FTC Staff Urge MLMs Not to Rely on Industry Income Disclosure Guidance

In the fall of 2023, BBB National Programs’ Direct Selling Self-Regulatory Council (DSSRC), which is the direct selling industry’s self-regulatory program funded by the industry trade group the Direct Selling Association (DSA), issued a nine-page document titled, Guidance on Income Disclosure Statements for the Direct Selling Industry. According to the DSSRC, “an income disclosure statement (IDS) is a document that many direct selling companies publish to disclose the amount of income that direct selling salesforce members can generally expect to earn.” The DSSRC indicates in the Guidance that it is based on the tenets of advertising law that have been articulated by the FTC and the DSSRC, and in the DSA Code of Ethics. But a little over a week ago, FTC staff sent an advisory opinion to the DSSRC saying that it got it wrong – way wrong. The letter begins by expressing “serious concerns” about the Guidance. It continues:

FTC Staff recognize that industry guidance in general can be helpful but, in the current form, we believe the IDS Guidance does much more harm than good…. We are concerned that some of the Guidance either is not fully consistent with federal law or fails to address key concepts of FTC law.

And the letter ends with this warning:

FTC Staff is concerned that the DSSRC’s Guidance will encourage deceptive conduct and facilitate deceptive earnings claims and will result in consumer harm. In our view, an MLM that wishes to follow the FTC Act should not rely on this Guidance.

But according to Peter Marinello, the vice president of the DSSRC to whom the letter was addressed, it’s the FTC staff that got it wrong, stating in response to a TINA.org request for comment on the letter:

While we appreciate the FTC staff’s commitment to consumer protection, we disagree with the FTC staff’s conclusions related to the Guidance. We will address our concerns with the FTC staff.

So what’s an MLM to do? Side with the DSSRC and risk an FTC inquiry or heed the conclusions in the FTC staff advisory opinion letter? If I were a betting person, which I’m not, I’d wager in favor of the FTC staff’s position. Here’s a rundown of some of the issues they have with the DSSRC’s Income Disclosure Guidance.

1. Don’t guess: According to the DSSRC’s IDS Guidance, earning claims about the amount of money that distributors can generally expect to earn with an MLM can be made even if the MLM only has “some indication” of distributor expenses or “an estimate of mandatory costs.” But according to FTC staff, this advice is not consistent with FTC law. MLMs need more proof than “an estimate” or “some indication.” If MLMs want to recruit using earnings claims, FTC staff believe companies must have more adequate substantiation to support those earnings claims.
2. Missing: FTC staff also objected to what the DSSRC didn’t say in its Guidance about the format and content of many MLM disclosure statements. By way of example, missing content seemed to include issues related to:

• The common practice of narrowing the sampling size in IDS calculations to only include successful MLM distributors (aka “active” distributors).
• Complicated and confusing disclosures that fail to provide realistic expectations or inform consumers of their likely income.
• The absence of information concerning the persistence of the same distributors staying at the top of the pay scale over time, and, correspondingly, the number of net new top earners each year.
• Clear information on expenses.
• How data is commonly presented to obscure risk of loss and the low probability of atypical outcomes.
• The inclusion of language that contradicts the purpose of the IDS, such as results depend on personal efforts, skills and determination.

3. Pop quiz: How can an MLM use earnings claims to advertise its business opportunity if the typical participant makes little to no money or loses money? According to FTC staff, this is a fundamental question that the DSSRC Guidance fails to answer. Luckily, the advisory opinion steps in with its own guidance: “Should expenses nullify income for many participants, any projected earnings claim—even an income claim for $25 per week—is likely to leave a net impression that is deceptive.”
4. Follow the money: Keeping track of where one’s money is going is important. And if you’re an MLM, FTC staff are questioning how it would be possible to make a non-deceptive income claim if you don’t know or can’t substantiate typical distributor expenses. As the advisory opinion states, “should an MLM not know or be able to substantiate typical expenses, I also question whether a non-deceptive claim about income can be made.”
5. Problematic adjectives: Not once, not twice, but three times, the DSSRC Guidance encourages MLMs to use the phrase “modest or supplemental income” when describing how much a distributor is likely to earn. But the advisory letter to the DSSRC raises concerns with the use of the words “modest” and “supplemental,” stating, “this characterization fails to take into account expenses of participants.” Further, it may not be accurate as many FTC cases, including lawsuits against Neora, Noland, AdvoCare and Herbalife, found that most participants lost money. The letter goes on to state, “And that certainly may be true for other MLMs.”
6. Exceptions to the rule: According to FTC staff, if significant numbers of distributors are making no money or losing money, income disclosure statements that highlight the earnings of the small percentage of MLM participants who make significant income is deceptive.
7. Possible in theory: According to the advisory letter, “while it is theoretically possible to make truthful, non-deceptive claims about substantial earnings, doing so requires at a minimum a clear, prominent, and unavoidable presentation of the typical participant’s revenue minus expenses—all of which must be substantiated.” This advice, in turn, leads us back to point 3.
8. And another thing: FTC staff make clear that their advisory opinion does not detail all of the concerns they have with the DSSRC’s IDS Guidance. As the letter states, “The concerns … mentioned here represent only a few of the multiple thorny issues that the DSSRC’s Guidance on IDSs simply fail to address.”

TINA.org’s recent MLM earnings claims investigation highlighted many of the concerns raised by FTC staff. Our analysis of 60 MLM income disclosure statements revealed that for those companies that provided enough information to calculate overall earnings, more than 80 percent of the companies’ distributors made $1,000 or less for the year (less than $20 a week) before deducting business expenses. For half the companies, on average more than 60 percent of distributors made no money at all. And these statistics are likely inflating the overall success of the typical distributor given the misleading ways in which many MLMs manipulate the earnings data of distributors in their income disclosure statements.

The DSSRC states that its mission, in part, is “[t]o enhance consumer and regulatory confidence … in the direct selling marketplace.” Indeed, the DSSRC was created to both signify and facilitate compliance with the law, but the FTC staff’s recent correspondence with the council makes clear that the DSSRC is not currently succeeding with this part of its mission.

TINA.org also reached out to the DSA for comment on the FTC staff advisory opinion letter. The industry group’s statement can be read here.