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Franchise Rule Changes In Effect;
NASAA Speaks On July 1, 2008, the Uniform Franchise Offering Circular (UFOC) passed into franchise history. The Franchise Disclosure Document (FDD) officially replaced the UFOC as the disclosure document to be used for all franchises sold in the United States under federal and state franchise laws and regulations. Use of the UFOC for new disclosures is prohibited under the Federal Trade Commission’s revised Franchise Rule (16 C.F.R. Part 436). In a rare showing of regulatory harmony, the North American Securities Administrators Association Franchise Committee, the representative body of state franchise regulators, published its final recommendations on state franchise regulations on June 30. The case material is available at www.nasaa.org/content /Files/ 2008UFOC.pdf. The regulators provided some additional guidance on the ancillary forms and filings that are needed for franchise registration, as well as their interpretations of the FDD format instructions of the Federal Trade Commission. Combined with the FTC’s Compliance Guides and updated list of Frequently Asked Questions, all of the anticipated regulatory guidance for FDD drafting has now been published.

Notably, the NASAA publication has simplified the filings for franchise sales people and eliminated their birthdates, home addresses, home telephone numbers and social security numbers from the public record filing. That change will substantially reduce the risk of identity theft from these documents. However, NASAA indicates that franchisors should update their registered list of franchise sellers monthly as the roster of franchise sellers changes.

Public Company Franchisors May Need to Add to FDD Financial Statements Public company audit opinions published in public company disclosure documents filed with the Securities and Exchange Commission are more complex under new rules enacted with the implementation of Sarbanes-Oxley legislation (SOX). Management is obligated to establish and maintain adequate internal control over financial reporting, among its other responsibilities under SOX. There are suggested frameworks for review of this obligation and publication of the results of that review in an annual report. These disclosures are found at Item 9A of Form 10-K. The auditors have the option of including their comments on management’s annual report on internal control over financial reporting in their audit opinion or in a separate opinion. At least one Big Four accounting firm is requiring its audited franchisors to include in their Item 21 Financial Statements not only the audited financial statements and related audit opinion, but a copy of Item 9A from the franchisor’s Form 10-K. This goes beyond the mandates of the FTC and the states, but the FTC has made clear in the Statement of Basis and Purpose published with the revised Franchise Rule that it defers to the SEC on matters of accounting and public company compliance.

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