Responding to a request by Congress, the U.S. General Accounting Office (GAO) examined various issues associated with the regulation of franchises and business opportunity ventures and prepared a report on its findings. The new report builds on the GAO's 1993 report addressing enforcement of the franchise Rule by the Federal Trade Commission (FTC) and discusses various matters pertaining to franchise relationship issues. This special Franchise Handbook Series looks at the findings of the new report.

All eight business opportunity regulatory officials who responded to the FTC survey reported that the agency's overall communication and enforcement coordination efforts for the years 1998 through 2000 were effective.

Specifically, five officials reported that FTC's efforts were "very effective," and the other three officials reported that FTC's efforts were "somewhat effective."

One state business opportunity regulatory official commented that informal communication and joint enforcement actions have been highly useful in promoting effective communication and networking opportunities.

The majority of the state business opportunity regulatory officials contacted have participated in annual law enforcement summits, monthly conference calls and joint FTC-state law enforcement actions-all of which facilitate communication and coordination.

In comparison with the state business opportunity regulatory officials, state franchise regulatory officials contacted by the agency viewed FTC's communication and coordination efforts as being less effective.

Specifically, five of the nine state franchise regulatory officials contacted viewed the agency's communication and coordination efforts as being "somewhat effective," and the remaining four viewed FTC's efforts as being "not effective" because of their limited interaction with FTC on franchise issues.

One franchise regulatory official commented that since annual summits and monthly conference calls focus primarily on business opportunity issues, they are generally not effective in assisting officials who enforce state franchise laws.

In general, the survey indicated that state franchise regulatory officials are interested in more interaction with FTC. Among the suggestions were:

The survey of state regulatory officials showed that support for FTC to perform reviews of disclosure documents is mixed. While a majority of the business opportunity officials who responded to the survey favored such a move, most of the state franchise regulators saw no need for FTC to review disclosure documents.

Specifically, FTC asked state business opportunity and franchise regulatory officials in the nine states that have both business opportunity and franchise disclosure laws whether FTC should review all or a random sample of disclosure documents for accuracy and/or completeness.

The survey results show that of the eight state business opportunity regulatory officials responding, five favored FTC performance of such reviews. Two responded that disclosure document reviews should be left to state agencies, and the remaining official expressed no opinion.

Of the nine state franchise regulatory officials who responded to the FTC survey, two said that the agency should perform such reviews, five stated that disclosure document reviews should be left to state agencies, and the remaining two officials expressed no opinion.

According to FTC staff members, the agency has neither a mandate nor the resources to review randomly selected or all disclosure documents. The staff members further stated that because selected states already review disclosure documents, requiring FTC to perform such reviews would be costly and consume resources that could be better spent on other law enforcement activities.

An official representing the North American Securities Administrators Association (NASAA) commented that state governments are generally better prepared to perform disclosure document reviews than is the federal government (in the form of the FTC).

Several years ago, NASAA implemented a project to coordinate and streamline the franchise disclosure registration and review process. Eleven of the 12 states that require registration of disclosure documents and perform disclosure document reviews have been involved in the coordinated review project.

The project was designed so that franchisors could register their disclosure documents in some or all registration states at one time-something that would not be mandatory but could be done at the option of the franchisor.

The project was based on the premise that most franchisors do not mind responding to state franchise examiners' comments regarding disclosure documents, but they want assurances that a disclosure document approved in one state will be approved in another.

Disclosure documents approved through the review process are deemed to be in compliance with franchise disclosure laws in the states conducting the coordinated reviews. Therefore, except for California (the only review state not participating in the process), NASAA would deem the approved disclosure documents suitable for submission to franchisees nationwide, including those in states with no franchise disclosure laws of their own.

Completed since the time the GAO report was written, the program is now known as CR-Fran, or coordinated franchise review. It allows a franchisor to register its franchise offering in two or more states at the same time in a procedure that promotes uniformity in the registration and review process.

As of 2004, eleven states that require presale registration of franchise offerings were participating in coordinated franchise review. Initial franchise registrations are eligible to participate in coordinated franchise review, so long as the applicant intends to file in two or more of the participating states.

Although renewal registrations and amendments of existing registrations are not currently eligible for coordinated franchise review, these registration filings may become eligible in the future.

The extent and nature of franchise relationship problems are unknown, because the FTC, franchise trade associations and state regulatory agencies do not have readily available, statistically reliable data that would indicate the scope of such problems. That is, the data available are not systematically gathered or generalizable.

Based on the data it has collected, FTC recognizes that some franchisees experience franchise relationship problems or are otherwise dissatisfied with their franchise purchase.

FTC staff members maintain, however, that the data the agency has compiled, while not comprehensive, suggest that franchise relationship problems are isolated incidents and are not prevalent across all franchises.

Various franchise trade association officials pointed to indicators or anecdotal information to support their views regarding franchise relationship problems, but none had any statistically reliable data on the extent and nature of those problems.

Further, selected state regulatory officials did not have readily available, statistically reliable data on the extent and nature of franchise relationship problems.

It may be possible to collect empirical data on this subject through a study of franchisors and franchisees, but there could be limitations to obtaining it, as well as cost and time considerations.