Federal Register, Volume 78 Issue 76 (Friday, April 19, 2013)[Federal Register Volume 78, Number 76 (Friday, April 19, 2013)]
[Rules and Regulations]
[Pages 23637-23666]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08830]
[[Page 23637]]
Vol. 78
Friday,
No. 76
April 19, 2013
Part II
Commodity Futures Trading Commission
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7 CFR Part 162
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Securities and Exchange Commission
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17 CFR Part 248
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Identity Theft Red Flags Rules; Final Rule
Federal Register / Vol. 78 , No. 76 / Friday, April 19, 2013 / Rules
and Regulations
[[Page 23638]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 162
RIN 3038-AD14
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 248
[Release Nos. 34-69359, IA-3582, IC-30456; File No. S7-02-12]
RIN 3235-AL26
Identity Theft Red Flags Rules
AGENCY: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint final rules and guidelines.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (together, the
``Commissions'') are jointly issuing final rules and guidelines to
require certain regulated entities to establish programs to address
risks of identity theft. These rules and guidelines implement
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, which amended the Fair Credit Reporting Act and directed the
Commissions to adopt rules requiring entities that are subject to the
Commissions' respective enforcement authorities to address identity
theft. First, the rules require financial institutions and creditors to
develop and implement a written identity theft prevention program
designed to detect, prevent, and mitigate identity theft in connection
with certain existing accounts or the opening of new accounts. The
rules include guidelines to assist entities in the formulation and
maintenance of programs that would satisfy the requirements of the
rules. Second, the rules establish special requirements for any credit
and debit card issuers that are subject to the Commissions' respective
enforcement authorities, to assess the validity of notifications of
changes of address under certain circumstances.
DATES: Effective date: May 20, 2013; Compliance date: November 20,
2013.
FOR FURTHER INFORMATION CONTACT: CFTC: Sue McDonough, Counsel, at
Commodity Futures Trading Commission, Office of the General Counsel,
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581,
telephone number (202) 418-5132, facsimile number (202) 418-5524, email
[email protected]; SEC: with regard to investment companies and
investment advisers, contact Andrea Ottomanelli Magovern, Senior
Counsel, Amanda Wagner, Senior Counsel, Thoreau Bartmann, Branch Chief,
or Hunter Jones, Assistant Director, Office of Regulatory Policy,
Division of Investment Management, (202) 551-6792, or with regard to
brokers, dealers, or transfer agents, contact Brice Prince, Special
Counsel, Joseph Furey, Assistant Chief Counsel, or David Blass, Chief
Counsel, Office of Chief Counsel, Division of Trading and Markets,
(202) 551-5550, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commissions are adopting new rules and
guidelines on identity theft red flags for entities subject to their
respective enforcement authorities. The CFTC is adding new subpart C
(``Identity Theft Red Flags'') to part 162 of the CFTC's regulations
[17 CFR part 162] and the SEC is adding new subpart C (``Regulation S-
ID: Identity Theft Red Flags'') to part 248 of the SEC's regulations
[17 CFR part 248], under the Fair Credit Reporting Act [15 U.S.C. 1681-
1681x], the Commodity Exchange Act [7 U.S.C. 1-27f], the Securities
Exchange Act of 1934 [15 U.S.C. 78a-78pp], the Investment Company Act
of 1940 [15 U.S.C. 80a], and the Investment Advisers Act of 1940 [15
U.S.C. 80b].
Table of Contents
I. Background
II. Explanation of the Final Rules and Guidelines
A. Final Identity Theft Red Flags Rules
1. Which Financial Institutions and Creditors Are Required to
Have a Program
2. The Objectives of the Program
3. The Elements of the Program
4. Administration of the Program
B. Final Guidelines
1. Section I of the Guidelines--Identity Theft Prevention
Program
2. Section II of the Guidelines--Identifying Relevant Red Flags
3. Section III of the Guidelines--Detecting Red Flags
4. Section IV of the Guidelines--Preventing and Mitigating
Identity Theft
5. Section V of the Guidelines--Updating the Identity Theft
Prevention Program
6. Section VI of the Guidelines--Methods for Administering the
Identity Theft Prevention Program
7. Section VII of the Guidelines--Other Applicable Legal
Requirements
8. Supplement A to the Guidelines
C. Final Card Issuer Rules
III. Related Matters
A. Cost-Benefit Considerations (CFTC) and Economic Analysis
(SEC)
B. Analysis of Effects on Efficiency, Competition, and Capital
Formation
C. Paperwork Reduction Act
D. Regulatory Flexibility Act
IV. Statutory Authority and Text of Amendments
I. Background
The growth and expansion of information technology and electronic
communication have made it increasingly easy to collect, maintain, and
transfer personal information about individuals.\1\ Advancements in
technology also have led to increasing threats to the integrity and
privacy of personal information.\2\ During recent decades, the federal
government has taken steps to help protect individuals, and to help
individuals protect themselves, from the risks of theft, loss, and
abuse of their personal information.\3\
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\1\ See, e.g., U.S. Government Accountability Office,
Information Security: Federal Guidance Needed to Address Control
Issues with Implementing Cloud Computing (May 2010), available at
http://www.gao.gov/new.items/d10513.pdf (discussing information
security implications of cloud computing); Department of Commerce,
Internet Policy Task Force, Commercial Data Privacy and Innovation
in the Internet Economy: A Dynamic Policy Framework, at Section I
(2010), available at http://www.ntia.doc.gov/reports/2010/iptf_
privacy_greenpaper_ 12162010.pdf (reviewing recent technological
changes that necessitate a new approach to commercial data
protection). See also Fred H. Cate, Privacy in the Information Age,
at 13-16 (1997) (discussing the privacy and data security issues
that arose during early increases in the use of digital data).
\2\ A recent survey found that in 2012, over 5% of Americans
were victims of identity fraud. See Javelin Strategy & Research,
2013 Identity Fraud Report: Data Breaches Becoming a Treasure Trove
for Fraudsters (Feb. 2013), available at https://www.javelinstrategy.com/uploads/web_brochure/1303.R_2013IdentityFraudBrochure.pdf; see also Comment Letter of Tyler
Krulla (``Tyler Krulla Comment Letter'') (Apr. 27, 2012) (``In
today's technology driven world it is easier than ever for anyone to
acquire and exploit someone's identity and cause severe financial
problems.'').
\3\ See, e.g., Consumer Data Privacy in a Networked World: A
Framework for Protecting Privacy and Promoting Innovation in the
Global Digital Economy (Feb. 2012), available at http://www.whitehouse.gov/sites/default/files/privacy-final.pdf (a White
House proposal to establish a consumer privacy bill of rights); The
President's Identity Theft Task Force Report (Sept. 2008), available
at http://www.ftc.gov/os/2008/10/081021taskforcereport.pdf;
Securities and Exchange Commission, Online Brokerage Accounts: What
you can do to Safeguard Your Money and Your Personal Information,
available at http://www.sec.gov/investor/pubs/onlinebrokerage.htm.
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The Fair Credit Reporting Act of 1970 (``FCRA''),\4\ as amended in
2003,\5\ required several federal agencies to issue joint rules and
guidelines regarding the detection, prevention, and mitigation of
identity theft for entities that are subject to their respective
enforcement authorities (also known as
[[Page 23639]]
the ``identity theft red flags rules'').\6\ Those agencies were the
Office of the Comptroller of the Currency (``OCC''), the Board of
Governors of the Federal Reserve System (``Federal Reserve Board''),
the Federal Deposit Insurance Corporation (``FDIC''), the Office of
Thrift Supervision (``OTS''), the National Credit Union Administration
(``NCUA''), and the Federal Trade Commission (``FTC'') (together, the
``Agencies'').\7\ In 2007, the Agencies issued joint final identity
theft red flags rules.\8\ At the time the Agencies adopted their rules,
the FCRA did not require or authorize the CFTC and SEC to issue
identity theft red flags rules. Instead, the Agencies' rules applied to
entities that registered with the CFTC and SEC, such as futures
commission merchants, broker-dealers, investment companies, and
investment advisers.\9\
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\4\ Pub. L. 91-508, 84 Stat. 1114 (1970), codified at 15 U.S.C.
1681-1681x.
\5\ See Fair and Accurate Credit Transactions Act of 2003, Pub.
L. 108-159, 117 Stat. 1952 (2003) (``FACT Act'').
\6\ See FCRA sections 615(e)(1)(A)-(B), 15 U.S.C.
1681m(e)(1)(A)-(B). Section 615(e)(1)(A) of the FCRA requires the
Agencies to jointly ``establish and maintain guidelines for use by
each financial institution and each creditor regarding identity
theft with respect to account holders at, or customers of, such
entities, and update such guidelines as often as necessary.''
Section 615(e)(1)(B) requires the Agencies to jointly ``prescribe
regulations requiring each financial institution and each creditor
to establish reasonable policies and procedures for implementing the
guidelines established pursuant to [section 615(e)(1)(A)], to
identify possible risks to account holders or customers or to the
safety and soundness of the institution or customers.''
\7\ The FCRA also required the Agencies to prescribe joint rules
applicable to issuers of credit and debit cards, to require that
such issuers assess the validity of notifications of changes of
address under certain circumstances (the ``card issuer rules''). See
FCRA section 615(e)(1)(C), 15 U.S.C. 1681m(e)(1)(C).
\8\ See Identity Theft Red Flags and Address Discrepancies under
the Fair and Accurate Credit Transactions Act of 2003, 72 FR 63718
(Nov. 9, 2007) (``2007 Adopting Release''). The rules included card
issuer rules. See supra note 7. The OCC, Federal Reserve Board,
FDIC, OTS, and NCUA began enforcing their identity theft red flags
rules on November 1, 2008. The FTC began enforcing its identity
theft red flags rules on January 1, 2011.
\9\ See 2007 Adopting Release, supra note 8.
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In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (``Dodd-Frank Act'') \10\ amended the FCRA to add the CFTC and SEC
to the list of federal agencies that must jointly adopt and
individually enforce identity theft red flags rules.\11\ Thus, the
Dodd-Frank Act provides for the transfer of rulemaking responsibility
and enforcement authority to the CFTC and SEC with respect to the
entities subject to each agency's enforcement authority. In February
2012, the Commissions jointly proposed for public notice and comment
identity theft red flags rules and guidelines and card issuer
rules.\12\
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\10\ Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\11\ See FCRA section 615(e)(1), 15 U.S.C. 1681m(e)(1). In
addition, section 1088(a)(10)(A) of the Dodd-Frank Act added the
Commissions to the list of federal administrative agencies
responsible for enforcement of rules pursuant to section 621(b) of
the FCRA. See infra note 24. Section 1100H of the Dodd-Frank Act
provides that the Commissions' new enforcement authority (as well as
other changes in various agencies' authority under other provisions)
becomes effective as of the ``designated transfer date'' to be
established by the Secretary of the Treasury, as described in
section 1062 of that Act. On September 20, 2010, the Secretary of
the Treasury designated July 21, 2011 as the transfer date. See
Designated Transfer Date, 75 FR 57252 (Sept. 20, 2010).
\12\ The Commissions' joint proposed rules and guidelines were
published in the Federal Register on March 6, 2012. See Identity
Theft Red Flags Rules, 77 FR 13450 (Mar. 6, 2012) (``Proposing
Release''). For ease of reference, unless the context indicates
otherwise, our general use of the terms ``identity theft red flags
rules'' or ``rules'' in this release will refer to both the identity
theft red flags rules and guidelines. In addition, unless the
context indicates otherwise, the general use of these terms in this
preamble and Section III of this release will refer to both the
identity theft red flags rules and guidelines, and the card issuer
rules (which are discussed in further detail later in this release).
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The CFTC and SEC received a total of 27 comment letters on the
proposal.\13\ Most commenters generally supported the proposal, and
many stated that the rules would benefit individuals.\14\ Commenters
expressed concern about the prevalence of identity theft and supported
our efforts to reduce it.\15\ Commenters also supported the
Commissions' proposal to adopt rules that would be substantially
similar to the rules the Agencies adopted in 2007.\16\ Some commenters
raised questions about the scope of the proposal and the meaning of
certain definitions.\17\ One commenter stated that benefits to
consumers would outweigh the costs of the rules,\18\ while another took
issue with the estimated costs of complying with the rules.\19\
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\13\ Comments on the proposal, including comments referenced in
this release, are available on the SEC's Web site at http://www.sec.gov/comments/s7-02-12/s70212.shtml and the CFTC's Web site
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1171.
\14\ See, e.g., Comment Letter of MarketCounsel (Apr. 25, 2012)
(``MarketCounsel Comment Letter'') (``MarketCounsel supports the
Commission's attempt to help protect individuals from the risk of
theft, loss, and abuse of their personal information through the
Proposed Rule.''); Comment Letter of Erik Speicher (``Erik Speicher
Comment Letter'') (Mar. 17, 2012) (``Identity theft is a major
concern of all citizens. The effects and burdens associated with
having ones [sic] identity stolen necessitate these proposed
regulations. The affirmative duty placed on the covered entities
will better protect all of us from the possibility of having our
identity stolen.''); Comment Letter of Lauren L. (Mar. 12, 2012)
(``Lauren L. Comment Letter'') (``[R]equirements to implement an
identity theft prevention plan and to verify change of personal
information [have] the [potential] to protect people.'').
\15\ See, e.g., Tyler Krulla Comment Letter; Lauren L. Comment
Letter (``I agree with the proposed changes. With the market
shifting to an IT based world, identity theft is increasing.
Therefore, more stringent rules and regulations should be in place
to protect those that may be affected.'').
\16\ See, e.g., Comment Letter of the Investment Company
Institute (May 1, 2012) (``ICI Comment Letter'').
\17\ See, e.g., Comment Letter of the Investment Adviser
Association (May 7, 2012) (``IAA Comment Letter'') (requesting that
the SEC and CFTC clarify the definitions of ``financial
institution'' and ``creditor'' and exclude investment advisers from
the categories of entities specifically mentioned in the scope
section of the rule); Comment Letter of the Options Clearing
Corporation (May 3, 2012) (``OCC Comment Letter'') (requesting that
the SEC and CFTC clarify the definition of ``creditor'' and
expressly exclude clearing organizations from the scope section of
the rule); Comment Letter of the Financial Services Roundtable and
the Securities Industry and Financial Markets Association (May 2,
2012) (``FSR/SIFMA Comment Letter'') (requesting that the SEC
specifically exclude certain categories of entities from the
definitions of ``financial institution'' and ``covered account,''
and that the SEC and CFTC specifically define the types of accounts
that would qualify as covered accounts).
\18\ See Erik Speicher Comment Letter.
\19\ See FSR/SIFMA Comment Letter. We discuss estimated costs
and benefits in the Section III of this release.
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Today, the CFTC and SEC are adopting the identity theft red flags
rules. The final rules are substantially similar to the rules the
Commissions proposed,\20\ and to the rules the Agencies adopted in
2007.\21\ The final rules apply to ``financial institutions'' and
``creditors'' subject to the Commissions' respective enforcement
authorities, and as discussed further below, do not exclude any
entities registered with the Commissions from their scope. The
Commissions recognize that entities subject to their respective
enforcement authorities, whose activities fall within the scope of the
rules, should already be in compliance with the Agencies' joint rules.
The rules we are adopting today do not contain requirements that were
not already in the Agencies' rules, nor do they expand the scope of
those rules to include new categories of entities that the Agencies'
rules did not already cover. The rules and this adopting release do
contain examples and minor language changes designed to help guide
entities within the SEC's enforcement authority in complying with the
rules, which may lead some entities that had not previously complied
with the Agencies' rules to determine that they fall within the scope
of the rules we are adopting today.
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\20\ See infra Section II.A.1.ii (discussing a revision to
proposed definition of ``creditor''); see also Sec.
248.201(b)(2)(i) (SEC) (revising the term ``non U.S. based financial
institution or creditor,'' which was included in the proposed
definition of ``board of directors,'' to ``foreign financial
institution or creditor,'' for clarity and consistency with the
CFTC's and Agencies' respective identity theft red flags rules).
\21\ See 2007 Adopting Release.
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[[Page 23640]]
II. Explanation of the Final Rules and Guidelines
A. Final Identity Theft Red Flags Rules
Sections 615(e)(1)(A) and (B) of the FCRA, as amended by the Dodd-
Frank Act, require that the Commissions jointly establish and maintain
guidelines for ``financial institutions'' and ``creditors'' regarding
identity theft, and adopt rules requiring such institutions and
creditors to establish reasonable policies and procedures for the
implementation of those guidelines.\22\ Under the final rules, a
financial institution or creditor that offers or maintains ``covered
accounts'' must establish an identity theft red flags program designed
to detect, prevent, and mitigate identity theft. To that end, the final
rules discussed below specify: (1) Which financial institutions and
creditors must develop and implement a written identity theft
prevention program (``Program''); (2) the objectives of the Program;
(3) the elements that the Program must contain; and (4) the steps
financial institutions and creditors need to take to administer the
Program.
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\22\ 15 U.S.C. 1681m(e)(1)(A) and (B). Key terms such as
``financial institution'' and ``creditor'' are defined in the rules
and discussed later in this Section.
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1. Which Financial Institutions and Creditors Are Required To Have a
Program
The ``scope'' subsections of the rules generally set forth the
types of entities that are subject to the Commissions' identity theft
red flags rules.\23\ Under these subsections, the rules apply to
entities over which Congress recently granted the Commissions
enforcement authority under the FCRA.\24\ The Commissions' scope
provisions are similar to those contained in the rules adopted by the
Agencies, which limit the rules' scope to entities that are within the
Agencies' respective enforcement authorities.\25\
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\23\ Sec. 162.30(a) (CFTC); Sec. 248.201(a) (SEC).
\24\ Section 1088(a)(10)(A) of the Dodd-Frank Act amended
section 621(b) of the FCRA to add the Commissions to the list of
federal agencies responsible for enforcement of the FCRA. As
amended, section 621(b) of the FCRA specifically provides that
enforcement of the requirements imposed under the FCRA ``shall be
enforced under * * * the Commodity Exchange Act, with respect to a
person subject to the jurisdiction of the [CFTC]; [and under] the
Federal securities laws, and any other laws that are subject to the
jurisdiction of the [SEC], with respect to a person that is subject
to the jurisdiction of the [SEC] * * *'' 15 U.S.C. 1681s(b)(1)(F)-
(G). See also 15 U.S.C. 1681a(f) (defining ``consumer reporting
agency'').
\25\ See, e.g., 12 CFR 334.90(a) (stating that the FDIC's red
flags rule ``applies to a financial institution or creditor that is
an insured state nonmember bank, insured state licensed branch of a
foreign bank, or a subsidiary of such entities (except brokers,
dealers, persons providing insurance, investment companies, and
investment advisers)''); 12 CFR 717.90(a) (stating that the NCUA's
red flags rule ``applies to a financial institution or creditor that
is a federal credit union'').
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As noted above, the CFTC's ``scope'' subsection ``applies to
financial institutions and creditors that are subject to'' the CFTC's
enforcement authority under the FCRA.\26\ The CFTC's proposed
definitions of ``financial institution'' and ``creditor'' describe the
entities to which its identity theft red flags rules and guidelines
apply. In the Proposing Release, the CFTC defined ``financial
institution'' as having the same meaning as in section 603(t) of the
FCRA.\27\ In addition, the CFTC's proposed definition of ``financial
institution'' also specified that the term includes any futures
commission merchant (``FCM''), retail foreign exchange dealer
(``RFED''), commodity trading advisor (``CTA''), commodity pool
operator (``CPO''), introducing broker (``IB''), swap dealer (``SD''),
or major swap participant (``MSP'') that directly or indirectly holds a
transaction account belonging to a consumer.\28\ Similarly, in the
CFTC's proposed definition of ``creditor,'' the CFTC applies the
definition of ``creditor'' from 15 U.S.C. 1681m(e)(4) to any FCM, RFED,
CTA, CPO, IB, SD, or MSP that ``regularly extends, renews, or continues
credit; regularly arranges for the extension, renewal, or continuation
of credit; or in acting as an assignee of an original creditor,
participates in the decision to extend, renew, or continue credit.''
\29\ The CFTC has determined that the final identity theft red flags
rules apply to these entities because of the increased likelihood that
these entities open or maintain covered accounts, or pose a reasonably
foreseeable risk to customers, or to the safety and soundness of the
financial institution or creditor, from identity theft. This approach
is consistent with the general scope of part 162 of the CFTC's
regulations.\30\
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\26\ Sec. 162.30(a); see also supra note 24.
