BILL ANALYSIS
SB 916
Page 1
Date of Hearing: July 10, 2001
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Lou Correa, Chair
SB 916 (Ackerman) - As Amended: July 5, 2001
SENATE VOTE : 40-0
SUBJECT : Discount buying organizations.
SUMMARY : Allows publicly traded discount buying organizations
(DBOs), such as direct telemarketing firms, to recognize income
from first-year membership fees, for accounting purposes and
compliance with rules of the Securities and Exchange Commission
(SEC). Specifically, this bill :
1)Requires DBOs to establish an escrow account of $50,000 with a
federally insured bank or financial institution to issue
refunds of membership fees at the request of the member.
2)Requires DBOs to replenish the escrow account within three
business days of the depletion of the initial $50,000 during
the first year of operation. Requires DBOs, for each calendar
year thereafter, to fund the escrow account at the level of
actual claims for the prior calendar year, but not less than
$50,000, and replenish this account within three business days
whenever the fund is depleted to 50% of its original funding
for that year.
3)Requires DBOs to provide proof of the establishment of the
escrow account to the Secretary of State and maintain records
of all requests for refunds and actual refunds. The records
must be made available for review upon the request of the
Attorney General, any district attorney, or the Department of
Justice.
4)Requires DBOs to provide a refund from the escrow account to
any member who requests a membership refund in writing, and
has not previously received a refund.
5)Requires the escrow trustee to issue the refund within 10 days
of the date that the written request for a refund is received.
In addition, requests for a refund may be sent directly to
and paid directly by the DBO.
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6)Requires that DBOs provide at least 15 toll-free service lines
to California consumers devoted exclusively to customer
service questions and complaints.
7)Requires that DBOs provide conspicuous written disclosures of
the right of cancellation and refund procedures with the
following stipulations:
a) The written disclosure shall be printed in boldface
capital letters with a minimum 14-point font.
b) The written disclosure shall indicate who to contact,
both directly through the company and through the escrow
account, for a refund.
c) The written disclosure shall be made at the time of
solicitation, and at the time an enrollment package is sent
to consumers.
8)Requires that DBOs provide a full refund without conditions
other than the surrender or destruction of materials that
allow the member to access or use the service.
9)Requires that DBOs advise customers, before any charges are
applied, that they need not provide billing information in
order to be charged a membership fee, in circumstances where
the telemarketing firm has prior access to the customer's
billing information.
10)Requires that DBOs obtain the Attorney General's satisfaction
with regard to the membership cancellation and refund terms,
including: the amount of initial membership charge and how and
when it will be charged; the existence of any policy to not
ask consumers for billing information; the duration of any
trial membership period and any policy to charge consumers a
membership fee who do not cancel within the trial period; and
how consumers may cancel memberships.
11)Specifies that the various consumer protections in this bill
apply to all entities proposing to utilize the exception to
the definition of "discount buying organization," including
those currently utilizing the exception.
12)States that failure to comply with these requirements would
be cause for the Attorney General to require the entity to
SB 916
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obtain written contracts from members and comply with other
specified provisions of the discount buying law.
This bill would provide that its provisions do not affect or
limit any remedy available to a consumer.
EXISTING LAW :
1)Defines "discount buying organization" as a person or entity
that, for consideration, provides consumers with the ability
to purchase goods and services at discount prices.
2)Requires organizations functioning as DBOs, which are not
otherwise exempt from the definition of a discount buying
organization, to do a number of things, including:
a) Disclose to prospective clients and members the specific
types of goods and services provided, applicable handling
and delivery charges, and warranty policy.
b) Employ written contracts for membership agreements.
c) Establish trust accounts to receive membership fees and
purchase funds from members.
3)Allows consumers who are injured by entities subject to the
discount buying statute to recover treble damages plus
attorney's fees and provides misdemeanor penalties for certain
violations.
4)Exempts a number of organizations from the definition of a
discount buying organization, including those in which the
consideration paid by clients or members does not exceed
specified thresholds and who provide the majority of their
goods and services at fixed locations.
5)Exempts organizations from the definition of a discount buying
organization that, in addition to receiving consideration
below a specified level, offer buying services to clients or
members through toll-free telephone access, computer access,
or video shopping terminals, provide a full refund of
membership fees without conditions during the first year of
membership, and maintain a $20,000 bond.
FISCAL EFFECT : Unknown
SB 916
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COMMENTS :
In 1976, the Legislature enacted the Discount Buying Act
requiring organizations offering goods and services to the
public at discounted prices in return for a membership fee to
provide certain disclosures to consumers and to provide
mechanisms to give consumers remedies when they suffer pecuniary
damages. The Act exempted certain types of entities from its
provisions. As initially enacted, the Act exempted
organizations whose membership fees were below certain
thresholds. In 1985, the Act was amended to exempt entities
that provide the majority of their goods and services at fixed
locations. In 1986, the Legislature created an additional
exception for entities providing access to discounted goods and
services through toll-free telephone access, computer access, or
video shopping terminals, provided they offer unconditional
refunds of membership fees in the first year of membership and
post a $20,000 bond.
This bill deals with a problem for publicly traded DBOs that
operate under the "unconditional refund" exemption for reporting
income derived from membership fees. Securities and Exchange
Commission guidelines, as set forth in SEC Staff Accounting
Bulletin No. 101, prohibit such entities from recognizing as
income membership fees prior to the expiration of any full
refund period that applies to the fees. Because the current
exception in the discount buying law requires, as a condition of
using the exception, "unconditional refunds" of membership fees
in the first year of membership, and since the discount buying
law lacks any mechanism for estimating the amount of refunds
that could occur, the SEC guidelines require exclusion of those
fees from revenue recognition until the refund period expires.
This bill would permit publicly traded DBOs to declare more of
their membership fee income for SEC purposes, by qualifying for
an alternative exemption from the Act, when it establishes an
escrow account to service "no questions asked" refunds. The
account would contain a first year minimum deposit of $50,000
for refunds. In each year thereafter, the account would require
the amount of the previous year's refunds, but no less than
$50,000. This would allow publicly traded companies to declare
more of their membership fee income, excluding from revenue
recognition only the amount that is derived from the previous
year's refunds, or no less than $50,000.
SB 916
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This bill is the product of lengthy discussions between the
Attorney General's office and MemberWorks, Inc., a publicly
traded direct telemarketing company, the sponsor of this bill.
The addition of enhanced consumer protections were requested by
the Attorney General's office and agreed to by the sponsor.
According to the author, important recent amendments to this
bill apply the various consumer protections in this bill to all
entities proposing to utilize the exception to the definition of
"discount buying organization," including those currently
utilizing the exception.
On April 27, 2001, MemberWorks and the California Attorney
General's Office entered into a settlement agreement under which
MemberWorks agreed to comply with provisions similar to those
contained in this bill. However, the settlement agreement
provisions do not address the SEC reporting problem. The
impetus for this bill was the sponsor's desire to comply fully
with both California law and SEC reporting guidelines.
REGISTERED SUPPORT / OPPOSITION :
Support
MemberWorks, Inc. (sponsor)
Attorney General
Opposition
None on file.
Analysis Prepared by : Mark McKenzie / B. & P. / (916)
319-3301