By Tom Solberg, State Bar Media Relations Coordinator

Dec. 7, 2010 – Congress has given final approval to a bill (the “Red Flag Program Clarification Act of 2010”) that exempts most lawyers from rules promulgated by the Federal Trade Commission (FTC) requiring businesses to implement a written “Identity Theft Prevention Program” designed to detect the warning signs (a.k.a. "red flags") of identity theft in their day-to-day operations.

The legislation clarifies Congress’ intent that lawyers, accountants, health care and other service providers generally not be classified as “creditors” for the purposes of the Fair and Accurate Credit Transactions Act (FACTA) of 2003. The State Bar of Wisconsin had joined with the ABA and other state and local bar associations in disputing the FTC’s conclusion that attorneys and other service providers are “creditors” covered by FACTA to the extent they allow clients to pay for professional services after the services are preformed.

The bill’s co-sponsors (Sens. John Thune, R-S.D. and Mark Begich, D-Alaska) noted in a statement following the Senate vote that the measure will allow small businesses to avoid “costly and unnecessary measures to prevent identity theft.” Thune added that “"Small businesses in South Dakota and across our country are the engines of job growth for America. Forcing them to comply with misdirected and costly federal regulations included in the FTC Red Flags Rule will hurt their ability to create jobs and continue growing our economy.”

The legislation stipulates, in part, that the term “creditor” refers only to businesses “that regularly and in the ordinary course of business (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, as described in section 623, in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person.” It goes on to clarify that the third item does not include funds advanced on behalf of a person “for expenses incidental to a service provided by the creditor to that person.”

In a written statement, ABA President Stephen N. Zack thanked those responsible for defending the legal profession against what he called unnecessary and unintended regulation.  "Congress acted decisively in passing legislation that clarifies how the Federal Trade Commission should apply the Red Flags Rule. We applaud the leaders of today’s House vote, Reps. John Adler, Paul Broun and Mike Simpson, and welcome President Obama signing this bill into law," he stated.

"We also thank the countless ABA members and state and local bar leaders who advocated on this issue, and the pro bono team of lawyers at Proskauer Rose who led our successful court fight. Together, we all made a difference for the profession."

In addition to urging Congressional action, the SBW, ABA and other professional associations had urged the FTC to delay the rule’s implementation and, six months ago, the agency announced the most recent of five such delays, which was due to expire on January 1, 2011.

The issue also played out in court after the ABA sued the FTC on the grounds that it had exceeded its regulatory authority. In October 2009, U.S. District Judge Reggie Walton of the District of Columbia ruled in favor of the ABA. The FTC appealed and the U.S. Court of Appeals for the District of Columbia Circuit heard that appeal last month. Given this week’s legislative development, the matter will presumably be dismissed as moot.

Lawyers required to protect personal information under new federal rule (April 1, 2009)

FTC delays enforcement of ‘Red Flags Rule’ requiring creditors and financial institutions to identity theft prevention programs (May 1, 2009)

State Bar of Wisconsin and ABA continue to push for exclusion from pending FTC identity theft 'Red Flags Rule' (July 8, 2009)

Help needed with efforts to delay “Red Flags Rule” implementation on August 1 (July 28, 2009)

Bill shielding some lawyers from FTC ‘red flag rule’ headed to Senate (Oct. 27, 2009)

FTC extends “Red Flags Rule” enforcement deadline to Dec. 31 (June 1, 2010)

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