Full Transcript of Risk Radio Podcast with Katie Hass

Katie Hass (KH): Hi, Jerilyn. Thanks for having me.

JTP: Can you tell us a little bit about your role as the Director of the Division of Consumer Protection?

KH: Yeah. So, in the state of Utah, the Division of Consumer Protection is one of several divisions in the Department of Commerce, which is under the governor. We are the primary enforcer of our state’s UDAP statute. That’s the unfair and deceptive acts and practices statute which is our Consumer Sales Practices Act in Utah. And that is the primary statute in which we enforce against deceptive acts and practices in consumer transactions. We have an administrative law function, but we can also, in collaboration with the Attorney General’s Office who represents our agency, bring cases in district court and sometimes federal court, depending on the nature of the case.

JTP: Yeah, quite extensive there. So, a lot of things out of direct selling. I did see a video of you the other day. I don’t know how long ago it was, but it was about a car salesman scam. So, you have quite the array of experience. And super thrilled to share your insights. I’ll try not to rapid fire these questions, but we do have several questions from our listeners I’ll try to get through. So, let’s go ahead and jump in. First, let’s talk a little bit about enforcement trends. What are you seeing the most often right now in the direct selling space?

KH: What I’m seeing the most often in the direct selling space, and I don’t think it’s changed much, but maybe the crackdown on it feels a little bit more intense, is a lot of things about earning statements. And of course, what I would call it the quality or the features of the products being sold. So oftentimes, it’s medicinal purposes if we’re talking about things like essential oils or vitamins or other things like that. But really, the bigger concern oftentimes is the financial harms that come with over promising on what people might be able to earn if they decide to engage in a direct selling practice.

JTP: Absolutely. So how have enforcement priorities shifted over the last 12 to 18 months? I know you mentioned right now that the climate’s very political and lots of things are changing. So, has anything with enforcement changed?

KH: I don’t think the enforcement field has changed that much or that drastically. I think post AMG, we see a little bit of a shift in the FTC. And what I think people are missing is that the FTC is actually doing a lot more to collaborate with states right now to bring joint enforcement actions. And that’s across the board in many different industries, including the direct selling industry. We brought a couple cases here in Utah that were not direct selling but were coaching on how to flip real estate or teaching you to be your own boss in that kind of way. And they over promised on what they were delivering to people as far as that coaching and mentoring if you wanted to get into the practice of flipping homes.

And so, we teamed up with the FTC in FTC versus Zurich and FTC versus Nudge. We were a state partner to bring those actions against some companies that were operating out of Utah in that space. What was helpful for the state is that we also, through that collaboration, learned a lot of things. And now we’re feeling a little bit more emboldened in bringing some of those bigger cases ourselves. And so, it’s been really nice to have that collaboration.

Just working together – because the FTC is reaching out more and more to states to partner with them on some of these bigger cases – allows for a lot of sharing of the load. A lot of our state UDAP statutes also have some significant fines and penalties attached to them. And that has been helpful in bringing companies into compliance.

JTP: Yeah, that’s amazing. It’s great to know they’re not just targeting our industry and social selling, but this across the board. So, what are you seeing for typical triggers on a regulatory investigation? Like, what’s a red flag?

KH: So, red flags for us are if I’m seeing social media posts with a lot of luxury, showing off your earnings, saying it was easy, no work involved to do all of these other things to show that I’m doing incredibly well through what started as a little bit of me just recommending products to my friends. Those overpromises that aren’t truly substantiated. Maybe that person had the good fortune of getting there, but it is not the typical result for most people. Those are triggers.

We’re complaint driven oftentimes at the division. So, somebody comes and complains to us and says, “hey … I didn’t feel like I got what I was promised,” and that kind of triggers a snowball.

But oftentimes, it’s the quality and grade of the product. So, you say that these are the best knives in the world or this essential oil is purely grown out of the country and is sourced from these perfect places, and then we find out it’s not. That can trigger the investigation. And then what ends up happening is those investigations can take on a life of their own. Because once an enforcement agency is in, they want to wrap up all possible things in that company. So, they’re going to start looking at the other things that are typical concerns. For the direct selling space, always those earning claims and the compensation plans are something that we’re curious about and want to know more about. And so, a complaint can trigger that opening, and that’s oftentimes what happens. We can also just see things online ourselves and go, well, that’s weird, and then decide we want to go in.

JTP: Yeah. It’s actually very easy to find.

KH: Yeah. They are. I mean, you’re talking about an industry that, for the most part, is reliant on 1099 independent contractors. Many of them are not in your office day to day understanding the bigger picture, understanding the concerns. They might not even know what the FTC stands for. So, they hear don’t do these things, but then they see a lot of other people out there, maybe even people they’re competing against, marketing themselves in a certain way. And so, it’s natural that they want to mimic what they see other people do that’s successful, and so they start doing it.

