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The broad brush oversight of the Federal Trade Commission’s (FTC) “Red Flags” Rule has sparked plenty of complaint and confusion. As the deadline for mandatory compliance has repeatedly been delayed, the pushback from industries has gained momentum. There have been a growing number of protests that the agency has overstepped its authority by trying to enforce the “Red Flags” regulation on a wide spectrum of businesses. Now, a prominent association is taking the fight to court to win exemption from the FTC’s Rule.

The American Bar Association (ABA) on Thursday asked that the U.S. District Court for the District of Columbia bar the FTC from implementing the “Red Flags” Rule on law practitioners. The Rule is designed to force companies to detect, mitigate and respond to instances of attempted fraud perpetrated by identity thieves. The businesses required to comply have to have a written “Red Flags” program addressing these tenets that must be approved by the company’s senior management before the compliance deadline, which right now is November 1, 2009. The Rule divides entities into two sections, “financial institutions” and “creditors.” The ABA is miffed because lawyers have been filed under the heading of “creditors” in the “Red Flags” Rule, which, to the association, is a dramatic failure in judgment.

“Congress did not intend to cover lawyers under the Rule,” said ABA President Carolyn Lamm. “The FTC’s decision to apply the Rule to lawyers is contrary to an unbroken history of state regulation of lawyers and intrudes on traditional state responsibilities. The Rule requires extensive reporting and bureaucratic compliance that would unnecessarily increase the cost of legal services.”

The FTC uses the definition for “creditor” that is outlined in the Fair and Accurate Credit Transaction Act of 2003 (FACTA), which is the definition adopted from the Equal Credit Opportunity Act (ECOA). In those pieces of legislation, a “creditor” is “any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” NACM members should be familiar with this definition as it is the reason business and commercial creditors fall under the governance of the “Red Flags” Rule.

Lawyers were never included in the original versions of the Rule and in subsequent releases until the April 30, 2009 deadline extension. During the previous delays in mandatory compliance, the FTC had pointed towards ongoing confusion and continuing interpretations of the scope of FACTA as the reasons for compliance delays. In April of this year, the FTC published a three-page document, “FTC Extended Enforcement Policy: Identity Theft Red Flags Rule, 16 CFR 681.1,” on its website and to the ABA’s surprise, lawyers were listed as one of the businesses that must develop policies under the “Red Flags” Rule. The reason given was:

In FACTA, Congress imported the definition of creditor from the [ECOA] for purposes of the [FCRA]. This definition covers all entities that regularly permit deferred payments for goods or services. The definition thus has a broad scope and may include entities that have not in the past considered themselves to be creditors. For example, creditors under the ECOA include professionals, such as lawyers or health care providers, who bill their clients after services are rendered. Similarly, a retailer or service provider that, on a regular basis, allows its customers to make purchases or obtain services and then bills them for payment at the end of each month would be a creditor under the ECOA.

ABA charges that the agency is completely ignoring the aforementioned ECOA definition of “creditor” and further argues that simply because lawyers provide a service in advance of billing doesn’t make them regular extenders of credit.

The ABA complains that applying the “Red Flags” Rule to lawyers is “arbitrary, capricious and contrary to the law.” It also asserts that the FTC has failed “to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under FACTA; or any legally supportable basis for application of the ‘Red Flags’ Rule to lawyers engaged in the practice of law.”

From ABA’s perspective, the FTC’s “Red Flag” Rules threatens the independence of the lawyer profession by subjecting it to “unauthorized” and “unjustified” federal regulation. The association is asking that the Rule be deemed unlawful and void in its application to lawyers, claiming it will impose significant burdens upon them, particularly sole practitioners and those in small firms.

Nearly 30 state and local bar associations have officially joined the ABA’s ranks in opposition and the association plans to appeal to Congress that the regulation should not apply to lawyers.

Since the Rule went into effect in January 2008, the deadline for mandatory compliance has been pushed back multiple times, with the current deadline looming of November 1, 2009. The FTC has stepped up its business education efforts to ensure all industries affected are aware of their responsibilities and the agency told NACM earlier this week that it is working on additional guidance materials that are planned to be published before October.

Matthew Carr, NACM staff writer. Follow us on Twitter@NACM_National


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