Legal Regulations That Apply to Your MDF Program
Important regulations that will impact your MDF program: Before we get into what these regulatory issues are, I’d like to say that I am not a lawyer, however these are real world examples and understanding of how these regulations can and should be applied. I have also never seen two companies who interpret them the same way, so in the end, your own finance or legal departments are the real arbiters of this. My goal in this last section is to make you aware of what the rules really are and what they might be so you know when you're designing a program, or before you launch a program, how you should apply them.
Here are essentially the four components or four regulatory considerations that every channel marketer needs to know (particularly those around MDF): The Robinson-Patman Act, Sarbanes-Oxley, Foreign Corrupt Act, and GDPR. My intent here is to give an overview of what these are and how they each impact your program.
Starting with the Robinson-Patman Act: It has been administered by the Fair Trade Commission, and it is part of a broader Act to make sure that there is no price discrimination between channel partners of different sizes. Back then it was likely Sears and Montgomery Wards, laughable by today's standards, where the big retail people and mom-and-pop shops in town are feeling pressured because Sears and Wards could drive them out of business with their preferred pricing. The law was intended to help mitigate that, and other companies figured out that co-op or MDF programs was a way around that, because we're not giving them a price discount, we're giving them promotional allowances.
The Robinson-Patman has an extension of it that particularly addresses promotional allowances. The basis of it is that all competing resellers must be offered similar programs on a proportionally equal basis. This means, essentially, that in theory there are ways around it, but you cannot offer MDF to just some partners and not to others. That, in a sense, is price discrimination, and there are suits against that. Now break that down, look at "Competing resellers," because that's a mouthful, and implies that the ultimate end user has equal access to different resellers or segments.
That might have been true back in the days of Sears and Montgomery Wards versus mom-and-pop who were also in town, but right now if they're not competing, you could offer unique programs. If you have government resellers and you have corporate enterprise resellers, they aren't going after the same customers, so they can have completely different programs in that context. So there are ways around this. "Proportionally equal" does not mean "Equal." Programs can vary by sales, number of locations, number of certified personnel, any criteria, and it does not have to just consider MDF.
If there are other financial benefits that you are offering partners, "Proportionally equal" means the sum total of financial benefits offered, not just MDF. Also, the "Offered" component is a grey area, because it doesn't necessarily mean "Promoted," it just means offered, so you can selectively over-promote your programs to certain partners. To that end, "Similar" doesn't mean "Identical," which we’ve also addressed, so there are ways around that.
The second is Sarbanes-Oxley (SOX), brought on by Enron and WorldCom, who basically misreported and overstated their earnings. Much of which went to various incentives, and hence, the marketing expense versus Contra revenue classifications. This is one of the regulations that most clients are most confused about. In general, I prefer that all promotional allowance programs be classified as Contra for a variety of reasons, however there are a lot of marketers who want to put their programs in the Opex category.
For your promotional allowance programs to be classified as Opex, all of the following conditions must exist. The payment, meaning the reimbursement for the activity, covers a service to the partner that offers a clear benefit to you, but is separated from the sale of the product. That benefit can be purchased by you from a source other than the partner, which is important. The ramifications of that are key. For example, you can buy a newspaper ad, your partner can buy a newspaper ad. But because it can be purchased separately by you and from the partner, it qualifies as being an operational expense in that context, and that you've obtained proof of performance as to what the reasonable estimated true cost of that activity is. Hence, the aforementioned newspaper ad, that cost should be, whether it was purchased by the partner or whether was purchased by you, essentially around the same value. Which means the partner can't mark up that cost for any one of a number of different reasons.
So within that, and within the typical kinds of MDF activities that those fund, there are things that clearly fall within marketing expense, and the things that fall outside marketing expense, because they cannot qualify for Opex criteria. Typically, the lines or the activities that we might see in Contra revenue might either be incentive-type programs or sales enablement kinds of programs. Whereas on the Opex side would be the kinds of typical marketing expenses that you would see or incur for advertising or lead generation. This should really be the basis for how you divide your expenses. Even so, the impact of that is very significant, because to qualify for Opex, you need all of the receipts from the third party costs focusing on that. So the back end administration if you were to ever get audited is much more cumbersome, because more liberties can be taken when your programs are entirely Contra-funded in that example.
Finally we have the Foreign Corrupt Protection Act, which is one within the MDF world, and has really impacted a lot of global marketers as of recent. There's been a lot of suits out against a lot of global business-to-business marketers. Essentially it is designed to prevent bribery of public or commercial officials to gain a competitive advantage. This is something that's more common in, let's say underdeveloped countries than in North America or Europe.
"Bribe" being a very loosely-defined term in this context because if you were to pay for travel or meals or Christmas gifts, or anything along that line, those can all be constituted as a bribe. If a partner takes your MDF and uses it to bribe an official, it is incumbent on you to know how your money is essentially being spent. So under mitigating risks, never pay a third party and always ask for legitimate receipts. If you don't reimburse it 100%, that further distances yourself. Don't pay for travel or gifts, don't prepay for activities, and be sure to pre-screen your partners.
So in summary there are four regulations impacting MDF programs, and it's important that you understand them so you can avoid legal issues. Individual companies vary in their approach on how to mitigate these, and you should consult with them before you launch a new program.
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