And that’s why it’s so important for companies to have compliance programs, but to then actually enforce those compliance programs. It is not enough just to say, “look on paper, we’ve got this compliance program.” That’s great. If you flagged a hundred posts, but then took down none of them, what are you actually doing?

JTP: What’s the follow-up? Right?

KH: Exactly. And so, that follow through to really enforce your policies (is important). And one of the things we’re going to look at too is, are you enforcing your policies the same with the person who just started as compared to the person who’s been there for quite some time and is successful? And I get that sometimes it’s difficult, actually more difficult, to go against the people who’ve been really successful in your business, but it is really important because they model the behavior that you expect everybody else to follow. And so, we absolutely look at that. And those are things we start to really dive into when we’re starting to investigate a case.

JTP: You’re absolutely right. A lot of companies tend to be very biased toward their top distributors because you don’t want to shake any cages, but it’s very important to maintain a full stream of compliance across the board. And I think it really starts with education from the very beginning. Something we’ve noticed is having an educational platform and being proactive with it instead of reactive has been really great for spreading awareness across the board and letting people know that compliance is here to help you. We don’t want to be the bad guys. We want to be the good guys. So, from your perspective, what does a strong, well run compliance program look like?

KH: Well, and I want to be fair, we obviously have a lot of direct sellers in the Utah. And there’s a lot of startup ones. And it’s really hard, I think, in the beginning when you’re just a CEO with maybe a team of two or three other people to be already thinking about compliance. So, it is really important even in the beginning that you start thinking about compliance because sometimes some of those practices get set in place. And then when you go to crack down on your distributors, it becomes really difficult because they’ve grown using the methods that they’ve used, which are arguably deceptive. So, you really want to be careful in the very beginning, even if it’s just you as the one man or one woman shop that you are making sure that you’re modeling the right behavior for your distributors and really working with them to understand what’s good and what’s bad.

In terms of what does a good compliance program look like? As you grow, I think it’s important that your newsletters contain something about compliance, that your compliance team is respected, and that you have the backs of your compliance team members when they reach out to your distributors, so that the field takes it seriously. And that there is follow-up education and follow-up monitoring maybe of those distributors who’ve made mistakes. I also think it’s really important to give good examples versus bad examples.

Most people who come into the direct selling space to do this as a side business maybe do not have a marketing background. So again, they’re going to take what’s already out there that they can see and try to mimic it. So, if you give the examples, like here’s an example of a post that’s done well that we would feel like is compliant, and here are some glaring examples of things not to do. I do think it is it is really helpful for them to have the visual, exact statements that are forbidden, and exact statements that are okay. Those types of things that your lawyers and your compliance team can vet really help people who are just starting out make sure that they’re building from a framework of good practices rather than modeling the wrong ones.

JTP: Absolutely. That’s one of the reasons we at FieldWatch work with startups is because we understand that it’s important to create a foundation of compliance to grow from. We want to grow with your company and make sure you’re starting off on the right foot.

When you do speak to startups, they have a budget for this or that, and they don’t even think about compliance. We stress to them how important it is because if they do get fined right off the bat, since they are small, any type of regulatory penalty might put them out of business. So, it’s just very important for them to understand and have that awareness about the critical nature of compliance. And I think another important factor with that is not just sending out notices, like you said about having a newsletter. It’s not just sending out notices when people are not in compliance but just keeping compliance as part of their everyday life, part of their everyday sales tactics, and part of their everyday social media postings. That way it’s not like, you know, we’re the bad guys coming in to break you down. No, we’re here to partner with you, and be safe.

KH: And one thing I would also caution and remind people about is that a lot of the social media channels now have private groups. So, as distributors grow and they start these kinds of private conversations where they think they can be a little bit freer in what they’re saying, I have a team of really good investigators who can get into those groups and figure out how to find stuff. You just want to be really mindful that private is not private. You might think you’re avoiding the regulators, but we have subpoena power. And we can get those posts from Facebook and other social media platforms. You need to know that it’s not enough just to say, well, “I’m having this in a closed meeting, or it’s only to my team.” It’s still deceptive when you are overpromising to even people on your own teams. And so, you just need to be really mindful that you have to be above board in all things, including private rooms, which are not free from the eyes of regulators.

