July 16, 1999
|TO:||William J. Baer, Director
Bureau of Competition
|FROM:||Frederick J. Zirkel
|SUBJECT:||OIG Survey of the Systems and Processes Used by FTC Staff to Ensure Compliance With Non-Monetary Provisions of FTC Administrative Orders|
The Office of Inspector General (OIG) has completed its survey of order compliance activities within the Bureaus of Competition (BC) and Consumer Protection (BCP). This memorandum transmits our survey results pertaining to BC's Compliance Division.
Our survey indicated that the Compliance Division is effectively monitoring order provisions. The division has taken innovative steps to better fulfill its compliance mandate, including working with other enforcement divisions on front-end approvals of divestitures, and designing orders that take advantage of others in the industry (competitors and potential acquirers) to identify noncompliance. The division effectively uses the services of paralegals on routine matters, enabling attorneys to address more substantive and complex compliance issues. However, it appears that additional paralegal support is needed as attorney staff is spending as much as 30 percent of its time on routine legal and clerical functions. We also believe that the compliance report review process can be enhanced by improving internal tracking of compliance reports; especially needed is a system to identify compliance reports that are past due. Further, dialog between the Commissioners' attorney advisors and the Compliance Division is needed to better focus the division's semiannual report on information most useful to the Commissioners.
While we do not feel that a detailed review of specific aspects of the division's monitoring activ- ities is needed at this time, management attention to the vulnerabilities we identified is warranted.
The results of our review were discussed with the Assistant Director for Compliance. His comments are appended to this report. We are grateful for his support and the assistance of his staff.
Survey of the Systems and Processes Used by FTC's Bureau of Competition Staff to Ensure Compliance With Non-Monetary Provisions of FTC Administrative Orders in Competition Cases
The Office of Inspector General (OIG) has completed its survey of order compliance activities within the Bureau of Competition's (BC) Compliance Division. The purpose of this survey was twofold: (i) to better understand how the division ensures compliance with its administrative orders and then, (ii) to decide whether any additional areas would benefit from a more detailed review.
A survey, as used in the auditing vernacular, refers to a process for gathering information without detailed verification on an organization, program, activity or function. Unlike audits, surveys are generally conducted within limited time frames. Survey outcomes dictate whether, and to what extent, detailed audits will be performed.
To collect data to conduct our survey, the OIG interviewed numerous Compliance Division staff to discuss how compliance reports are tracked, verified, and processed. We also spoke with bureau operations staff to discuss systems used by the bureau to record compliance activities. In addition, we obtained a listing of 193 active Part II consent orders maintained in the agency's Matter Management System (MMS) dating back to 1989 from which we judgmentally selected a sample of nine (9) to help focus on in our survey. In reviewing these nine orders (and through discussions with staff), the OIG was able to (i) identify order provisions, (ii) verify that compliance reports address the order provisions, (iii) determine whether established deadlines were met regarding the issuance of the "10 day letter," the receipt of the regular compliance reports and annual (periodic) compliance reports, and (iv) examine the timeliness of staff responses (comfort letters) to respondents. We reviewed the division's compliance tracking systems for completeness, comparability with other agency data management systems, and accuracy. Finally, we reviewed Chapter 12 of the Operating Manual (OM) entitled Compliance, and Rules 2.33 and 2.41 of the FTC Rules of Practice to identify proper procedures which staff are required to follow in compliance report processing.
The Bureau of Competition is responsible for enforcing Federal antitrust and trade regulation laws under Section 5 of the Federal Trade Commission Act, the Clayton Act, and a number of other special statutes which the Commission is charged with enforcing. In carrying out these responsibilities, BC examines a wide variety of industries and commercial practices. When appropriate, it then takes action to ensure that competition in the nation's markets for goods and services is maintained in a manner that will best assure the working of free market forces. Such action may include seeking injunctive relief in Federal District Court, complaint and litigation before the agency's administrative law judges, and formal nonadjudicative settlement of complaints. The bureau also conducts compliance investigations and initiates proceedings for civil penalties to assure compliance with final Commission orders dealing with competition and trade restraint matters.
