Content area
Full Text
In our previous article in this Journal,1 we provided a Top Ten list of the highlights of the Federal Trade Commission's revised Franchise Rule (16 C.F.R. Part 436-Disclosure Requirements and Prohibitions Concerning Franchising) (the New Rule), which replaces the original 1978 Franchise Rule (the Old Rule). This article is a more comprehensive overview of the New Rule and its implications for the franchise industry. It is assumed that the reader is generally familiar with the Old Rule and the Uniform Franchise Offering Circular (UFOC).
Effective Date
The New Rule was promulgated on January 23, 2007. In an effort to ease compliance burdens via a phase-in process and to coordinate implementation with state franchise administrators, the FTC delayed the effective date of the New Rule. Franchisors are allowed to begin compliance with the New Rule and initiate use of the mandated disclosure document (Franchise Disclosure Document or FDD) as early as July 1, 2007, but no later than July 1, 2008. A franchisor must adopt the FDD and the requirements of the New Rule in their entirety and cannot select portions of the New Rule (except for electronic data disclosure, as noted below) while retaining other provisions of the Old Rule or the UFOC.
Efforts by the FTC and state franchise regulators to coordinate the implementation of the New Rule culminated in the adoption of an interim policy, entitled "Instructions for Filing a Uniform Franchise Registration Application Using the 'New FTC Franchise Rule' After July 1, 2007," by the North American Securities Administrators Association, Inc. (NASAA) on June 22, 2007.2 The NASAA policy essentially adopts the New Rule in its entirety, including the format of the FDD. The NASAA policy adds an additional FDD cover page, which basically includes several warning legends, possible risk factors, and other information.3
In addition, nothing in the New Rule prohibits state franchise regulators from prescribing additional disclosures for the FDD or mandating other requirements. The New Rule follows the preemption policies established by the FTC in the Old Rule:
The FTC does not intend to preempt the franchise practice laws of any state or local government, except to the extent of any inconsistency with this Rule. A law is not inconsistent with this Rule if it affords prospective franchisees...