\27\ See 15 U.S.C. 1681a(t) (defining ``financial institution''
to include certain banks and credit unions, and ``any other person
that, directly or indirectly, holds a transaction account (as
defined in Section 19(b) of the Federal Reserve Act) belonging to a
consumer''). Section 19(b) of the Federal Reserve Act defines a
transaction account as ``a deposit or account on which the depositor
or account holder is permitted to make withdrawals by negotiable or
transferable instrument, payment orders or withdrawal, telephone
transfers, or other similar items for the purpose of making payments
or transfers to third parties or others.'' 12 U.S.C. 461(b)(1)(C).)
\28\ Sec. 162.30(b)(7).
\29\ Sec. 162.30(b)(5).
\30\ Sec. 162.1(b) (specifying that ``[t]his part applies to
certain consumer information held by * * * futures commission
merchants, retail foreign exchange dealers, commodity trading
advisors, commodity pool operators, introducing brokers, major swap
participants and swap dealers.'')
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One commenter suggested that the CFTC follow the SEC's approach and
simply cross-reference the FCRA definition of ``financial institution''
and the FCRA definition of ``creditor'' as amended by the Red Flag
Program Clarification Act of 2010 (``Clarification Act'') \31\ rather
than including named entities in the definition.\32\ The commenter
argued that cross-referencing the FCRA definitions, as amended by the
Clarification Act, rather than including specific types of entities
that are subject to the CFTC's enforcement authority in the definitions
of ``financial institution'' and ``creditor,'' would be more consistent
with the SEC's and the Agencies' regulations and would allow the
agencies to easily adapt to any changes to the FCRA over time.\33\
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\31\ In December 2010, President Obama signed into law the Red
Flag Program Clarification Act of 2010, which amended the definition
of ``creditor'' in the FCRA for purposes of identity theft red flags
rules. Red Flag Program Clarification Act of 2010, Public Law 111-
319 (2010) (inserting new section 4 at the end of section 615(e) of
the FCRA), codified at 15 U.S.C. 1681m(e)(4).
\32\ IAA Comment Letter.
\33\ The commenter also noted that the CFTC's proposed
definition of ``creditor'' would include certain entities such as
CPOs and CTAs--entities that do not extend credit.
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After considering these concerns, the CFTC has concluded that if it
were to follow the SEC's approach and simply cross-reference the FCRA
definitions of ``financial institution'' and ``creditor,'' the general
scope provisions of 17 CFR part 162 would still apply and specify that
part 162 applies to FCMs, RFEDs, CTAs, CPOs, IBs, MSPs, and SDs. As a
practical matter, a cross-reference to the FCRA definitions of
``financial institution'' and ``creditor'' would not change the result
because under the general scope provisions of part 162, the CFTC's
identity theft red flags rules would still apply to the same list of
entities. As a result, the CFTC believes that it should retain the same
definition of ``financial institution'' and ``creditor'' contained in
the Proposing Release.
The SEC's ``scope'' subsection provides that the final rules apply
to a financial institution or creditor, as defined by the FCRA, that
is:
A broker, dealer or any other person that is registered or
required to be registered under the Securities Exchange Act of 1934
(``Exchange Act'');
An investment company that is registered or required to be
registered under the Investment Company Act of 1940 (``Investment
Company Act''), that has elected to be regulated as a business
[[Page 23641]]
development company (``BDC'') under that Act, or that operates as an
employees' securities company (``ESC'') under that Act; or
An investment adviser that is registered or required to be
registered under the Investment Advisers Act of 1940 (``Investment
Advisers Act'').\34\
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\34\ Sec. 248.201(a).
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The types of entities listed by name in the scope section are the
registered entities regulated by the SEC that are most likely to be
financial institutions or creditors, i.e., brokers or dealers
(``broker-dealers''), investment companies, and investment
advisers.\35\ The scope section also includes any other entities that
are registered or are required to register under the Exchange Act.\36\
Some types of entities required to register under the Exchange Act,
such as nationally recognized statistical rating organizations
(``NRSROs''), self-regulatory organizations (``SROs''), municipal
advisors, and municipal securities dealers, are not listed by name in
the scope section because they may be less likely to qualify as
financial institutions or creditors under the FCRA.\37\ Nevertheless,
if any entity of a type not listed qualifies as a financial institution
or creditor, it is covered by the SEC's rules. The scope section does
not include entities that are not themselves registered or required to
register with the SEC (with the exception of certain non-registered
investment companies that nonetheless are regulated by the SEC \38\),
even if they register securities under the Securities Act of 1933 or
the Exchange Act, or report information under the federal securities
laws.\39\
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\35\ The SEC's final rules define the scope of the identity
theft red flags rules, section 248.201(a), differently than
Regulation S-AM, the affiliate marketing rule the SEC adopted under
the FCRA, defines its scope. See 17 CFR 248.101(b) (providing that
Regulation S-AM applies to any brokers or dealers (other than
notice-registered brokers or dealers), any investment companies, and
any investment advisers or transfer agents registered with the SEC).
Section 214(b) of the FACT Act, pursuant to which the SEC adopted
Regulation S-AM, did not specify the types of entities that would be
subject to the SEC's rules, and did not state that the affiliate
marketing rules should apply to all persons subject to the SEC's
enforcement authority. By contrast, the Dodd-Frank Act specifies
that the SEC's identity theft red flags rules should apply to a
``person that is subject to the jurisdiction'' of the SEC. See Dodd-
Frank Act sections 1088(a)(8), (10). Therefore, the SEC's identity
theft red flags rules apply to BDCs, ESCs, and ``any * * * person
that is registered or required to be registered under the Securities
Exchange Act of 1934,'' as well as to those entities within the
scope of Regulation S-AM.
The scope of the SEC's final rules also differs from that of
Regulation S-P, 17 CFR part 248, subpart A, the privacy rule the SEC
adopted in 2000 pursuant to the Gramm-Leach-Bliley Act. Public Law
106-102 (1999). Regulation S-P was adopted under Title V of that
Act, which, unlike the FCRA, limited the SEC's regulatory authority
to: (i) Brokers and dealers; (ii) investment companies; and (iii)
investment advisers registered under the Investment Advisers Act.
See 15 U.S.C. 6805(a)(3)-(5).
\36\ The Dodd-Frank Act defines a ``person regulated by the
[SEC],'' for other purposes of the Act, as certain entities that are
registered or required to be registered with the SEC, and certain
employees, agents, and contractors of those entities. See Dodd-Frank
Act section 1002(21).
\37\ The SEC believes that municipal advisors and municipal
securities dealers may be less likely to qualify as financial
institutions because they may be less likely to maintain transaction
accounts for consumers. A commenter agreed with us that municipal
advisors and municipal securities dealers may be less likely to
qualify as financial institutions. See FSR/SIFMA Comment Letter. For
further discussion, see infra notes 43-47 and accompanying text.
\38\ As noted above, the scope of the final rules covers BDCs
and ESCs, which typically do not register as investment companies
with the SEC but are regulated by the SEC. BDCs file with the SEC
notices of reliance on the BDC provisions of the Investment Company
Act and the SEC's rules thereunder. See Form N-54A (``Notification
of Election to be Subject to Sections 55 through 65 of the
Investment Company Act of 1940 Filed Pursuant to Section 54(a) of
the Act'') [17 CFR 274.53]. ESCs operate pursuant to individual
exemptive orders issued by the SEC that govern the companies'
operations. See Investment Company Act section 6(b) [15 U.S.C. 80a-
6(b)].
\39\ See, e.g., Exemptions for Advisers to Venture Capital
Funds, Private Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers, Investment Advisers
Act Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)]
(adopting rules related to investment advisers exempt from
registration with the SEC, including ``exempt reporting advisers'').
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The SEC received four comment letters arguing that it should
specifically exclude certain entities from the scope of the rules.\40\
These commenters recommended that the scope section exclude registered
investment advisers,\41\ clearing organizations,\42\ SROs, municipal
securities dealers, municipal advisors, or NRSROs.\43\ The commenters
argued that these entities are unlikely to be financial institutions or
creditors and that, without a specific exclusion, the scope of the
rules is unclear and the rules would require these entities to
periodically review their operations to ensure compliance with rules
that are not relevant to their businesses.\44\ Another commenter
recommended that the rules not list any of the types of entities
subject to the rules, because such a list could confuse entities that
are on the list but do not qualify as financial institutions or
creditors.\45\
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\40\ See IAA Comment Letter; Comment Letter of the National
Society of Compliance Professionals, Inc. (May 4, 2012) (``NSCP
Comment Letter''); OCC Comment Letter; FSR/SIFMA Comment Letter.
\41\ See, e.g., IAA Comment Letter (``[W]e believe a cleaner
approach would be to eliminate investment advisers from the entities
specifically mentioned in the scope section.''); NSCP Comment Letter
(``We would urge the Commission to specifically exclude investment
advisers from the scope of the rule since it is our view that any
adviser that is a financial institution would already be covered by
FCRA.''). For further discussion, see infra notes 55-60 and 73-76
and accompanying text.
\42\ See OCC Comment Letter (``[W]e encourage the Commissions to
expressly exclude clearing organizations from the scope of the
Proposed Rules because, as explained below, clearing organizations
like OCC should not be considered `creditors' for these
purposes.''). For further discussion, see infra note 75.
\43\ See FSR/SIFMA Comment Letter (``Specifically, we ask that
the SEC exclude * * * those entities that are unlikely to be deemed
financial institutions or creditors under the FCRA, such as NRSROs,
SROs, municipal advisors, municipal securities dealers, and
registered investment advisers.'').
\44\ See, e.g., NSCP Comment Letter.
\45\ See MarketCounsel Comment Letter.
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We appreciate these concerns, and seek to minimize potential
unnecessary burdens on regulated entities. As we acknowledge above, the
entities that are not listed in the rule's scope section may be less
likely to qualify as financial institutions or creditors under the
FCRA, e.g., because they do not hold transaction accounts for
consumers.\46\ The Dodd-Frank Act required the SEC to adopt identity
theft red flags rules with respect to persons that are ``subject to the
jurisdiction of the Securities and Exchange Commission.'' \47\
Expressly excluding from certain requirements of the rules any entities
that are registered with the SEC, are subject to the SEC's enforcement
authority, and are covered by the scope of the rules likely would not
effectively implement the purposes of the Dodd-Frank Act and the FCRA,
which are described in this release. In addition, we continue to
believe that specifically listing in the scope section the entities
that are likely to be subject to the rules--if they qualify as
financial institutions or creditors--will provide useful guidance to
those entities in determining their status under the rules. Therefore,
we are adopting the scope section of the rules as proposed.
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\46\ See supra note 37 and accompanying text. For further
discussion of the extent to which investment advisers, which are
specifically listed in the rules' scope section, may qualify as
financial institutions or creditors, see infra notes 55-60 and 73-76
and accompanying text.
\47\ 15 U.S.C. 1681s(b)(1)(G).
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i. Definition of Financial Institution
As discussed above, the Commissions' final red flags rules apply to
``financial institutions'' and ``creditors.'' As in the proposed rules,
the Commissions are defining the term ``financial institution'' in the
final rules by reference to the definition of the term in section
603(t) of the FCRA.\48\ That section defines a
[[Page 23642]]
financial institution to include certain banks and credit unions, and
``any other person that, directly or indirectly, holds a transaction
account (as defined in section 19(b) of the Federal Reserve Act)
belonging to a consumer.'' \49\ Section 19(b) of the Federal Reserve
Act defines ``transaction account'' to include an ``account on which
the * * * account holder is permitted to make withdrawals by negotiable
or transferable instrument, payment orders of withdrawal, telephone
transfers, or other similar items for the purpose of making payments or
transfers to third persons or others.'' \50\ Section 603(c) of the FCRA
defines ``consumer'' as an individual; \51\ thus, to qualify as a
financial institution, an entity must hold a transaction account
belonging to an individual. The following are illustrative examples of
an SEC-regulated entity that could fall within the meaning of the term
``financial institution'' because it holds transaction accounts
belonging to individuals: (i) A broker-dealer that offers custodial
accounts; (ii) a registered investment company that enables investors
to make wire transfers to other parties or that offers check-writing
privileges; and (iii) an investment adviser that directly or indirectly
holds transaction accounts and that is permitted to direct payments or
transfers out of those accounts to third parties.\52\
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\48\ 15 U.S.C. 1681a(t). See Sec. 162.30(b)(7) (CFTC); Sec.
248.201(b)(7) (SEC). The Agencies also defined ``financial
institution,'' in their identity theft red flags rules, by reference
to the FCRA. See, e.g., 16 CFR 681.1(b)(7) (FTC) (``Financial
institution has the same meaning as in 15 U.S.C. 1681a(t).'').
\49\ 15 U.S.C. 1681a(t). In full, the FCRA defines ``financial
institution'' to mean ``a State or National bank, a State or Federal
savings and loan association, a mutual savings bank, a State or
Federal credit union, or any other person that, directly or
indirectly, holds a transaction account [as defined in section 19(b)
of the Federal Reserve Act] belonging to a consumer.'' Id.
\50\ 12 U.S.C. 461(b)(1)(C). Section 19(b) further states that a
transaction account ``includes demand deposits, negotiable order of
withdrawal accounts, savings deposits subject to automatic
transfers, and share draft accounts.'' Id.
\51\ 15 U.S.C. 1681a(c).
\52\ The CFTC's definition specifies that financial institution
``includes any futures commission merchant, retail foreign exchange
dealer, commodity trading advisor, commodity pool operator,
introducing broker, swap dealer, or major swap participant that
directly or indirectly holds a transaction account belonging to a
consumer.'' See Sec. 162.30(b)(7).
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A few commenters raised concerns about the SEC's statements in the
Proposing Release regarding the possibility that some investment
advisers could be financial institutions under certain circumstances.
These commenters argued that investment advisers generally do not
``hold'' transaction accounts, thus meaning that they would not be
financial institutions under the definition.\53\ One commenter
requested that we state that investment advisers who are authorized to
withdraw assets from investors' accounts to pay bills, or otherwise
direct payments to third parties, on behalf of investors do not
``indirectly'' hold such accounts and therefore are not financial
institutions.\54\
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\53\ See, e.g., IAA Comment Letter (``Investment advisers are
not banks or credit unions and do not hold transaction accounts,
such as custodial accounts or accounts with check-writing
privileges. Instead, any cash or securities managed by investment
advisers must be held in custody with financial institutions that
are qualified custodians (broker-dealers or banks, primarily).'').
\54\ See MarketCounsel Comment Letter (``MarketCounsel requests
additional clarification in the Proposed Rule to make it clear that
an investment adviser will not be deemed to indirectly hold a
transaction account simply because it has control over, or access
to, the transaction account.'').
---------------------------------------------------------------------------
The SEC has concluded otherwise. As described below, some
investment advisers do hold transaction accounts, both directly and
indirectly, and thus may qualify as financial institutions under the
rules as we are adopting them. As discussed further in Section III of
this release, SEC staff anticipates that the following examples of
circumstances in which certain entities, particularly investment
advisers, may qualify as financial institutions may lead some of these
entities that had not previously complied with the Agencies' rules to
now determine that they should comply with Regulation S-ID.\55\
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\55\ SEC staff understands, based on comment letters and
communications with industry representatives, that a number of
investment advisers may not currently have identity theft red flags
Programs. See MarketCounsel Comment Letter; IAA Comment Letter. SEC
staff also expects, based on Investment Adviser Registration
Depository (IARD) data, that certain private fund advisers could
potentially meet the definition of ``financial institution'' or
``creditor.'' See infra note 190.
---------------------------------------------------------------------------
Investment advisers who have the ability to direct transfers or
payments from accounts belonging to individuals to third parties upon
the individuals' instructions, or who act as agents on behalf of the
individuals, are susceptible to the same types of risks of fraud as
other financial institutions, and individuals who hold transaction
accounts with these investment advisers bear the same types of risks of
identity theft and loss of assets as consumers holding accounts with
other financial institutions. If such an adviser does not have a
program in place to verify investors' identities and detect identity
theft red flags, another individual may deceive the adviser by posing
as an investor. The red flags program of a bank or other qualified
custodian \56\ that maintains physical custody of an investor's assets
would not adequately protect individuals holding transaction accounts
with such advisers, because the adviser could give an order to withdraw
assets, but at the direction of an impostor.\57\ Investors who entrust
their assets to registered investment advisers that directly or
indirectly hold transaction accounts should receive the protections
against identity theft provided by these rules.
---------------------------------------------------------------------------
\56\ See 17 CFR 275.206(4)-2(d)(6) (setting forth the entities
that fall within the definition of ``qualified custodian'').
\57\ See, e.g., Byron Acohido, Cybercrooks fool financial
advisers to steal from clients, USA Today, Aug. 26, 2012, available
at http://usatoday30.usatoday.com/money/perfi/basics/story/2012-08-26/wire-transfer-fraud/57335540/1 (last visited March 4, 2013) (``In
a new twist, cyber-robbers are using ginned-up email messages in
attempts to con financial advisers into wiring cash out of their
clients' online investment accounts. If the adviser falls for it, a
wire transfer gets legitimately executed, and cash flows into a bank
account controlled by the thieves--leaving the victim in a dispute
with the financial adviser over getting made whole.'').
---------------------------------------------------------------------------
For instance, even if an investor's assets are physically held with
a qualified custodian, an adviser that has authority, by power of
attorney or otherwise, to withdraw money from the investor's account
and direct payments to third parties according to the investor's
instructions would hold a transaction account. However, an adviser that
has authority to withdraw money from an investor's account solely to
deduct its own advisory fees would not hold a transaction account,
because the adviser would not be making the payments to third
parties.\58\
---------------------------------------------------------------------------
\58\ See supra note 50 and accompanying text.
---------------------------------------------------------------------------
Registered investment advisers to private funds also may directly
or indirectly hold transaction accounts.\59\ If an individual invests
money in a private fund, and the adviser to the fund has the authority,
pursuant to an arrangement with the private fund or the individual, to
direct such individual's investment proceeds (e.g., redemptions,
distributions, dividends, interest, or other proceeds related to the
individual's account) to third parties, then that adviser would
indirectly hold a transaction account. For example, a private fund
adviser would hold a transaction account if it has the authority to
direct an investor's redemption proceeds to other persons upon
instructions received from the investor.\60\
---------------------------------------------------------------------------
\59\ A ``private fund'' is ``an issuer that would be an
investment company, as defined in section 3 of the Investment
Company Act, but for section 3(c)(1) or 3(c)(7) of that Act.'' 15
U.S.C. 80b-2(a)(29).
\60\ On the other hand, an investment adviser may not hold a
transaction account if the adviser has a narrowly-drafted power of
attorney with an investor under which the adviser has no authority
to redirect the investor's investment proceeds to third parties or
others upon instructions from the investor.
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ii. Definition of Creditor
The Commissions' final definitions of ``creditor'' refer to the
definition of
[[Page 23643]]
``creditor'' in the FCRA as amended by the Clarification Act.\61\ The
FCRA now defines ``creditor,'' for purposes of the red flags rules, as
a creditor as defined in the Equal Credit Opportunity Act \62\
(``ECOA'') (i.e., a person that regularly extends, renews or continues
credit,\63\ or makes those arrangements) that ``regularly and in the
course of business * * * advances funds to or on behalf of a person,
based on an obligation of the person to repay the funds or repayable
from specific property pledged by or on behalf of the person.'' \64\
The FCRA excludes from this definition a creditor that ``advances funds
on behalf of a person for expenses incidental to a service provided by
the creditor to that person * * *'' \65\
---------------------------------------------------------------------------
\61\ See Sec. 162.30(b)(5) (CFTC); Sec. 248.201(b)(5) (SEC);
see also supra note 31.
\62\ Section 702(e) of the ECOA defines ``creditor'' to mean
``any person who regularly extends, renews, or continues credit; any
person who regularly arranges for the extension, renewal, or
continuation of credit; or any assignee of an original creditor who
participates in the decision to extend, renew, or continue credit.''
15 U.S.C. 1691a(e).
\63\ The Commissions are defining ``credit'' by reference to its
definition in the FCRA. See Sec. 162.30(b)(4) (CFTC); Sec.
248.201(b)(4) (SEC). That definition refers to the definition of
credit in the ECOA, which means ``the right granted by a creditor to
a debtor to defer payment of debt or to incur debts and defer its
payment or to purchase property or services and defer payment
therefor.'' The Agencies defined ``credit'' in the same manner in
their identity theft red flags rules. See, e.g., 16 CFR 681.1(b)(4)
(FTC) (defining ``credit'' as having the same meaning as in 15
U.S.C. 1681a(r)(5), which defines ``credit'' as having the same
meaning as in section 702 of the ECOA).
