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NYCLA Report Urges FTC to Reconsider Decision to Apply
“Red Flags Rule” To Legal Profession
JUNE 25, 2009 – NEW YORK, NY – The New York County Lawyers’ Association (NYCLA) has issued a report, “NYCLA Ethics Institute Federal Trade Commission Red Flags Rule Report,” urging the Federal Trace Commission (FTC) to reconsider its decision to apply the “Red Flags Rule,” a measure designed to combat the growing epidemic of identity theft and due to take effect on August 1, 2009, to the legal profession.
Background on “Red Flags Rule”
The FTC’s “Red Flags Rule” requires financial institutions and creditors “to develop and implement written identity theft prevention programs” designed to identify the relevant warning signs – or ‘red flags’ – of identity theft. The FTC’s determination that lawyers and law firms, along with physicians and other health care providers, fall under the category of “creditors” is based on the Equal Credit Opportunity Act’s (ECOA) definition of ‘credit,’ which includes a right granted to defer payment for any purchase. Consequently, any person providing a product or service for which the consumer pays after delivery is a creditor.
The NYCLA report maintains that the application of the Red Flags Rule to attorneys has serious implications on the confidential nature of the client-lawyer relationship and may potentially limit a client’s access to legal advice. The Report states:
…It [the Rule] would have a chilling impact on client-lawyer relationships if lawyers were now required to demand certain specific personally identifiable information from a client before providing advice. [“I am sorry, but before I am able to provide you with legal advice, I must first ask you some questions that are required by the Federal Government.”] Clearly, some clients will be reluctant to provide this information and will be put in the position of having to decide whether to provide this personal information or go without the advice of counsel.
Moreover, questioning the FTC’s determination that a lawyer is a “creditor,” the Report states:
This strained interpretation [that any person providing a product or service for which the consumer pays after delivery is a creditor] ignores the reality that in many instances lawyers are not creditors with respect to their clients. Specific examples of situations where lawyers are not acting as “creditors” include, but are not limited to, the case of a retainer agreement, the prompt payment of its bills by the client, or a contingent fee arrangement—all of which are extremely common circumstances. However, to the extent that any lawyer or law firm does become a “creditor” with respect to a client, that occurrence is so tangential as to make the FTC’s use of it as a basis for including the legal profession within the ambit of the Red Flag Rules untenable.
Regarding what entity is best to regulate attorneys, the Report asserts: “As the U.S. Supreme Court has stated, “[s]ince the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States and the District of Columbia within their respective jurisdictions.”
FTC Previously Sought to Regulate Lawyers
The FTC previously sought to regulate lawyers in 2005 (American Bar Association v. Federal Trade Commission, 430 F.3d 457), when it attempted to apply the financial reporting provisions of the Gramm-Leach-Bliley Act (GBLA) of 1999 to lawyers. The FTC considered lawyers and law firms who were “significantly engaged in financial activities” to be “financial institutions” and therefore subject to requirements of Title V. In a suit filed by the ABA and New York State Bar Association seeking declaratory judgments that the FTC did not have the authority to regulate lawyers under the GBLA, the bar associations prevailed. Among the D.C. Circuit Court of Appeals findings was that the FTC’s attempt to regulate lawyers under the GBLA “was an ‘arbitrary and capricious’ violation of the Administrative Procedure Act.”
Let NYCLA Know Your Views
Lewis F. Tesser, director of the NYCLA Ethics Institute, explained that if the Red Flags Rule is adopted on August 1, NYCLA plans to provide appropriate material about compliance in CLE programs and other vehicles. Members of the legal community are invited to share their thoughts about the Rule on NYCLA’s blog, located on the Association’s homepage at www.nycla.org, which asks, “Should the FTC regulate your firm?” For more information about the Rule, go to the FTC’s website, www2.ftc.gov/opa/2009/04/redflags.shtm.
The New York County Lawyers’ Association (www.nycla.org) was founded in 1908 as the first major bar association in the country that admitted members without regard to race, ethnicity, religion, gender or sexual identity. Since its inception, it has pioneered some of the most far-reaching and tangible reforms in American jurisprudence and has continuously played an active role in legal developments and public policy.
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To read the NYCLA Ethics Institute’s report urging the FTC to reconsider its decision to apply the Red Flags rule to the legal profession, visit NYCLA’s homepage at www.nycla.org.