Network marketers beware: the answer to this question could be extremely relevant to the future viability of your business and the company you represent.
Some company owners believe proactively addressing compliance issues is too negative a topic to broach with their distributors. As a result, they shelve the entire subject. Other company owners put major emphasis on running a tight ship in their compliance departments. Either way, your company’s compliance policies might not be enough to avoid regulatory scrutiny.
All company leaders must prepare for that letter from a regulatory agency, or worse, for regulators to knock on the front door. If they wait for this to happen before establishing a proactive compliance department, it may be too late.
Part of smart due diligence before joining a company is to find out if that company has a compliance department that enforces its policies and supports ethical marketing. When you are building a business, it is important to know what your company’s compliance department is doing. Be proactive and don’t wait until there are rumors about compliance issues.
The first question to ask is, who is running the compliance department, and how are they running it? If your sponsor does not know the answer, reach out to the company’s VP of sales and marketing.
Ideally, a qualified staff person or outside compliance consultant is authorized to handle incoming and outgoing communications with distributors. If your company is a DSA member, it has a designated Compliance Officer in place. Either way, the compliance department’s function is to build a culture that complies with regulatory standards.
As a professional compliance consultant, I’ve seen a variety of direct selling and network marketing compliance departments. Each handles its responsibilities differently, representing unique sets of issues. Some owners are keenly aware of their compliance responsibilities and some are not. When companies take their fiduciary responsibilities seriously, then distributors can go about their business fully confident that their company will be around for the long haul.
As a counterexample, let’s take a look at two companies that did not take compliance seriously.
One company sold gas cards. The company owner did not think compliance was important. He changed the compensation structure repeatedly. Finally, the company received a letter from a regulator. When the issue was brought to the attention of the company’s attorney, he was surprised to discover the company was no longer operating under the compensation plan he had originally reviewed. When the owner showed him the revised plan, it became clear to the attorney that the company was now paying out recruitment bonuses instead of commissions on the sale of product. The distributors were out in the field presenting this noncompliant, recruitment-based compensation plan over and over.
The attorney explained to the owner that he would not be able to defend the revised compensation plan. The owner complained that it was impossible to change the plan back to the original version, because he would lose his distributors. The attorney was unable to turn this owner around; within three months the company was found to be a pyramid scheme and shut down.
Next, let’s consider a company that sold nutritionals. The FDA discovered that the ingredients were listed incorrectly on the bottle. The product included numerous ingredients that boosted the main ingredient’s effectiveness, but it did not properly label them. When the word got out, a large number of distributors resigned immediately and soon the company was shut down.
As these examples attest, compliance starts at the top and works its way down to each and every distributor. Shoddy compliance practices can result in substantial compliance headaches and can even get a company shut down. Investigations, inquiries, and suspicion will directly influence the productivity of the company’s field force and staff. A full-blown compliance investigation will negatively impact the company’s bottom line and its ability to provide quality products and a viable opportunity..
Smoothly working compliance procedures, on the other hand, guarantee an atmosphere that maximizes every distributor’s capabilities, and a long-lasting opportunity for years to come.
The goal of direct selling and network marketing companies is to create happy customers who repeatedly buy their products. One key to generating a loyal customer base is a happy sales team. In order to remain happy (and productive), distributors have to feel confidence in their company.
The best way to avoid potentially devastating scenarios is education: education of the owner as he develops his business model; and education of the distributors, which begins with providing them with training sessions describing the company’s policies and procedures and compliance requirements. This flow of vital information is what insures the protection and confidence necessary for a company to flourish.
Another important factor affecting the running of an effective compliance department is documentation. The compliance coordinator must keep impeccable records of contacts and discussions regarding all issues that circulate through the department.
Who spends the time becoming familiar with the regulatory laws and changing specifications and is adept at communicating this information to a company and its distributors? Since every company’s compliance needs are unique to that company, no standard formula can be applied to every company. A knowledgeable compliance consultant who is up to date on the newest and latest changes in regulatory guidelines is invaluable.
Taking the initiative to employ such an expert early on will establish such a solid foundation for a company that the ongoing monitoring will become part of the working fabric of the company. Distributors will understand the procedures they must follow and the standards against which they will be evaluated. Questions can be more readily addressed and answered.
Companies must play by the rules—or, if they don’t, learn to live with the consequences. The bottom line to compliance is this: when federal and state regulators are happy, everyone’s happy.
Since 1991, DONNA MARIE SERRITELLA
has worked with over 100 direct selling companies
providing startup consultation, compliance
department setup, and ongoing monitoring.