Highlights from thought leaders’ Risk Roundup Columns of 2021
Regulators stayed busy in 2021, reminding direct sellers of the unique legal challenges faced by the channel throughout the year. Combined with the ever-increasing importance of addressing ESG and fraud risks facing the entire corporate landscape, we have selected the key insights and advice from our knowledgable contributors to keep SSN’s readers ahead of the curve. Please visit SocialSellingNews.com for the complete articles.
FTC Maintains Pressure on Compensation Plans
March 2021 Issue
By Brent Kugler
In the last quarter of 2019, the FTC filed two highly publicized enforcement actions against AdvoCare and Neora. These actions followed public statements by the FTC promising further aggressive enforcement activity against what it considers to be non-compliant direct selling practices. The FTC enforcement actions against these companies also signaled an increase in FTC scrutiny of MLM compensation structures.
In regard to this, the FTC announced new criteria for determining what is and is not a legally compliant MLM compensation plan. Speaking to a DSA audience in Fall 2018, the FTC’s Andrew Smith said the agency asks two preliminary questions when evaluating a MLM compensation plan: (i) does a compensation plan overly incentivize recruitment rather than product sales; and (ii) does the compensation plan create incentives for distributors to purchase more products than they actually need?
While the FTC’s new criteria for defining what is and is not a compliant MLM compensation structure plan is seemingly at odds with established legal case precedent, and even the FTC’s 2018 Guidance to the MLM industry, the current regulatory climate means increased risk. This is especially so for established companies that continue to utilize antiquated compensation plan structures and concepts as well as startup companies that make the mistake of adopting an outdated compensation model.
The compensation plan—in structure, terminology, and practice—should emphasize that rewards to participants and commissions are primarily based on verifiable sales to end-user retail customers.
Companies should update the terminology in their compensation plan so that it cannot be misconstrued as emphasizing rewards based on distributor purchases.
Participant purchase requirements for qualification or maintenance purposes should be set at minimal amounts or replaced entirely with retail sale requirements.
Make sure your company’s compensation plan is written in a way that makes it easy to understand.
The PRO Act: Bad for Direct Selling
April 2021 Issue
By Brian Bennett
One of the core issues for the Direct Selling Association (DSA) and direct selling throughout our storied history has been protecting the independent contractor status of the salesforce. When legislation goes to undermine that relationship, it has the potential to throw into disarray our way of doing business. H.R. 842, the c) Act, would do just that.
Passage of the PRO Act by the full U.S. House of Representatives is the biggest shot across the bow to independent contractor status in recent history. It would impose the strict “ABC” test as the standard for someone to be classified as an independent contractor under the National Labor Relations Act.
All of this is against a backdrop of other actions being taken in Washington, D.C., going to the core of this issue. The U.S. Department of Labor recently rescinded a rule finalized by the last Administration that would have provided a more deferential approach to individuals being classified as independent contractors. A proposed rule similar to the ABC test is anticipated to be released by this administration in the next month.
DSA is working on Capitol Hill, regulatory agencies, and the courts so that they see the dangers and opportunities for direct selling on this issue are addressed. We need all direct selling executives and salesforce members so we can dodge this shot across the bow.
6 Steps Critical to Mitigating Environmental, Social and Governance Risks
June 2021 Issue
By Miguel Pena
Over the past decade, environmental, social and governance (ESG) risks have risen to the top for enterprise risk-management teams. Mitigating these risks, sometimes known simply as “corporate sustainability,” is playing a greater and greater role in a company’s success.
Any company that is serious about its growth and long-term viability should consider developing a sustainability or ESG strategy if they haven’t already. Such programs bring quantitative cost savings, often in the form of more efficient operations, reduced waste, lower energy costs and better risk management.
The intangible benefits can be even more valuable, including enhanced brand reputation, employee engagement, innovation, and better risk management.
If your organization is considering the adoption of a sustainability program, or if you are evaluating your existing efforts, here are six key concepts vital to success.
Start at the top : A characteristic shared by the most successful sustainability programs is the endorsement and full support from company leadership.
Be strategic and systematic: The most important step is a materiality assessment along with a stakeholder engagement process.
Prioritize effectively: Start with an agenda or framework focused on the areas of most significant impact and importance, and then work to gain support from key allies or decision-makers.
Set the right goals: Programs should set goals and targets that are lofty, ambitious, and time-bound.
Maintain alignment throughout the organization: Having the support of management across the company reduces friction and facilitates collaboration across departments.
Establish a branding and communication strategy: Clear, concise messaging that works in tandem with the company’s existing corporate identity is essential in communicating these changes.
FTC Looks to Expand Civil Penalty Arsenal in Wake of AMG Loss
July 2021 Issue
By Donnelly L. McDowell, with content from John E. Villafranco
In the wake of the Supreme Court’s unanimous decision in favor of AMG Capital Management (in its recent case)—which stated that the FTC lacks authority to obtain monetary redress under Section 13(b) of the FTC Act—then Acting Chair Rebecca Slaughter vowed to lobby Congress in response.
Her goal was to “restore and strengthen the powers of the agency” and consider new ways to obtain money from companies through enforcement. Two months after the AMG decision, the FTC continues to make good on those promises.
The actions under ROSCA and GLBA send a clear signal that the FTC will continue to push the envelope to expand its civil penalty authority by testing new legal theories in enforcement.
We can expect the FTC to pursue this enforcement strategy concurrently while also continuing to seek new legislation from Congress, providing authority to obtain monetary redress under Section 13(b). Former Acting Chair Slaughter and Commissioner Chopra have both supported these initiatives.
Direct Sales Fraud Prevention
August 2021 Issue
By Colt Passey
Implementing strict fraud prevention practices and multi-factor authentication has become standard practice. However, fraud prevention can also focus on trust and safety by not insulting customers—for instance, by incorrectly identifying legitimate interactions as fraudulent and making interactions intolerable through repeated high-friction challenges. While this statement refers to customers, the same applies to distributors.
These attacks directly, or indirectly, lead to:
- Lost sales and revenue
- Eroded brand and reputation
- Tarnished customer relationships/reputation
- Increased marketing and ad spend
- Diverted traffic, clicks and downloads
Measuring fraud by just looking at successful transactions isn’t a good strategy. Approved transactions can be from fraudulent actors using actual data. Analyzing digital behavior and patterns are a more effective method for identifying suspicious transactions. Merchants need to grab whatever piece of data about a cardholder’s behavior and how they’re acting.
Fraud prevention software can provide a significant amount of data and patterns, information useful in discovering fraud. Every transaction that comes in is compared with all the transactions that come through worldwide. This process is automated, using artificial intelligence and machine learning, and speeds up locating the unique factors an organization needs to account for.
An organization can enhance customer safety online and in the physical world to make them feel safe. Customers need to feel secure that in the online world, their business will be transacted reliably and securely. The customers need to feel confident that their information is protected and safe. In addition, an organization needs to feel satisfied that the consumer will not abuse the process.
As this industry grows and changes, leveraging machine learning and artificial intelligence proves to customers that a company cares about protecting their identities as well as protecting the company. That’s why it is important to use multiple strategies and have systems in place to prevent cyberattacks and fraudster activities.
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