|TO:||Jodie Bernstein, Director
Bureau of Consumer Protection
|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 BCP's Enforcement Division.
Our survey indicated that the Enforcement Division is effectively monitoring order provisions. The division has acquired investigative responsibilities which complement its compliance monitoring function. The division also has an effective system to track the status of compliance reports. Deadlines for communicating with respondents are met, and internal deadlines serve as an incentive to staff to move compliance reports through the process.
While we do not feel that a detailed review of the division's monitoring activities is needed at this time, management attention to the vulnerabilities we identified is warranted. Specifically, the number of "facially deficient" reports received by the Enforcement Division seems high - about two-thirds of compliance reports under review during the period October 1, 1998 to March 31, 1999. The Enforcement Division should explore ways to lower this percentage by proactively addressing recurring and predictable deficiencies in the "code 1" letter to the respondent. Further, dialog between the Commissioners' attorney advisors and the Enforcement Division is needed to better focus the division's semiannual report on information most useful to the Commissioners.
The results of our survey were discussed with the Enforcement's Division's Associate and Assistant Directors. Their comments are appended to this report. Management agreed with our two recommendations and has already taken steps to implement them.
We are grateful for your support and the assistance of your staff.
Survey of the Systems and Processes Used by FTC's Bureau of Consumer Protection 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 Bureau of Consumer Protection (BCP). The purpose of this survey was twofold: (i) to better understand how the division ensures compliance with its administrative orders. Then, based on the survey findings, (ii) to decide whether any area or areas would benefit from a detailed audit.
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 often dictate whether, and to what extent, detailed audits will be performed.
The OIG survey team held an entrance conference with BCP's Deputy Director and the Enforcement Division management team to discuss the scope and objectives of our survey. To collect data to conduct our survey, the OIG interviewed four (4) Enforcement Division staff to discuss how compliance reports are tracked, verified, and processed.(1) We selected at random nine (9) BCP cases from the universe of cases in the Annual Reports for fiscal years 1995 through 1997 to focus on in our survey. In reviewing the consent orders and compliance reports pertaining to these eight cases, the OIG (i) identified order provisions, (ii) verified that compliance reports address the order provisions, (iii) determined whether deadlines were met regarding the issuance of the "code 1" letter and the receipt of the regular compliance reports, and (iv) looked at the timing of staff responses (comfort letters) to respondents. We included as one of the nine cases a "responsible party" administered redress case to better learn how the division monitors these relatively unique matters.
We reviewed the division's compliance tracking system for completeness and accuracy, and the division's adherence to Commission semiannual reporting requirements. 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.
Our survey does not address federal court orders since they are covered by Project Scofflaw which only recently has been assigned to the division. We will examine the results of Project Scofflaw after the division has had sufficient time to implement it more fully.
The Bureau of Consumer Protection investigates unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act as well as potential violations of numerous special statutes which the Commission is charged with enforcing. It prosecutes, before the agency's administrative law judges, alleged violations of law after issuance of a complaint by the Commission, or obtains, through negotiation, consented-to orders, which must be accepted and issued by the Commission. The bureau investigates compliance with final orders, rules, statutes, and guides, and seeks civil penalties or consumer redress for their violation.
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 offer the proposed respondent an opportunity to resolve the allegations by entering into a Part 2 administrative consent order. If a negotiated agreement cannot be obtained, 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 during this proceeding , it may enter into a Part 3 administrative 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 either a Part 2 or Part 3 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 Enforcement Division. Usually, 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)
When receiving its copy of the complaint and order issued by the Commission, the Enforcement Division will assign a staff member to review the manner of compliance. Staff will then write a letter to the respondent (a.k.a. code 1 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, including its advertisements and sales pitches, to bring them into compliance with the Commission's order. 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.
A compliance report is received in the Office of the Secretary, then forwarded to the Enforcement Division. Division staff review it and, if appropriate, correspond 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 Associate Director for Enforcement together, in most cases, with a draft 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 referral of the matter to the Department of Justice for a civil penalty action.
The OIG survey team found both strengths and vulnerabilities in its review of compliance monitoring activities in the Enforcement Division. Overall, we believe that the division is effectively monitoring compliance with the Commission's administrative orders. While we do not feel that a more detailed review of the systems and processes used by FTC staff to ensure compliance with administrative orders is needed at this time, management attention to the vulnerabilities we identified is warranted.
