Red Flags Rule does not apply to lawyers

UPDATE 2: On Dec. 20, 2010, President Obama signed this provision into law.

UPDATE: On Dec. 7, 2010, the U.S. House of Representatives also approved this legislation.

On Nov. 30, the U.S. Senate unanimously passed the Red Flag Program Clarification Act of 2010, which clarifies that the Federal Trade Commission's Red Flags Rule does not apply to lawyers, doctors, accountants, and certain other service providers. The bill has been referred to the House Committee on Financial Services.

The Red Flags Rule requires financial organizations and "creditors" to develop programs to prevent identity theft.

The Senate action comes after efforts by bar associations and other organizations to exempt professionals who maintain accounts for clients that generally do not carry risks of identity theft.

For background on this issue, see the American Bar Association website.

ABA sues FTC over the Red Flags Rule

Yesterday the American Bar Association announced it had filed suit seeking to bar the Federal Trade Commission (FTC) from applying the Red Flags Rule to lawyers. The Red Flags Rule requires "creditors" and "financial institutions" with covered accounts to implement programs to identify, detect, and respond to warning signs of identity theft. There has been some confusion regarding which businesses the rule does and does not apply to.

In late July, the FTC delayed enforcement of the rule until Nov. 1, 2009, and indicated in a press release that it would soon provide additional guidance regarding how to determine whether the rule applies to a particular business.

The ABA claims 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 the FACTA; or any legally supportable basis for application of the Red Flags Rule to lawyers engaged in the practice of law.'"

For more on the suit, see the ABA's press release and this report by the National Law Journal.

For details on the Red Flags Rule, see the FTC's How-To Guide for Business.