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 FTC was the need to re-enforce, regulate and clarify in specific terms what the earlier Sherman Antitrust Act 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. (See also: Antitrust Defined.)

At first, the FTC was charged with the responsibility of preventing or dissolving monopolies and to bring civil lawsuits against violators. 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. (See also: Early Monopolies: Conquest and Corruption.)

Additional Functions of the FTC

  • 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 FTC.
  • Investigatory: 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 FTC may issue a cease and desist order against businesses found to be using unfair practices, or those in violation of other restrictive statutes.
  • Internet: Although through most of the 1990s, internet commerce was not covered by FTC 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, new FTC regulations are expected to be imposed. (See also: Financial Capitalism Opens Doors to Personal Fortune.)
  • Oversight and Monitoring: A critical function of the FTC 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.
  • Fact Finding: 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.

Targeting Mergers

Also falling under FTC scrutiny were the many mergers that were consummated in recent decades, such as the Exxon-Mobil consolidation and the marriages of Boeing-McDonnell Douglas and American Online with Time Warner. The FTC made sure there were no violations of antitrust or anti-monopoly violations in the mergers of these companies. (See also: Biggest Merger and Acquisition Disasters.)

Composition and Structure

A commission of five supervisory members appointed by the U.S. 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.

The FTC's Three Principal Bureaus 

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 service claims.

The Bureau of Competition investigates and attempts the prevention of anti-competitive 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—telecommunications, for example—a merger that eventuates in restraint of trade or monopolistic pricing can have a major impact on the economy.

Benefits—and Abuses—of FTC Oversight 

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 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. (See also: Oil and Gas Industry Primer.)

Critics in the late-1970s claimed the FTC 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 Ronald Reagan's first term, the FTC was made answerable to (and under the control of) the 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 Bottom Line

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. (See also: The Wonderful World of Mergers and Credit Scams to Watch Out For.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.