\64\ 15 U.S.C. 1681m(e)(4)(A)(iii). The FCRA defines a
``creditor'' also to include a creditor (as defined in the ECOA)
that ``regularly and in the ordinary course of business (i) obtains
or uses consumer reports, directly or indirectly, in connection with
a credit transaction; (ii) furnishes information to consumer
reporting agencies * * * in connection with a credit transaction * *
*'' 15 U.S.C. 1681m(e)(4)(A)(i)-(ii).
\65\ FCRA section 615(e)(4)(B), 15 U.S.C. 1681m(e)(4)(B). The
Clarification Act does not define the extent to which the
advancement of funds for expenses would be considered ``incidental''
to services rendered by the creditor. The legislative history
indicates that the Clarification Act was intended to ensure that
lawyers, doctors, and other small businesses that may advance funds
to pay for services such as expert witnesses, or that may bill in
arrears for services provided, should not be considered creditors
under the red flags rules. See 156 Cong. Rec. S8288-9 (daily ed.
Nov. 30, 2010) (statements of Senators Thune and Dodd).
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The CFTC's definition of ``creditor'' includes certain entities
(such as FCMs and CTAs) that regularly extend, renew or continue credit
or make those credit arrangements.\66\ The proposed definition applies
the definition of ``creditor'' from 15 U.S.C. 1681m(e)(4) to ``any
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator, introducing broker, swap
dealer, or major swap participant that regularly extends, renews, or
continues credit; regularly arranges for the extension, renewal, or
continuation of credit; or in acting as an assignee of an original
creditor, participates in the decision to extend, renew, or continue
credit.'' \67\ One commenter stated that the proposed definition was
overly broad and unclear because it did not appear to include
derivative clearing organizations (``DCOs'') such as the Options
Clearing Corporation, while the SEC's definition could be read to
include DCOs, and recommended that DCOs be explicitly excluded from the
definition.\68\ The commenter further requested that the Commissions
specifically exclude DCOs from the scope of the Proposed Rules.
---------------------------------------------------------------------------
\66\ See Sec. 162.30(b)(5).
\67\ See Sec. 162.30(b)(7).
\68\ OCC Comment Letter.
---------------------------------------------------------------------------
As the commenter noted, the CFTC's definition of ``creditor''
excludes DCOs because DCOs are not included on the list of entities
that may qualify as creditors under the rule. Under the proposed CFTC
rules, a ``creditor'' includes any FCM, RFED, CTA, CPO, IB, SD, or MSP
that regularly extends, renews, or continues credit or makes credit
arrangements. Unlike DCOs, the listed entities which are included in
the CFTC definition of ``creditor'' engage in retail customer business
and maintain retail customer accounts. These entities are included as
potential creditors in the definition because they are the CFTC
registrants most likely to collect personal consumer data. Moreover,
this list of potential creditors is consistent with the general scope
provisions of the part 162 rules, which also apply to FCMs, RFEDs,
CTAs, CPOs, IBs, SDs, or MSPs.\69\ Accordingly, the CFTC declines to
provide a specific exclusion for DCOs from the scope of the rule.
---------------------------------------------------------------------------
\69\ See Sec. 162.1(b).
---------------------------------------------------------------------------
As proposed, the SEC's definition of ``creditor'' referred to the
definition of ``creditor'' under FCRA, and stated that it ``includes
lenders such as brokers or dealers offering margin accounts, securities
lending services, and short selling services.'' \70\ The SEC proposed
to name these entities in the definition because they are likely to
qualify as ``creditors,'' since the funds advanced in these accounts do
not appear to be for ``expenses incidental to a service provided.'' One
commenter, the Options Clearing Corporation, argued that the proposed
definition's reference to securities lending services could be read to
mean that an intermediary in securities lending transactions is a
``creditor'' under the SEC's rules, even if the entity does not meet
FCRA's definition of ``creditor.'' \71\ The SEC intended the proposed
definition of ``creditor'' to be limited to the FCRA definition, and to
include relevant examples of activities that could qualify an entity as
a creditor. In order to clarify this definition and avoid an
inadvertently broad meaning of the term ``creditor,'' we are revising
the definition to rely on FCRA's statutory definition of the term and
omit the references to specific types of lending, such as margin
accounts, securities lending services, and short selling services.\72\
---------------------------------------------------------------------------
\70\ See proposed Sec. 248.201(b)(5).
\71\ OCC Comment Letter.
\72\ See Sec. 248.201(b)(5).
---------------------------------------------------------------------------
Some commenters stated that most investment advisers would probably
not qualify as creditors under the definition.\73\ One commenter
believed that the proposal might have implied that investment advisers
were subject to a different standard than other entities under the
definition of ``creditor,'' and requested that we clarify that
investment advisers may, like all other entities, take advantage of the
exception in the definition to advance funds on behalf of a person for
expenses incidental to a service provided by the creditor to that
person.\74\ Our final rules do not treat investment advisers
differently than any other entity under the definition of ``creditor.''
\75\ An investment adviser could potentially qualify as a creditor if
it ``advances funds'' to an investor that are not for expenses
incidental to services provided by that adviser. For example, a private
[[Page 23644]]
fund adviser that regularly and in the ordinary course of business
lends money, short-term or otherwise, to permit investors to make an
investment in the fund, pending the receipt or clearance of an
investor's check or wire transfer, could qualify as a creditor.\76\
---------------------------------------------------------------------------
\73\ See, e.g., MarketCounsel Comment Letter; NSCP Comment
Letter (``We agree with the proposal that investment advisers are
not creditors for purposes of the proposal because advisers
generally do not bill in arrears. We are not aware of any situation
where an investment adviser would advance funds and we would note
that such advisers would likely run afoul of state rules that
prohibit an adviser from loaning funds or borrowing funds from a
client.'').
\74\ MarketCounsel Comment Letter.
\75\ The definition of ``creditor'' in FCRA also authorizes the
Agencies and the Commissions to include other entities in the
definition of ``creditor'' if the Commissions determine that those
entities offer or maintain accounts that are subject to a reasonably
foreseeable risk of identity theft. 15 U.S.C. 1681m(e)(4)(C). One
commenter urged the Commissions not to exercise this authority, and
particularly not to include clearing organizations as creditors
under the definition. See OCC Comment Letter (``We believe there is
no reasonable basis for concluding that the securities loan clearing
services offered by OCC as described above would pose a reasonably
foreseeable risk of identity theft or that such services should
cause OCC to be considered a `creditor.'''). The Commissions did not
propose to specifically include clearing organizations in the
definition of ``creditor'' under this authority, and the final rules
do not include any additional types of entities in the definition of
``creditor'' that are not already included in the statutory
definition.
\76\ However, a private fund adviser would not qualify as a
creditor solely because its private funds regularly borrow money
from third-party credit facilities pending receipt of investor
contributions, as the definition of ``creditor'' does not include
``indirect'' creditors.
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iii. Definition of Covered Account and Other Terms
Under the final rules, a financial institution or creditor must
establish a red flags Program if it offers or maintains ``covered
accounts.'' As in the proposed rules, the Commissions are defining the
term ``covered account'' in the final rules as: (i) An account that a
financial institution or creditor offers or maintains, primarily for
personal, family, or household purposes, that involves or is designed
to permit multiple payments or transactions; and (ii) any other account
that the financial institution or creditor offers or maintains for
which there is a reasonably foreseeable risk to customers \77\ or to
the safety and soundness of the financial institution or creditor from
identity theft, including financial, operational, compliance,
reputation, or litigation risks.\78\ The CFTC's definition includes a
margin account as an example of a covered account.\79\ The SEC's
definition includes, as examples of a covered account, a brokerage
account with a broker-dealer or an account maintained by a mutual fund
(or its agent) that permits wire transfers or other payments to third
parties.\80\
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\77\ To be a financial institution, an entity must hold a
transaction account with at least one ``consumer'' (defined as an
``individual'' in 15 U.S.C. 1681a(c)). However, once an entity is a
financial institution, it must periodically determine whether it
offers or maintains ``covered accounts'' to or on behalf of its
customers, which may be individuals or business entities. Sections
162.30(b)(6) (CFTC) and 248.201(b)(6) (SEC) define ``customer'' to
mean a person that has a covered account with a financial
institution or creditor. The Commissions are including this
definition for two reasons. First, this definition is the same as
the definition of ``customer'' in the Agencies' final rules. Second,
because the definition uses the term ``person,'' it covers various
types of business entities (e.g., small businesses) that could be
victims of identity theft. 15 U.S.C. 1681a(b). Although the
definition of ``customer'' is broad, not every account held by or
offered to a customer will be considered a covered account, as the
identification of covered accounts under the identity theft red
flags rules is based on a risk-based determination. See infra notes
95-100 and accompanying text.
\78\ Sec. 162.30(b)(3) (CFTC) and Sec. 248.201(b)(3) (SEC).
The Agencies' 2007 Adopting Release (which included an identical
definition of the term ``account'') noted that ``the definition of
`account' still applies to fiduciary, agency, custodial, brokerage
and investment advisory activities.'' 2007 Adopting Release supra
note 8, at 63721.
\79\ See Sec. 162.30(b)(3)(i).
\80\ See Sec. 248.201(b)(3)(i).
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The Commissions are defining an ``account'' as a ``continuing
relationship established by a person with a financial institution or
creditor to obtain a product or service for personal, family, household
or business purposes.''\81\ The CFTC's definition specifically includes
an extension of credit, such as the purchase of property or services
involving a deferred payment.\82\ The SEC's definition includes, as
examples of accounts, ``a brokerage account, a mutual fund account
(i.e., an account with an open-end investment company), and an
investment advisory account.'' \83\
---------------------------------------------------------------------------
\81\ Sec. 162.30(b)(1) (CFTC) and Sec. 248.201(b)(1) (SEC).
Two commenters requested further guidance on the meaning of
``continuing relationship'' in the proposed definition of the term
``account.'' Comment Letter of Nathaniel Washburn (April 12, 2012);
Comment Letter of Chris Barnard (``Chris Barnard Comment Letter'')
(Mar. 29, 2012). The SEC and the CFTC's definition of ``account'' is
the same as that adopted by the Agencies. The Agencies' 2007
Adopting Release provides further guidance on the meaning of
continuing relationship, noting that it is designed to exclude
single, non-continuing transactions by non-customers. 2007 Adopting
Release supra note 8, at 63721.
\82\ Sec. 162.30(b)(1).
\83\ Sec. 248.201(b)(1).
---------------------------------------------------------------------------
In the Proposing Release, the Commissions noted that ``entities
that adopt red flags Programs would focus their attention on `covered
accounts' for indicia of possible identity theft.''\84\ In response to
this statement, one commenter recommended revising the definition of
``covered account'' such that entities adopting red flags Programs
would focus particularly on protecting various types of information
provided by customers, rather than focusing on particular categories of
accounts.\85\ The Commissions have decided not to revise the definition
of ``covered account'' as suggested by this commenter, because the
Commissions believe that by focusing the rules on the types of accounts
that might pose a reasonably foreseeable risk of identity theft,
financial institutions and creditors are best able to protect the
information that customers provide in the course of holding these
accounts. Moreover, the current definition and scope of the term
``covered account'' are similar to the provisions of the other
Agencies' identity theft red flags rules.\86\ As discussed below, the
Commissions believe that the final rules' terms should be defined as
the Agencies defined them in their respective final rules, where
appropriate, to foster consistent regulations.\87\
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\84\ 77 FR 13450, 13454.
\85\ See Comment Letter of Kenneth Orgoglioso (May 7, 2012).
\86\ See, e.g., 16 CFR 681.1(b)(3).
\87\ See infra note 93 and accompanying text.
---------------------------------------------------------------------------
Two commenters argued that insurance company separate accounts are
unlikely to be covered accounts because they are not established for
personal, family, or household purposes and do not pose a reasonably
foreseeable risk of identity theft.\88\ They contended that insurance
company separate accounts are investment vehicles underlying variable
life and annuity insurance products, and generally individual customers
do not have a direct relationship with these accounts. One of the
commenters requested that the definition of ``covered account''
specifically exclude insurance company separate accounts.\89\ The
commenter noted that because third parties and customers do not have
direct access to insurance company separate accounts, there is little
risk of identity theft in these accounts.\90\
---------------------------------------------------------------------------
\88\ Comment Letter of the American Council of Life Insurers
(May 7, 2012); FSR/SIFMA Comment Letter.
\89\ FSR/SIFMA Comment Letter.
\90\ See id. (``Further, third parties, including customers, do
not have direct access to Separate Accounts, which means that the
types of identity theft risks anticipated by the proposed Red Flags
Rules are essentially nonexistent.'').
---------------------------------------------------------------------------
The final rules require all financial institutions and creditors to
assess whether they offer or maintain covered accounts. Although, as
discussed above, some commenters suggested that insurance company
separate accounts may not qualify as covered accounts under the
definition, the final rule does not exclude insurance company separate
accounts from the definition of ``covered account'' because it would be
impracticable to provide an exhaustive list of account types that are
not covered accounts. Similarly, one commenter requested that the SEC
list all of the types of accounts that would be ``covered accounts''
under the rules.\91\ The rules provide examples of covered accounts,
but we cannot anticipate all of the types of accounts that could be
covered accounts. Any list that attempts to encompass all types of
covered accounts would likely be under-inclusive and would not take
into account future business practices.\92\ The
[[Page 23645]]
definition of ``covered account'' is deliberately designed to be
flexible to allow the financial institution or creditor to determine
which accounts pose a reasonably foreseeable risk of identity theft and
protect them accordingly. Therefore, we are adopting the definitions of
``account'' and ``covered account'' as they were proposed.
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\91\ Id.
\92\ For example, an institution that holds only business
accounts may decide later to offer accounts for personal, family, or
household purposes that permit multiple payments. The rule's
requirement that a financial institution or creditor periodically
determine whether it holds covered accounts is designed to require
that these entities re-evaluate whether they in fact hold any
covered accounts. See infra notes 95 and 96 and accompanying text.
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The identity theft red flags rules also define several other terms
as the Agencies defined them in their final rules, where appropriate,
to foster consistent regulations.\93\ In addition, terms that the SEC's
rules do not define have the same meaning they have in FCRA.\94\
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\93\ See Sec. 162.30(b)(4) (CFTC) and Sec. 248.201(b)(4) (SEC)
(definition of ``credit''); Sec. 162.30(b)(6) (CFTC) and Sec.
248.201(b)(6) (SEC) (definition of ``customer''); Sec. 162.30(b)(7)
(CFTC) and Sec. 248.201(b)(7) (SEC) (definition of ``financial
institution''); Sec. 162.30(b)(10) (CFTC) and Sec. 248.201(b)(10)
(SEC) (definition of ``red flag''); Sec. 162.30(b)(11) (CFTC) and
Sec. 248.201(b)(11) (SEC) (definition of ``service provider'').
The Agencies defined ``identity theft'' in their identity theft
red flags rules by referring to a definition previously adopted by
the FTC. See, e.g., 12 CFR 334.90(b)(8) (FDIC). The FTC defined
``identity theft'' as ``a fraud committed or attempted using the
identifying information of another person without authority.'' See
16 CFR 603.2(a). The FTC also has defined ``identifying
information,'' a term used in its definition of ``identity theft.''
See 16 CFR 603.2(b). The Commissions are defining the terms
``identifying information'' and ``identity theft'' by including the
same definitions of the terms as they appear in 16 CFR 603.2. See
Sec. 162.30(b)(8) and (9) (CFTC); Sec. 248.201(b)(8) and (9)
(SEC). One commenter suggested that we add the following highlighted
language to the definition of ``identity theft'' so that it would
read a ``fraud, deception, or other crime committed or attempted
using the identifying information of another person without
authority.'' Chris Barnard Comment Letter. Changing the definition
of ``identity theft'' so that it differs from the definition used by
the Agencies could lead to higher compliance costs, reduce
comparability of the Agencies' rules in contravention of the
statutory mandate, and pose difficulties for entities within the
enforcement authority of multiple agencies. Accordingly, we are
adopting the definition of ``identity theft'' as it was proposed.
\94\ See Sec. 248.201(b)(12)(vi) (SEC).
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iv. Determination of Whether a Covered Account Is Offered or Maintained
As under the proposed rules, under the final rules, each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts.\95\ As a part of this periodic
determination, a financial institution or creditor must conduct a risk
assessment that takes into consideration: (1) The methods it provides
to open its accounts; (2) the methods it provides to access its
accounts; and (3) its previous experiences with identity theft.\96\ A
financial institution or creditor should consider whether, for example,
a reasonably foreseeable risk of identity theft may exist in connection
with accounts it offers or maintains that may be opened or accessed
remotely or through methods that do not require face-to-face contact,
such as through email or the Internet, or by telephone. In addition, if
financial institutions or creditors offer or maintain accounts that
have been the target of identity theft, they should factor those
experiences into their determination. The Commissions anticipate that
entities will be able to demonstrate that they have complied with
applicable requirements, including their recurring determinations
regarding covered accounts.\97\
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\95\ Sec. 162.30(c) (CFTC) and Sec. 248.201(c) (SEC).
\96\ Sec. 162.30(c) (CFTC) and Sec. 248.201(c) (SEC).
\97\ See, e.g., Frequently Asked Questions: Identity Theft Red
Flags and Address Discrepancies at I.1, available at http://www.ftc.gov/os/2009/06/090611redflagsfaq.pdf (noting in joint
interpretive guidance provided by the Agencies' staff that, while
the Agencies' 2007 identity theft rules do not contain specific
record retention requirements, financial institutions and creditors
must be able to demonstrate that they have complied with the rules'
requirements).
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The Commissions acknowledge that some financial institutions or
creditors regulated by the Commissions do not offer or maintain
accounts for personal, family, or household purposes,\98\ and engage
predominantly in transactions with businesses, where the risk of
identity theft is minimal. In these instances, the financial
institution or creditor may determine after a preliminary risk
assessment that the accounts it offers or maintains do not pose a
reasonably foreseeable risk to customers or to its own safety and
soundness from identity theft, and therefore it does not need to
develop and implement a Program because it does not offer or maintain
any ``covered accounts.'' \99\ Alternatively, the financial institution
or creditor may determine that only a limited range of its accounts
present a reasonably foreseeable risk to customers, and therefore may
decide to develop and implement a Program that applies only to those
accounts or types of accounts.\100\ As proposed, under the final rules,
a financial institution or creditor that initially determines that it
does not need to have a Program is required to periodically reassess
whether it must develop and implement a Program in light of changes in
the accounts that it offers or maintains and the various other factors
set forth in sections 162.30(c) (CFTC) and 248.201(c) (SEC).
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\98\ See Sec. 162.30(b)(3)(i) (CFTC) and Sec. 248.201(b)(3)(i)
(SEC).
\99\ See Sec. 162.30(b)(3)(ii) (CFTC) and Sec.
248.201(b)(3)(ii) (SEC). For example, an FCM that is otherwise
subject to the identity theft red flags rules and that handles
accounts only for large, institutional investors might make a risk-
based determination that because it is subject to a low risk of
identity theft, it does not need to develop and implement a Program.
Similarly, a money market fund that is otherwise subject to the
identity theft red flags rules but that permits investments only by
other institutions and separately verifies and authenticates
transaction requests might make such a risk-based determination that
it need not develop a Program.
\100\ Even a Program limited in scale, however, needs to comply
with all of the provisions of the rules. See, e.g., Sec. 162.30(d)-
(f) (CFTC) and Sec. 248.201(d)-(f) (SEC) (program requirements).
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2. The Objectives of the Program
The final rules provide that each financial institution or creditor
that offers or maintains one or more covered accounts must develop and
implement a written Program designed to detect, prevent, and mitigate
identity theft in connection with the opening of a covered account or
any existing covered account.\101\ These provisions also require that
each Program be appropriate to the size and complexity of the financial
institution or creditor and the nature and scope of its activities.
Thus, the final rules are designed to be scalable, by permitting
Programs that take into account the operations of smaller institutions.
We received no comment on the proposed objectives of the Program and
are adopting them as proposed.
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\101\ See Sec. 162.30(d)(1) (CFTC) and Sec. 248.201(d)(1)
(SEC).
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3. The Elements of the Program
The final rules set out the four elements that financial
institutions and creditors must include in their Programs.\102\ These
elements are being adopted as proposed and are identical to the
elements required under the Agencies' final identity theft red flags
rules.\103\
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\102\ See Sec. 162.30(d)(2) (CFTC) and Sec. 248.201(d)(2)
(SEC).
\103\ See 2007 Adopting Release, supra note 8, at 63726-63730.