Commission law enforcement actions may be triggered by letters from consumers or businesses, Congressional inquiries, referrals from federal/state/local officials, premerger filings, or public information on consumer, business or economic subjects. If the Commission believes that a violation of law has occurred, it may obtain voluntary compliance by entering into a Part 2 administrative consent order with a company or individual respondent.(1) If voluntary compliance is not reached, the Commission may issue a Part 3 administrative complaint. This results in a formal proceeding, much like a court trial, held before an administrative law judge (ALJ) at which evidence is submitted, testimony is heard and witnesses are examined and cross-examined. If a respondent decides to settle the charges against it, it may enter into a Part 3 consent order and end the proceeding. If the proceeding continues to completion, the ALJ issues an initial decision and the case moves to the Commission for final disposition. If the Commission ultimately finds a law violation, it may issue a cease and desist order or other appropriate relief.
After the Commission issues an administrative order, the Office of the Secretary serves a copy of the order on the respondent. This is done by certified mail, return receipt requested, in most instances. Copies of the complaint and order, on which is stamped the date of mailing to the respondent, are then sent to the Compliance Division. Usually, conduct orders provide that a compliance report must be filed within 60 days after service of the order. In addition, respondents may be required to file supplemental and/or periodic compliance reports. Generally orders remain in effect for a period of 20 years.(2)
After receiving its copy of the complaint and order issued by the Commission, the Compliance Division will assign a staff member to review the manner of compliance. Staff will then write a letter to the respondent (a.k.a. 10-day letter) outlining the information and documentation that should be submitted in the respondent's report demonstrating compliance with the provisions of the order.
A report of compliance is usually submitted in a narrative form by a respondent setting forth in detail how it modified its business practices. Respondents are required to report on all their business activities. Corporations must report on relevant activities of their subsidiaries and divisions and also their joint ventures with other firms. Individual respondents must report on the activities of whatever enterprises they may own or control or in which they may participate.
Compliance reports are received in the Office of the Secretary, then forwarded to the Compliance Division. Compliance staff reviews it and, if appropriate, corresponds with the respondent and/or his/her attorney to obtain changes or additional materials. Staff then forwards the compliance report, along with a memorandum recommending either no further action or the opening of a compliance investigation, to the Assistant Director for Compliance, together, in most cases, with a draft (comfort) letter to inform the respondent of the staff's conclusions regarding the report (e.g., that it does not warrant any enforcement action). If staff decides not to recommend any enforcement action with respect to a compliance report, generally no further action is taken on the matter. If after conducting a compliance investigation the staff concludes that the order has been violated, it may recommend a civil penalty action.
The OIG survey team found both strengths and vulnerabilities in its review of compliance monitoring activities in the Compliance Division. Nevertheless, we believe that the division is effectively monitoring compliance with its administrative orders. While we do not feel that a more detailed review of specific aspects of the division's monitoring activities is needed at this time, management attention to the vulnerabilities we identified is warranted.
Strengths in BC's Process to Ensure Compliance with Orders
The OIG review team identified a number of strengths in the division's compliance program that contribute to its overall success. Some of the more notable strengths are discussed below.
The Compliance Division works well with other enforcement divisions in drafting and approving administrative orders. This relationship results not only in a more efficient compliance process, but in orders that staff feel are "more enforceable."
Compliance Division attorneys, working closely with other bureau attorneys, have achieved successful outcomes when structuring divestitures with "front-end buyers," i.e., buyers of divested assets who have been screened by FTC attorneys and deemed to be viable. Attorneys we spoke with said that they spend a considerable portion of their time on screening potential buyers, and negotiating and drafting consent orders. This review, we believe, makes efficient use of staff resources as it reduces the overall compliance effort in the long run. The parties involved seem to us to be more motivated at this point in the process to find a suitable acquirer than months after the order is signed.
Based on interviews with compliance staff, it also appears that staff has a good working relationship with the other divisions in this regard. One attorney considered this relationship key to the formulation of "enforceable" order provisions. Other attorneys we interviewed commented that their experience with the compliance process (i.e., focusing on remedies) enables them to contribute an expertise in judging whether a potential buyer is financially viable - - an expertise which the investigative lawyers do not necessarily have. Compliance attorneys also felt that they do a good job educating the respondent's attorney regarding the kinds of documents needed to address anticompetitive concerns, lessening the need for repeated correspondence between the parties.