JTP: Right. You’re absolutely right. And I think a lot of people and companies just don’t know that, and they think, well, this is private. They’re not going to see it. We’ll stay off the radar. And that is just not true. So, I’m so glad you brought that up and mentioned it because there’s so many examples out there where we’ve had to flag it and they didn’t understand how we got in. If we can get in, of course the legal and regulatory bodies can get in. So that’s really good to know. Thank you for sharing that.

Looking ahead, where do you see regulatory enforcement heading in the next few years?

KH: I think there’s more and more focus on earnings claims, and what a true income disclosure statement should look like. Obviously, our federal partner, the FTC, is heavily engaged in that rulemaking as well as other things, but I’d be really watching that and try to get ahead of it.

And so, when you’re saying, “look, I made $1,000 selling this widget last month.” Well, if the party I threw cost me $600, if my Facebook marketing account cost me another $300, and it cost me $100 to do, you know, something else related to buying the product and then reselling it, or if you’re not doing a straight to consumer sale at your party then I didn’t make that money.

If I’m telling everybody I made a $1,000, but really it cost me a $1,000 to make that $1,000 dollars, is that really making a $1,000? I don’t think most businesses would say I made a profit of a $1,000 when they had to spend a $1,000 to make that $1,000. And so, it can feel really good when you’re finally breaking even or even when you make some sales. And maybe you don’t mind the expense of the party because you had all your friends over, and it was a great time, and it was an awesome opportunity to just get together with people. I get it. But if you’re deducting that as a business expense as a 1099 worker, if you’re tracking those things and you didn’t really make that, well, the company doesn’t necessarily know that. But as regulators, we’re starting to really look at that because when we are telling people this is what you could make, they actually have to be able to make that free from most of the normal things that a business would consider the business costs of doing that.

JTP: And outside of the one percent who’s actually making that. Right?

KH: So, yeah. I mean, look at it. They’re very successful in this. I have many products in my office and in my home that come from direct selling companies. There are wonderful, good products out there that this industry provides. And I have a lot of friends who are in this space, who fell in love with a vitamin or something else that really did impact them in a way that they were like, “I want to be sharing this with all of my friends.” And then ended up making money sharing it with all their friends because they love those products. I think that’s fine. I think that people should be rewarded for recommending products that they love. I have the people in my life who do all the research into products that I don’t want to do. When I’m like, I really feel like my vitamin D is down. I have my friend who I call, and I’m like, I need a vitamin D supplement. Which one are you recommending today? Like, what is your favorite? And we all have those people in our lives – the car expert, the technology expert, or whoever it is that we call and we rely on.

It’s great that there’s an industry out there that gives remuneration to the people who actually take the time to do the research and pick the products. I think you’re seeing that more and more in social media too with influencers starting to do that, and I think you’re seeing hybrids in the direct selling space there too. Again, be really careful with that. But so, I think that concept is fine. It’s just the overpromising. And when people have to buy in quite a bit in order to make that money – the large startup costs and the purchasing items – is where I think we as regulators start to get interested and concerned. And states can then independently step in or join in some sort of collaboration to investigate.

And so, keep in mind, you have a couple different things that can happen. A state could come in by themselves. A state could team up with other states in what we call multistate, and then you could have the FTC by themselves or the FTC joining up with states. There’s a lot of regulators out there, and we always get the complaint of, “why us?”

Well, you fell on the radar. And usually, you fell on the radar because it’s something that one of your distributors said. It’s not a radar you want to be on, so it’s really important that you’re making sure your distributors are not out there saying things that you know they shouldn’t be saying. I think in some cases, distributors at the top levels have started to be held accountable for their statements as well.

JTP: We’re seeing that.

KH: And that is really important to keep in mind too. Back to the good model behavior of the top-level people, they really need to make sure that they’re in compliance because I think more and more state and federal regulators are going to start going after them as well because they knew better.

JTP: Yep. I’ve been hearing about a few cases like that. So, keeping the top distributors accountable for their whole downline is super important right now. I don’t want to specifically talk about any of those cases, but you probably know a few.

So, what do they do? If you have a distributor who posts on social media and they’re trying to follow all the rules and they are putting disclaimers like they think they’re supposed to, do those actually work? Do the disclaimers count for anything?

KH: In my personal opinion, not much. Look, how many of us have bought a weight loss program because we saw the picture of the friend who has now lost all the weight? And then, to be honest, the results aren’t typical at the bottom in fine print. Very tiny little letters that say results are not typical. So, no (they don’t count for much). We can put all the disclaimers we want out there. But when you’re bombarded with image after image of success, health, well-being, monetary riches, ease, comfort, luxury, all of those types of things – the little disclaimer at the bottom, I feel like I’m in the Dumb and Dumber show where he’s like, “so you’re saying I have a chance.” This is this is where we’re at.

