June 1, 2010 – Responding to requests from several Members of Congress, the Federal Trade Commission (FTC) has delayed enforcement of its “Red Flags Rule” through Dec. 31, 2010, while Congress considers legislation that would refine the scope of entities it covers.

The core of the issue is the FTC’s interpretation of the Fair and Accurate Credit Transactions Act (FACTA). The FTC has argued that FACTA applies to lawyers and other professional “creditors.” The FTC is charged with promulgating a rule requiring “creditors” to develop programs identifying, detecting and responding to the warning signs ("red flags") of identity theft.

The American Bar Association (ABA) has sued the FTC, arguing that imposing the identity theft rule requirements on its members is arbitrary, capricious and has no legally supportable basis. In October 2009 the court ruled that the FTC had overreached and that applying the rule to lawyers was unreasonable. The FTC has said it will appeal the decision.

The ABA filed its suit in August 2009 as part of a three-pronged effort to block the rule’s application to the legal profession. Legislative efforts include a request to the FTC that it delay enforcement and pending legislation (HR 3763 was unanimously passed by the House of Representatives on Oct. 20 and is awaiting Senate action).

The pending legislation excludes from the meaning of “creditor” any health care practice, accounting practice, or legal practice with 20 or fewer employees. The bill also excludes any other business that the FTC determines: (1) knows all its customers or clients individually; (2) only performs services in or around the residences of its customers; or (3) has not experienced incidents of identity theft, and identity theft is rare for businesses of that type.

The State Bar of Wisconsin has joined with the ABA and nearly 30 state and local bars in opposing application of the rule to the legal profession. The FTC has responded with several enforcement policies delaying enforcement of the rule, including the most recent announcement to allow Congress time to finalize the legislation.

The FTC also urged Congress to act quickly to pass legislation that will resolve any questions as to which entities are covered by the rule and obviate the need for further enforcement delays.

“Congress needs to fix the unintended consequences of the legislation establishing the Red Flags Rule – and to fix this problem quickly. We appreciate the efforts of Congressmen Barney Frank and John Adler for getting a clarifying measure passed in the House, and hope action in the Senate will be swift,” FTC Chairman Jon Leibowitz said. “As an agency we’re charged with enforcing the law, and endless extensions delay enforcement.”

In the interim, FTC staff has continued to provide guidance, including through materials posted on www.ftc.gov/redflagsrule.

By Tom Solberg, Public Relations Coordinator, State Bar of Wisconsin

Related Articles:

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

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

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

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

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