Subject: 16CFRPart436 ---Franchise Rule Comment

This comment is directed to the creation of the term :franchise Seller" and how that category of person fits into the definitions later used in the Franchise Disclosure Document.

Proposed Section 436.1(h) introduces the concept of combining the current terms "franchisor" and "franchise broker" into a single concept so that it is clear that the obligation to furnish franchise disclosure documents refers to both. The concept goes further in that it makes sales representatives and agents as well as franchisor's employees obliged to furnish disclosures. We totally agree with the concept that irregardless of who makes the sale of the franchise, someone should be responsible for providing adequate disclosure to the prospective franchisee on a timely basis.

Our concern is that the term "franchise broker" does not disappear in the Franchise Disclosure Document. Item 2 requires the disclosure of a specific list of persons and "franchise brokers" including information about each person as described in Item 2. Interestingly, while it includes "franchise brokers" it does not include the franchisor's employees such as sales representatives and agents actually involved in the sale unless they are one of the persons specifically listed.

Moreover, the issue is (a) what is a "franchise broker"; and (b) who should be disclosed in Item 2. Section 436.1(h) defines a third party broker as one who offers for sale, sells, or "arranges" for the sale of an interest in a franchise. It is the concept of "arranges" for the sale of an interest in a franchise which is confusing and provides the umbrella which causes most third parties who refer prospects to a franchisor to be, currently, a "franchise broker' thereby disclosed in Item 2. It seems to us that the term "arranges" for the sale is undefined and goes well beyond the commonly accepted definition of broker responsibilities.

To understand what a broker does, I attempted to find a common definition of a broker and researched the matter in Section 3 of 12 C.J.S.. That definition makes a distinction between a "broker" and a "middleman" or "finder".

".... there is a well defined distinction between a middleman and a broker.......A middleman is not subject to the rules governing brokers, but is employed merely to bring the parties, who desire to exchange or buy or sell property, and in such transactions his services are not rendered as an agent of either party but he merely puts the parties in a position where they may make their own contracts, and he may later receive a commission from both.

......So, the distinction between a finder and a broker lies within the finder's bringing parties together with no involvement in negotiating price or other terms of the transaction unlike the broker, whose duty it is to bring the parties to an agreement of his employer's terms."

It is our belief that the Proposed Rule blurs the distinction between broker and middleman by focusing solely on whether a commission is received. It brings all third parties who may receive a commision together as "franchise brokers" and we believe that is wrong.Item 2 seems to require that any person who furthers a franchise sale and receives a commission or other consideration if a sale is consummated by the franchisor is a "franchise broker" who must be identified in Item 2, even in the event that person has never received a commission although he has the right to do so. Why does this make a difference? Literally, that will force a franchisor who has a referral agreement with an organization such as Frannet and each of its 57 Associates or with Tom Miller Associates who has agreements with literally hundreds of business brokers each of whom will receive a commission in the event that a prospect referred by any such person ultimately purchases a franchise, to disclose information about each of the hundreds of such people and provide in the UFOC the information necessitated by Item 2. This is cumbersome, could cause the UFOC to be voluminius, and, more importantly, be of no value to the prospective franchisee.

Instead, we believe that there should be 2 classes of third party intermediaries - franchise brokers and franchise middlemen or finders. The former category would include those who have the authority to negotiate price or any other terms of the transaction on behalf of the franchisor, accept funds, and bring the parties to an agreement. The latter would have no such authority, but would merely bring the parties together to make their own contracts, even though, in the event a transaction was concluded, the middleman or finder received a commission as compensation for bringing the parties together and describing briefly the franchisor's business to the prospect. It is our belief that the former is a true "franchise broker" who should be disclosed in Item 2, but that the latter - the middleman or finder -- should not because of the limited role he or she plays in the transaction and the fact that such person is not in an agency relationship with either the franchisor or the franchisee.

Steven A. Rosen
Frannet
650 Sentry Parkway, Suite One
Blue Bell, PA 19422
(610)941 2195
(610)941 2183 (fax)
FCAbluebel@AOL.com