And so, I think most of us today are bombarded with so many terms and conditions, disclaimers, and long contracts, that, candidly, even though most people are responsible for what they sign, they are clicking through, and the words just don’t have the impact of the images. A picture says a thousand words. So, if you want to put a picture of somebody up there who’s bankrupt and on the streets because they gave away all their money to buy inventory, of course, and say this is also a result, but you’re not doing that.

You’re putting up the people who’ve been incredibly successful at this endeavor or want to at least show that they’ve been successful even if they haven’t, and those little disclaimers are just not doing the trick.

So, if you are saying one thing in the picture, in the image, and everything else, and then the fine print at the bottom is the other, it’s just not on balance, it’s still deceptive.

JTP: That is very good to know. I think a lot of companies have been relying too heavily on that. So, thank you for notating that, and now we know. Could you give us maybe the top two things you would say companies should be doing to prepare for what’s coming next in terms of regulatory rules?

KH: I would start thinking about those income disclosure statements and what an accurate one looks like. I think if the industry as a whole could get to something that regulators would feel comfortable with, that would be great. There’s an argument about whether or not those are even really that effective, but we would need another podcast to discuss that. I think if they’re going to be allowable and you’re going to do them, then you have to outline what a true statement looks like, including things that you would consider business expenses and things that you wouldn’t.

How do you provide an average of what the typical person has to spend. I don’t know. You have to start thinking through that now. I do get the business side of it, that you do not want to scare distributors immediately with a lot of heavy regulation and a lot of changes and all of that. So, if you’re going to have to change your compensation plan at all to get into compliance, if you are going to have to retool those income disclosures, if you’re going to have to start tracking the business expenses, thinking ahead now to what that might look like for your style of company, I think, is a really great way to get ahead.

The other thing that I want to touch on in the few minutes that we have left is that sometimes when these inquiries come in from regulators, they are not taken very seriously at the beginning.

And so, it’s very important that you figure out which agency or state you’re dealing with and if there’s other states or agencies that might be looking at this with them. You also need to be really responsive and have a good open dialogue with the regulator. If I come in, for example, from us, and I see that this was just one or two rogue distributors and you had warned them, taken their posts down, and shut them off because they were repeat offenders, we might be in and out very quickly.

If it is a slog to get information, if we’re seeing more and more problems, if we’re seeing that you’re not even adhering to your own policies, yeah, you’ve got words on paper, but you’re not actually complying with it, the investigation can grow. And so, working with the regulator to make sure that you’re understanding what they’re asking for helps us understand what you’re seeing.

Many state regulators are looking just to get the information that they need in not necessarily an acrimonious way. And one of our fine factors is how well you worked with us to resolve the problem.

And so, we tend to start reducing the fines and penalties in our book if we feel like the company really kind of got what we were concerned about and quickly helped us come to a resolution. And so, it’s just something to think about with your entire team. Because sometimes letters go to the wrong people first, and you don’t want those letters to just be placed on a desk someplace and ignored because they are important when they come in, especially if you’re a small company and you’re not familiar with the process.

JTP: Absolutely. Those are great points. Thank you so much for sharing that because sometimes it’s hard to know where to start. Whether you’re a startup or a bigger enterprise company, you might have to go back and rewrite your whole compensation plan. That’s just something you have to do to stay above the regulatory radar. So those are really great points.

And before we wrap this up, are there any recommendations you have to direct sales companies who might be struggling to find compliance expertise?

KH: Yeah, I mean, I think there are compliance experts out there, but I can understand that it’s a cost that maybe you are not ready to bear.

That said, I would be looking very carefully at some of the settlement agreements that the FTC or other state partners have entered into with direct selling companies, especially those terms and the things that they have prohibited versus the things that they allow. I would also be looking at some of the free things that some of the compliance experts out there have offered, any kind of guidance that you can find, just so that you get your team off on the right foot. Because once your team has a way of doing things, it is very hard to get them to shift, and it causes a lot of pain. And so, to the extent that it’s affordable, getting a compliance team in early, whether it’s internal or external, is really important because it is prolific what can happen on social media. And oftentimes, once those posts are up, it is very hard for people to take them down. And so, if you see something that is troublesome to you, make sure that your people – the distributors that did it – are taking it down and that you have a takedown notice for them to take it down. If they don’t take it down, try to work with a social media company to take it down, and take it down across the platforms that they might be on.

JTP: This has been so amazing. I’m so thankful that you were able to spend some time with us today. I know your time is very precious, so thank you so much for sharing your insights with us. And for all the listeners out there, thanks for tuning in to the new Risk Radio. And don’t forget to like, follow, and share.