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First, the final rules require a financial institution or creditor
to develop a Program that includes reasonable policies and procedures
to identify relevant red flags \104\ for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those red flags into the Program.\105\ Rather than
[[Page 23646]]
singling out specific red flags as mandatory or requiring specific
policies and procedures to identify possible red flags, this first
element provides financial institutions and creditors with flexibility
in determining which red flags are relevant to their businesses and the
covered accounts they manage over time. The list of factors that a
financial institution or creditor should consider (as well as examples)
are included in Section II of the guidelines, which appear at the end
of the final rules.\106\ Given the changing nature of identity theft,
the Commissions believe that this element allows financial institutions
or creditors to respond and adapt to new forms of identity theft and
the attendant risks as they arise.
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\104\ Sec. 162.30(b)(10) (CFTC) and Sec. 248.201(b)(10) (SEC)
define ``red flag'' to mean a pattern, practice, or specific
activity that indicates the possible existence of identity theft.
\105\ See Sec. 162.30(d)(2)(i) (CFTC) Sec. 248.201(d)(2)(i)
(SEC). The board of directors, appropriate committee thereof, or
designated senior management employee may determine that a Program
designed by a parent, subsidiary, or affiliated entity is also
appropriate for use by the financial institution or creditor. In
making such a determination, the board (or committee or designated
employee) must conduct an independent review to ensure that the
Program is suitable and complies with the requirements of the red
flags rules. See 2007 Adopting Release, supra note 8, at 63730.
\106\ See Section II.B.2 below.
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Second, the final rules require financial institutions and
creditors to have reasonable policies and procedures to detect the red
flags that the Program incorporates.\107\ This element does not provide
a specific method of detection. Instead, section III of the guidelines
provides examples of various means to detect red flags.\108\
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\107\ See Sec. 162.30(d)(2)(ii) (CFTC) and Sec.
248.201(d)(2)(ii) (SEC).
\108\ See Section II.B.3 below.
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Third, the final rules require financial institutions and creditors
to have reasonable policies and procedures to respond appropriately to
any red flags that they detect.\109\ This element incorporates the
requirement that a financial institution or creditor assess whether the
red flags that are detected evidence a risk of identity theft and, if
so, determine how to respond appropriately based on the degree of risk.
Section IV of the guidelines sets out a list of aggravating factors and
examples that a financial institution or creditor should consider in
determining the appropriate response.\110\
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\109\ See Sec. 162.30(d)(2)(iii) (CFTC) and Sec.
248.201(d)(2)(iii) (SEC).
\110\ See Section II.B.4 below.
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Finally, the rules require financial institutions and creditors to
have reasonable policies and procedures to periodically update the
Program (including the red flags determined to be relevant), to reflect
changes in risks to customers and to the safety and soundness of the
financial institution or creditor from identity theft.\111\ As
discussed above, financial institutions and creditors are required to
determine which red flags are relevant to their businesses and the
covered accounts they offer or maintain. The Commissions are requiring
a periodic update, rather than immediate or continuous updates, to be
parallel with the identity theft red flags rules of the Agencies and to
avoid unnecessary regulatory burdens. Section V of the guidelines
provides a set of factors that should cause a financial institution or
creditor to update its Program.\112\ We received no comment on the
proposed elements of Programs and are adopting them as proposed.
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\111\ See Sec. 162.30(d)(2)(iv) (CFTC) and Sec.
248.201(d)(2)(iv) (SEC).
\112\ See Section II.B.5 below.
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4. Administration of the Program
The final rules provide direction to financial institutions and
creditors regarding the administration of Programs as a means of
enhancing the effectiveness of those Programs.\113\ First, the final
rules require that a financial institution or creditor obtain approval
of the initial written Program from either its board of directors, an
appropriate committee of the board of directors, or if the entity does
not have a board, from a designated senior management employee.\114\
This requirement highlights the responsibility of the board of
directors in approving a Program. One commenter asked us to clarify
that an entity that already has an existing Program in place, in
compliance with the other Agencies' rules, need not have the board
reapprove the Program to comply with this requirement.\115\ We agree
that if a financial institution or creditor already has a Program in
place, the board is not required to reapprove the existing Program in
response to this requirement, provided the Program otherwise meets the
requirements of the final rules.
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\113\ See Sec. 162.30(e) (CFTC) and Sec. 248.201(e) (SEC).
\114\ See Sec. 162.30(e)(1) (CFTC) and Sec. 248.201(e)(1)
(SEC), see also Sec. 162.30(b)(2) (CFTC) and Sec. 248.201(b)(2)
(SEC).
\115\ ICI Comment Letter.
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Second, the final rules provide that financial institutions and
creditors must involve the board of directors, an appropriate committee
thereof, or a designated senior management employee in the oversight,
development, implementation, and administration of the Program.\116\
The designated senior management employee who is responsible for the
oversight of a broker-dealer's, investment company's or investment
adviser's Program may be the entity's chief compliance officer.\117\
Third, the final rules provide that financial institutions and
creditors must train staff, as necessary, to effectively implement
their Programs.\118\
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\116\ See Sec. 162.30(e)(2) (CFTC) and Sec. 248.201(e)(2)
(SEC). Section VI of the guidelines elaborates on this provision.
\117\ See, e.g., rule 38a-1(a)(4) under the Investment Company
Act (addressing the chief compliance officer position), 17 CFR
270.38a-1(a)(4); rule 206(4)-7(c) under the Investment Advisers Act,
17 CFR 275.206(4)-7 (same).
\118\ See Sec. 162.30(e)(3) (CFTC) and Sec. 248.201(e)(3)
(SEC).
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Finally, the rules provide that financial institutions and
creditors must exercise appropriate and effective oversight of service
provider arrangements.\119\ The Commissions believe that it is
important that the rules address service provider arrangements so that
financial institutions and creditors remain legally responsible for
compliance with the rules, irrespective of whether such financial
institutions and creditors outsource their identity theft red flags
detection, prevention, and mitigation operations to a service
provider.\120\ The final rules do not prescribe a specific manner in
which appropriate and effective oversight of service provider
arrangements must occur. Instead, the requirement provides flexibility
to financial institutions and creditors in maintaining their service
provider arrangements, while making clear that such institutions and
creditors are still required to fulfill their legal compliance
obligations.\121\ We received no comments on the substance of this
aspect of the proposal \122\ and are adopting the requirements related
to the administration of Programs as proposed.
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\119\ See Sec. 162.30(e)(4) (CFTC) and Sec. 248.201(e)(4)
(SEC). Sec. 162.30(b)(11) (CFTC) and Sec. 248.201(b)(11) (SEC)
define the term ``service provider'' to mean a person that provides
a service directly to the financial institution or creditor.
\120\ For example, a financial institution or creditor that uses
a service provider to open accounts on its behalf, could reserve for
itself the responsibility to verify the identity of a person opening
a new account, may direct the service provider to do so, or may use
another service provider to verify identity. Ultimately, however,
the financial institution or creditor remains responsible for
ensuring that the activity is conducted in compliance with a Program
that meets the requirements of the identity theft red flags rules.
\121\ These legal compliance obligations include, but are not
limited to, the maintenance of records in connection with any
service provider arrangements. See 17 CFR 240.17a-4(b)(7) (requiring
that each broker-dealer maintain a record of all written agreements
entered into by the broker-dealer relating to its business as such);
17 CFR 275.204-2(a)(10) (requiring that each investment adviser
maintain a record of all written agreements entered into by the
investment adviser with any client or otherwise relating to the
business of the investment adviser as such).
\122\ But see infra note 143 and accompanying text (discussing a
comment received on the costs associated with this aspect of the
proposal).
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[[Page 23647]]
B. Final Guidelines
As amended by the Dodd-Frank Act, section 615(e)(1)(A) of the FCRA
provides that the Commissions must jointly ``establish and maintain
guidelines for use by each financial institution and each creditor
regarding identity theft with respect to account holders at, or
customers of, such entities, and update such guidelines as often as
necessary.'' \123\ Accordingly, the Commissions are jointly adopting
guidelines in an appendix to the final identity theft red flags rules
that are intended to assist financial institutions and creditors in the
formulation and maintenance of a Program that satisfies the
requirements of the rules. These guidelines are substantially similar
to the guidelines adopted by the Agencies.
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\123\ 15 U.S.C. 1681m(e)(1)(A).
---------------------------------------------------------------------------
The final rules require each financial institution or creditor that
is required to implement a Program to consider the guidelines and
include in its Program those guidelines that are appropriate.\124\ The
Program needs to contain reasonable policies and procedures to fulfill
the requirements of the final rules, even if a financial institution or
creditor determines that one or more guidelines are not appropriate for
its circumstances. We received no comment on the guidelines, and the
Commissions are adopting them as proposed.
---------------------------------------------------------------------------
\124\ See Sec. 162.30(f) (CFTC) and Sec. 248.201(f) (SEC).
---------------------------------------------------------------------------
1. Section I of the Guidelines--Identity Theft Prevention Program
Section I of the guidelines makes clear that a financial
institution or creditor may incorporate into its Program, as
appropriate, its existing policies, procedures, and other arrangements
that control reasonably foreseeable risks to customers or to the safety
and soundness of the financial institution or creditor from identity
theft. An example of such existing policies, procedures, and other
arrangements may include other policies, procedures, and arrangements
that the financial institution or creditor has developed to prevent
fraud or otherwise ensure compliance with applicable laws and
regulations.
2. Section II of the Guidelines--Identifying Relevant Red Flags
Section II(a) of the guidelines sets out several risk factors that
a financial institution or creditor must consider in identifying
relevant red flags for covered accounts, as appropriate. These risk
factors are: (i) The types of covered accounts a financial institution
or creditor offers or maintains; (ii) the methods it provides to open
or access its covered accounts; and (iii) its previous experiences with
identity theft. Thus, for example, red flags relevant to one type of
covered account may differ from those relevant to another type of
covered account. Under the guidelines, a financial institution or
creditor also should consider identifying as relevant those red flags
that directly relate to its previous experiences with identity theft.
Section II(b) of the guidelines sets out examples of sources from
which financial institutions and creditors should derive relevant red
flags. As discussed in the Proposing Release, this section of the
guidelines does not require financial institutions and creditors to
incorporate relevant red flags strictly from these sources. Instead,
financial institutions and creditors must consider them when developing
a Program.
Section II(c) of the guidelines identifies five categories of red
flags that financial institutions and creditors must consider including
in their Programs, as appropriate:
Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
Presentation of suspicious documents, such as documents
that appear to have been altered or forged;
Presentation of suspicious personal identifying
information, such as a suspicious address change;
Unusual use of, or other suspicious activity related to, a
covered account; and
Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible identity
theft in connection with covered accounts held by the financial
institution or creditor.
Supplement A to the guidelines includes a non-comprehensive list of
examples of red flags from each of these categories.
3. Section III of the Guidelines--Detecting Red Flags
Section III of the guidelines provides examples of policies and
procedures that a financial institution or creditor must consider
including in its Program's policies and procedures for the purpose of
detecting red flags. As discussed in the Proposing Release, entities
that are currently subject to the Agencies' identity theft red flags
rules,\125\ the federal customer identification program (``CIP'') rules
\126\ or other Bank Secrecy Act rules,\127\ the Federal Financial
Institutions Examination Council's guidance on authentication,\128\ or
the Interagency Guidelines Establishing Information Security Standards
\129\ may already be engaged in detecting red flags. These entities may
wish to integrate the policies and procedures already developed for
purposes of complying with these rules and standards into their
Programs. However, such policies and procedures may need to be
supplemented.\130\
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\125\ See 2007 Adopting Release, supra note 8.
\126\ See, e.g., 31 CFR 1023.220 (broker-dealers), 1024.220
(mutual funds), and 1026.220 (futures commission merchants and
introducing brokers). The CIP regulations implement section 326 of
the USA PATRIOT Act, codified at 31 U.S.C. 5318(l).
\127\ See, e.g., 31 CFR 103.130 (anti-money laundering programs
for mutual funds).
\128\ See ``Authentication in an Internet Banking Environment,''
available at http://www.ffiec.gov/pdf/authentication_guidance.pdf.
\129\ See 12 CFR part 30, app. B (national banks); 12 CFR part
208, app. D-2 and part 225, app. F (state member banks and bank
holding companies); 12 CFR part 364, app. B (state non-member
banks); 12 CFR part 570, app. B (savings associations); 12 CFR part
748, app. A (credit unions).
\130\ For example, the CIP rules were written to implement
section 326 (31 U.S.C. 5318(l)) of the USA PATRIOT Act (Pub. L. 107-
56 (2001)), and certain types of ``accounts,'' ``customers,'' and
products are exempted or treated specially in the CIP rules because
they pose a lower risk of money laundering or terrorist financing.
Such special treatment may not be appropriate to accomplish the
broader objective of detecting, preventing, and mitigating identity
theft.
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4. Section IV of the Guidelines--Preventing and Mitigating Identity
Theft
Section IV of the guidelines states that a Program's policies and
procedures should provide for appropriate responses to the red flags
that a financial institution or creditor has detected, that are
commensurate with the degree of risk posed by each red flag. In
determining an appropriate response, under the guidelines, a financial
institution or creditor is required to consider aggravating factors
that may heighten the risk of identity theft. Section IV of the
guidelines also provides several examples of appropriate responses.
These examples are identical to those included in the Agencies' final
guidelines. Financial institutions and creditors also may consider
adopting measures to prevent and mitigate identity theft that are not
listed in the guidelines.
5. Section V of the Guidelines--Updating the Identity Theft Prevention
Program
Section V of the guidelines includes a list of factors on which a
financial institution or creditor could base the periodic updates to
its Program. These factors are: (i) The experiences of the financial
institution or creditor with identity theft; (ii) changes in methods of
[[Page 23648]]
identity theft; (iii) changes in methods to detect, prevent, and
mitigate identity theft; (iv) changes in the types of accounts that the
financial institution or creditor offers or maintains; and (v) changes
in the business arrangements of the financial institution or creditor,
including mergers, acquisitions, alliances, joint ventures, and service
provider arrangements.
6. Section VI of the Guidelines--Methods for Administering the Identity
Theft Prevention Program
Section VI of the guidelines provides additional guidance for
financial institutions and creditors to consider in administering their
Programs. These guideline provisions are substantially identical to
those prescribed by the Agencies in their final guidelines.
i. Oversight of Identity Theft Prevention Program
Section VI(a) of the guidelines states that oversight by the board
of directors, an appropriate committee of the board, or a designated
senior management employee should include: (i) Assigning specific
responsibility for the Program's implementation; (ii) reviewing reports
prepared by staff regarding compliance by the financial institution or
creditor with the final rules; and (iii) approving material changes to
the Program as necessary to address changing identity theft risks.
ii. Reporting to the Board of Directors
Section VI(b) of the guidelines states that staff of the financial
institution or creditor responsible for development, implementation,
and administration of its Program should report to the board of
directors, an appropriate committee of the board, or a designated
senior management employee, at least annually, on compliance by the
financial institution or creditor with the final rules. In addition,
section VI(b) of the guidelines provides that the report should address
material matters related to the Program and evaluate issues such as
recommendations for material changes to the Program.\131\
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\131\ The other issues referenced in the guideline are: (i) The
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; (ii) service provider arrangements; and
(iii) significant incidents involving identity theft and
management's response.
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iii. Oversight of Service Provider Arrangements
Section VI(c) of the guidelines provides that whenever a financial
institution or creditor engages a service provider to perform an
activity in connection with one or more covered accounts, the financial
institution or creditor should take steps to ensure that the activity
of the service provider is conducted in accordance with reasonable
policies and procedures designed to detect, prevent, and mitigate the
risk of identity theft. As discussed in the Proposing Release, the
Commissions believe that these guidelines make clear that a service
provider that provides services to multiple financial institutions and
creditors may do so in accordance with its own program to prevent
identity theft, as long as the service provider's program meets the
requirements of the identity theft red flags rules.
Section VI(c) of the guidelines also includes, as an example of how
a financial institution or creditor may comply with this provision,
that a financial institution or creditor could require the service
provider by contract to have policies and procedures to detect relevant
red flags that may arise in the performance of the service provider's
activities, and either report the red flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft. In those circumstances, the Commissions expect
that the contractual arrangements would include the provision of
sufficient documentation by the service provider to the financial
institution or creditor to enable it to assess compliance with the
identity theft red flags rules.
7. Section VII of the Guidelines--Other Applicable Legal Requirements
Section VII of the guidelines identifies other applicable legal
requirements from the FCRA and USA PATRIOT Act that financial
institutions and creditors should keep in mind when developing,
implementing, and administering their Programs.
8. Supplement A to the Guidelines
Supplement A to the guidelines provides illustrative examples of
red flags that financial institutions and creditors are required to
consider incorporating into their Programs, as appropriate. These
examples are substantially similar to the examples identified in the
Agencies' final guidelines. The examples are organized under the five
categories of red flags that are set forth in section II(c) of the
guidelines.
The Commissions recognize that some of the examples of red flags
may be more reliable indicators of identity theft, while others are
more reliable when detected in combination with other red flags. The
Commissions intend that Supplement A to the guidelines be flexible and
allow a financial institution or creditor to tailor the red flags it
chooses for its Program to its own operations. Although the final rules
do not require a financial institution or creditor to justify to the
Commissions failure to include in its Program a specific red flag from
the list of examples, a financial institution or creditor has to
account for the overall effectiveness of its Program, and ensure that
the Program is appropriate to the entity's size and complexity, and to
the nature and scope of its activities.
C. Final Card Issuer Rules
Section 615(e)(1)(C) of the FCRA provides that the CFTC and SEC
must ``prescribe regulations applicable to card issuers to ensure that,
if a card issuer receives notification of a change of address for an
existing account, and within a short period of time (during at least
the first 30 days after such notification is received) receives a
request for an additional or replacement card for the same account, the
card issuer may not issue the additional or replacement card, unless
the card issuer applies certain address validation procedures.''\132\
Accordingly, the Commissions are adopting rules that set out the duties
of card issuers regarding changes of address.\133\ These rules are
similar to the final card issuer rules adopted by the Agencies.\134\
The rules apply only to a person that issues a debit or credit card
(``card issuer'') and that is subject to the enforcement authority of
either Commission.\135\ The Commissions did not receive any comments on
the card issuer rules, and are adopting them as proposed.
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\132\ 15 U.S.C. 1681m(e)(1)(C).
\133\ See Sec. 162.32 (CFTC) and Sec. 248.202 (SEC).
\134\ See, e.g., 16 CFR 681.3 (FTC).
\135\ See supra Section II.A.1.
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As discussed in the Proposing Release, the CFTC is not aware of any
entities subject to its enforcement authority that issue debit or
credit cards and, as a matter of practice, believes that it is highly
unlikely that CFTC-regulated entities would issue debit or credit
cards. As also discussed in the Proposing Release, the SEC understands
that a number of entities within its enforcement authority issue cards
in partnership with affiliated or unaffiliated banks and financial
institutions, but that these cards are generally issued by the partner
bank, and not by the SEC-regulated entity. The SEC therefore expects
that no entities within its enforcement authority will be subject to
the card issuer rules.
[[Page 23649]]
III. Related Matters
A. Cost-Benefit Considerations (CFTC) and Economic Analysis (SEC)
CFTC
Section 15(a) of the CEA \136\ requires the CFTC to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The CFTC considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) considerations.\137\ In the paragraphs that follow, the
CFTC summarizes the proposal and comments to the same before
considering the costs and benefits of the final rule in light of the
15(a) considerations.
---------------------------------------------------------------------------
\136\ 7 U.S.C. 19(a).
\137\ Id.
---------------------------------------------------------------------------
Cost-Benefit Considerations of Identity Theft Red Flags Rules
Background and Proposal. As discussed above, section 1088 of the
Dodd-Frank Act transferred authority over certain parts of FCRA from
the Agencies to the CFTC and the SEC for entities they regulate. On
February 28, 2012, the CFTC, together with the SEC, issued proposed
rules to help protect investors from identity theft by ensuring that
FCMs, IBs, CPOs, and other CFTC-regulated entities create programs to
detect and respond appropriately to red flags.\138\ The proposed rules,
which were substantially similar to rules adopted in 2007 by the FTC
and other federal financial regulatory agencies, would require CFTC-
regulated entities to adopt written identity theft programs that
include reasonable policies and procedures to: (1) Identify relevant
red flags; (2) detect the occurrence of red flags; (3) respond
appropriately to the detected red flags; and (4) periodically update
their programs. The proposed rules also included guidelines and
examples of red flags to help regulated entities administer their
programs.
---------------------------------------------------------------------------
\138\ 77 FR 13450 (Mar. 6, 2012).
