Posted on May 28, 2010 by Timothy Tobin

FTC Red Flags Rule Enforcement Delayed Again (and New Legal Challenge)

The FTC announced today that it is delaying enforcement of its FACTA Red Flags Rule yet again, this time through December 31, 2010. This is the fifth time the FTC has delayed enforcement of its beleaguered red flag rule, which it originally had planned to enforce beginning November 1, 2008. This latest delay, just like the previous one, comes at the request of members of Congress who plan to amend the FACTA red flag provisions to narrow the scope of the entities that are covered. On May 25, 2010, members of Congress introduced S. 3416, which would exclude health care, accounting and law practices with fewer than 20 employees as well as certain other small businesses. 

 

 

The further delay comes as FTC Chairman Leibowitz acknowledges the agency’s Rule’s shortcomings: “Congress needs to fix the unintended consequences of the legislation establishing the Red Flags Rule – and to fix this problem quickly.”

As previously covered in the Chronicle, the last delay occurred on October 30, 2009 when the FTC announced it would not begin enforcing the rule until June 1, 2010. That delay followed U.S. District Court for the District of Columbia's ruling that the Red Flags Rule does not apply to lawyers (for analysis of that decision, click here). It also followed the House of Representatives' unanimous passage in late October of HR 3763, which proposes to amend FCRA to exempt certain small businesses from the Red Flags Rule. Subsequently, in November 2009, the American Institute of Certified Public Accountants (AICPA) filed a lawsuit against the FTC challenging the applicability of the Red Flag Rule to Certified Public Accountants. 

Now the Red Flag Rule is facing a new legal challenge. On May 21, 2010, the American Medical Association (AMA), the American Osteopathic Association and the Medical Society of the District of Columbia filed a lawsuit against the FTC in the U.S. District Court for the District of Columbia challenging the Red Flag Rule and citing the court’s earlier decision regarding the applicability of the Rule to lawyers. In the latest lawsuit, these medical organizations argue that the Rule, which is applicable to financial institutions and creditors, unjustifiably "treats physician practices like banks, credit card companies and mortgage lenders."

 
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Posted on November 12, 2009 by Christopher Wolf

AICPA Sues FTC to Block Red Flags Applicability to Accountants

The American Institute of Certified Public Accountants (AICPA) on Tuesday filed a lawsuit against the Federal Trade Commission (FTC) challenging the applicability of the agency's Red Flags Rule to Certified Public Accountants.  This comes on the heels of district court ruling in a lawsuit brought by the American Bar Association (ABA) reported here that the regulations do not apply to lawyers.

 We do not believe that there is any reasonably foreseeable risk of identity theft when CPA clients are billed for services rendered,” said  AICPA President and CEO Barry Melancon. “As trusted advisors, CPAs are personally acquainted with their clients and already adhere to strict privacy requirements governing identifying information.

The accountants' lawsuit  alleges primarily that the FTC lacks authority to regulate CPAs just as it lacks authority to regulate lawyers, both of whom are regulated by state authorities.  In addition, the lawsuit claims that the FTC failed to explain how the manner in which public accountants bill their clients in the normal course of business constitutes an "extension of credit" under the rule and that it failed to identify any legally supportable basis for applying the rule to accountants.   The FTC specifically referred to accountants as potentially covered entities in its FAQs concerning the rule published over the Summer.  In promulgating the rule, the AICPA alleges that the FTC never identified CPAs as potentially covered entities.

The Red Flags rule has been the source of significant controversy which,  in addition to the lawsuit by the American Bar Association, has resulted in repeated extensions of the FTC enforcement date.  Currently, the FTC is set to enorce the rule on June 1, 2010.

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