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Bill Would Exempt Many Businesses, Health Care Providers from the FTC’s Red Flags Rule

Business Law Update Sarah E. Coyne, Kevin J. Eldridge, Margaret E. Utterback, Kathryn A. Kronquist

With yet another Federal Trade Commission ("FTC") enforcement deadline for the Red Flags Rule fast approaching, the U.S. Congress acted quickly to exempt many businesses and health care providers from the Red Flags Rule. The Red Flag Program Clarification Act of 2010 ("Clarification Act") was passed by both houses of Congress within seven days of its introduction and is expected to be signed by President Obama.

As we reported in previous client updates, the FTC had interpreted the implementing legislation for the Red Flags Rule (The Fair and Accurate Credit Transactions Act of 2003) very broadly to apply to any business that provided services to customers without demanding upfront payment. After much outcry and lawsuits against the FTC by the American Bar Association and the American Medical Association, Congress decided to act.

The Clarification Act would exempt from the Red Flags Rule businesses that "advance[] funds on behalf of a person for expenses incidental to a service provided," and it clarifies that the Red Flags Rule was meant to apply only to businesses that (1) obtain or use consumer reports (directly or indirectly) in connection with credit transactions; (2) furnish information to consumer reporting agencies in connection with a credit transaction; and (3) advance funds to or on behalf of a person based on an obligation to repay the funds or repayable from specific pledged property.

The Clarification Act also gives the FTC authority to promulgate regulations applying the Red Flags Rule to specific types of businesses that have accounts the FTC determines to be "subject to a reasonably foreseeable risk of identity theft." Although some commentators have expressed concern that the FTC will use this language to keep the application of the Red Flags Rule broad, the congressional record is replete with references to Congress' intent to exempt health care providers, accounting practices, law firms, and many other types of businesses.

If you have any questions about the Red Flags Rule, please contact Sarah Coyne at (608) 283-2435 /, Kevin Eldridge at (608) 283-2452 /, Maggie Utterback at (608) 283-2443 /, Kate Kronquist at (414) 277-5397 / or your Quarles & Brady attorney.