---------------------------------------------------------------------------
In its proposed consideration of costs and benefits pursuant to CEA
section 15(a), the CFTC stated that section 162.30 should not result in
any significant new costs or benefits because it generally reflects a
statutory transfer of enforcement authority from the FTC to the CFTC.
The CFTC requested comment on all aspects of its proposed consideration
of costs and benefits.
Comments. The CFTC received two comments on its consideration of
the costs and benefits of the joint proposal. These two commenters were
divided on the reasonableness of the Commissions' estimated costs of
compliance. In a letter focused on the SEC's proposed regulations
(which are, of course, substantially similar to the CFTC's proposed
regulations), one commenter stated that because Regulation S-ID ``is
substantially similar to'' the existing FTC rules and guidelines,
broker-dealers should not bear ``any new costs in coming into
compliance with proposed Regulation S-ID.''\139\ This commenter further
stated that ``broker-dealers should already have in place a program
that complies with the FTC rule. While firms will need to update some
of their procedures to reflect the SEC's new responsibility for the
oversight of the application of this rule, many of the changes would be
cosmetic and grammatical in nature.'' \140\ In marked contrast, another
comment letter, submitted on behalf of the Financial Services
Roundtable (``FSR'') and the Securities Industry and Financial Markets
Association (``SIFMA''), stated that the ``consensus of our members is
that the estimated compliance costs for the proposed Rules are
extremely low and unrealistic.'' \141\
---------------------------------------------------------------------------
\139\ See NSCP Comment Letter.
\140\ Id.
\141\ See FSR/SIFMA Comment Letter.
---------------------------------------------------------------------------
The FSR/SIFMA Comment Letter also stated that the FSR and SIFMA
members estimated that the initial compliance burden to implement the
rules would average 2,000 hours for each line of business conducted by
a ``large, complex financial institution,'' noting that the estimate
would vary based on the number of ``covered accounts'' for each line of
business. In addition, this comment letter also stated that continuing
compliance monitoring for such an institution would average 400 hours
annually. They did not provide any data or information from which the
CFTC could replicate its estimates.
The FSR/SIFMA Comment Letter also stated that ``financial
institutions with an existing Red Flags program would experience an
incremental burden due to reassessing the scope of the `covered
accounts' and reevaluating whether a business activity would be defined
as a `financial institution' or as a `creditor' for purposes of the
Agencies' Rules.''\142\ The letter did not attribute a time estimate to
this ``incremental burden.''
---------------------------------------------------------------------------
\142\ Id.
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Finally, the FSR/SIFMA Comment Letter contended that the
Commissions' ``estimated compliance costs further fail to consider the
cost to third-party service providers, many of which may be required to
implement an identity theft program even though they are not financial
institutions or creditors.'' \143\
---------------------------------------------------------------------------
\143\ Id.
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CFTC Response to Comments Regarding Costs and Benefits. In
considering the costs and benefits of the final rules, the CFTC assumes
that each CFTC-regulated entity covered by the final rules is already
in existence and acting in compliance with the law, including the FTC's
identity theft rules.\144\ Under this assumption, the CFTC believes, as
one of the commenters did,\145\ that entities will incur few if any new
costs in complying with the CFTC's regulations because they are largely
unchanged in terms of scope and substance from the FTC's rules. The
CFTC believes that the costs of compliance for such entities may
actually decrease as a result of the additional guidance provided in
this rulemaking. Without such guidance from the CFTC, entities might
incur the costs of seeking advice from third parties. With respect to
the comment that CFTC-regulated entities will experience an
``incremental burden'' in reassessing covered accounts and determining
whether their activities fall within the scope of the rules,\146\ the
CFTC notes that the FTC's identity theft rules also include the
requirement to periodically reassess covered accounts, and thus costs
associated with this requirement are not new costs.
---------------------------------------------------------------------------
\144\ As discussed above, the final rules implement a shift in
oversight of identity theft red flags rules for CFTC-regulated
entities from the FTC to the CFTC. The rules do not contain new
requirements, nor do they substantially expand the scope of the
FTC's rules. Most entities should already be in compliance with the
FTC's existing rules, which the FTC began enforcing on January 1,
2011.
\145\ See NSCP Comment Letter.
\146\ See supra note 142 and accompanying text.
---------------------------------------------------------------------------
With regard to the estimate in the FSR/SIFMA Comment Letter that a
``large, complex financial institution'' will incur 2,000 hours of
``initial compliance burden,''\147\ the CFTC is unaware of any such
institution that is not already acting in compliance with the FCRA and
the FTC's rules. But even if such a large, complex financial
institution exists and is not already in compliance with FCRA and the
FTC's rules, the ``initial burden'' that such an entity would incur is
largely attributable to the FCRA, as amended by the Dodd-Frank Act. As
discussed above,
[[Page 23650]]
Congress mandated that the CFTC promulgate rules to bring its regulated
entities into compliance with FCRA, and the CFTC has elected to do so
in a manner that imposes minimal incremental cost on CFTC-regulated
entities. In response to the comments concerning the costs to ``third-
party service providers,'' the CFTC stresses these costs have already
been taken into account, as CFTC-regulated entities that have
outsourced identity theft detection, prevention, and mitigation
operations to affiliates or third-party service providers have
effectively shifted a burden that the CFTC-regulated entities otherwise
would have carried themselves.
---------------------------------------------------------------------------
\147\ See FSR/SIFMA Comment Letter.
---------------------------------------------------------------------------
One commenter also stated that since it maintains no covered
accounts and has no plans to, it should be specifically excluded from
the scope of the rules to avoid any potential that it would be subject
to the requirements of the final rules. According to this commenter, to
include it within the scope of the final rules would require it
needlessly to incur compliance costs associated with periodically
reassessing whether they maintain any covered accounts and documenting
the same.\148\
---------------------------------------------------------------------------
\148\ See OCC Comment Letter.
---------------------------------------------------------------------------
The majority of the per-entity costs associated with the final
rules would be incurred by those financial institutions and creditors
that maintain covered accounts.\149\ Additionally, even if financial
institutions and creditors do not currently maintain, or intend to
maintain, covered accounts, such entities must nevertheless
periodically assess whether they maintain covered accounts, as certain
accounts may be deemed to be ``covered accounts'' if reasonably
foreseeable identity theft risks are associated with these
accounts.\150\ Moreover, the CFTC reiterates that the final rules do
not contain any new requirements or significantly expand the scope of
the pre-existing FTC rules. Therefore, no financial institutions or
creditors, regardless of whether they maintain covered accounts, should
incur any additional costs other than the costs already being incurred
under the previous regulatory framework.
---------------------------------------------------------------------------
\149\ See infra notes 151 and 152.
\150\ See supra notes 95-100 and accompanying text.
---------------------------------------------------------------------------
Consideration of Costs and Benefits in Light of CEA Section 15(a).
As discussed above, the Dodd-Frank Act shifted enforcement authority
over CFTC-regulated entities that are subject to section 615(e) of the
FCRA from the FTC to the CFTC. Section 615(e) of the FCRA, as amended
by the Dodd-Frank Act, requires that the CFTC, jointly with the
Agencies and the SEC, adopt identity theft red flags rules. To carry
out this requirement, the CFTC is adopting section 162.30, which is
substantially similar to the identity theft red flags rules adopted by
the Agencies in 2007.
Section 162.30 will shift oversight of identity theft rules of
CFTC-regulated entities from the FTC to the CFTC. These entities should
already be in compliance with the FTC's existing identity theft red
flags rules, which the FTC began enforcing on January 1, 2011. Because
section 162.30 is substantially similar to those existing rules, these
entities should not bear any significant costs in coming into
compliance with section 162.30. The new regulation does not contain new
requirements, nor does it expand the scope of the rules significantly.
The new regulation does contain examples and minor language changes
designed to help guide entities within the CFTC's enforcement authority
in complying with the rules, which the CFTC expects will mitigate costs
of compliance. Moreover, section 162.30 would not impose any
significant new costs on new entities since any newly-formed entities
would already be covered under the FTC's existing rules.
In the analysis for the Paperwork Reduction Act of 1995 (``PRA'')
below, the staff identified certain initial and ongoing hour burdens
and associated time costs related to compliance with section 162.30.
However, these costs are not new costs, but are current costs
associated with compliance with the Agencies' existing rules. CFTC-
regulated entities will incur these hours and costs regardless of
whether the CFTC adopts section 162.30. These hours and costs would be
transferred from the Agencies' PRA allotment to the CFTC. No new costs
should result from the adoption of section 162.30.
These existing costs related to section 162.30 would include, for
newly-formed CFTC-regulated entities, the one-time cost for financial
institutions and creditors to conduct initial assessments of covered
accounts, create a Program, obtain board approval of the Program, and
train staff.\151\ The existing costs would also include the ongoing
cost to periodically review and update the Program, report periodically
on the Program, and conduct periodic assessments of covered
accounts.\152\
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\151\ CFTC staff estimates that the one-time burden of
compliance would include 2 hours to conduct initial assessments of
covered accounts, 25 hours to develop and obtain board approval of a
Program, and 4 hours to train staff. CFTC staff estimates that, of
the 31 hours incurred, 12 hours would be spent by internal counsel
at an hourly rate of $354, 17 hours would be spent by administrative
assistants at an hourly rate of $66, and 2 hours would be spent by
the board of directors as a whole, at an hourly rate of $4000, for a
total cost of $13,370 per entity for entities that need to come into
compliance with proposed subpart C to Part 162. This estimate is
based on the following calculations: $354 x 12 hours = $4,248; $66 x
17 = $1,122; $4,000 x 2 = $8,000; $4,248 + $1,122 + $8,000 =
$13,370.
As discussed in the PRA analysis, CFTC staff estimates that
there are 702 CFTC-regulated entities that newly form each year and
that would fall within the definitions of ``financial institution''
or ``creditor.'' Of these 702 entities, 54 entities would maintain
covered accounts. See infra note 168 and text following note 168.
CFTC staff estimates that 2 hours of internal counsel's time would
be spent conducting an initial assessment to determine whether they
have covered accounts and whether they are subject to the proposed
rule (or 702 entities). The cost associated with this determination
is $497,016 based on the following calculation: $354 x 2 = $708;
$708 x 702 = $497,016. CFTC staff estimates that 54 entities would
bear the remaining specified costs for a total cost of $683,748 (54
x $12,662 = $683,748). See SIFMA's Office Salaries in the Securities
Industry 2011.
Staff also estimates that in response to Dodd-Frank, there will
be approximately 125 newly registered SDs and MSPs. Staff believes
that each of these SDs and MSPs will be a financial institution or
creditor with covered accounts. The additional cost of these SDs and
MSPs is $1,671,250 (125 x $13,370 = $1,671,250).
\152\ CFTC staff estimates that the ongoing burden of compliance
would include 2 hours to conduct periodic assessments of covered
accounts, 2 hours to periodically review and update the Program, and
4 hours to prepare and present an annual report to the board, for a
total of 8 hours. CFTC staff estimates that, of the 8 hours
incurred, 7 hours would be spent by internal counsel at an hourly
rate of $354 and 1 hour would be spent by the board of directors as
a whole, at an hourly rate of $4,000, for a total hourly cost of
$6,500. This estimate is based on the following calculations rounded
to two significant digits: $354 x 7 hours = $2,478; $4,000 x 1 hour
= $4,000; $2,478 + $4,000 = $6,478 [ap] $6,500.
As discussed in the PRA analysis, CFTC staff estimates that
2,946 existing CFTC-regulated entities would be financial
institutions or creditors, of which 260 maintain covered accounts.
CFTC staff estimates that 2 hours of internal counsel's time would
be spent conducting periodic assessments of covered accounts and
that all financial institutions or creditors subject to the proposed
rule (or 2,946 entities) would bear this cost for a total cost of
$2,100,000 based on the following calculations rounded to two
significant digits: $354 x 2 = $708; $708 x 2,946 = $2,085,768 [ap]
$2,100,000. CFTC staff estimates that 260 entities would bear the
remaining specified ongoing costs for a total cost of $1,500,000
(260 x $5,770 = $1,500,200 [ap] $1,500,000).
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The benefits related to adoption of section 162.30, which already
exist in connection with the Agencies' identity theft red flags rules,
would include a reduction in the risk of identity theft for investors
(consumers) and cardholders, and a reduction in the risk of losses due
to fraud for financial institutions and creditors. It is not
practicable for the CFTC to estimate with precision the dollar value
associated with the benefits that will inure to the public from the
adoption of section 162.30, as the quantity or value of identity theft
[[Page 23651]]
deterred or prevented is not knowable. The CFTC, however, recognizes
that the cost of any given instance of identity theft may be
substantial to the individual involved. Joint adoption of identity
theft red flags rules in a form that is substantially similar to the
Agencies' identity theft red flags rules might also benefit financial
institutions and creditors because entities regulated by multiple
federal agencies could comply with a single set of standards, which
would reduce potential compliance costs. As is true of the Agencies'
identity theft red flags rules, the CFTC has designed section 162.30 to
provide financial institutions and creditors significant flexibility in
developing and maintaining a Program that is tailored to the size and
complexity of their business and the nature of their operations, as
well as in satisfying the address verification procedures.
Accordingly, as previously discussed, section 162.30 should not
result in any significant new costs or benefits, because it generally
reflects a statutory transfer of enforcement authority from the FTC to
the CFTC, does not include any significant new requirements, and does
not include new entities that were not previously covered by the
Agencies' rules.
Section 15(a) Analysis. As stated above, the CFTC is required to
consider costs and benefits of proposed CFTC action in light of (1)
protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. These rules protect market participants and
the public by detecting, preventing, and mitigating identity theft, an
illegal act that may be costly to them in both time and money.\153\
Because, however, these rules create no new requirements -- rather, as
explained above, the CFTC is adopting rules that reflect requirements
already in place -- the impact of the rules on the protection of market
participants and the public will remain the same. The Commission is not
aware of any effect of these rules on the efficiency, competitiveness,
and financial integrity of futures markets, price discovery, sound risk
management practices, or other public interest considerations.
Customers of CFTC registrants will continue to benefit from these rules
in the same way they have benefited from the rules as they were
administered by the Agencies.
---------------------------------------------------------------------------
\153\ According to the Javelin 2011 Identity Fraud Survey
Report, consumer costs (the average out[hyphen]of[hyphen]pocket
dollar amount victims pay) increased in 2010. See Javelin 2011
Identity Fraud Survey Report (2011). The report attributed this
increase to new account fraud, which showed longer periods of misuse
and detection and therefore more dollar losses associated with it
than any other type of fraud. Notwithstanding the increase in cost,
the report stated that the number of identity theft victims has
decreased in recent years. Id.
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Cost-Benefit Considerations of Card Issuer Rules
With respect to specific types of identity theft, section 615(e) of
the FCRA identified the scenario involving credit and debit card
issuers as being a possible indicator of identity theft. Accordingly,
the card issuer rules in section 162.32 set out the duties of card
issuers regarding changes of address. The card issuer rules will apply
only to a person that issues a debit or credit card and that is subject
to the CFTC's enforcement authority. The card issuer rules require a
card issuer to comply with certain address validation procedures in the
event that such issuer receives a notification of a change of address
for an existing account from a cardholder, and within a short period of
time (during at least the first 30 days after such notification is
received) receives a request for an additional or replacement card for
the same account. The card issuer may not issue the additional or
replacement card unless it complies with those procedures. The
procedures include: (1) Notifying the cardholder of the request in
writing or electronically either at the cardholder's former address, or
by any other means of communication that the card issuer and the
cardholder have previously agreed to use; or (2) assessing the validity
of the change of address in accordance with established policies and
procedures.
Section 162.32 will shift oversight of card issuer rules of CFTC-
regulated entities from the FTC to the CFTC. These entities should
already be in compliance with the FTC's existing card issuer rules,
which the FTC began enforcing on January 1, 2011. Because section
162.32 is substantially similar to those existing card issuer rules,
these entities should not bear any new costs in coming into compliance.
The new regulation does not contain new requirements, nor does it
expand the scope of the rules to include new entities that were not
already previously covered by the Agencies' card issuer rules.
The existing costs related to section 162.32 would include the cost
for card issuers to establish policies and procedures that assess the
validity of a change of address notification submitted shortly before a
request for an additional card and, before issuing an additional or
replacement card, either notify the cardholder at the previous address
or through another previously agreed-upon form of communication, or
alternatively assess the validity of the address change through
existing policies and procedures. As discussed in the PRA analysis,
CFTC staff does not expect that any CFTC-regulated entities would be
subject to the requirements of section 162.32.
The benefits related to adoption of section 162.32, which already
exist in connection with the Agencies' card issuer rules, would include
a reduction in the risk of identity theft for cardholders, and a
reduction in the risk of losses due to fraud for card issuers. However,
it is not practicable for the CFTC to estimate with precision the
dollar value associated with the benefits that will inure to the public
from these card issuer rules. As is true of the Agencies' card issuer
rules, the CFTC has designed section 162.32 to provide card issuers
significant flexibility in developing and maintaining a Program that is
tailored to the size and complexity of their business and the nature of
their operations.
Accordingly, as previously discussed, the card issuer rules should
not result in any significant new costs or benefits, because they
generally reflect a statutory transfer of enforcement authority from
the FTC to the CFTC, do not include any significant new requirements,
and do not include new entities that were not previously covered by the
Agencies' rules.
Section 15(a) Analysis. As stated above, the CFTC is required to
consider costs and benefits of proposed CFTC action in light of (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. These rules protect market participants and
the public by preventing identity theft, an illegal act that may be
costly to them in both time and money.\154\ Because, however, these
rules create no new requirements--rather, as explained above, the CFTC
is adopting rules that reflect requirements already in place--their
cost and benefits have no incremental impact on the five section 15(a)
factors. Customers of CFTC registrants will continue to benefit from
these rules in the same way they have benefited from the rules as they
were administered by the Agencies.
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\154\ See id.
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[[Page 23652]]
SEC
The SEC is sensitive to the costs and benefits imposed by its
rules. As discussed above, the Dodd-Frank Act shifted enforcement
authority over SEC-regulated entities that are subject to section
615(e) of the FCRA from the Agencies to the SEC. Section 615(e) of the
FCRA, as amended by the Dodd-Frank Act, requires that the SEC, jointly
with the Agencies and the CFTC, adopt identity theft red flags rules
and guidelines. To carry out this requirement, the SEC is adopting
Regulation S-ID, which is substantially similar to the identity theft
red flags rules and guidelines adopted by the Agencies in 2007, and
whose scope covers the same categories of SEC-regulated entities that
were covered under the Agencies' red flags rules.
Regulation S-ID requires a financial institution or creditor that
is subject to the SEC's enforcement authority and that offers or
maintains covered accounts to develop, implement, and administer a
written identity theft prevention Program. A financial institution or
creditor must design its Program to detect, prevent, and mitigate
identity theft in connection with the opening of a covered account or
any existing covered account. A financial institution or creditor also
must appropriately tailor its Program to its size and complexity, and
to the nature and scope of its activities. In addition, a financial
institution or creditor must take certain steps to comply with the
requirements of the identity theft red flags rules, including training
staff, providing annual reports to the board of directors, an
appropriate committee thereof, or a designated senior management
employee, and, if applicable, oversight of service providers.
Section 615(e)(1)(C) of the FCRA singles out change of address
notifications sent to credit and debit card issuers as a possible
indicator of identity theft, and requires the SEC to prescribe
regulations concerning such notifications. Accordingly, the card issuer
rules in this release set out the duties of card issuers regarding
changes of address. The card issuer rules apply only to SEC-regulated
entities that issue credit or debit cards.\155\ The card issuer rules
require a card issuer to comply with certain address validation
procedures in the event that such issuer receives a notification of a
change of address for an existing account, and within a short period of
time (during at least the first 30 days after it receives such
notification) receives a request for an additional or replacement card
for the same account. The card issuer may not issue the additional or
replacement card unless it complies with those procedures. The
procedures include: (1) Notifying the cardholder of the request either
at the cardholder's former address, or by any other means of
communication that the card issuer and the cardholder have previously
agreed to use; or (2) assessing the validity of the change of address
in accordance with established policies and procedures.
---------------------------------------------------------------------------
\155\ See Sec. 248.202(a) (defining scope of the SEC's rules).
