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Inside Privacy Updates on Developments in Global Privacy & Data Security from Covington & Burling LLP

Federal Trade Commission Provides Initial Interpretation of the Red Flags Clarification Act in Litigation with the American Bar Association

Posted in Congress, Federal Trade Commission, Financial Institutions, Financial Privacy, Litigation, Red Flags

We recently covered the Red Flag Program Clarification Act of 2010 in a blog post and client alert.  The Act was intended to narrow the scope of the Federal Trade Commission’s Red Flags rule, which imposes requirements on creditors and financial institutions to detect and deter identity theft.  Prior to the Act’s passage, the American Bar Association had commenced litigation against the FTC regarding the rule’s application to attorneys.  The litigation is presently in the U.S. Court of Appeals for the District of Columbia Circuit, and in court papers filed on Friday, January 20, 2011, the FTC provided its initial interpretation of the Act’s impact on the rule. 

The FTC argued that the Act does not provide a blanket exemption for all attorneys, contrary to the ABA’s contention and the district court’s ruling.  Pursuant to the Act, an attorney could be subject to the Red Flags rule if he or she satisfies the definition of “creditor” under the Equal Credit Opportunity Act and regularly obtains consumer reports in connection with credit transactions, furnishes information to consumer reporting agencies in connection with credit transactions, or lends money to or on behalf of a person unless the loan is for expenses incidental to the services provided by the attorney.  In addition, the Act authorizes the FTC to subject any person to the rule if the FTC determines, by rulemaking, that the person “offers or maintains accounts that are subject to a reasonably foreseeable risk of identity theft.”  The FTC pointed to these two provisions, as well as the absence of legislative history supporting a blanket exemption for any profession, in arguing that the Act does not support the ABA’s position that attorneys should be categorically exempt from the rule. 

The ABA’s responsive brief is due on February 3, 2011.