January 2011 • Vol. 31 No. 1 | An E-Publication of the Los Angeles County Bar Association

Congress Passes Bill that Exempts Lawyers from Red Flags Rule

LACBA urged FTC exemption, contacted Congress, joined amicus brief.

LACBA’s efforts to exempt lawyers from the Red Flags Rule under the Fair and Accurate Credit Transactions Act of 2003 (FACTA) paid off when Congress passed the Red Flag Program Clarification Act in late 2010. LACBA had urged the Federal Trade Commission to take this action itself in a letter sent in July 2009, along with copies to U.S. Senators and Representatives from California.

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 to include 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 had resisted American Bar Association requests to exempt lawyers from the Red Flags Rule. LACBA agreed with the ABA’s position that Congress did not intend to consider lawyers as creditors, nor did it intend to regulate lawyers under FACTA.

LACBA's letter, signed by then 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 represents an extension of credit.

To date, the FTC had 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.

The FTC persisted in including lawyers for several months, prompting the ABA to file suit against it, ABA v. FTC. LACBA joined in the New York State Bar Association’s amicus brief, in which LACBA was ably assisted by Amicus Briefs Chair Richard Rothschild. Brian Huben, trustee and chair of LACBA’s Legislation Committee, tracked the bill’s progress. With the recent passage in December of the final bill that excludes lawyers from the Red Flags Rule, the lawsuit will likely be dismissed.

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