---------------------------------------------------------------------------
The baseline we use to analyze the economic effects of Regulation
S-ID is the identity theft red flags regulatory scheme administered by
the Agencies. Regulation S-ID, as discussed above, implements the
transfer of oversight of identity theft red flags rules for SEC-
regulated entities from the Agencies to the SEC. Entities that qualify
as a financial institution or creditor and offer or maintain covered
accounts should already have existing identity theft red flags
Programs. Regulation S-ID does not contain new requirements, nor does
it expand the scope of the Agencies' rules to include new entities that
the Agencies' rules did not previously cover. Regulation S-ID does
contain examples and minor language changes designed to help guide
entities within the SEC's enforcement authority in complying with the
rules. Because Regulation S-ID is substantially similar to the
Agencies' rules, the entities within its scope should not bear new
costs in coming into compliance with Regulation S-ID.\156\
---------------------------------------------------------------------------
\156\ See, e.g., NSCP Comment Letter (``Because proposed
Regulation S-ID is substantially similar to [the Agencies'] existing
rules and guidelines, broker-dealer firms should not bear any new
costs in coming into compliance with proposed Regulation S-ID.'').
As previously indicated, the SEC staff understands that a number of
investment advisers may not currently have identity theft red flags
Programs. See supra note 55 and infra notes 186 and 190. The new
guidance in this release may lead some of these entities to
determine that they should comply with Regulation S-ID. Although the
costs and benefits of Regulation S-ID discussed below would be new
to these entities, the costs would result not from Regulation S-ID
but instead from the entities' recognition that these rules and the
previously-existing rules apply to them. In that regard, the
initial, one-time costs of Regulation S-ID could be up to $756 for
each investment adviser that qualifies as a financial institution or
creditor, and additional one-time costs of $13,885 for each such
investment adviser that maintains covered accounts. See infra notes
158 and 159. Not all investment advisers will bear the full extent
of these costs, however, as some may already have in place certain
identity theft protections. And, the guidance in this release could
have the benefit of further reducing identity theft. See infra
discussion of benefits in Part III.A of this release.
---------------------------------------------------------------------------
Costs
The costs of complying with section 248.201 of Regulation S-ID
include both ongoing costs and initial, one-time costs.\157\ These are
the same costs that were associated with the requirements of the
Agencies' red flags rules, and these costs will continue to apply after
the adoption of the SEC's identity theft red flags rules (section
248.201 of Regulation S-ID). The ongoing costs include the costs to
periodically review and update the Program, report on the Program, and
conduct assessments of covered accounts.\158\ All entities that qualify
as financial institutions or creditors and that maintain covered
accounts will bear these costs. Existing entities subject to Regulation
S-ID should already bear, and will continue to be subject to, the
ongoing costs.
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\157\ See infra note 182 and accompanying text.
\158\ Unless otherwise stated, all cost estimates for personnel
time are derived from SIFMA's Management & Professional Earnings in
the Securities Industry 2011, modified to account for an 1800-hour
work-year and multiplied by 5.35 to account for bonuses, entity
size, employee benefits, and overhead. The estimates in this
release, both for salary rates and numbers of entities affected,
have been updated from those in the Proposing Release to reflect
recent SIFMA management and professional salary data.
SEC staff estimates that the ongoing burden of compliance will
include 2 hours to conduct periodic assessments of covered accounts,
2 hours to periodically review and update the Program, and 4 hours
to prepare and present an annual report to the board, for a total of
8 hours. SEC staff estimates that, of the 8 hours incurred, 7 hours
will be spent by internal counsel at an hourly rate of $378 and 1
hour will be spent by the board of directors as a whole, at an
hourly rate of $4500, for a total hourly cost of $7146 per entity.
This estimate is based on the following calculations: $378 x 7 hours
= $2646; $4500 x 1 hour = $4500; $2646 + $4500 = $7146. The cost
estimate for the board of directors is derived from estimates made
by SEC staff regarding typical board size and compensation that is
based on information received from fund representatives and publicly
available sources.
As discussed in the PRA analysis, SEC staff estimates that
10,339 existing SEC-regulated entities will be financial
institutions or creditors under Regulation S-ID, and approximately
90%, or 9305, of these entities will maintain covered accounts. See
infra notes 190 and 191 and accompanying text. SEC staff estimates
that 2 hours of internal counsel's time will be spent conducting
periodic assessments of covered accounts and that all financial
institutions or creditors subject to the rule (or 10,339 entities)
will bear this cost for a total cost of $7,816,284 based on the
following calculations: $378 x 2 = $756; $756 x 10,339 = $7,816,284.
SEC staff estimates that 9305 entities will bear the remaining
specified ongoing costs for a total cost of $59,458,950 (9305 x
(($378 x 5) + ($4500 x 1)) = $59,458,950).
---------------------------------------------------------------------------
Initial, one-time costs relate to the initial assessments of
covered accounts, creation of a Program, board approval of the Program,
and the training of staff.\159\ New entities will bear these costs.
---------------------------------------------------------------------------
\159\ SEC staff estimates that the incremental one-time burden
of compliance includes 2 hours to conduct initial assessments of
covered accounts, 25 hours to develop and obtain board approval of a
Program, and 4 hours to train staff. SEC staff estimates that, of
the 31 hours incurred, 12 hours will be spent by internal counsel at
an hourly rate of $378, 17 hours will be spent by administrative
assistants at an hourly rate of $65, and 2 hours will be spent by
the board of directors as a whole, at an hourly rate of $4500, for a
total cost of $14,641 per new entity. This estimate is based on the
following calculations: $378 x 12 hours = $4536; $65 x 17 = $1105;
$4500 x 2 = $9000; $4536 + $1105 + $9000 = $14,641. The cost
estimate for administrative assistants is derived from SIFMA's
Office Salaries in the Securities Industry 2011, modified to account
for an 1800-hour work-year and multiplied by 2.93 to account for
bonuses, entity size, employee benefits, and overhead.
As discussed in the PRA analysis, SEC staff estimates that
there are 1271 SEC-regulated entities that newly form each year and
that could be financial institutions or creditors, of which 668 are
likely to qualify as financial institutions or creditors. See infra
note 186. Of these 668 entities that are likely to qualify as
financial institutions or creditors, SEC staff estimates that
approximately 90%, or 601, of these entities will maintain covered
accounts. See infra note 188 and accompanying text. SEC staff
estimates that 2 hours of internal counsel's time will be spent
conducting an initial assessment of covered accounts and that all
newly-formed financial institutions or creditors subject to
Regulation S-ID (or 668 entities) will bear this cost for a total
cost of $505,008 based on the following calculation: $378 x 2 =
$756; $756 x 668 = $505,008. SEC staff estimates that the 601
entities that will maintain covered accounts will bear the remaining
specified costs for a total cost of $8,344,885 (601 x (($378 x 10) +
($65 x 17) + ($4500 x 2)) = $8,344,885).
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[[Page 23653]]
As discussed above, the final rules require financial institutions
and creditors to tailor their Programs to the size and complexity of
the entity and to the nature and scope of the entity's activities.
Ongoing and one-time costs will therefore depend on the size and
complexity of the SEC-regulated entity. Entities may already have other
policies and procedures in place that are designed to reduce the risks
of identity theft for their customers. The presence of other related
policies and procedures could reduce the ongoing and one-time costs of
compliance.
Two commenters agreed with the SEC that the substantial similarity
of Regulation S-ID to the Agencies' rules should minimize any
compliance costs for entities that have previously complied with the
Agencies' rules,\160\ and another commenter stated that the benefits of
reduced risk of identity theft would outweigh the costs associated with
the rules.\161\ Another commenter raised concerns with the cost
estimates in the Proposing Release, and argued that actual costs of
compliance could be much greater than estimated.\162\ This commenter
provided hour burden estimates for large, complex financial
institutions that were significantly higher than the estimates made for
those entities in the Proposing Release. Additionally, the commenter
stated that the Commissions' estimated compliance costs did not
consider the costs to third-party service providers that may be
required to implement an identity theft red flags Program, even though
they are not financial institutions or creditors. The commenter also
noted, however, that burdens placed upon entities currently complying
with the Agencies' rules would be the same burdens that each of these
entities already incurs in regularly assessing whether it maintains
covered accounts and evaluating whether it falls within the rules'
scope.
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\160\ See NSCP Comment Letter (``Because proposed Regulation S-
ID is substantially similar to [the Agencies'] existing rules and
guidelines, broker-dealer firms should not bear any new costs in
coming into compliance with proposed Regulation S-ID.''); ICI
Comment Letter (``We commend the Commission for proposing
requirements that are consistent with those that have applied to
certain SEC registrants since 2008 pursuant to rules of the [FTC]
under [the FACT Act]. This consistency will facilitate registrants'
transition from compliance with the FTC's rule to the Commission's
rule with little or no disruption or added expense.'')
\161\ See Eric Speicher Comment Letter.
\162\ See FSR/SIFMA Comment Letter. FSR/SIFMA estimated that
``the initial compliance burden to implement the [proposed rules]
would average 2,000 hours for each line of business conducted by a
large, complex financial institution . . .'' and that ``the
continuing compliance monitoring for a large, complex financial
institution . . . would average 400 hours annually.'' FSR/SIFMA also
noted that ``financial institutions with an existing Red Flags
program would experience an incremental burden'' in connection with
the SEC's rules.
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We note that the commenter who suggested that significantly higher
hour burdens would be associated with the rules focused on large,
complex financial institutions. Regulation S-ID requires each financial
institution and creditor to tailor its Program to its size and
complexity, and to the nature and scope of its activities. Our
estimates take into account the hour burdens for small financial
institutions and creditors, which we understand, based on discussions
with industry representatives, to be significantly less than the
estimates provided by this commenter. We also note that costs to
service providers have already been taken into account, as SEC-
regulated entities that have outsourced identity theft detection,
prevention, and mitigation operations to service providers have
effectively shifted a burden that the SEC-regulated entities otherwise
would have carried themselves.\163\ As mentioned above, the costs of
Regulation S-ID are not new, and existing entities should already have
identity theft red flags Programs and bear the ongoing costs associated
with Regulation S-ID.
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\163\ See infra Section III.C. (describing the SEC's PRA
collection of information requirements).
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The existing costs related to the card issuer rules (section
248.202 of Regulation S-ID) include the cost for card issuers to
establish policies and procedures that assess the validity of a change
of address notification submitted shortly before a request for an
additional or replacement card and, before issuing an additional or
replacement card, either notify the cardholder at the previous address
or through another previously agreed-upon form of communication, or
alternatively assess the validity of the address change through
existing policies and procedures. As discussed in the PRA analysis, SEC
staff does not expect that any SEC-regulated entities will be subject
to the card issuer rules.
In the PRA analysis below, the staff identifies certain ongoing and
initial hour burdens and associated time costs related to compliance
with Regulation S-ID. These hour burdens and costs are consistent with
those associated with the requirements of the Agencies' existing rules.
Benefits
The benefits related to adoption of Regulation S-ID, which already
exist in connection with the Agencies' identity theft red flags rules,
include a reduction in the risk of identity theft for investors
(consumers) and cardholders, and a reduction in the risk of losses due
to fraud for financial institutions and creditors. The SEC is the
federal agency best positioned to oversee the financial institutions
and creditors subject to its enforcement authority because of its
experience in overseeing these entities. Adoption of Regulation S-ID
therefore may have the added benefit of increasing entities' adherence
to their identity theft red flags Programs, thus further reducing the
risk of identity theft for investors. As is true of the Agencies'
identity theft red flags rules, the SEC has designed Regulation S-ID to
provide financial institutions, creditors, and card issuers significant
flexibility in developing and maintaining a Program that is tailored to
the size and complexity of their business and the nature of their
operations, as well as in satisfying the address verification
procedures. Many of the benefits and costs discussed are difficult to
quantify, in particular when discussing the potential reduction in the
risk of identity theft. The SEC staff cannot quantify the benefits of
the potential reduction in the risk of identity theft because of the
uncertainty of its effect on customer behavior. Therefore, we discuss
much of the benefits qualitatively but, where possible, the SEC staff
attempted to quantify the costs.
Alternatives
In analyzing the costs and benefits that could result from the
implementation of Regulation S-ID, the
[[Page 23654]]
SEC also considered the costs and benefits of any plausible
alternatives to the final rules as set forth in this release. As
discussed above, section 615(e) of the FCRA, as amended by the Dodd-
Frank Act, requires that the SEC, jointly with the Agencies and the
CFTC, adopt identity theft red flags rules and guidelines that are
substantially similar to those adopted by the Agencies. The rules the
SEC promulgates should achieve a similar outcome with respect to the
reduction in the risk of identity theft as the rules of other Agencies.
Alternatives to the identity theft red flags rules that would achieve a
similar outcome may impose additional costs, especially for those
entities that would need to alter existing Programs to conform to a new
set of rules. The SEC does provide additional guidance in this release
to better enable entities to determine whether they fall within the
rules' scope. Although the SEC could have provided different guidance
with this release, the SEC believes that the release provides
sufficient guidance to enable entities to determine whether they need
to adopt identity theft red flags Programs. Lastly, for the reasons
discussed above, the SEC is not exempting certain entities from certain
requirements of the identity theft red flags rules. The SEC believes
that if an entity determines that it is a financial institution or a
creditor that offers or maintains covered accounts, then the risk of
identity theft that the rules are designed to address is present. Under
such circumstances, we believe that the benefits of the rules justify
the costs to the financial institution or creditor subject to the rules
and, therefore, no exemptions are appropriate.
B. Analysis of Effects on Efficiency, Competition, and Capital
Formation
Section 3(f) of the Exchange Act and section 2(c) of the Investment
Company Act require the SEC, whenever it engages in rulemaking and must
consider or determine if an action is necessary, appropriate, or
consistent with the public interest, to consider, in addition to the
protection of investors, whether the action would promote efficiency,
competition, and capital formation. In addition, section 23(a)(2) of
the Exchange Act requires the SEC, when making rules under the Exchange
Act, to consider the impact the rules may have upon competition.
Section 23(a)(2) of the Exchange Act prohibits the SEC from adopting
any rule that would impose a burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\164\
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\164\ See infra Section IV (setting forth statutory authority
under, among other things, the Exchange Act and Investment Company
Act for rulemakings).
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As discussed in the cost-benefit analysis above, Regulation S-ID
will carry out the requirement in the Dodd-Frank Act that the SEC adopt
rules governing identity theft protections, pursuant to section 615(e)
of the FCRA with regard to entities that are subject to the SEC's
enforcement authority. This requirement was designed to transfer
regulatory oversight of identity theft red flags rules for SEC-
regulated entities from the Agencies to the SEC. Regulation S-ID is
substantially similar to the identity theft red flags rules adopted by
the Agencies in 2007, and does not contain new requirements. The
entities covered by Regulation S-ID should already be in compliance
with existing identity theft red flags rules.
For the reasons discussed above, Regulation S-ID should have a
negligible effect on efficiency, competition, and capital formation
because it does not include new requirements and does not include new
entities that were not previously covered by the Agencies' rules.\165\
The SEC thereby finds that, pursuant to Exchange Act section 23(a)(2),
the adoption of Regulation S-ID would not result in any burden on
competition, efficiency, or capital formation that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
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\165\ See infra note 182 (discussing the entities that the SEC
staff expects, based on discussions with industry representatives
and a review of applicable law, will fall within the scope of
Regulation S-ID). The SEC staff understands, however, that a number
of investment advisers may not currently have identity theft red
flags Programs. See supra note 55. The guidance in this release
regarding situations in which certain SEC-regulated entities could
qualify as financial institutions or creditors should not produce
any significant effects. These entities may experience a negligible
increase to business efficiency due to the industry-specific
guidance in this release regarding the types of activities that
could cause an entity to fall within the scope of Regulation S-ID.
The guidance should also have a negligible effect on capital
formation. Prior to Regulation S-ID, investors preferring to base
their capital allocations on the existence of identity theft red
flags Programs could have allocated capital with entities adhering
to the Agencies' rules. The guidance therefore should have a
negligible effect on the amount of capital allocated for investment
purposes. In addition, all entities that conclude based on this
guidance that they are subject to the final rules will be subject to
the same requirements, and experience the same costs and benefits,
as all other entities currently adhering to the Agencies' existing
rules. The guidance therefore should have a negligible effect on
competition.
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C. Paperwork Reduction Act
CFTC
Provisions of sections 162.30 and 162.32 contain collection of
information requirements within the meaning of the PRA. The CFTC
submitted the proposal to the Office of Management and Budget (``OMB'')
for review and public comment, in accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. The title for this collection of information is ``Part
162 Subpart C--Identity Theft.'' Responses to this new collection of
information are mandatory.
1. Information Provided by Reporting Entities/Persons
Under part 162, subpart C, CFTC regulated entities--which presently
would include approximately 260 CFTC registrants \166\ plus 125 new
CFTC registrants pursuant to Title VII of the Dodd-Frank Act \167\--are
required to design, develop and implement reasonable policies and
procedures to identify relevant red flags, and potentially to notify
cardholders of identity theft risks. In addition, CFTC-regulated
entities are required to: (i) Collect information and keep records for
the purpose of ensuring that their Programs met requirements to detect,
prevent, and mitigate identity theft in
[[Page 23655]]
connection with the opening of a covered account or any existing
covered account; (ii) develop and implement reasonable policies and
procedures to identify, detect and respond to relevant red flags, as
well as periodic reports related to the Program; and (iii) from time to
time, notify cardholders of possible identity theft with respect to
their covered accounts, as well as assess the validity of those
accounts.
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\166\ See the NFA's Internet Web site at http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML
for the most up-to-date number of CFTC regulated entities. For the
purposes of the PRA calculation, CFTC staff used the number of
registered FCMs, CTAs, CPOs IBs and RFEDs on the NFA's Internet Web
site as of November 20, 2012. The NFA's site states that there are
3,485 CFTC registrants as of October 31, 2012. (The total number of
registrants also includes 7 exchanges which are not subject to this
rule and not included in the calculation.) Of the 3,485 registrants,
there are 104 FCMs, 1,284 IBs, 1,041 CTAs, 1,035 CPOs, and 14 RFEDs.
CFTC staff has observed that approximately 50 percent of all CPOs
(518) are dually registered as CTAs. Moreover, CFTC staff also has
observed that all entities registering as RFEDs (14) also register
as FCMs. Based on these observations, the CFTC has determined that
the total number of entities is 2,946 (this total excludes the 7
exchanges that are not subject to this rule, the 518 CPOs that are
also registered as CTAs, and the 14 RFEDs that are also registered
as FCMs).
Of the total 2,946 entities, all of the FCMs (104) are likely to
qualify as financial institutions or creditors carrying covered
accounts, approximately 10 percent of CTAs (104) and CPOs (52) are
likely to qualify as financial institutions or creditors carrying
covered accounts and none of the IBs are likely to qualify as a
financial institution or creditor carrying covered accounts, for a
total of 260 financial institutions or creditors that would bear the
initial one-time burden of compliance with the CFTC's rules.
\167\ CFTC staff estimates that 125 SDs and MSPs will register
with the CFTC upon the issuance of final rules under the Dodd-Frank
Act further defining the terms ``swap dealers'' and ``major swap
participants'' and setting forth a registration regime for these
entities. The CFTC estimates the number of MSPs to be quite small,
at six or fewer.
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These burden estimates assume that CFTC-regulated entities already
comply with the identity theft red flags rules jointly adopted by the
FTC with the Agencies, as of January 1, 2011. Consequently, these
entities may already have in place many of the customary protections
addressing identity theft and changes of address required by these
regulations.
Burden means the total time, effort, or financial resources
expended by persons to generate, maintain, retain, disclose or provide
information to or for a federal agency. Because compliance with
identity theft red flags rules jointly adopted by the FTC with the
Agencies may have occurred, the CFTC estimates the time and cost
burdens of complying with part 162 to be both one-time and ongoing
burdens. However, any initial or one-time burdens associated with
compliance with part 162 would apply only to newly-formed entities, and
the ongoing burden to all CFTC-regulated entities.
i. Initial Burden
The CFTC estimates that the one-time burden of compliance with part
162 for its regulated entities with covered accounts would be: (i) 25
hours to develop and obtain board approval of a Program; (ii) 4 hours
for staff training; and (iii) 2 hours to conduct an initial assessment
of covered accounts, totaling 31 hours. Of the 31 hours, the CFTC
estimates that 15 hours would involve internal counsel, 14 hours
expended by administrative assistants, and 2 hours by the board of
directors in total, for those newly-regulated entities.
The CFTC estimates that approximately 702 FCMs, CTAs and CPOs \168\
would need to conduct an initial assessment of covered accounts. As
noted above, the CFTC estimates that approximately 125 newly registered
SDs and MSPs would need to conduct an initial assessment of covered
accounts. The total number of newly registered CFTC registrants would
be 827 entities. Each of these 827 entities would need to conduct an
initial assessment of covered accounts, for a total of 1,654
hours.\169\ Of these 827 entities, CFTC staff estimates that
approximately 179 of these entities may maintain covered accounts.
