Although this proposal has been overtaken by events, with the Trump administration’s regulatory pause now in effect and one of the two dissenting commissioners the new chairman of the FTC, it tackles an interesting compliance area and may be worth keeping an eye on in the future.

Most readers will be familiar with the type of activity being targeted by the proposed rule change. It usually involves a pitch for a product to be sold to consumers at a profit, or a money-making opportunity that involves investment, coaching or consulting work.

Many such pitches involve claims about the amount of money that can be made, claims frequently inflated or exaggerated in order to encourage the individual to invest time, money and effort into the scheme in question.

Sam Levine, Director of the Federal Trade Commission’s Bureau of Consumer Protection (BCP) – quoted in the press release announcing the proposed changes – pointed to the potential for consumer harm: “Phony claims about likely earnings lure people looking for honest income into spending thousands, even tens of thousands, of dollars on multi-level marketing, business coaching and other schemes.”

Relief and refunds

Deceptive claims are already illegal under existing rules. However, the proposed changes would permit the FTC to seek “strong relief” from the companies making such deceptive claims – and that relief would include refunds to those who lose money as a result of such schemes.

The proposed changes to the business opportunity rule involve:

• prohibiting those selling such opportunities from making material misrepresentations, including those about earnings;
• requiring such sellers to have written substantiation in support of such claims; and
• making the written substantiation available to consumers should they request it.

A new rule to address false or misleading earning claims in the multi-level marketing (MLM) industry is being proposed.

This would prohibit MLM sellers specifically from making deceptive earnings and related claims and, as with the business opportunity rule, would require MLM sellers to have written substantiation to back up any claims made.

In addition the agency is seeking comments from the public on the specific elements of a proposed earnings claim rule, which might include requirements around:

• making earnings data available to recruits and participants;
• the posting of such data on company websites;
• stipulating that all MLM earning claims are to be accompanied by clear and conspicuous information about the earnings that can generally be expected;
• introducing a waiting period before a recruit pays money to an MLM or joins an MLM;
• prohibiting misrepresentations relating to expenses, benefits or compensation plans; and
• prohibiting the use of non-disparagement or other “gag” clauses  by MLMs (usually employed to suppress truthful negative information).

According to Levine “the proposed rules would help the FTC deter illegal conduct with civil penalties and put money back in consumers’ pockets. We look forward to getting public comment.”

The comment period for the proposals will last 60 days from when they are published in the Federal Register.