Process through Social Media

The National Law Review recently featured an article, Service of Process through Social Media, written by Philip H. Cohen with Greenberg Traurig, LLP:

GT Law

 

In the matter of Federal Trade Commission v. PCCare247 Inc., Case No. 12 Civ. 7189 (PAE), 2013 WL 841037 (S.D.N.Y. March 7, 2013) (PCCare247), the United States District Court for the Southern District of New York sanctioned using social media as a means of circumventing the Hague Service Convention’s standard method of facilitating service among signatory states through designated Central Authorities. Granting the FTC’s motion for leave to effect service of documents by alternative means on defendants located in India, Judge Paul A. Engelmayer’s ruling appears to represent the first time a U.S. court has permitted service of process via Facebook.

In PCCare247, Indian defendants allegedly operated a scheme to convince American consumers that they should spend money to fix non-existent problems with their computers. After the Indian Central Authority was unable to formally serve the Indian defendants pursuant to the Hague Convention, the court granted the FTC’s request to serve process on the defendants by both email and through a Facebook account.

The FTC’s proposed service using Facebook presented the court with a novel issue.  Last year, another court in the Southern District of New York denied a motion to permit a party to effect service using Facebook because the plaintiff had not sufficiently established the credibility of the defendant’s Facebook account.  Fortunato v. Chase Bank USA, N.A., Case No. 11 Civ. 6608 (JFK), 2012 WL 2086950 (S.D.N.Y. June 7, 2012) (Fortunato).  Fortunato involved a domestic defendant accused of committing credit card fraud.  After several failed attempts at personal service, the court rejected the third-party plaintiff’s “unorthodox” proposal to serve process, including by Facebook, citing concerns about the lack of certainty and authenticity of the defendant’s purported Facebook profile.  The court questioned whether the Facebook profile was in fact operational and accessed by the party to be served, noting that the location listed on the profile was inconsistent with four potential addresses a private investigator had identified. The court opted instead for service by publication pursuant to New York rules.

Distinguishing  PCCare247 from  Fortunato, Judge Engelmayer articulated several considerations supporting his confidence in “service by Facebook.” The court observed that under Rule 4(f)(3) of the Federal Rules of Civil Procedure, a court remains free to order alternative means of service on an individual in a foreign country so long as the means of service are not prohibited by international agreement and comport with due process.  The court acknowledged that although service by email and Facebook is not enumerated in Article 10 of the Hague Service Convention, India has not specifically objected to them. Therefore, under Rule 4(f)(3) the court found that it was free to authorize process by these means provided that doing so would satisfy due process.

Recognizing that the reasonableness inquiry is intended to “unshackle[] the federal  courts from anachronistic methods of service and permit[] them entry into the technological renaissance,” quoting Rio Props., Inc. v. Rio Int’l Interlink, 284 F.3d 1007, 1017 (9th Cir. 2002), the court concluded that Facebook was “reasonably calculated to provide defendants with notice of future filings” in the case. In support of its conclusion, the court explained that the defendants ran an Internet-based  business and that the email addresses specified for the defendants were those used for various aspects of the  alleged scheme.  For two of the Indian defendants in PCCAre247, their Facebook accounts were registered to the same email addresses to be served. Moreover, the court had “independent confirmation” that one of the email addresses identified was genuine and operated by a defendant, because it had been used to communicate with the court on several occasions.  Additional evidence that the Facebook profiles were authentic included that some of the defendants listed their job titles at the defendant companies and that the defendants were  Facebook “friends” with each other. Additional considerations the court noted were: the FTC had made several good faith efforts to serve the defendants by other means; and defendants had already demonstrated knowledge of the lawsuit. Accordingly, the FTC’s proposal to serve process by both email and Facebook was a combination that satisfied due process as a means of alternative service and was highly likely to be an effective means of reaching and communicating with the defendants.

This decision suggests that under the right circumstances, where a party establishes a reasonable foundation for the authenticity of the accounts, service via email and social media may be an economical and effective option for serving process on foreign parties, or even domestic parties that are otherwise difficult to track down by traditional means.

