November 3, 2009

Enforcement of Red Flags Rule Delayed to June 1, 2010

Holland & Knight Alert
Maximillian J. Bodoin

The Federal Trade Commission (FTC) recently announced it will further delay enforcement of the Red Flags Rule (Rule) until June 1, 2010, marking the fourth time the FTC has pushed back the enforcement deadline. Members of Congress, who are working on legislation to exempt certain businesses from the Rule, specifically requested the extension.

According to the FTC, the Rule applies to a wide range of businesses: any company that provides goods or services on a deferred payment basis (e.g., net-30 days billing) may be required to comply with the Rule. The FTC has further indicated that nonprofit organizations and government entities may also be subject to the Rule. For a more detailed discussion about the Red Flags Rule, please see the Holland & Knight Red Flags Alert published on July 22, 2009.

The June 1, 2010 extension applies only to entities subject to FTC oversight under the Rule. Many financial services companies and lending institutions, which are regulated by other agencies, already should have a compliance program in place.

Congress May Pass Legislation to Exempt Certain Businesses From the Rule

The scope of the Rule has been the subject of ongoing discussion, as numerous organizations have lobbied the FTC and Congress for a variety of exemptions. On October 20, 2009, the U.S. House of Representatives passed a bill that would exempt healthcare, accounting and legal practices from the Rule if the practice has 20 or fewer employees. The bill, H.R. 3763, also requires the FTC to create a process allowing other businesses to request a similar exemption from the Rule. The legislation has been sent to the U.S. Senate, which has yet to consider the proposed legislation.

FTC Cannot Enforce Rule Against Lawyers, Federal Court Rules

On October 30, 2009, the District Court for the District of Columbia ruled in favor of the American Bar Association (ABA) in its lawsuit to stop the FTC from enforcing the Red Flags Rule against attorneys. In its suit, the ABA argued that the application of the Rule to attorneys exceeds the FTC’s authority. The FTC has not announced yet whether it will appeal the ruling.

Need Help Developing a Compliance Program?

To assist businesses and other organizations, Holland & Knight has developed a baseline, fixed-fee Red Flag Rule compliance package that is designed to help organizations determine if they are subject to the Rule, and if so, to implement a compliance program.

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