Enforcement of SEC Rule Threatens MDF Dollars

A fair number of channel chiefs have become concerned over an increasingly stringent interpretation and enforcement of a Securities and Exchange Commission rule that affects how companies can distribute their market development funds (MDF).

For many solution providers, MDF is a crucial lifeline that allows them to fund their own marketing efforts using monies from vendors. For example, many solution providers might take clients to a ball game and have that activity funded by a vendor that gets a few minutes of meet and greet time with the solution provider’s customers.

But according to the new SEC rules, companies will no longer be able to treat that as an expense they can write off. Instead, they will have to record that spending against deferred revenue. The only way around this rule appears to be if the vendor decides the distribute MDF dollars through a third-party not directly involved in the transaction.

This would essentially rule out using distributors to funnel MDF dollars to solution providers, but would permit vendors to hire conference companies to create an event for solution providers that then could be treated as an expense (full disclosure, Ziff-Davis, the parent company of Channel Insider, runs events and conferences).

This may sound a little arbitrary given that the rule as been on the books for awhile now but not strictly enforced. However, Websense chief financial officer Douglas Wride reports that the rule, written by lawyers with little business experience or any direct relation to the channel, is now beginning to be enforced by auditors.

There’s nothing like a rule being enforced to change the behavior of vendors, so solution providers might want to start gearing up for a new set of approaches for indirectly tapping the MDF coffers of vendors that is likely to prove to be more cumbersome and extended.

Naturally, vendors are lobbying to get this SEC rule relaxed, which like many recent SEC regulations was a legitimate attempt to curb abuses of the MDF process in the name of better financial governance. But that misguided effort is also likely to choke off much of the financial air supply that many solution providers count on to fund their marketing and sales efforts.

So while the rule is well intentioned, it takes a pretty draconian approach to solving the problem of people abusing MDF monies to fund all kinds of activities that may have noting to do with actually developing a market.

Ultimately, the SEC needs to come up with clear rules about how and when to apply MDF money while still giving the vendors some level of control over how those dollars actually get spent. Without that level of control, chances are vendors are going to find other things to do with their money besides putting it into an MDF kitty.

And if that actually happens, everybody in the channel loses.