CALIFORNIA SENATE BILL 919 HIGHLIGHTS WHY FRANCHISE CONSULTANTS/BROKERS SHOULD BE LICENSED AND REGULATED.

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Franchise broker licensing requirements are becoming a critical topic as the new California franchise law (SB 919) set to take effect in 2026 aims to regulate franchise sales and broker misconduct. Testing and licensing for franchise brokers and mandatory insurance will protect prospective franchisees and enhance transparency in franchise transactions. These regulations highlight the need for ethical standards in franchise consulting and sales.

 

CALIFORNIA SENATE BILL 919 HIGHLIGHTS WHY FRANCHISE CONSULTANTS/BROKERS SHOULD BE LICENSED AND REGULATED.

 

By FMM Contributor

 

The franchise industry plays a pivotal role in the U.S. economy, offering entrepreneurs a structured pathway to business ownership. However, the integrity of this model can be compromised by franchise consultants and brokers who engage in unethical practices. Implementing mandatory testing, licensing, and insurance requirements for these professionals is essential to uphold ethical standards and protect prospective franchisees.

 

Evidence of Broker Misconduct in Other Fields

Broker misconduct in other investment fields has been documented across various sectors. For example, the Financial Industry Regulatory Authority (FINRA) has identified financial advisors & brokers with significant histories of misconduct, leading to the adoption of rules to mitigate such risks. These rules empower FINRA to impose conditions or restrictions on brokers and require firms to implement heightened supervisory procedures. While this pertains to the financial industry, it underscores the necessity for regulatory measures to address misconduct. This principle is equally applicable to franchise brokers.

 

California’s Legislative Response

Recognizing the potential for abuse, California enacted Senate Bill 919 (SB 919) on September 24, 2024, amending the state’s Franchise Investment Law to regulate franchise brokers and sales organizations. Set to take effect on July 1, 2026, or one year after the legislature authorizes funding, whichever is later, SB 919 introduces several key provisions:

 

  • Registration Requirements: Franchise brokers must register annually with the California Department of Financial Protection and Innovation (DFPI) before offering or selling franchises

 

  • Disclosure Obligations: Brokers are mandated to provide prospective franchisees with comprehensive disclosures, including any fees and the nature of their compensation, ensuring transparency in the franchise sales process.

 

  • Recordkeeping and Prohibited Practices: The law imposes specific recordkeeping requirements and delineates unlawful actions by franchise brokers, aiming to prevent deceptive practices

 

The Case for Testing, Licensing, and Insurance

The introduction of SB 919 highlights the importance of regulating franchise brokers. Mandatory testing and licensing ensure that brokers possess the necessary knowledge and adhere to ethical standards, enhancing the quality of service provided to prospective franchisees. Requiring brokers to carry insurance would offer financial recourse for franchisees harmed by broker misconduct, fostering accountability within the industry.

 

Conclusion

The franchise sector’s success relies on the trust between franchisors, brokers, and franchisees. Implementing stringent regulatory measures, including testing, licensing, and insurance requirements for franchise brokers, is crucial to maintaining this trust and protecting all parties involved. California’s SB 919 serves as a progressive model, underscoring the need for comprehensive regulation to uphold the integrity of the franchise industry.

 

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This article was researched, outlined and edited with the support of A.I.

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