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Government Regulations to Stop Social Media's elite from making Money

It's no secret that advertising, endorsements, and sponsorships attribute to more than 98% of a social Influencers net worth. Influencers the social-media stars courted by fashion, beauty and luxury brands for their legions of internet followers, are attracting a new crowd—regulators. These stars offer their fans on Instagram, Facebook and other platforms what might seem like unscripted glimpses into their daily lives, complete with products and brand mentions—but sometimes without disclosing that companies have paid them in cash, goods or services.

Regulators say such financial rewards—even those given to influencers without explicit demands in return—can run afoul of longstanding rules against deceptive marketing if they aren't disclosed. Authorities in the U.S., the U.K., France and elsewhere are policing social media to ferret out potential offenders.

The Federal Trade Commission in September sent warning letters to 21 social-media influencers asking them to disclose any financial arrangements with brands mentioned in recent posts on Instagram.
Supermodel Naomi Campbell and “Pretty Little Liars” actresses Shay Mitchell and Lucy Hale, as well as bloggers and reality-TV personalities, were among those contacted by the FTC.

“There are tons and tons of endorsements out there,” said FTC attorney Michael Ostheimer. “Some people are making adequate disclosures. Some are not.”

With consumers’ eyeballs increasingly directed to social-media networks, brands are intensifying efforts to woo influencers with perks and cash. In return, brands expect influencers to trumpet them to followers, who can number in the tens of millions.

Brands and influencers also have agreed on so-called affiliate marketing services, which allow influencers to earn commissions based on the traffic or sales that they drive from their blogs and social-media accounts to companies’ e-commerce operations.

The FTC letters and responses were reviewed by The Wall Street Journal. Several influencers said they were unaware that their social-media posts risked violating deceptive-advertising rules.
Ms. Mitchell, in a response to the FTC through an attorney, said she was “under the impression that a clearly articulated ‘Thank you’ would satisfy applicable FTC requirements” to disclose her relationship with Epic Road, a luxury travel company she mentioned in recent posts. Ms. Mitchell said she received travel services from Epic Road in exchange for social-media posts mentioning the company, according to her response. The FTC says that merely writing “thank you” to a brand in a post isn’t enough to show clearly that an influencer may have received something free from a company.

Influencers like Rachel Parcell, a Utah-based fashion blogger, gained fame on the internet through blogs and social media, where they discuss cosmetics, fashion, luxury and lifestyle brands. Ms. Parcell, whose blog is called Pink Peonies and whose Instagram account has 942,000 followers, got a letter from the FTC questioning several posts, including one mentioning the Monarch Beach Resort in Southern California.

Ms. Parcell responded that she received a free night’s stay and four discounted nights at the resort in exchange for six Instagram posts. “At the time of these posts I did not understand that receiving free or discounted accommodations at a resort created a material connection requiring disclosure,” Ms. Parcell wrote. Monarch Beach Resort didn’t reply to requests for comment.

Sometimes influencers praise a product without receiving a financial reward. Ms. Campbell, in a response to the FTC from her attorney, said she had no financial ties to Globe-Trotter, a luxury luggage brand she mentioned in a post.

In June, Ms. Hale tagged a photo of herself on Instagram—where she has 19 million followers—holding a Fendi bag at a polo event sponsored by champagne maker Veuve Clicquot. “Beautiful day in Jersey overlooking NYC for the @veuveclicquot classic,” she wrote.

FTC lawyers sent the “Pretty Little Liars” star letters wanting to know if she had any kind of financial relationship with Fendi; the agency didn’t ask about Veuve Clicquot.

Veuve Clicquot hired Ms. Hale to host a live webcast of the event and arranged for Fendi to lend her the bag that was visible in her Instagram post, according to a spokesman for the brands, both owned by LVMH Moët Hennessy Louis Vuitton SE. “She was not obligated under any agreement to carry the bag or to post about it,” the spokesman added.

In a letter to the FTC, Ms. Hale’s lawyer denied she was a marketer or endorser for Fendi. Still, “she has volunteered in good faith to delete the posts and apologizes for any confusion they may have caused,” according to a copy of the letter reviewed by the Journal.

FTC officials say that merely tagging a brand or business on social media is a form of endorsement that falls under its purview. Disclosure should happen, the agency says, if an audience would view an endorsement differently knowing that an influencer had financially benefited from the brand. While the FTC doesn’t dictate the exact wording for disclosures, it says influencers can write “#ad” or “#sponsored” in a social-media post to indicate a business relationship.

The FTC is acting beyond the world of fashion and luxury. In September, it reached a settlement with two influencers who promoted an online gambling service on social media without disclosing that they owned the company.
The agency can order brands and endorsers to surrender money made from deceptive marketing practices. To date, it has decided against using that authority in enforcement actions involving influencer marketing, the FTC’s Mr. Ostheimer says. Consumer advocates say that needs to change. “Until there are actual consequences for breaking this rule, I don’t think people are going to take it seriously,” says Kristen Strader of Public Citizen, a consumer-advocacy group.

To make disclosure easier, Instagram this summer rolled out a template for influencers that places the label “paid partnership” on top of a post.
Mr. Ostheimer said the label isn’t particularly noticeable to a reader and that he has “significant doubts” about whether the Instagram disclosure was enough.
Jessica Gibby, a spokeswoman for Instagram, said the template should offer “a consistent look and feel for branded content on the platform, which is good for every Instagrammer.”