Accordingly, the CFTC estimates the one-time burden for these 179
entities to be 5,191 hours,\170\ for a total burden among newly
registered entities of 6,845 hours.\171\
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\168\ Based on a review of new registrations typically filed
with the CFTC each year, CFTC staff estimates that approximately 7
FCMs, 225 IBs, 400 CTAs, and 140 CPOs are newly formed each year,
for a total of 772 entities. CFTC staff also has observed that
approximately 50 percent of all CPOs are duly registered as CTAs.
With respect to RFEDs, CFTC staff has observed that all entities
registering as RFEDs also register as FCMs. Based on these
observations, CFTC has determined that the total number of newly-
formed financial institutions and creditors is 702 (772-70 CPOs that
are also registered as CTAs). Each of these 702 financial
institutions or creditors would bear the initial one-time burden of
compliance with the proposed rules.
Of the total 702 newly-formed entities, staff estimates that all
of the FCMs are likely to carry covered accounts, 10 percent of CTAs
and CPOs are likely to carry covered accounts, and none of the IBs
are likely to carry covered accounts, for a total of 54 newly-formed
financial institutions or creditors carrying covered accounts that
would be required to conduct an initial one-time burden of
compliance with subpart C or Part 162.
\169\ This estimate is based on the following calculation: 827
entities x 2 hours = 1,654 hours.
\170\ This estimate is based on the following calculation: 179
entities x 29 hours = 5,191 hours.
\171\ This estimate is based on the following calculation: 1,654
hours for all newly registered CFTC registrants + 5,191 hours for
the one-time burden of newly registered entities with covered
accounts, for a total of 6,845 hours.
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ii. Ongoing Burden
The CFTC staff estimates that the ongoing compliance burden
associated with part 162 would include: (i) 2 hours to periodically
review and update the Program, review and preserve contracts with
service providers, and review and preserve any documentation received
from such providers; (ii) 4 hours to prepare and present an annual
report to the board; and (iii) 2 hours to conduct periodic assessments
to determine if the entity offers or maintains covered accounts, for a
total of 8 hours. The CFTC staff estimates that of the 8 hours
expended, 7 hours would be spent by internal counsel, and 1 hour would
be spent by the board of directors as a whole.
The CFTC estimates that approximately 3,071 entities may maintain
covered accounts, and that they would be required to periodically
review their accounts to determine if they comply with these rules, for
a total of 6,142 hours for these entities.\172\ Of these 3,071
entities, the CFTC estimates that approximately 385 maintain covered
accounts, and thus would need to incur the additional burdens related
to complying with the rule, for a total of 2,310 hours.\173\ The total
ongoing burden for all CFTC registrants is 8,452 hours.\174\
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\172\ This estimate is based on the following calculation: 3,071
entities x 2 hours = 6,142 hours. (The Proposing Release contained
an arithmetic error in the calculation for the total ongoing burden
for all CFTC registrants. The total number of hours was erroneously
calculated to total 76,498 hours rather than 6,498. See 77 FR 13450,
13467.)
\173\ This estimate is based on the following calculation: 385
entities x 6 hours = 2,310 hours.
\174\ This estimate is based on the following calculation: 6,142
hours + 2,310 hours = 8,452 hours.
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SEC:
Provisions of sections 248.201 and 248.202 contain ``collection of
information'' requirements within the meaning of the PRA. In the
Proposing Release, the SEC solicited comment on the collection of
information requirements. The SEC also submitted the proposed
collections of information to the OMB for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for this collection of
information is ``Part 248, Subpart C--Regulation S-ID.'' In response to
this submission, the OMB issued control number 3235-0692.\175\
Responses to the new collection of information provisions are
mandatory, and the information, when provided to the SEC in connection
with staff examinations or investigations, is kept confidential to the
extent permitted by law.
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\175\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a currently valid OMB control number.
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1. Description of the Collections
Under Regulation S-ID, SEC-regulated entities are required to
develop and implement reasonable policies and procedures to identify,
detect and respond to relevant red flags and, in the case of entities
that issue credit or debit cards, to assess the validity of, and
communicate with cardholders regarding, address changes. Section
248.201 of Regulation S-ID includes the following ``collections of
information'' by SEC-regulated entities that are financial institutions
or creditors if the entity maintains covered accounts: (1) Creation and
periodic updating of a Program that is approved by the board of
directors, an appropriate committee thereof, or a designated senior
management employee; (2) periodic staff reporting on compliance with
the identify theft red flags rules and guidelines, as required to be
considered by section VI of the guidelines; and (3) training of staff
to implement the Program. Section 248.202 of Regulation S-ID includes
the following ``collections of information'' by SEC-regulated entities
that are credit or debit card issuers: (1) Establishment of policies
and procedures that assess the validity
[[Page 23656]]
of a change of address notification if a request for an additional or
replacement card on the account follows soon after the address change;
and (2) notification of a cardholder, before issuance of an additional
or replacement card, at the previous address or through some other
previously agreed-upon form of communication, or alternatively,
assessment of the validity of the address change request through the
entity's established policies and procedures.
SEC-regulated entities that must comply with the collections of
information required by Regulation S-ID should already be in compliance
with the identity theft red flags rules that the Agencies jointly
adopted in 2007.\176\ The requirements of those rules are substantially
similar and comparable to the requirements of Regulation S-ID.\177\
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\176\ SEC staff, however, understands that a number of
investment advisers may not currently have identity theft red flags
Programs. See supra note 55. Under the new guidance, for entities
having now determined that they should comply with Regulation S-ID,
the collections of information required by Regulation S-ID and the
estimates of time and costs discussed below may be new. As discussed
further below, SEC staff estimates that there are approximately 3791
investment advisers that are currently registered with the SEC and
are likely to qualify as financial institutions or creditors. SEC
staff is unable to estimate how many of these investment advisers
previously complied with the Agencies' identity theft red flags
rules.
\177\ See 2007 Adopting Release, supra note 8, at Section VI.A
(discussing the PRA analysis with respect to the Agencies' identity
theft red flags rules); ``FTC Extends Enforcement Deadline for
Identity Theft Red Flags Rule'' at http://www.ftc.gov/opa/2010/05/redflags.shtm.
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In addition, SEC staff understands that most SEC-regulated entities
that are financial institutions or creditors may otherwise have in
place many of the protections regarding identity theft and changes of
address that Regulation S-ID requires because they are usual and
customary business practices that they engage in to minimize losses
from fraud. Furthermore, SEC staff believes that many of them are
likely to have already effectively implemented most of the requirements
as a result of having to comply (or an affiliate having to comply) with
other, existing statutes, regulations and guidance, such as the federal
CIP rules implementing section 326 of the USA PATRIOT Act,\178\ the
Interagency Guidelines Establishing Information Security Standards that
implement section 501(b) of the Gramm-Leach-Bliley Act (GLBA),\179\
section 216 of the FACT Act,\180\ and guidance issued by the Agencies
or the Federal Financial Institutions Examination Council regarding
information security, authentication, identity theft, and response
programs.\181\
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\178\ 31 U.S.C. 5318(l) (requiring verification of the identity
of persons opening accounts).
\179\ 15 U.S.C. 6801.
\180\ 15 U.S.C. 1681w.
\181\ See 2007 Adopting Release, supra note 8, at nn.55-57
(describing applicable statutes, regulations, and guidance).
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SEC staff estimates of time and cost burdens represent the one-time
burden of complying with Regulation S-ID for newly-formed SEC-regulated
entities, and the ongoing costs of compliance for all SEC-regulated
entities.\182\ SEC staff estimates also attribute all burdens to
entities that are directly subject to the requirements of the
rulemaking. An entity directly subject to Regulation S-ID that
outsources activities to a service provider is, in effect, shifting to
that service provider the burden that it would otherwise have carried
itself. Under these circumstances, the burden is, by contract, shifted
from the entity that is directly subject to Regulation S-ID to the
service provider, but the total amount of burden is not increased.
Thus, service provider burdens are already included in the burden
estimates provided for entities that are directly subject to Regulation
S-ID. The time and cost estimates made here are based on conversations
with industry representatives and on a review of comments received on
the proposed rules as well as the estimates made in the regulatory
analyses of the identity theft red flags rules previously issued by the
Agencies.
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\182\ Based on discussions with industry representatives and a
review of applicable law, SEC staff expects that, of the SEC-
regulated entities that fall within the scope of Regulation S-ID,
most broker-dealers, many investment companies (including almost all
open-end investment companies and ESCs), and some registered
investment advisers will likely qualify as financial institutions or
creditors. SEC staff expects that other SEC-regulated entities
described in the scope section of Regulation S-ID, such as BDCs,
transfer agents, NRSROs, SROs, and clearing agencies may be less
likely to be financial institutions or creditors as defined in the
rules, and therefore we do not include these entities in our
estimates.
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2. Section 248.201 (Duties Regarding the Detection, Prevention, and
Mitigation of Identity Theft)
The collections of information required by section 248.201 apply to
SEC-regulated entities that are financial institutions or
creditors.\183\ As stated above, SEC staff expects that SEC-regulated
entities should already have incurred initial or one-time burdens
associated with compliance with Regulation S-ID because they should
already be in compliance with the substantially identical requirements
of the Agencies' identity theft red flags rules.\184\ Any initial or
one-time burden estimates associated with compliance with section
248.201 of Regulation S-ID apply only to newly-formed entities. The
ongoing burden estimates apply to all SEC-regulated entities that are
financial institutions or creditors. Existing entities subject to
Regulation S-ID should already bear, and will continue to be subject
to, this burden. In the Proposing Release, the SEC solicited comment on
its estimates of the burdens associated with the collections of
information required by section 248.201; one commenter raised concerns
with the estimates in the Proposing Release, arguing that actual
burdens could be greater than estimated.\185\
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\183\ Sec. 248.201(a).
\184\ See 2007 Adopting Release, supra note 8, at Section VI.A
(discussing the PRA analysis with respect to the Agencies' identity
theft red flags rules). Because the requirements of Regulation S-ID
are substantially identical to the requirements of the Agencies'
identity theft red flags rules, the SEC staff took the Agencies' PRA
analysis into account in estimating the regulatory burdens of
Regulation S-ID.
\185\ See supra note 162 and accompanying text.
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i. Initial Burden
SEC staff estimates that the one-time burden of compliance with
section 248.201 for SEC-regulated financial institutions and creditors
with covered accounts is: (i) 25 hours to develop and obtain board
approval of a Program; (ii) 4 hours to train staff; and (iii) 2 hours
to conduct an initial assessment of covered accounts, for a total of 31
hours. SEC staff estimates that, of the 31 hours incurred, 12 hours
will be spent by internal counsel, 17 hours will be spent by
administrative assistants, and 2 hours will be spent by the board of
directors as a whole for newly-formed entities.
SEC staff estimates that approximately 668 SEC-regulated financial
institutions and creditors are newly formed each year.\186\ Each of
these 668 entities will need to conduct an initial assessment of
covered accounts, for a total of 1336 hours.\187\ Of these 668
entities, SEC staff estimates that approximately 90% (or
[[Page 23657]]
601) maintain covered accounts.\188\ Accordingly, SEC staff estimates
that the total initial burden for the 601 newly formed SEC-regulated
entities that are likely to qualify as financial institutions or
creditors and maintain covered accounts is 18,631 hours, and the total
initial burden for all newly formed SEC-regulated entities is 18,765
hours.\189\
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\186\ Based on a review of new registrations typically filed
with the SEC each year, SEC staff estimates that approximately 900
investment advisers, 231 broker-dealers, 139 investment companies,
and 1 ESC typically apply for registration with the SEC or otherwise
are newly formed each year, for a total of 1271 entities that could
be financial institutions or creditors. Of these, SEC staff
estimates that all of the investment companies, ESCs, and broker-
dealers are likely to qualify as financial institutions or
creditors, and 33% (or 297) of investment advisers are likely to
qualify, for a total of 668 total financial institutions or
creditors that will bear the initial one-time burden of assessing
covered accounts under Regulation S-ID. Information regarding the
method used to estimate that 33% of investment advisers are likely
to qualify as financial institutions or creditors can be found in
note 190 below.
\187\ This estimate is based on the following calculation: 668
entities x 2 hours = 1336 hours.
\188\ In the Proposing Release, the SEC requested comment on the
estimate that approximately 90% of all financial institutions and
creditors maintain covered accounts; the SEC received no comments on
this estimate.
\189\ These estimates are based on the following calculations:
601 financial institutions and creditors that maintain covered
accounts x 31 hours = 18,631 hours; 17,429 hours (601 financial
institutions and creditors that maintain covered accounts x 29
hours) + 1336 hours (burden for all SEC-regulated entities that are
financial institutions or creditors to conduct an initial assessment
of covered accounts) = 18,765 hours.
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ii. Ongoing Burden
SEC staff estimates that the ongoing burden of compliance with
section 248.201 includes: (i) 2 hours to conduct periodic assessments
to determine if the entity offers or maintains covered accounts; (ii) 4
hours to prepare and present an annual report to the board; and (iii) 2
hours to periodically review and update the Program, including review
and preservation of contracts with service providers, and review and
preservation of any documentation received from service providers, for
a total of 8 hours. SEC staff estimates that, of the 8 hours incurred,
7 hours will be spent by internal counsel and 1 hour will be spent by
the board of directors as a whole.
SEC staff estimates that there are 10,339 SEC-regulated entities
that are either financial institutions or creditors, and that all of
these are required to periodically review their accounts to determine
if they offer or maintain covered accounts, for a total of 20,678 hours
for these entities.\190\ Of these 10,339 entities, SEC staff estimates
that approximately 90%, or 9305, maintain covered accounts, and thus
will bear the additional burdens related to complying with the
rules.\191\ Accordingly, SEC staff estimates that the total ongoing
burden for these 9305 financial institutions and creditors that
maintain covered accounts will be 74,440 hours.\192\ The estimated
total ongoing burden for the 10,339 SEC-regulated entities that are
financial institutions or creditors covered by Regulation S-ID will be
76,508 hours.\193\
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\190\ Based on a review of entities that the SEC regulates, SEC
staff estimates that, as of July 1, 2012, there are approximately
11,622 investment advisers, 4706 broker-dealers, 1692 active open-
end investment companies, and 150 ESCs. Of these, SEC staff
estimates that all of the broker-dealers, open-end investment
companies and ESCs are likely to qualify as financial institutions
or creditors, and approximately 3791 investment advisers (or about
33%, as explained further below) are likely to qualify, for a total
of 10,339 total financial institutions or creditors that will bear
the ongoing burden of assessing covered accounts under Regulation S-
ID. (The SEC staff estimates that the other types of entities that
are covered by the scope of the SEC's rules will not be financial
institutions or creditors and therefore will not be subject to the
rules' requirements. See supra note 182.) The total hours estimate
is based on the following calculation: 10,339 entities x 2 hours =
20,678 hours.
The SEC staff estimate that 33% of SEC-registered investment
advisers will be subject to the requirements of Regulation S-ID is
based on the following calculation. According to Investment Adviser
Registration Depository (IARD) data, there are approximately 11,622
investment advisers registered with the SEC as of July 1, 2012. Of
these advisers, approximately 7327 could potentially be subject to
the rule as financial institutions because they indicate they have
customers who are natural persons. We estimate that approximately
16%, or 1202 of these 7327 advisers, hold transaction accounts
belonging to natural persons and therefore would qualify as
financial institutions under the rule. Additionally, 4055 of the
11,622 advisers registered with the SEC have private fund clients.
We expect that most of the funds advised by these advisers would
have at least one natural person investor, and thus they could
potentially meet the definition of ``financial institution.'' In
addition, some of these private fund advisers may engage in lending
activities that would also qualify them as creditors under the rule.
In order to avoid duplication, however, we are deducting 1466
private fund advisers from the total number of advisers we estimate
will be subject to the rule, because they also indicated on Form ADV
that they have individual or high net worth clients and are already
accounted for in our estimates above. Accordingly, the staff
estimates that approximately 3791 (i.e., 1202 + 4055 - 1466)
advisers registered with the SEC will be subject to the rule. These
3791 advisers are about 33% of the 11,622 SEC-registered advisers.
\191\ In the Proposing Release, the SEC requested comment on the
estimate that approximately 90% of all financial institutions and
creditors maintain covered accounts; the SEC received no comments on
this estimate. See supra note 188 and accompanying text. If a
financial institution or creditor does not maintain covered
accounts, there will be no ongoing annual burden for purposes of the
PRA.
\192\ This estimate is based on the following calculation: 9305
financial institutions and creditors that maintain covered accounts
x 8 hours = 74,440 hours.
\193\ This estimate is based on the following calculation:
20,678 hours (10,339 financial institutions and creditors x 2 hours
(for review of accounts)) + 55,830 hours (9305 financial
institutions and creditors that maintain covered accounts x 6 hours
(for report to board, and review and update of Program)) = 76,508
hours.
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2. Section 248.202 (Duties of Card Issuers Regarding Changes of
Address).
The collections of information required by section 248.202 apply
only to SEC-regulated entities that issue credit or debit cards.\194\
SEC staff understands that SEC-regulated entities generally do not
issue credit or debit cards, but instead have arrangements with other
entities, such as banks, that issue cards on their behalf. These other
entities, which are not regulated by the SEC, are already subject to
substantially similar change of address obligations pursuant to the
Agencies' identity theft red flags rules. In addition, SEC staff
understands that card issuers already assess the validity of change of
address requests and, for the most part, have automated the process of
notifying the cardholder or using other means to assess the validity of
changes of address. Therefore, implementation of this requirement poses
no further burden.
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\194\ Sec. 248.202(a).
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SEC staff does not expect that any SEC-regulated entities will be
subject to the information collection requirements of section 248.202.
Accordingly, SEC staff estimates that there is no hourly or cost burden
for SEC-regulated entities related to section 248.202. In the Proposing
Release, the SEC solicited comment on this same estimate of the burdens
associated with the collections of information required by section
248.202 and received no comments on its burden estimate.
D. Regulatory Flexibility Act
CFTC
The Regulatory Flexibility Act (``RFA'') requires that federal
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact.\195\ The CFTC has already established certain definitions of
``small entities'' to be used in evaluating the impact of its rules on
such small entities in accordance with the RFA.\196\ The CFTC's final
identity theft red flags regulations affect FCMs, RFEDs, IBs, CTAs,
CPOs, SDs, and MSPs. SDs and MSPs are new categories of registrants.
Accordingly, the CFTC has noted in other rule proposals that it has not
previously addressed the question of whether such persons were, in
fact, small entities for purposes of the RFA.\197\
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\195\ See 5 U.S.C. 601-612.
\196\ 47 FR 18618 (Apr. 30, 1982).
\197\ See 75 FR 81519 (Dec. 28, 2010); 76 FR 6708 (Feb. 8,
2011); 76 FR 6715 (Feb. 8, 2011).
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In this regard, the CFTC has previously determined that FCMs should
not be considered to be small entities for purposes of the RFA, based,
in part, upon FCMs' obligation to meet the minimum financial
requirements established by the CFTC to enhance the protection of
customers' segregated funds and protect the financial condition of FCMs
generally.\198\ Like FCMs, SDs will be subject to minimum capital and
margin requirements, and
[[Page 23658]]
are expected to comprise the largest global financial institutions--and
the CFTC is required to exempt from designation as an SD entities that
engage in a de minimis level of swaps dealing in connection with
transactions with or on behalf of customers. Accordingly, for purposes
of the RFA, the CFTC has determined that SDs not be considered ``small
entities'' for essentially the same reasons that it has previously
determined FCMs not to be small entities.\199\
---------------------------------------------------------------------------
\198\ See, e.g., 75 FR 81519 (Dec. 28, 2010).
\199\ Id.
---------------------------------------------------------------------------
The CFTC also has previously determined that large traders are not
``small entities'' for RFA purposes, with the CFTC considering the size
of a trader's position to be the only appropriate test for the purpose
of large trader reporting.\200\ The CFTC also has noted that MSPs
maintain substantial positions in swaps, creating substantial
counterparty exposure that could have serious adverse effects on the
financial stability of the United States banking system or financial
markets.\201\ Accordingly, for purposes of the RFA, the CFTC has
determined that MSPs not be considered ``small entities'' for
essentially the same reasons that it has previously determined large
traders not to be small entities.\202\
---------------------------------------------------------------------------
\200\ See 47 FR 18618 (Apr. 30, 1982).
\201\ See, e.g., 75 FR 81519 (Dec. 28, 2010).
\202\ Id.
