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Home Advocacy Federal Issues FTC Rulemaking on Identity Theft “Red Flags”

Federal Issues

FTC Rulemaking on Identity Theft “Red Flags” 

CPAs and CPA firms were officially exempted from the FTC’s Red Flags rule with the passage of S.3987, the “Red Flag Program Clarification Act of 2010” in December 2010. 

On May 28, 2010, the Federal Trade Commission announced it was again delaying implementation until December 31, 2010 of a proposed Final Rule relating to Identity Theft Red Flags under the Fair and Accurate Credit Transactions Act of 2003. The proposed “Red Flags” rule is designed to help prevent identity theft among credit providers and financial institutions. However, it would cover any CPA who bills clients for services rendered. The AICPA requested that the FTC exempt CPAs from the regulation and filed a suit in federal court seeking a bar against application of the FTC rule to CPAs and accounting firms.

Application of the FTC’s Red Flags rule to CPAs would be onerous and burdensome because it would require accountants, who are already trusted advisers to their clients and adhere to strict privacy requirements, to develop and implement a written identity theft prevention program in accordance with FTC mandates. The AICPA does not believe there is any reasonably foreseeable risk of identity theft when CPA clients are billed for services rendered.

Responding to the increase in identity theft, Congress passed the Fair and Accurate Credit Transactions Act of 2003 (FACTA), amending the Fair Credit Reporting Act (FCRA). Among the many provisions in FACTA was a mandate that the FTC, federal bank regulatory agencies, and the National Credit Union Administration jointly develop rules and guidelines for financial institutions and creditors regarding identity theft. Final rules and guidelines were issued jointly in 2007 requiring, among other things, that each “financial institution” or “creditor” develop and implement a written Identity Theft Prevention Program to detect, prevent, and mitigate identity theft in connection with certain accounts. Elements of the program are tied to the identification and detection of “Red Flags,” which are defined as “a pattern, practice, or specific activity that indicates the possible existence of identity theft.”

Representative John Adler, a New Jersey Democrat, introduced legislation last year (H.R. 3763) that would free accountants, lawyers and health care providers from Red Flags Rule compliance if their practice has 20 or fewer employees. The bill passed the House unanimously on a vote of 400-0. As the legislation made its way to the Senate for consideration, the U.S. District Court for the District of Columbia ruled in favor of the American Bar Association that the FTC could not apply the Red Flags Rule to lawyers. Because accountants are similarly situated to lawyers in regards to being considered a “creditor” under the FTC interpretation of FACTA, the AICPA also filed a lawsuit against the FTC on November 10, 2009. Earlier in the year, the District Court for the District of Columbia granted a delay of enforcement of the rule for public accounting members of the AICPA for ninety days after an opinion comes down from the Court of Appeals on the similar case brought by the American Bar Association.

On November 15, 2010 the Court of Appeals heard oral arguments in the American Bar Association v. FTC lawsuit.  In response, to the oral arguments, Senator John Thune, a South Dakota Republican and Senator Mark Begich, an Alaska Democrat, introduced S. 3987, the “Red Flag Program Clarification Act of 2010” to make clear that professionals, like CPAs and CPA firms, are not classified as “creditors” for the purposes of the Red Flags Rule. Senator Thune further clarified the intent of the legislation in his floor statement by stating,“So, for example, an accountant would not become a creditor simply for obtaining a consumer report--with the permission of any consumer whose report is obtained--in order to examine the integrity of a company's management.” The bill passed the Senate without amendment by unanimous consent on November 30, 2010 and was agreed to by voice vote in the House of Representatives on December 7, 2010.  S. 3987 was then signed into law by President Obama on December 18, 2010.

Resources

Copy of Legislation

Copies of S. 3987 and H.R. 3763 are available on the Library of Congress's THOMAS website.  All versions of the bills, and all Congressional actions, are available by using the advanced search function and searching for S. 3987 and H.R. 3763 by bill number under the 111th Congress.

Member Floor Statements during Consideration of S. 3987

December 7, 2010, House Floor Statements by Representatives John Adler, a New Jersey Democrat, Mike Simpson, an Idaho Republican, and Paul Broun, a Georgia Republican.

November 30, 2010 Senate Floor Statements by Senators John Thune, a South Dakota Republican, Chris Dodd, a Connecticut Democrat, and Mark Begich, an Alaska Democrat.

AICPA Letters and Other Actions

November 10, 2009 AICPA Complaint Requesting Relief from FTC Red Flags Rule

October 20, 3009 AICPA Letter to the FTC requesting a delay in its Red Flags Rule enforcement as a result of decision in the American Bar Association lawsuit.

October 15, 2009 AICPA Letter to Representative Adler applauding his recognition that the FTC overstepped its authority as well as requesting a lifting of the cap from exclusion of the rule to ensure a full CPA exemption.

August 4, 2009 AICPA Letter to the FTC applauding the delay of the Red Flags Rule and requesting a full CPA exemption from the rule.

Staff Contact

Matthew Iandoli
Director, Congressional Affairs
202.434.9274
miandoli@aicpa.org

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