On December 17, DSA President Joe Mariano, Executive Vice President Adolfo Franco and Associate Legal Counsel John Webb met with representatives of the U.S. Securities and Exchange Commission (SEC) to discuss a recent Investor Alert on pyramid schemes masquerading as legitimate direct sellers. 

DSA viewed this as an opportunity to constructively reengage the SEC (the industry has had periodic discussions with the Commission over the years) and also raise some concerns DSA has about the wording of the Investor Alert.  The representatives with whom we met included Lori Schock, Director of the Office of Investor Education and Advocacy, Owen Donley, Chief Counsel of the Office of Investor Education and Advocacy and Holly Pal, Counsel, Division of Enforcement.  Brian Privor, Senior Counsel in the Division of Enforcement, also attended but listened and did not actively participate in our discussions.

As reported previously, the Alert was issued in response to two recent pyramid schemes prosecuted by the SEC.  While DSA applauded the SEC’s explicit reaffirmation of longstanding precepts of law, regulation, and common business practices by concluding “multi-level marketing” is a legitimate way to buy and sell products; other aspects of the Investor Alert were of concern as the Alert characterized sales to non-participants and “buy-ins” unartfully and inaccurately (See attached earlier memo on concerns about the Alert.)

Joe provided a detailed overview of DSA’s rigorous self-regulation and high industry ethics and business standards as well as its positive economic impact for the American economy.  Following that presentation, a discussion ensued on the text of the Alert and how aspects of the language used were not precise or could lead to misinterpretation.  We underscored that these concerns were not simple questions of semantics but explained how the Alert could be and has been used to undermine legitimate direct selling. The SEC officials were genuinely interested in our perspective, took copious notes and were most interested in learning more about our self-regulatory efforts, including the 90% buyback provision.

We were also informed that representatives of Pershing Square Capital Management had also recently communicated with these same officials about the language of the Investor Alert, specifically enquiring about the SEC position on sales to non-participants.  From our discussions we learned that Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer of Pershing Square Capital Management is also a member of the SEC Investor Advisory Committee – a body created under statute to advise the Commission on various issues, including regulatory priorities, trading strategies, and the integrity of the securities marketplace.  Additionally, the SEC officials reported that while they had received several inquiries from interested parties purportedly representing the direct selling industry in response to the Investor Alert, they had detected no discernible public reaction to the release.

The SEC officials reiterated to us (and they reported, to the Pershing Square communicants) that the Investor Alert was in response to the two recent prosecutions of pyramid schemes masquerading as legitimate direct selling companies and that the Alert is not a statement of the law nor a legal analysis and is simply meant as an educational tool for investors.  The officials also confirmed that the Investor Alert was not issued as a consequence of a surge in complaints about pyramid schemes.  The SEC agreed to send a letter to DSA explaining the limited nature and purpose of the Investor Alert to make clear it is not a policy statement or legal advisory opinion. 

DSA proposed specific changes in writing to the Investor Alert, and asked that the Commission consider revisions or clarifications.  The SEC representatives indicated they would review DSA’s suggested changes and would also use the voluminous DSA materials provided (including those from DSA’s “very helpful” websites) to inform themselves on the issues presented, but indicated no specific plans to reissue the Investor Alert.

We also raised the question of generally inappropriate and manipulative practices of short sellers and urged the Commission to evaluate these activities.  We cited direct sellers’ experiences as examples of egregious short selling and class action legal actions.  The representatives acknowledged potential abuses.

In closing, Joe invited the officials to participate in future DSA education events, offered the possibility of working with the Direct Selling Education Foundation on public/investor education initiatives, and to otherwise collaborate on matters of mutual interest.  The SEC representatives were enthusiastic about the prospects for cooperation and information sharing, and appeared sincerely appreciative of the industry/Association outreach and eager for further dialogue.  They indicated that while anti-pyramid enforcement action has been and remains an important matter for the SEC, there was no plan for any new initiative or extraordinary action on the matter.  (Of course, specific actions regarding individual alleged violations were not discussed.)

We will continue to keep you informed on our regulatory community outreach activities.