Proposed Rule Changes and an Executive Order: What It Means for Direct Selling Companies
The Federal Trade Commission (FTC) recently issued two Notices of Proposed Rulemaking (NPR) and an Advance Notice of Proposed Rulemaking (ANPR) that could significantly impact the direct selling industry.
The reason I say “could” is that shortly thereafter, on his first day as the 47th President of the United States, President Trump signed an Executive Order directing all executive departments and agencies to not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register, until a department or agency head appointed or designated by the President reviews and approves the rule.
The Executive Order also directs agencies to consider delaying the effective date of published or pending rules for 60 days to allow for evaluation of legal, factual, or policy concerns, with the possibility of further delay if necessary. While this provides a temporary reprieve from new or pending regulations for companies, it also signals the possibility of regulatory changes down the road, giving companies more time to prepare for changes or provide input if, and when, the rules are put up for public comment.
In light of these actions, it remains crucial for direct selling companies to stay informed, carefully review these proposed rules, and prepare for potential changes.
The Business Opportunity Rule is a regulation that requires sellers of business opportunities to provide consumers with detailed information about the opportunity, including potential risks, to help them make informed decisions before joining the business venture.
The proposed amendments aim to expand the scope of the Business Opportunity Rule to include a broader range of money-making opportunities, such as business coaching and investment opportunities requiring a purchase. These changes would impose requirements on sellers to avoid material misrepresentations and maintain records, although they would not mandate full disclosure obligations as applied to traditional business opportunities.
The amendments also propose defining “earnings” more broadly to encompass various financial gains, replacing terms like "sales or gross or net income." Notably, multi-level marketing companies (MLMs) would be exempt from the scope of this rule – because the FTC has proposed a new rule, the Earnings Claim Rule, focusing exclusively on MLMs.
The proposed Earnings Claim Rule highlights the FTC’s focus on protecting consumers from deceptive practices and ensuring transparency in earnings claims within the MLM industry specifically. This new Earnings Claim Rule would specifically prohibit making misleading earnings claims, providing unsubstantiated recruitment materials, making claims without a reasonable basis or proper written substantiation, and misrepresenting MLM opportunities as employment.
MLMs would be required to maintain substantiation for earnings claims for three years and provide it upon request to the FTC or consumers. The FTC emphasized the need for evidence-based claims, rejecting mandatory disclosures for atypical earnings claims while considering more detailed requirements through a supplemental rulemaking proceeding.
In that supplemental rulemaking proceeding, the FTC issued an ANPR on Additional Components of the Proposed Earnings Claim Rule, seeking input on additional rules to address deceptive earnings claims and related practices in the MLM industry.
The ANPR considers requiring MLMs to disclose earnings data, including participant expenses, and provide clear information about typical earnings. It also considers imposing a waiting period before recruits can join or pay, prohibiting misrepresentations about expenses, benefits, compensation, and earnings-related claims, and banning unsubstantiated claims about refunds, work-success relationships, product efficacy, or industry statistics. Furthermore, it proposes barring MLMs from using non-disparagement clauses to silence participants from sharing truthful negative information with regulators or others.
BBB National Programs’ Direct Selling Self-Regulatory Council will continue to follow closely any final FTC rules affecting the direct selling industry and will update our guidance as warranted.
The reason I say “could” is that shortly thereafter, on his first day as the 47th President of the United States, President Trump signed an Executive Order directing all executive departments and agencies to not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register, until a department or agency head appointed or designated by the President reviews and approves the rule.
The Executive Order also directs agencies to consider delaying the effective date of published or pending rules for 60 days to allow for evaluation of legal, factual, or policy concerns, with the possibility of further delay if necessary. While this provides a temporary reprieve from new or pending regulations for companies, it also signals the possibility of regulatory changes down the road, giving companies more time to prepare for changes or provide input if, and when, the rules are put up for public comment.
In light of these actions, it remains crucial for direct selling companies to stay informed, carefully review these proposed rules, and prepare for potential changes.
FTC’s Actions Explained
The FTC’s proposed rules aim to expand the existing Business Opportunity Rule, now renamed the "Business and Money-Making Opportunity Rule" (16 CFR 437), and establish a new Earnings Claims Rule.The Business Opportunity Rule is a regulation that requires sellers of business opportunities to provide consumers with detailed information about the opportunity, including potential risks, to help them make informed decisions before joining the business venture.
The proposed amendments aim to expand the scope of the Business Opportunity Rule to include a broader range of money-making opportunities, such as business coaching and investment opportunities requiring a purchase. These changes would impose requirements on sellers to avoid material misrepresentations and maintain records, although they would not mandate full disclosure obligations as applied to traditional business opportunities.
The amendments also propose defining “earnings” more broadly to encompass various financial gains, replacing terms like "sales or gross or net income." Notably, multi-level marketing companies (MLMs) would be exempt from the scope of this rule – because the FTC has proposed a new rule, the Earnings Claim Rule, focusing exclusively on MLMs.
The proposed Earnings Claim Rule highlights the FTC’s focus on protecting consumers from deceptive practices and ensuring transparency in earnings claims within the MLM industry specifically. This new Earnings Claim Rule would specifically prohibit making misleading earnings claims, providing unsubstantiated recruitment materials, making claims without a reasonable basis or proper written substantiation, and misrepresenting MLM opportunities as employment.
MLMs would be required to maintain substantiation for earnings claims for three years and provide it upon request to the FTC or consumers. The FTC emphasized the need for evidence-based claims, rejecting mandatory disclosures for atypical earnings claims while considering more detailed requirements through a supplemental rulemaking proceeding.
In that supplemental rulemaking proceeding, the FTC issued an ANPR on Additional Components of the Proposed Earnings Claim Rule, seeking input on additional rules to address deceptive earnings claims and related practices in the MLM industry.
The ANPR considers requiring MLMs to disclose earnings data, including participant expenses, and provide clear information about typical earnings. It also considers imposing a waiting period before recruits can join or pay, prohibiting misrepresentations about expenses, benefits, compensation, and earnings-related claims, and banning unsubstantiated claims about refunds, work-success relationships, product efficacy, or industry statistics. Furthermore, it proposes barring MLMs from using non-disparagement clauses to silence participants from sharing truthful negative information with regulators or others.
The Road Ahead
Despite their uncertain status due to the Executive Order, these new proposed FTC rules demonstrate that it is more important than ever that direct selling companies continue to exercise extreme caution in their oversight of the dissemination of earnings claims on websites, by their salesforce members on social media, and at company gatherings. Transparency and accuracy in earnings claims are essential to protect consumers from deceptive practices and maintain trust in the industry.BBB National Programs’ Direct Selling Self-Regulatory Council will continue to follow closely any final FTC rules affecting the direct selling industry and will update our guidance as warranted.