Who is Responsible for Truthfulness in Advertising?

(Ethics and the Media in Russia Today, The Freedom Forum, Moscow, Russia April 6, 1995)

By William Dunkerley

News of the MMM Fund scandal reverberated around the world. On all continents, people were reading newspaper stories and watching TV reports on the latest events. But as the worldwide mass media heralded these stories, some Russians were wondering about the role Russian mass media played in the development of the MMM problem in the first place. After all, it was through advertisements in the Russian mass media that many Russians were enticed into placing their money into the MMM investment fund.

Was the press negligent? Should the mass media share in the blame for what happened? Are stricter media laws needed to govern what claims can be made in advertisements?

These are intriguing questions to ponder. And unquestionably, the answers should come from Russians and not from an American observer such as I. But let me describe how the American mass media and system of laws would handle a similar situation if it were to occur in the United States.

Securities Marketing

The American system is not perfect. We certainly have had our own share of instances of securities fraud. Indeed, we have an agency of our federal government which exists to regulate the sale of securities. This agency is called the Securities and Exchange Commission (SEC). It has over 2500 employees and is governed by five commissioners. They are appointed by the President of the United States and must be confirmed by the Senate. In an effort to reduce political influence, no more than three commissioners from any one political party may serve on the Commission at the same time.

It is the rules and regulations of the Securities and Exchange Commission that serve to protect American investors. That job is not a legal responsibility of the mass media. In fact, there is no specific law at all for the mass media in the United States. The First Amendment of our Constitution prohibits Congress from making any law that will abridge the freedom of the press. Aside from that, media enterprises must abide by the laws to which all companies and private citizens are subject.

American Securities Advertising

But what about the advertising of securities in American newspapers? What about claims such advertisers might make with regard to the financial rewards investors might receive?

Actually, it would be difficult to find an adver- tisement in an American newspaper that offers the sale of a security. According to John Heine, deputy press officer for the SEC, the offering of securities for sale is very strictly regulated. Before a fund can offer securities for sale, it must file with the SEC a prospectus and other information. The fund must certify that all this information is correct. Then a copy of the prospectus must be provided to anyone who is being approached to buy the security. The prospectus could be over 300 pages long.

So you can see why securities are not advertised for sale in American newspapers. The advertisement would have to contain all the information from the 300 page prospectus!

What Is Being Advertised

There are advertisements in American newspapers from firms that sell securities, however. But if they are not offering securities for sale, what is being advertised? Copies of the prospectus, that’s what. Take the Wall Street Journal, for example. In every edition, you will be able to see advertisements from securities firms offering to send a copy of their prospectus to anyone who inquires.

These advertisements for copies of a prospectus are not subject to the same SEC regulations that cover actual offers to sell securities. Does this mean the securities firms are then free to make outlandish claims in these advertisements? Will newspapers publish such claims?

Kirk Carr, director of advertising services at the Wall Street Journal thinks not. He says his newspaper has clear voluntary guidelines for the kinds of advertisements they will accept. The guidelines permit accepting advertisements from municipal funds and corporate offerings. For all other offerings, Carr says, the prospectus must first be examined by the Journal’s staff. And the Journal will refuse an advertisement if it believes it to be misleading. “Advertising becomes part of your newspaper’s product. And it reflects on the publication itself. We scrutinize ads basically for credibility purposes,” he adds.

Avoiding a Law Suit

There is another reason an American publisher might scrutinize advertising claims. Attorney Ellen Kozak who specializes in legal issues pertaining to publishing says, “the publisher could become the subject of a civil law suit.” She recalls that during the 1980s, an American publisher ran a classified advertisement which said, “have gun, will travel.” The advertisement drew responses from individuals who were seeking to have people murdered. Ultimately, the advertiser was hired by one of these respondents and proceeded to kill someone! The publisher was sued, and lost the case.

What was the publisher guilty of? Not exercising good judgment was the answer. Publishers do not have a duty to investigate the contents of advertisements. But this was a case of clearly foreseeable risk of harm. The ad in question was inescapably for an illegal activity. The publisher should have refused to carry the ad. By not doing so, the publisher became liable for damages.

There is, of course, a big difference between this case and advertisements that simply exaggerate the profits one might reap from an investment. But if a newspaper accepts an advertisement offering a prospectus and making outrageous claims, it might be charged with civil liability for an investor’s loses. And a case like that “could cost a lot of money to defend in court,” Kozak concludes.

Who’s Responsible for What?

Does this mean that American media organizations have the final responsibility for what an advertisement says? Should newspapers and magazines, radio and TV stations be the police force for what advertising information is offered to the public? What about non- securities related advertising?

In the United States, the Federal Trade Commission (FTC) is charged with prohibiting unfair and deceptive business practices. This includes false or unsubstantiated advertising.

The primary responsibility for advertising claims, however, lies with the advertiser, not with the publisher. “It is a basic tenet of advertising law that advertisers are required to have a ‘reasonable basis’ for all objective product claims before the claims are made,” says attorney Lewis Rose, an expert in advertising and marketing law. Rose points out that the advertiser or manufacturer has the knowledge and resources to determine the validity of a claim. It makes more sense and is less costly overall not to pass on the responsibility for verifying advertising claims to the publisher or consumer. After all, a publisher can not effectively have expertise in all the fields that are advertised in a publication.

This doesn’t mean that publishers are without any responsibility, though. If a manufacturer advertises a product in a false or unsubstantiated way, the FTC may additionally charge others such as the publisher or advertising agency, as well. FTC Commissioner Deborah K. Owen says, “The primary factor that we consider is the extent to which the [others] actually participated in the deception.” This means that a key factor is whether the other parties “knew or had reason to know that the ad was deceptive or unsubstantiated.

Summary

In the United States, the primary responsibility for truthfulness in advertising is with the advertiser. Punishing a newspaper for the false claims of an advertiser would be like “shooting the messenger.” The publisher, however, is not without responsibility altogether. Good judgment must be exercised to avoid publishing advertisements which are obviously false, misleading or contrary to law. Indeed many publishers feel a responsibility to their readers to reject ads that are obviously false or misleading.