©2013 Greenberg Traurig, LLP

Federal Trade Commission (FTC) Has Released New Guidance on the Use of Disclosures by Mobile and Online Advertisers

The National Law Review recently featured an article, Federal Trade Commission (FTC) Has Released New Guidance on the Use of Disclosures by Mobile and Online Advertisers, written by the  Retail Industry Group with Morgan, Lewis & Bockius LLP:

Morgan Lewis logo

 

Background

In 2000, the FTC issued the guidance “Dot Com Disclosures: Information about Online Advertising,”1 which emphasized that consumer protection laws applied equally across all mediums, including to computers and the Internet. The FTC counseled that, where a disclosure is needed to prevent an advertising claim from being misleading, the disclosure must be both “clear” and “conspicuous” and provided advice and examples on how the FTC would interpret and apply those terms.

With the rise of smartphones and tablets, which have smaller screens, and the prevalence of social media marketing, the FTC decided to update the guidance and began seeking public comment in May 2011. The FTC issued the new guidance, “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,”2 on March 12, 2013.

The new “Dot Com Disclosures” guidance emphasizes that consumer protection laws apply to all mediums, including smartphones and tablets, and to all formats, such as social media platforms, regardless of the space constraints those particular mediums and formats may impose. Space constraints are not considered an excuse for failure to provide the disclosures necessary to prevent advertising from being misleading or unfair. The new guidance includes helpful advice on compliance and an appendix with illustrative examples of ads and related disclosures.

The New Guidance

In the new guidance, the FTC recommends that problems with disclosures in the context of mobile devices and social media are best resolved by incorporating the relevant limitations and qualifying information into the ad itself and thus avoiding the need for any disclosure.

Where a disclosure is necessary to prevent an ad from being misleading, the disclosure must be “clear and conspicuous.” This requirement applies to all devices and platforms on which an ad may be viewed by consumers. If disclosures cannot be made in a clear and conspicuous manner on a particular medium, the advertiser should not use that medium for advertising.

In order to ensure that a disclosure is clear and conspicuous, the guidance advises advertisers to consider the placement and proximity of the disclosure to the specific advertising claim it is related to. The FTC says that disclosures should be “as close as possible” to the triggering claim. Advertisements should also be designed so that “scrolling” is not necessary to find a disclosure. Where a website is lengthy or where there are multiple routes through a website, it may be necessary to repeat disclosures.

Disclosures should be displayed so they are noticeable to consumers. To that end, advertisers should evaluate the size, color, and graphic treatment of a disclosure in comparison to the triggering claim and other parts of the website. The disclosure should be viewed in the context of the entire ad and other elements, such as graphics, sound, or audio, to ensure that consumers are not distracted from the disclosure.

Like the earlier guidance, the new guidance advises advertisers to avoid hyperlinks for disclosures that involve either product cost or significant health and safety issues. Where hyperlinks are used, care should be taken to (a) make the links obvious, (b) label the links accurately and as specifically as possible, (c) use hyperlink styles consistently, and (d) place the link as close to the relevant claim as possible. Advertisers should be careful to consider how hyperlinks may function on certain devices and assess the effectiveness by monitoring click-through rates.

Placement of disclosures on pop-ups is discouraged since they are often blocked and may not be viewed on certain devices.

Practical Implications

The new guidance is a reminder of the importance of ensuring that advertising complies with consumer protection laws, even where ads are viewed on new devices and in novel formats. The guidance indicates how the FTC will exercise its own enforcement powers, and it will be a touchstone for how state regulators, courts, and plaintiffs’ attorneys evaluate retailers’ marketing. Although particular advertising claims must be evaluated on a case-bycase basis and compliance with the guidance will not eliminate the threat of enforcement actions or class action litigation, the new “Dot Com Disclosures” guidance provides some helpful direction to retailers seeking to stay on the right side of the line.

1. View the original guidance at http://www.ftc.gov/os/2000/05/0005dotcomstaffreport.pdf. 

2. View the new guidance at http://www.ftc.gov/os/2013/03/130312dotcomdisclosures.pdf.

Copyright © 2013 by Morgan, Lewis & Bockius LLP

Cutting Edge Issues in Asbestos Litigation Conference – March 18-19, 2013

The National Law Review is pleased to bring you information about the upcoming Perrin Cutting Edge Issues in Asbestos Litigation Conference:

Asbestos March 18 2013

Monday, March 18th – Tuesday, March 19th, 2013
Beverly Wilshire, A Four Seasons Hotel
Beverly Hills, CA