Lusthaus Law recently provided a high-level overview of the Model Franchise Broker Registration Act, which was proposed in May 2024 by the North American Securities Administrators Association (NASAA).
Our clients and readership requested that we launch into a bigger discussion about NASAA, the Act and how it could impact franchises. We don’t want to keep our audience waiting…
What is NASAA?
NASAA is a membership organization comprised of securities regulators (which includes franchise regulators) in the United States, Canada and Mexico.
According to its website, NASAA is the “oldest international investor protection organization with a membership consisting of 68 state, provincial and territorial securities administrators.”
NASAA members have a “multifaceted mission of protecting investors from fraud and abuse, conducting investor education, providing guidance and assistance via the established regulatory framework.” Carrying out this mission ultimately helps drive the economy.
The inception of NASAA antedates that of the Securities and Exchange Commission (SEC). As per its site, NASAA prides itself on advocating for the protection of investors, “especially those who lack the expertise, experience and resources to protect their own interests.”
NASAA’s Relationship with Franchisors
NY franchisors in particular should familiarize themselves with NASAA, since franchisors are required to register their franchise offerings with the NY Department of Law. This can be done electronically through the NASAA Franchise Electronic Filing Depository (FRED).
Understanding NASAA’s Authority
NASAA does not have direct enforcement authority itself. Instead, NASAA coordinates and supports the enforcement actions of its member agencies. These member agencies have the authority to enforce securities laws (e.g., franchise laws) within their respective jurisdictions. NASAA facilitates cooperation among these regulators, provides training and resources, and promotes best practices in securities regulation.
States and provinces ask NASAA for guidance and it prepares model legislation, for example, which can be adopted wholesale, partially or in a modified form. A recent example is the Model Franchise Broker Registration Act.
Basics of the Model Franchise Broker Registration Act
NASAA has noted that franchise brokers have been the subject of complaints, “including allegations of misrepresentations, hard sell tactics, and confusion about their role.”
Franchisors traditionally hire brokers to help develop the franchise system and expand into new territories, particularly by pairing them with qualified, prospective franchisees. But few franchise rules govern the actions of franchise brokers. New York and Washington are the only states that require franchise brokers to register with a state franchise administrator (the attorney general). For context, franchisors are required to register with franchise administrators in 15 states.
NASAA proposed the Model Franchise Broker Registration Act in May and described its objective of reining in irresponsible and unethical practices: “The Franchise Broker Act is loosely based on Washington State’s current franchise broker registration requirements and incorporates elements of broker-dealer and securities salesperson requirements.”
The proposed act addresses prohibited practices, disclosure obligations, and recordkeeping obligations for franchise brokers.
Public comment on the proposed act closed in June and may be submitted for approval to the NASAA membership, which includes various franchise stakeholders. Read the full text of the proposed Act.
How This Act Could Impact Brokers
Should the Act pass, state legislatures could use the act as a template for adopting their own rules to curb the negative impact of franchise brokers. It includes provisions to prevent fraudulent and manipulative practices. For these reasons, in addition to the fact that they should act ethically to begin with, brokers should review their processes to ensure they operate in a transparent and fair manner.
Franchisors and franchisees should speak with a NY franchise lawyer to help understand their relationships with franchise brokers and consultants. Franchise brokers and consultants are also encouraged to reach out to Lusthaus Law to learn more about their potential legal requirements.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