We consider it a strength that one of the Compliance Division attorneys had been detailed to an investigative division at his request for a period of time and that several other Compliance Division attorneys had (temporarily) worked, or are now working, in investigative divisions. We believe there are strong benefits to such "cross-training" among staff, and would generally encourage a formal program to facilitate these exchanges.(3)
We were also impressed with the requirement that every order must be approved by the Assistant Director for Compliance before it is submitted to the Commission for its consideration and found nothing to suggest that this is not being done, or that this has unduly lengthened the approval process.
The FTC has designed an external control into its orders that takes advantage of competitors' or potential acquirers' knowledge of a respondent's business practices to identify noncompliance.
In enforcing its orders, the FTC must decide how best to use its scarce resources to monitor the nationwide activities of individuals and firms in several diverse areas of commerce. Recognizing that most complaints come from competitors and others in the industry, the FTC has sought to capitalize on this knowledge by using these "interested 3rd parties" to assist it in performing its monitoring function as well. The agency does this by requiring respondents to notify others in the industry of the order, magnifying the agency's presence through the assistance of individuals closest to the activities of the respondent. In addition to multiplying the FTC's "eyes and ears" in the marketplace, the requirement, it seems to us, also deters would-be violators through the knowledge that others are watching them too. One staff we spoke with occasionally initiates contacts with competitors to learn if the respondent has violated an order.
The Compliance Division makes efficient use of limited staff resources by utilizing paralegal services to perform routine legal tasks, freeing up attorneys to concentrate on divestiture preapproval.
We were impressed that one paralegal had been assigned to monitor compliance reports in approximately 75 active cases, most of which were routine cases in that they were not expected to involve complicated order directives. This freed up attorneys in the division to spend more time utilizing their expertise working on more complicated cases, including the structuring of front-end buyer divestitures, as discussed above. The paralegal appeared to manage her case- load well, and performed adequate steps to ensure the accuracy of the reports assigned to her.(4)
Compliance staff maintained good communication with respondents in drafting order provisions and securing the approval of the 60 day compliance report.
Our discussions with staff revealed that they are in frequent contact with the respondent through the consent process, working with him/her to structure necessary modifications to its business practices to satisfy anticompetitive concerns.(5) Further, the division generally followed up within weeks of service of the order with a letter to the respondent further explaining order provisions as they pertain to the respondent's particular situation. The purpose of these letters is to further clarify the respondent's reporting requirements so as to better assist it to file timely regular (60 day) compliance reports which demonstrate compliance with the provisions of the orders.
Management's attitude in promoting an effective enforcement program
When beginning the review, we held an entrance conference with the Assistant Director for Compliance to obtain an overview of the compliance process and discuss strengths and vulnerabilities from his perspective. During this meeting, we discussed our methodology, which centered around speaking with staff attorneys who worked on cases selected by us.
The Assistant Director was open and forthright regarding some of the problems of his division, and steps he has already taken to address these vulnerabilities and to strengthen the compliance program. Furthermore, he sent all Compliance Division staff an E-mail encouraging staff to be open to the OIG survey and to view it as an opportunity to improve the compliance process. In the E-mail, the Assistant Director indicated to staff that the OIG survey "is not an exercise in covering ourselves... So don't feel you need to sugarcoat anything." We believe that his openness to the review enhanced the quality of the responses we obtained from staff.
Vulnerabilities in BC's Process to Ensure Compliance with Orders
The OIG review team identified aspects of BC's order compliance program that could, if left unchecked, reduce its overall effectiveness. These observations follow.
The Compliance Division should utilize additional paralegal staff to process routine compliance reports and to perform support tasks now being performed by staff attorneys.
We found a shared agreement that the division is understaffed. This seemed to be true particularly with paralegal and staff support. Several attorneys said they spent perhaps a third of their time doing things such as photocopying, typing, and routine legal research which they thought a good paralegal could do, and thereby free up more of their time to fully utilize their professional training and skills. Since the trend in the bureau is toward the front end approval of divestitures, subsequent (annual) compliance reports are more likely to be routine. Other routine functions, including maintenance of an intra-divisional tracking system, could then be assured. (The issue of a tracking system is more fully discussed below.)
We believe these responsibilities warrant the hiring of at least a part-time paralegal, perhaps, at a minimum, a third-year law student. We did not review, and therefore make no recommendations regarding attorney workload or staffing needs in the division.