Strengths in BCP's Process to Ensure Compliance with Orders
The OIG review team identified many strengths in the division's compliance program that contribute to its overall success. Below are noted some of these observations.
The Enforcement Division has certain investigative responsibilities which utilize its acquired expertise.
Over the last few years, the bureau supplemented the division's existing investigative duties in the areas of order, rule, statute and guide compliance with numerous de novo Section 5 responsibilities. These include motor oil, air filters, vocational schools, and scholarships, which are much broader than pure order enforcement, and several other areas where economic injury is alleged.
Enforcement Division management added that investigations of possible rule violations as well as order violations involve the same investigative skills used in conducting any investigation. Further the division has conducted sweeps of rule violations and Section 5 violations in other areas. We believe that this accumulation of duties is generally beneficial in that it exposes the attorneys and others in the division to important knowledge which enhances their capabilities to perform their purely enforcement functions.
The division has an effective system for tracking compliance reports.
Enforcement Division staff records the dates that regular compliance reports are due after ascertaining the order's service date. The information is then entered into a shared data base used by all division staff. The shared system enables the division to keep the data current by splitting the responsibility among a number of staff and avoids the need for one person to enter division-wide tracking data. Further, each piece of data is only handled once, which reduces the possibility of data-entry error. The division's Quarterly Status Report for the first quarter of fiscal year 1999 appeared to us to be up to date and complete. It is important that the division closely track the due dates of compliance reports since attorneys assigned to monitor order compliance often learn of compliance problems -- or of new problems not covered by the order -- by reading the compliance report.
The 10-day deadline for "Code 1" letters is almost always met.
Chapter 12 of the FTC Operating Manual (OM) proscribes requirements for the bureaus to follow on the timing of 10-day letters to respondents (a.k.a. code 1 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.
We found that the Enforcement Division generally meets this deadline. This is important -- and all those we interviewed agreed -- because the letter informs the respondent of the compliance report's due date and provides the name and telephone number of a contact point within the division. This letter is also intended to open up a dialogue with the respondent (or respondent's counsel) as soon as possible that will contribute to more prompt compliance with the order. The division encloses with the letter an instruction sheet to this end which provides information on filing deadlines, the availability of Enforcement staff for consultation, penalties for noncompliance, and the requirement that the respondent submit a sworn written statement that the facts submitted in its compliance report are true. By meeting the 10-day deadline, staff has made a good faith effort to speed up the compliance process.
The division conducts "sweeps" to assess compliance with FTC orders.
We consider it a strength that the division has the proactive policy of conducting "sweeps" periodically. A "sweep" is a limited investigation or inquiry into whether a number of businesses and/or former or present respondents are currently complying with consumer protection laws administered by the bureau. Although in our survey we did not attempt to ascertain how the policy operated so as to target the industries or areas of commerce or individual businesses it does -- and do not express an opinion as to the fairness of any targeting decision -- we find as a strength the existence of a policy which attempts in a substantial way to monitor compliance of more than just several respondents at a time, and to proactively seek out violators.
The division has established a self-imposed deadline to conclude compliance report reviews.
The division management has imposed upon staff a 120 day "deadline" from the filing of the compliance report to send a letter to the Associate Director for Enforcement recommending a course of action closing out the case. This deadline, or goal, which is not required by any rule or manual, helps to focus staff on moving compliance matters toward resolution. Staff, we believe, feel tension to either process reports in a timely manner or justify why deadlines are not met. When staff is responsible for missed deadlines, management can and does consider this during staff's performance appraisal.
The division's monitoring of responsible-party redress cases appears to be thorough.
As part of our sample of orders, we selected one that included a redress distribution conducted by the company under order. These responsible-party distributions are the exception and have decreased in number in the last several years. This particular order did not require a monetary distribution, rather it involved the distribution of a replacement product. Our objective was to learn how the division monitors compliance in this unique and challenging situation.
We found that the division had spent considerable time to ensure that this particular respondent fulfilled its obligations under the order, and took additional steps to maximize consumer awareness of the product replacement program. For instance, a staff lawyer called 59 distributors of the product to try to enlist their support in providing the Enforcement Division with a list of its buyers of the product. A memo in the file for the case detailed other proactive activities staff undertook to see that the order was enforced. When the respondent invited staff to review its records at its site, staff declined because it had become convinced in working with the respondent that its records were complete and faithfully kept and that it had acted in good faith in complying with its obligations to administer redress.
