Credit Union Promotions: Keeping Sweepstakes and Contests Compliant
Why don’t credit unions run lotteries? Because their members already know the real jackpot is lower fees and better rates. While that may be true, credit unions should consider the complexities of running lotteries because they are generally illegal under both federal and state law. Instead of lotteries, sweepstakes and contests can be a great way to market and promote the credit union and its products and services. However, they come with their own unique compliance challenges as sometimes there is a fine line between a sweepstakes or contest and an illegal lottery.
When someone is required to provide consideration (such as an entry fee or purchasing a product) for the chance to win a prize, it is generally considered a lottery. However, when you remove the requirement to provide consideration, and simply award prizes to participants based on chance rather than skill, you have a sweepstakes. On the other hand, a skill contest is any puzzle, game, competition or other contest where a prize is awarded based on the skill of the contestant. Even though consideration may be required to enter, a skill contest is generally not an illegal lottery as it is not based solely on luck to win. To ensure its sweepstakes and contests are not considered lotteries, credit unions may want to have an attorney assist in creating the terms and conditions, or rules, that provide the structure of the promotion.
Sweepstakes and contests are generally governed under state law. For instance, in the state of New York, if the total value of prizes in a sweepstakes exceeds $5,000, the promoter must register the sweepstakes with the New York Department of State and post a bond 30 days before the sweepstakes begins. Also, after it ends, the promoter must file a list of winners.
However, there is one applicable federal law when it comes to sweepstakes and contests, enforced by the U.S. Postal Service (UPSP): The Deceptive Mail Prevention and Enforcement Act (Act). The Act is federal law aimed at protecting consumers from misleading or fraudulent mailings, including sweepstakes, contests, and other promotional offers sent through the mail. Somewhat similar to CAN-SPAM, the Act contains both disclosure requirements and opt-out requirements. Credit unions must give recipients the option to opt out of receiving future sweepstakes or contest mailings. Each mailing must clearly include a telephone number or mailing address where opt-out requests can be submitted. In addition, credit unions are required to have processes in place to ensure that no further mailings are sent to individuals who have chosen to opt out.
For the disclosures required under the Act, every direct mail item that relates to sweepstakes and contests must include the following information, which must be “clearly and conspicuously displayed”: 1) The terms and conditions, including the rules and entry procedures; 2) The sponsor or mailer and their principal place of business or other contact address; 3) The quantity, estimated retail value and nature of each prize; and 4) The schedule of any payments made over time.
In addition, sweepstakes require the following disclosures in addition to those listed above:
• A statement that no purchase is necessary to enter and that a purchase does not increase the chances of winning
• Estimated odds of winning each prize
• The quantity, estimated retail value and nature of each prize
• The schedule of any payments made over time.
Contests, by way of contrast, require the following additional disclosures:
• The number of rounds and the cost to enter each round, whether subsequent rounds will be more difficult and the maximum cost to enter all rounds
• Percentage of entrants who may correctly solve the contest
• Identity of the judges and the method used in judging
• The date the winner will be determined
Credit Unions that do not follow these rules risk having their mail items stopped by the United States Postal Service and may also be subject to significant penalties based on how many non-compliant “pieces” were mailed. Those penalties range from $25,000 to $1 million depending on the number of pieces involved.
Lastly, keep in mind that Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) principles under the Consumer Financial Protection Bureau (CFPB) also apply to sweepstakes and contests. Because states generally have authority to enforce federal UDAAP laws, credit unions should carefully review both federal UDAAP and state UDAP guidance before developing promotional materials and drafting rules and disclosures for these types of promotions. In addition, the Federal Trade Commission’s (FTC) UDAP would be enforceable with respect to state-chartered credit unions. This NCUA Guidance offers an overview of UDAAP that may be helpful.
Credit unions can stay compliant with sweepstakes and contest rules by focusing on transparency, fairness, and strong internal controls. Getting staff who are responsible for compliance involved right from the start is key when planning sweepstakes and contests. It helps to spot potential issues early, keeping things aligned with UDAAP principles, and making sure marketing efforts are in compliance with applicable Federal and state laws. By building compliance into their promotions from the start, credit unions can engage members effectively while minimizing any compliance and regulatory risks.