The Compliance Division lacks an internal tracking system that staff can use to monitor compliance report activity.
Given the nature of the work in the Compliance Division and the importance of monitoring deadlines and due dates, it is critical that the division develop (or procure) a tracking system that will provide needed case information to managers and alert attorneys to impending deadlines. During our entrance conference, the Assistant Director indicated that the division's internal tracking system was not up to date; i.e., case information on current cases was not entered, and matters considered to be inactive had not yet been removed. One reason given, which we validated, was the lack of staff support to maintain the system. The Assistant Director indicated to us that he was maintaining the system. We do not believe this to be an efficient use of his time, but understand that given staffing shortages and his familiarity with automated systems, he likely believed that he was in the best position to maintain the tracking system.
In the absence of a centralized tracking system, most staff have developed its own systems to manage its caseload. One attorney stated that he does not actively track reports and instead relies on his mid year and final performance reviews to go through his files for case status information. This was the exception. Generally staff we spoke with had developed some form of a unique, manual system that tracked their individual caseload. These systems were, by admission of their authors, best efforts. No attorney claimed that his system was complete or error proof. Further, no system we observed alerted management or staff in advance to pending compliance report due dates, and staff we spoke with said that a respondent's failure to submit routine compliance reports is usually not noticed until weeks or months later. (See below.)
During the conclusion of our fieldwork, we learned that the Assistant Director was experimenting with another tracking system, called Access. We did not review this system to assess whether it meets all information requirements of the division due to its newness. If the Assistant Director determines that Access does enable him and his staff to track report status information, we would further suggest that the system be maintained by a paralegal. Alternatively, the Compliance Division should consider the approach used by BCP's Enforcement Division, which uses a shared database system to track all compliance activity, relying on attorneys and paralegals to enter matter information on specific cases assigned to them. A paralegal (investigator) then summarizes the reports quarterly for management's use.
Ten day letters are sent to respondents late
Chapter 12 of the FTC Operating Manual (OM) proscribes requirements for the bureaus to follow on the timing of "initial" letters to respondents (a.k.a. 10-day letters) The manual states that within 10 days after receipt of a copy of the order from the Office of the Secretary, staff should notify each respondent by letter of specific matters to be covered by the report, material to be submitted with it, and the date that the report is due.
Our survey found that although the Division generally complied with the requirement that 10-day letters be sent to respondents, the letters were often not sent within the ten-day period specified in the OM. These letters were said by those we interviewed to be tailored to the orders involved so as to better assist the respondents to file timely regular (60 day) compliance reports which demonstrate compliance with the provisions of the orders. However, staff told the OIG that these letters are not a priority because there is frequent contact between staff and the respondent (or its attorney) in the period shortly following the service of the order upon the respondent. Thus, staff feels that the 10-day letter are more "form than substance" because the information is conveyed to the respondents before the 10-day period expires.(6) While there is some evidence to support staff's reasoning, we suggest that the division make a greater effort to comply with the ten-day period. However, if in so doing it finds that ten days is too short a period to draft a letter which adequately informs the respondent as to what it should do to demonstrate its compliance within 60 days after being served, the division should consider seeking a modification to the 10 day rule to add more time.
Routine compliance reports are frequently not filed timely by respondents.
Staff generally agree that late compliance reports are common.(7) While most told us that it is not uncommon for reports to be several weeks or months late, one attorney stated he knew of at least one annual report that was filed over one year late. We found that attorneys assigned to routine conduct cases, such as prior notification orders, will usually believe that the periodic (annual) report will say little if anything beyond the statement that the respondent has made no acquisitions during the year, and will contain nothing to hint that there might be a violation of the order.(8) Therefore staff generally believes that no harm is done if the reports are filed late.
Since respondents send their compliance reports to the Office of the Secretary (OS), it is possible that some reports are forwarded to the Compliance Division late. In our interviews with division attorneys, it was claimed that OS has on occasion not forwarded compliance reports which it received some time before to the assigned attorney until that attorney called OS to determine its whereabouts. We did not speak with anyone in OS or otherwise to confirm this claim.
