September 2009 • Vol. 29 No. 8 | An E-Publication of the Los Angeles County Bar Association

LACBA Urges Federal Trade Commission to Exempt Lawyers from Red Flags Rule

Exempting lawyers from the Red Flags Rule under the Fair and Accurate Credit Transactions Act of 2003—That’s the action LACBA urged the Federal Trade Commission to take in a letter sent last July along with copies to U.S. Senators and Representatives from California.

LACBA agreed with the American Bar Association’s position that Congress did not intend to consider lawyers as creditors, nor did it intend to regulate lawyers under FACTA.

The Red Flags Rule is an anti-fraud regulation requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to the warning signs, or “red flags,” that could indicate identity theft. Financial regulatory agencies, including the FTC, developed the rule as mandated by FACTA, which defines “creditor” to include any entity that regularly extends or renews credit—or arranges for others to do so—and includes all entities that regularly permit deferred payments for goods or services. Accepting credit cards as a form of payment does not, by itself, make an entity a creditor.

The FTC has resisted ABA requests to exempt lawyers from the Red Flags Rule. 

LACBA's letter, signed by President Don Mike Anthony, stated that lawyers do not extend credit to their clients and, in fact, cannot bill clients until services are performed. Those fees also must be considered reasonable by ethical standards. The fact that services precede billing does not mean that the billing is deferred and is an extension of credit.

The FTC has not found any incidents of identity theft arising from a lawyer-client relationship. Client information pertaining to legal matters is already kept in strict confidence by lawyers due to ethical guidelines. For LACBA’s members, especially the majority who are solo or small firm practitioners, the burden of compliance with the Red Flags Rule far outweighs any perceived benefit a client might receive.

FTC Delays Red Flags Rule

The Federal Trade Commission announced on July 29 that it has delayed enforcement of the Red Flags Rule until November 1, 2009. To assist small businesses and other entities, the FTC staff will redouble its efforts to educate them about compliance with the rule and ease compliance by providing additional resources and guidance to clarify whether businesses are covered by the rule and what they must do to comply.


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