Governmental Affairs

Effort Pays Off: New Law Confirms 'Red Flags Rule' Exemption

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After more than 18 months of effort on two fronts, the ABA scored a major legislative victory in December when President Barack Obama signed a new law clarifying that lawyers are not “creditors” under the Fair and Accurate Credit Transactions Act of 2003 and therefore not subject to the Federal Trade Commission’s “red flags rule” regarding identity theft.

The rule requires businesses defined as creditors to develop programs that identify and respond to the warning signs, or red flags, of identity theft. The FTC announced in April 2009—a week before the rule was to go into effect—that it would define “creditors” as all entities that regularly provide services or goods before seeking payment. That definition would have pulled lawyers, doctors, accountants and other professionals within the scope of the red flags rule along with retail businesses, even though Congress never expressed that intent when it passed FACTA.

“At last, the American legal profession has clear and final relief from attempts to solve a nonexistent problem that would have created paper-pushing and raised legal costs,” says ABA President Stephen N. Zack, administrative partner in the Miami office of Boies, Schiller & Flexner.

The ABA began its fight to gain an exemption for lawyers shortly after being notified of the FTC interpretation of the rule. In response, the commission issued the first of several orders postponing enforcement of the rule. Armed with a policy adopted by the ABA Board of Governors in June 2009, association leaders supported by the Governmental Affairs Office intensified their lobbying efforts on Capitol Hill. State and local bar associations weighed in as well, and other professional groups also began challenging the rule.

Two months later, the ABA filed a complaint in federal court seeking to block enforcement of the rule. The ABA legal team, led by Steven C. Krane of Proskauer Rose in New York City until his death on June 22, 2010, maintained that lawyers are not engaged in the type of commercial activity that FACTA seeks to regulate, and that the burden of lawyer compliance with the rule far outweighed any perceived benefit to clients.

In October 2009, Judge Reggie B. Walton of the U.S. District Court for the District of Columbia ruled that the FTC had exceeded its authority by applying the rule to practicing lawyers.

The FTC’s appeal was still pending when Congress began considering bipartisan legislation to narrow the scope of FACTA to exempt not only lawyers but other professionals and small businesses that do not operate as creditors. The legislation moved through Congress without opposition.

For his part, Zack emphasizes that the ABA will continue to defend the profession against all forms of unnecessary and unintended regulation.

Rhonda McMillion is editor of ABA Washington Letter, a Governmental Affairs Office publication.

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