To address the issue of compliance reports being received late due to possible internal delays, we suggest that the Compliance Division adopt the practice, used by BCP's Enforcement Division, to state in the initial letter sent to a respondent (10-day letter) that one copy of the report (which now must be filed in duplicate with OS) be sent directly to the Compliance Division attorney. Further, to better alert attorneys to missed deadlines, the tracking function should be centralized with the paralegal. All reports would be received through her. She would note due dates on a tickler file, and forward the report to the staff responsible. When the due date approaches, she can alert staff, who can then enforce the compliance report timing deadlines.
Staff believe that too much time is spent drafting "internal information" memos to the Assistant Director on routine compliance matters.
Perhaps another reason why the tracking of annual reports is not accorded a high priority by Compliance Division attorneys is that, once these reports are received, the attorney must write a memo to the Assistant Director regarding the acceptability of the compliance report. One attorney speculated that the requirement of a memo is a relic of an earlier time when the Commission had to approve compliance reports. The prevailing belief is that since the periodic (annual) reports usually say little of value, the contents of the memos on those reports are of little value. The time required to write the memo on a periodic (annual) report was said to be as much as four hours. When considering the amount of time required of all staff to draft and review these memorandums (including the Assistant Director's review time), and the number of compliance reports received annually, we estimate that the division spends one-third of a staff year on this activity.
A suggestion made by one attorney for cutting back on the amount of time spent on drafting the memos, that has the support of all the staff attorneys we interviewed, is to compose a short form which the attorneys could complete based on their review of the compliance report. The form would contain all the needed key information the Assistant Director presently receives from the memo, including how the information was verified. The use of such a form, once composed, could be completed in a fraction of the time now required to write a memo.
Comfort letters to respondents on routine matters often issued months after compliance report is received
Another possible vulnerability we noticed was that the "comfort letter" that is required to be sent to each respondent after a compliance report is reviewed and found to be satisfactory was often not sent until over six months -- and occasionally over a year -- after the attorney assigned to the case had begun his review of the report.(9) Comfort letters are tied to the attorney "internal information" memorandum discussed above in that comfort letters are not issued until the internal memorandum are prepared by staff and approved by the Compliance Division director. Thus delays in the preparation of internal memoranda leads to corresponding delays in the issuance of the comfort letter. Adopting a policy to streamline communication of the review results will have a positive impact on the timing of comfort letters.
What is the impact of a late comfort letter? According to staff, there is little impact. Comfort letters are often written in response to compliance reports that affirm that the respondent has taken no action to violate the order. Hence, if the respondent has not, for example, made any acquisitions that would violate the terms of the order, the comfort letter simply acknowledges the receipt of the compliance report. While there is validity to staff assertions, the OIG feels some respondents may be anxiously waiting for a more formal acceptance by the agency. In either scenario, the reputation of the agency suffers.
The Compliance Division, with the assistance of Commission-attorney advisors, should reassess the information needs of the Commissioners regarding the semiannual compliance summaries.
Chapter 12 of the Operating Manual (Sec. 2.10.1) requires the Compliance Division, on a semiannual basis, to forward a report to the Commission identifying compliance reports that have been reviewed by the (division) and those that are currently under review. The OIG reviewed the compliance report summaries for fiscal year 1998 and the first half of fiscal 1999. Two of the three reports present detailed information on approximately 125 active matters, including case name and docket number, report receipt date, review completion and filing date(s). The third report was simply a numerical summary of compliance activity.
The OIG learned that the reports are an outgrowth of a decision made by the Commission several years ago to delegate compliance report approvals to BC's Assistant Director for Compliance and BCP's Associate Director of Enforcement. In exchange, the Commission asked for a summary report, first on a quarterly basis, then later semiannually, to keep the Commission informed about this important activity.
The OIG found the report format did not provide a meaningful snapshot of compliance activity. Reports that provided pages of detailed information were not adequately summarized. For example, we could not determine from the FY 1998 reports, without reviewing all matters identified, the number of (i) compliance reports carried forward into the current period, (ii) new reports received in the period, (iii) respondents no longer under order, and (iv) investigations opened - all key indicators of performance. Further, most cases presented on the report were not part of the division's workload in the period, e.g., respondents under order who were not required to submit a compliance report during that particular reporting period.(10) In addition, specific issues of potential interest to the Commission, such as unresolved compliance issues and potential civil penalty actions resulting from order violation, could not be obtained from these semiannual summaries. In short, the summaries created more questions for us than they answered.
