Since its establishment in 1914 by President Woodrow Wilson, the Federal Trade Commission (FTC) has been protecting consumers, investors and businesses from anti-competitive practices such as monopolies, monopolistic mergers, price-fixing, bid-rigging, fraudulent and or deceptive advertising and unfounded product claims. These important functions help the U.S. economy run smoothly, safely and fairly for business, consumer and investor.
Early Days of the Federal Trade Commission
The initial motivation for the creation and enactment into law of the Federal Trade Commission was to re-enforce, regulate and clarify in specific terms what the earlier Sherman Anti-Trust Laws and the Clayton Antitrust Act prohibited. Both laws prohibited business practices that would limit or eliminate competition to the detriment of consumers, investors and the economy in general.
Widespread public outrage over abuses of these laws and ongoing anti-competitive business practices in violation of the earlier laws also impelled Wilson to take action against trusts and monopolies. (Check out the history and reasons behind antitrust laws, as well as the arguments over them. Read Antitrust Defined.)
At first, the FTC was charged with the responsibility of preventing or dissolving monopolies, and to bring civil law suits against violators of the law. Monopolies, by their nature, are anti-competitive, and are therefore injurious to consumer and investor interests and to the economy at large. A monopoly may dictate consumer prices, control quality and distribution.
In the ensuing decades, as the American economy became more complex and flourished through technological innovation, increased productivity and personal income, the opening of an increasing number of profitable foreign markets, the FTC likewise expanded and took on additional functions and responsibilities. (Companies with too much power can take advantage of consumers. Learn more in Early Monopolies: Conquest And Corruption.)
Additional Functions of the Federal Trade Commission
Enforcement of Laws
The FTC has the power to bring civil suits in federal court to secure financial compensation and penalties for individuals, or for class action litigants damaged by violators of applicable laws. Fines and punishments against violators are imposed by the courts, rather than directly by the Federal Trade Commission.
In response to complaints from consumers, businesses, trade associations or other sources, or through evidence of misdeeds, the FTC may investigate a business to determine the validity of a charge or allegation and recommend further action against the alleged violator (such as a court action), if the evidence warrants. The Federal Trade Commission may issue a cease and desist order against businesses found to be using unfair practices, or those in violation of other restrictive statutes.
Although through most of the 1990s, internet commerce was not covered by Federal Trade Commissions' regulations, data developed by the FTC in 2000 disclosed a low 20% compliance with applicable laws among internet-based businesses. As internet business expands and becomes a larger fraction of the gross domestic product (GDP), new FTC regulations are expected to be imposed. (For more insight, read Financial Capitalism Opens Doors To Personal Fortune.)
Oversight and Monitoring
A critical function of the Federal Trade Commission is its continual monitoring and oversight of the business community for violations of the law and unfair practices. Besides its anti-competitive functions, the FTC also attempts to enforce prohibition against false advertising and the full disclosure requirements in various business transactions and activities – pricing, franchising and advertising, among many others.
In recent decades the fast-paced development of high-tech applications in the business world has necessitated continual education for users of high-tech devices, and for the FTC as well. With the accumulation of facts and information on these technologies and the business practices associated with them, the FTC is better equipped to issue appropriate protective regulations.
The results of much FTC activity in the areas cited above have proved beneficial to the public. A successful lawsuit brought by the FTC against the tobacco industry stopped cigarette advertising targeting adolescents and pre-teens.
The Federal Trade Commission: Targeting Mergers
Also falling under FTC scrutiny were the many mergers that were consummated in recent decades, such as the Exxon-Mobil (NYSE:XOM) consolidation and the marriages of Boeing-McDonnell Douglas (NYSE:BA), and American Online (NYSE:AOL) and Time Warner (NYSE:TWX). The FTC made sure there were no violations of anti-trust or anti-monopoly violations in the mergers of these companies. (Some mergers do not end well. Check out Biggest Merger and Acquisition Disasters.)
The Composition and Structure of the Federal Trade Commission
A commission of five supervisory members appointed by the United States president administers the activities of the FTC. Each commission member serves a seven-year term, and must be approved by the Senate. A chairperson, selected by the president, is empowered to appoint an executive director who acts as a chief operating officer. The commissioners must approve the appointment.
Three Principal Bureaus of the Federal Trade Commission
The Bureau of Consumer Protection protects consumers against deceptive and or unfair business practices. Included under the FTC mandate are deceptive advertising and fraudulent product and/or service claims.
The Bureau of Competition investigates and attempts the prevention of anticompetitive business practices, such as monopolies, price fixing and similar regulatory violations, which may negatively affect commercial competition. Criminal violations in these areas are handled by the Antitrust Division of the U.S. Department of Justice, which cooperates with the Bureau of Competition.
The Bureau of Economics works in accord with the Bureau of Competition to study the economic effects of FTC lawmaking initiatives and of existing law. In the matter of mergers and acquisitions in critical industries, such as communications, for example, a merger that eventuates in restraint of trade or monopolistic pricing can have a major impact on the economy.
Abuses and Benefits of Federal Trade Commission Oversight and Statutory Powers
Acquiring more regulatory power over the years, the FTC entered a period of aggressive prosecutions and sanctions in the early 1970s. By the end of the decade, however, criticism of the FTC's activism increased in the business community and in the U.S. Congress. Among FTC actions criticized was the commission's issuance of regulations for the influential petroleum industry, a major contributor to GDP and to tax revenues. (For more on the factors affecting this industry, check out Oil And Gas Industry Primer.)
Critics in the late-1970s claimed the Federal Trade Commission had become too powerful, too insensitive to the needs of business and the public, and operated almost independently with little oversight from either Congress or the president.
Consequently, during the first term of President Ronald Reagan, the FTC was made answerable to (and under the control of) the United States president. A new FTC attitude also emerged in the ensuing years, which was more cooperative with business interests without abandoning its protective functions. Eventually becoming as important as its anti-competitive function, the monitoring and enforcement of consumer fraud violations became a major activity of the FTC.
The Federal Trade Commission provides important statutory safeguards to consumers, investors, businesses and the economy in general. It also makes sure the regulations are strictly complied with. At the same time, the FTC does not act as an obstacle to the conduct of business in the American free market. With the FTC more flexible in its regulatory and enforcement functions, businesses, investors, consumers and the economy all benefit, and have the potential to prosper. (For more on the Federal Trade Commission's role in the economy check out The Wonderful World Of Mergers and Credit Scams To Watch Out For.)