Vulnerabilities in BCP's Process to Ensure Compliance with Orders
The OIG review team identified aspects of BCP's order compliance program that could, if left unchecked, reduce its overall effectiveness. These observations follow.
BCP investigative divisions often prepare orders for the Commission without review by the bureau's Enforcement Division.
Although some of the staff interviewed in our survey were occasionally called upon to assist in the drafting of an order for the Commission for a case with which they were familiar, at least one lawyer we interviewed had never been asked to help draft an order. The general impression we received from our interviews was that orders were often being prepared for the Commission without any input from an experienced Enforcement Division attorney most familiar with effective enforcement language.
By way of comparison, we learned that the Assistant Director of Compliance (in the Bureau of Competition) reviews all orders before they are issued. This review, according to him, works well and has not delayed the issuance of final orders. It also facilitates communication between the BC divisions.
Enforcement Division staff told the survey team that investigative staff often rely on boilerplate language obtained from a number of sources, including the FTC Intranet, when drafting an order. While these sources do contain language for many possible provisions that might be used in a particular order, we believe that an attorney, familiar with the specific problems inherent in compliance, would likely make a valuable contribution in the drafting of compliance provisions. Although most or all of the attorneys in the investigative divisions who draft the orders are highly skilled and are familiar with the problems of compliance, we believe that it would be helpful for a division attorney, skilled in enforcement provisions, to review the draft language of an order for comments. As we discuss immediately below, this could impact the number of "facially deficient" compliance reports received by the division.
The number of facially deficient compliance reports received by the division appears very high.
The OIG survey team noted from its review of BCP's Semiannual Report Summaries that a large percentage of compliance reports are facially deficient.(3) For example, the division's most recent summary report for the six-month period ending March 31, 1999, indicates that about two-thirds of the compliance reports under review were facially deficient, resulting in requests for additional information or other actions.(4) It may be that the total number of mailings required by good-faith respondents to demonstrate their compliance would be lessened if the division were to routinely survey front line enforcement staff regarding recurring and predictable deficiencies found in previously reviewed compliance reports in similar industries.
We believe the public interest is served when compliance is demonstrated quickly - or at least in as few mailings as possible. In addition, fewer resubmissions free up staff time to work on other matters.
On another related front, the division should review the universe of facially deficient submissions, by industry affected, to determine whether staff can better anticipate and address likely noncompliance issues, and proactively discuss them in the code 1 letter, in the belief that respondents can, in effect, benefit from lessons learned from deficient reports of other respondents. Alternatively, staff familiar with industries under order could assist in the drafting of the order and/or code 1 letter to include specific language that would help guard against deficient submissions.
The Enforcement 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 that the division, on a semiannual basis, 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. The reports present for each half year the number of (i) initial compliance reports reviewed; (ii) matters where the reviews were completed and the compliance reports received and filed; and (iii) reports that were "facially deficient."
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 BCP's Associate Director of Enforcement and BC's Assistant Director for Compliance. 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.
While the operating manual identifies the requirement, it provides no guidance regarding the format for the report.(5) The format chosen by BCP does not identify individual cases; rather, it provides only a numerical summary of cases (by category identified above) and includes a "highlights" section. Our review of these reports revealed that categories overlap and do not include reports received in the reporting period that staff has yet to review. Hence, we could not determine, for example, the universe of compliance reports under review, awaiting review, nor identify reports whose review has lasted more than six months - all key indicators of performance. 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 concerns regarding the reports' 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 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 for division (BC & BCP) managers to sit down with attorney-advisors to identify the report's purpose. In this way, staff can target its data reporting activities to what is needed now, and the Commissioners will have a report that can be used and understood.
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 when requested. If such information is not readily available outside of the Enforcement Division, then staff should seek to address these specific needs by providing only the information that the Commission deems useful. In both situations, Enforcement 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. The Enforcement Division should review the universe of facially deficient submissions, by industry affected, to identify recurrent noncompliance issues which staff can incorporate in the code 1 letter, to increase the likelihood of responsive compliance reports. (Page 7)
Recommendation 2. Enforcement 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 7)
1. Enforcement Division management requested and received permission from our office for an Assistant Director to be present at each staff interview.
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. A "facially deficient" report refers to a respondent's submission in which required information/documentation needed to ensure compliance is missing, or on its face, inadequate.
4. The OIG did not audit the numbers provided in the semiannual reports.
5. Findings associated with semiannual reporting to the Commission are similar to those identified by our survey in BC's Compliance Division.