Further, we noted that both BCP's Enforcement Division and BC's Compliance Division submit reports in differing formats (from each other), sometimes varying the format between reporting periods. We also noted that no current Commissioner was involved in the decision several years ago to require the reports.
To better understand how these reports assist the Commission and the uses made of the reports, we contacted an attorney advisor to one of the Commissioners. She validated many of our initial suspicions regarding the report's utility. She noted that the report itself was reviewed by the attorney advisors in her office, but that more detailed information about compliance matters was usually obtained from other sources. While there is certain information that is relevant and useful for the Commissioners, she stated that it was either too difficult to glean from the existing formats, or simply not there.
When all was considered, the OIG wondered whether the reports were even necessary, and the time and resources necessary to produce them couldn't be better applied elsewhere.
We agree with the attorney advisor that Commissioners would find select information about compliance activities useful and informative. From our vantage point, what is needed is division (BC & BCP) managers to sit down with attorney advisors to identify their and the Commissioners' needs in this area, and not rely on guidance that was issued by a different Commission with different needs. In this way, staff can target its data reporting activities to what is needed now, and the Commissioners will have useful information at their fingertips.
Along these lines, we note that there is an abundance of information about the agency's compliance activities on the agency's Matter Management System (MMS) that may meet some or all of the Commission's information needs. Under this assumption, bureau operations staff can simply prepare reports for the Commissioners. If such information is not readily available outside of the Compliance Division, then staff should seek to address these specific needs by providing only the information that the Commission deems useful. In both situations, Compliance Division managers and staff efforts are minimized, and the Commission and its advisors can focus on needed outcome measures without having to wade through pages of case information.
While we do not believe that a further review of the bureau's compliance process is needed at this time, we did note some vulnerabilities that, if left unchecked, could impact the division's efficiency and effectiveness in carrying out its compliance mission. These recommendations appear in the report and are summarized below:
Recommendation 1. Provide additional paralegal support to assist in routine compliance monitoring activities. (Page 6)
Recommendation 2. Implement a centralized data base system that will capture case data, including compliance report due dates. (Page 6) Centralize the maintenance of the system with paralegal staff. (Page 7)
Recommendation 3. Develop a streamlined format regarding the reporting of staff's compliance report review results that will allow for more timely issuance of comfort letters. (Page 9)
Recommendation 4. Compliance Division management should take the initiative to work with the Commissioner attorney-advisors to identify the information needs of the Commissioners regarding the semiannual compliance activity reports. Based on this meeting, the division should then decide either to eliminate the report or amend its format to convey only the specific information requested by the Commission. (Page 10)
1. In a premerger investigation, all that may be required to consummate the merger is the divestiture of assets by one or both parties, leading to a divestiture order.
2. In January 1996, the Commission implemented a policy whereby all existing and future administrative orders would, with few exceptions, "sunset" after 20 years. When this policy became effective, thousands of orders over 20 years old were terminated.
3. We would not encourage such exchanges if it meant that the Compliance Division would not receive staff in return. Currently, one of two Deputy Assistant Directors is working with an enforcement division without an exchange of staff. While there are clear benefits, such moves could give bureau management the impression that the ratio between workload and staff is at an optimal level, which we are not convinced is the case. See "staffing" finding under the "Vulnerabilities" section below.
4. The Compliance Division currently employs two paralegals. However, only one is assigned responsibility to monitor compliance reports.
5. The OIG did not contact respondents to obtain their opinion on the frequency and/or level of communications.
6. We did not interview any respondents who have received a late 10-day letter to verify staff's "form over substance" belief.
7. The OIG did not attempt to quantify or estimate the number or duration of late reports.
8. We did not find, however, that the staff regarded an annual compliance report as serving no purpose. No matter how perfunctory it might be, there seemed to be a consensus that compliance was aided by requiring the respondent once a year to focus on the order which affects it.
9. Comfort letters, as required by Ch. 12 of the OM, are prepared by staff after it has reviewed a respondent's compliance report and found, in staff's opinion, that no further action is warranted. There is no formal deadline in the division, or in the OM, for its issuance.
10. The OIG did not audit the numbers provided on these semiannual reports.