---------------------------------------------------------------------------
The CFTC did not receive any comments on its analysis of the
application of the RFA to SDs and MSPs. Moreover, the CFTC has issued
final rules in which it determined that the registration and regulation
of SDs and MSPs would not have a significant economic impact on a
substantial number of small entities.\203\
---------------------------------------------------------------------------
\203\ See, e.g., 77 FR 2613 (Jan. 19, 2012); 77 FR 20128 (Apr.
3, 2012).
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Further, the CFTC has determined that the requirements on financial
institutions and creditors, and card issuers set forth in the identity
theft red flags rules, respectively, will not have a significant
economic impact on a substantial number of small entities because many
of these entities are already complying with the identity theft red
flags rules of the Agencies. Moreover, the CFTC believes that the rules
include a great deal of flexibility to assist its regulated entities in
complying with such rules and guidelines.
In accordance with 5 U.S.C. 605(b), the CFTC Chairman, on behalf of
the CFTC, certifies that these rules will not have a significant
economic impact on a substantial number of small entities.
SEC
The SEC has prepared the following Final Regulatory Flexibility
Analysis (``FRFA'') regarding Regulation S-ID in accordance with 5
U.S.C. 604. The SEC included an Initial Regulatory Flexibility Analysis
(``IRFA'') in the Proposing Release in February 2012.\204\
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\204\ See Proposing Release, supra note 12.
---------------------------------------------------------------------------
1. Need for Regulation S-ID
The FACT Act, which amended FCRA to address identity theft red
flags, was enacted in part to help prevent the theft of consumer
information. The statute contains several provisions relating to the
detection, prevention, and mitigation of identity theft. Section
1088(a) of the Dodd-Frank Act amended section 615(e) of the FCRA by
adding the SEC (and CFTC) to the list of federal agencies required to
adopt rules related to the detection, prevention, and mitigation of
identity theft. Regulation S-ID implements the statutory directives in
section 615(e) of the FCRA, which require the SEC to adopt identity
theft rules jointly with the Agencies and the CFTC.
Section 615(e) requires the SEC to adopt rules that require
financial institutions and creditors to establish policies and
procedures to implement guidelines established by the SEC that address
identity theft with respect to account holders and customers. Section
615(e) also requires the SEC to adopt rules applicable to credit and
debit card issuers to implement policies and procedures to assess the
validity of change of address requests.
2. Significant Issues Raised by Public Comment
In the Proposing Release, we requested comment on the IRFA. None of
the comment letters we received specifically addressed the IRFA. None
of the comment letters made specific comments about Regulation S-ID's
impact on smaller financial institutions and creditors.
3. Small Entities Subject to the Rule
For purposes of the Regulatory Flexibility Act (``RFA''), an
investment company is a small entity if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year. SEC staff estimates that approximately 119 of the 1692
active open-end investment companies registered on Form N-1A meet this
definition.\205\
---------------------------------------------------------------------------
\205\ This information is based on staff analysis of information
from filings on Form N-SAR and from databases compiled by third-
party information providers, including Lipper Inc.
---------------------------------------------------------------------------
Under SEC rules, for purposes of the Investment Advisers Act and
the RFA, an investment adviser generally is a small entity if it: (i)
Has assets under management having a total value of less than $25
million; (ii) did not have total assets of $5 million or more on the
last day of its most recent fiscal year; and (iii) does not control, is
not controlled by, and is not under common control with another
investment adviser that has assets under management of $25 million or
more, or any person (other than a natural person) that had total assets
of $5 million or more on the last day of its most recent fiscal
year.\206\ Based on information in filings submitted to the SEC, 561 of
the approximately 11,622 investment advisers registered with the SEC
are small entities.\207\
---------------------------------------------------------------------------
\206\ 17 CFR 275.0-7(a).
\207\ This information is based on data from the Investment
Adviser Registration Depository (IARD) as of July 1, 2012.
---------------------------------------------------------------------------
For purposes of the RFA, a broker-dealer is a small business if it
had total capital (net worth plus subordinated liabilities) of less
than $500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared pursuant to rule 17a-5(d) of
the Exchange Act or, if not required to file such statements, a broker-
dealer that had total capital (net worth plus subordinated liabilities)
of less than $500,000 on the last business day of the preceding fiscal
year (or in the time that it has been in business, if shorter) and if
it is not an affiliate of an entity that is not a small business.\208\
SEC staff estimates that approximately 797 broker-dealers meet this
definition.\209\
---------------------------------------------------------------------------
\208\ 17 CFR 240.0-10(c).
\209\ This estimate is based on information provided in FOCUS
Reports filed with the SEC as of July 1, 2012. There are
approximately 4706 broker-dealers registered with the SEC.
---------------------------------------------------------------------------
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
Section 615(e) of the FCRA, as amended by section 1088 of the Dodd-
Frank Act, requires the SEC to adopt rules that require financial
institutions and creditors to establish reasonable policies and
procedures to implement guidelines established by the SEC that address
identity theft with respect to account holders and customers. Section
248.201 of Regulation S-ID implements this mandate by requiring a
covered financial institution or creditor that offers or maintains
certain accounts to create an identity theft prevention Program that
detects, prevents, and
[[Page 23659]]
mitigates the risk of identity theft applicable to these accounts.
Section 615(e) also requires the SEC to adopt rules applicable to
credit and debit card issuers to implement policies and procedures to
assess the validity of change of address requests. Section 248.202 of
Regulation S-ID implements this requirement by requiring credit and
debit card issuers to establish reasonable policies and procedures to
assess the validity of a change of address if it receives notification
of a change of address for a credit or debit card account and within a
short period of time afterwards (within 30 days), the issuer receives a
request for an additional or replacement card for the same account.
Because all SEC-regulated entities, including small entities,
should already be in compliance with the substantially similar identity
theft red flags rules that the Agencies began enforcing in 2008 and
2011,\210\ Regulation S-ID should not impose new compliance,
recordkeeping, or reporting burdens. If a SEC-regulated small entity is
not already in compliance with the existing identity theft red flags
rules issued by the Agencies, the burden of compliance with Regulation
S-ID should be minimal because we understand that these entities
already engage in various activities to minimize losses due to fraud as
part of their usual and customary business practices. In particular,
the rules allow these entities to consolidate their existing policies
and procedures into their written Program and may require some
additional staff training. Accordingly, the impact of the requirements
should be largely incremental and not significant, and we do not
anticipate that Regulation S-ID will disproportionately affect small
entities.
---------------------------------------------------------------------------
\210\ See supra note 8.
---------------------------------------------------------------------------
The SEC has estimated the costs of Regulation S-ID for all entities
(including small entities) in the PRA and economic analysis included in
this release. No new classes of skills are required to comply with
Regulation S-ID. SEC staff does not anticipate that small entities will
face unique or special burdens when complying with Regulation S-ID.
5. Agency Action To Minimize Effect on Small Entities
The RFA directs the SEC to consider significant alternatives that
would accomplish our stated objective, while minimizing any significant
economic impact on small issuers. In connection with Regulation S-ID,
the SEC considered the following alternatives: (i) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (ii) the
clarification, consolidation, or simplification of compliance
requirements under Regulation S-ID for small entities; (iii) the use of
performance rather than design standards; and (iv) an exemption from
coverage of Regulation S-ID, or any part thereof, for small entities.
Regulation S-ID requires covered financial institutions and
creditors that offer or maintain certain accounts to create an identity
theft prevention Program and report to the board of directors, an
appropriate committee thereof, or a designated senior management
employee at least annually on compliance with the regulations. Credit
and debit card issuers are required to respond to a change of address
request by notifying the cardholder or using other means to assess the
validity of a change of address.
The standards in Regulation S-ID are flexible, and take into
account a covered financial institution or creditor's size and
sophistication, as well as the costs and benefits of alternative
compliance methods. A Program under Regulation S-ID should be tailored
to the risk of identity theft in a financial institution or creditor's
covered accounts, thereby permitting small entities whose accounts pose
a low risk of identity theft to avoid much of the cost of compliance.
Because small entities maintain covered accounts that pose a risk of
identity theft for consumers just as larger entities do, providing an
exemption from Regulation S-ID for small entities could subject
consumers with covered accounts at small entities to a higher risk of
identity theft.
Pursuant to section 615(e) of the FCRA, as amended by section 1088
of the Dodd-Frank Act, the SEC and the CFTC are jointly adopting
identity theft red flags rules that are substantially similar and
comparable to the identity theft red flags rules previously adopted by
the Agencies. Providing a new exemption for small entities, or further
consolidating or simplifying the regulations for small entities, could
result in significant differences between the identity theft red flags
rules adopted by the Commissions and the rules adopted by the Agencies.
Because SEC-regulated entities, including small entities, should
already be in compliance with the substantially similar identity theft
red flags rules that the Agencies began enforcing in 2008 and 2011, SEC
staff does not expect that small entities will need a delayed effective
or compliance date beyond that already provided to all entities subject
to the rules.
IV. Statutory Authority and Text of Amendments
The CFTC is amending Part 162 under the authority set forth in
sections 1088(a)(8), 1088(a)(10), and 1088(b) of the Dodd-Frank
Act,\211\ and sections 615(e), 621(b), 624, and 628 of the FCRA.\212\
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\211\ Pub. L. 111-203, Sec. Sec. 1088(a)(8), 1088(a)(10), and
Sec. 1088(b), 124 Stat. 1376 (2010).
\212\ 15 U.S.C 1681-(e), 1681s(b), 1681s-3 and note, and
1681w(a)(1).
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The SEC is adopting Regulation S-ID under the authority set forth
in sections 1088(a)(8), 1088(a)(10), and 1088(b) of the Dodd-Frank
Act,\213\ section 615(e) of the FCRA,\214\ sections 17 and 23 of the
Exchange Act,\215\ sections 31 and 38 of the Investment Company
Act,\216\ and sections 204 and 211 of the Investment Advisers Act.\217\
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\213\ Pub. L. 111-203, Sec. Sec. 1088(a)(8), 1088(a)(10),
1088(b), 124 Stat. 1376 (2010).
\214\ 15 U.S.C. 1681m(e).
\215\ 15 U.S.C. 78q and 78w.
\216\ 15 U.S.C. 80a-30 and 80a-37.
\217\ 15 U.S.C. 80b-4 and 80b-11.
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List of Subjects
17 CFR Part 162
Cardholders, Card issuers, Commodity pool operators, Commodity
trading advisors, Confidential business information, Consumer reports,
Credit, Creditors, Consumer, Customer, Financial institutions, Futures
commission merchants, Identity theft, Introducing brokers, Major swap
participants, Privacy, Red flags, Reporting and recordkeeping
requirements, Retail foreign exchange dealers, Self-regulatory
organizations, Service provider, Swap dealers.
17 CFR Part 248
Affiliate marketing, Brokers, Cardholders, Card issuers,
Confidential business information, Consumers, Consumer financial
information, Consumer reports, Credit, Creditors, Customers, Dealers,
Financial institutions, Identity theft, Investment advisers, Investment
companies, Privacy, Red flags, Reporting and recordkeeping
requirements, Securities, Security measures, Self-regulatory
organizations, Service providers, Transfer agents.
Text of Final Rules
Commodity Futures Trading Commission
For the reasons stated above in the preamble, the Commodity Futures
[[Page 23660]]
Trading Commission is amending 17 CFR part 162 as follows:
PART 162--PROTECTION OF CONSUMER INFORMATION UNDER THE FAIR CREDIT
REPORTING ACT
0
1. The authority citation for part 162 continues to read as follows:
Authority: Sec. 1088, Pub. L. 111-203; 124 Stat. 1376 (2010).
0
2. Add subpart C to part 162 read as follows:
Subpart C--Identity Theft Red Flags
Sec.
162.30 Duties regarding the detection, prevention, and mitigation of
identity theft.
162.31 [Reserved]
162.32 Duties of card issuers regarding changes of address.
Subpart C--Identity Theft Red Flags
Sec. 162.30 Duties regarding the detection, prevention, and
mitigation of identity theft.
(a) Scope of this subpart. This section applies to financial
institutions or creditors that are subject to administrative
enforcement of the FCRA by the Commission pursuant to Sec. 621(b)(1) of
the FCRA, 15 U.S.C. 1681s(b)(1).
(b) Special definitions for this subpart. For purposes of this
section, and Appendix B to this part, the following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes
an extension of credit, such as the purchase of property or services
involving a deferred payment.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated senior management employee.
(3) Covered account means:
(i) An account that a financial institution or creditor offers or
maintains, primarily for personal, family, or household purposes, that
involves or is designed to permit multiple payments or transactions,
such as a margin account; and
(ii) Any other account that the financial institution or creditor
offers or maintains for which there is a reasonably foreseeable risk to
customers or to the safety and soundness of the financial institution
or creditor from identity theft, including financial, operational,
compliance, reputation, or litigation risks.
(4) Credit has the same meaning in Sec. 603(r)(5) of the FCRA, 15
U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4), and
includes any futures commission merchant, retail foreign exchange
dealer, commodity trading advisor, commodity pool operator, introducing
broker, swap dealer, or major swap participant that regularly extends,
renews, or continues credit; regularly arranges for the extension,
renewal, or continuation of credit; or in acting as an assignee of an
original creditor, participates in the decision to extend, renew, or
continue credit.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t) and includes any futures commission merchant, retail foreign
exchange dealer, commodity trading advisor, commodity pool operator,
introducing broker, swap dealer, or major swap participant that
directly or indirectly holds a transaction account belonging to a
consumer.
(8) Identifying information means any name or number that may be
used, alone or in conjunction with any other information, to identify a
specific person, including any--
(i) Name, Social Security number, date of birth, official State or
government issued driver's license or identification number, alien
registration number, government passport number, employer or taxpayer
identification number;
(ii) Unique biometric data, such as fingerprint, voice print,
retina or iris image, or other unique physical representation;
(iii) Unique electronic identification number, address, or routing
code; or
(iv) Telecommunication identifying information or access device (as
defined in 18 U.S.C. 1029(e)).
(9) Identity theft means a fraud committed or attempted using the
identifying information of another person without authority.
(10) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(11) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic identification of covered accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor shall conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program-(1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program that is designed to detect,
prevent, and mitigate identity theft in connection with the opening of
a covered account or any existing covered account. The Identity Theft
Prevention Program must be appropriate to the size and complexity of
the financial institution or creditor and the nature and scope of its
activities.
(2) Elements of the Identity Theft Prevention Program. The Identity
Theft Prevention Program must include reasonable policies and
procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Identity Theft Prevention Program;
(ii) Detect Red Flags that have been incorporated into the Identity
Theft Prevention Program of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Identity Theft Prevention Program (including the
Red Flags determined to be relevant) is updated periodically, to
reflect changes in risks to customers and to the safety and soundness
of the financial institution or creditor from identity theft.
(e) Administration of the Identity Theft Prevention Program. Each
financial institution or creditor that is required to implement an
Identity Theft Prevention Program must provide for the continued
administration of the Identity Theft Prevention Program and must:
(1) Obtain approval of the initial written Identity Theft
Prevention Program from either its board of directors or an appropriate
committee of the board of directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a
[[Page 23661]]
designated employee at the level of senior management in the oversight,
development, implementation and administration of the Identity Theft
Prevention Program;
(3) Train staff, as necessary, to effectively implement the
Identity Theft Prevention Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement an Identity Theft Prevention Program must
consider the guidelines in appendix B of this part and include in its
Identity Theft Prevention Program those guidelines that are
appropriate.
Sec. 162.31 [Reserved]
Sec. 162.32 Duties of card issuers regarding changes of address.
(a) Scope. This section applies to a person described in Sec.
162.30(a) that issues a debit or credit card (card issuer).
(b) Definition of cardholder. For purposes of this section, a
cardholder means a consumer who has been issued a credit or debit card.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a change of address if it receives notification of a change of
address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days
after it receives such notification), the card issuer receives a
request for an additional or replacement card for the same account.
Under these circumstances, the card issuer may not issue an additional
or replacement card, until, in accordance with its reasonable policies
and procedures and for the purpose of assessing the validity of the
change of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 162.30.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.
0
3. Add Appendix B to part 162 to read as follows:
Appendix B to Part 162--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation
Section 162.30 requires each financial institution or creditor
that offers or maintains one or more covered accounts, as defined in
Sec. 162.30(b)(3), to develop and provide for the continued
administration of a written Identity Theft Prevention Program to
detect, prevent, and mitigate identity theft in connection with the
opening of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the formulation and maintenance of an Identity Theft
Prevention Program that satisfies the requirements of Sec. 162.30.
I. The Identity Theft Prevention Program
In designing its Identity Theft Prevention Program, a financial
institution or creditor may incorporate, as appropriate, its
existing policies, procedures, and other arrangements that control
reasonably foreseeable risks to customers or to the safety and
soundness of the financial institution or creditor from identity
theft.
II. Identifying Relevant Red Flags
(a) Risk factors. A financial institution or creditor should
consider the following factors in identifying relevant Red Flags for
covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Financial institutions and creditors
should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution
or creditor has experienced;
(2) Methods of identity theft that the financial institution or
creditor has identified that reflect changes in identity theft
risks; and
(3) Applicable supervisory guidance.
(c) Categories of Red Flags. The Identity Theft Prevention
Program should include relevant Red Flags from the following
categories, as appropriate. Examples of Red Flags from each of these
categories are appended as Supplement A to this Appendix B.
(1) Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying
information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to,
a covered account; and
(5) Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible
identity theft in connection with covered accounts held by the
financial institution or creditor.
III. Detecting Red Flags
The Identity Theft Prevention Program's policies and procedures
should address the detection of Red Flags in connection with the
opening of covered accounts and existing covered accounts, such as
by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account; and
(b) Authenticating customers, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.
IV. Preventing and Mitigating Identity Theft
The Identity Theft Prevention Program's policies and procedures
should provide for appropriate responses to the Red Flags the
financial institution or creditor has detected that are commensurate
with the degree of risk posed. In determining an appropriate
response, a financial institution or creditor should consider
aggravating factors that may heighten the risk of identity theft,
such as a data security incident that results in unauthorized access
to a customer's account records held by the financial institution or
creditor, or third party, or notice that a customer has provided
information related to a covered account held by the financial
institution or creditor to someone fraudulently claiming to
represent the financial institution or creditor or to a fraudulent
Internet Web site. Appropriate responses may include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the customer;
(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not
selling a covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the
particular circumstances.
V. Updating the Identity Theft Prevention Program
Financial institutions and creditors should update the Identity
Theft Prevention Program (including the Red Flags determined to be
relevant) periodically, to reflect changes in risks to customers or
to the safety and
[[Page 23662]]
soundness of the financial institution or creditor from identity
theft, based on factors such as:
(a) The experiences of the financial institution or creditor
with identity theft;
(b) Changes in methods of identity theft;
(c) Changes in methods to detect, prevent, and mitigate identity
theft;
(d) Changes in the types of accounts that the financial
institution or creditor offers or maintains; and
(e) Changes in the business arrangements of the financial
institution or creditor, including mergers, acquisitions, alliances,
joint ventures, and service provider arrangements.
VI. Methods for Administering the Identity Theft Prevention Program
(a) Oversight of Identity Theft Prevention Program. Oversight by
the board of directors, an appropriate committee of the board, or a
designated senior management employee should include:
(1) Assigning specific responsibility for the Identity Theft
Prevention Program's implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the financial institution or creditor with Sec. 162.30; and
(3) Approving material changes to the Identity Theft Prevention
Program as necessary to address changing identity theft risks.
(b) Reports. (1) In general. Staff of the financial institution
or creditor responsible for development, implementation, and
administration of its Identity Theft Prevention Program should
report to the board of directors, an appropriate committee of the
board, or a designated senior management employee, at least
annually, on compliance by the financial institution or creditor
with Sec. 162.30.
(2) Contents of report. The report should address material
matters related to the Identity Theft Prevention Program and
evaluate issues such as: The effectiveness of the policies and
procedures of the financial institution or creditor in addressing
the risk of identity theft in connection with the opening of covered
accounts and with respect to existing covered accounts; service
provider arrangements; significant incidents involving identity
theft and management's response; and recommendations for material
changes to the Identity Theft Prevention Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.
VII. Other Applicable Legal Requirements
Financial institutions and creditors should be mindful of other
related legal requirements that may be applicable, such as:
(a) For financial institutions and creditors that are subject to
31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance
with applicable law and regulation;
(b) Implementing any requirements under 15 U.S.C. 1681c-1(h)
regarding the circumstances under which credit may be extended when
the financial institution or creditor detects a fraud or active duty
alert;
(c) Implementing any requirements for furnishers of information
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example,
to correct or update inaccurate or incomplete information, and to
not report information that the furnisher has reasonable cause to
believe is inaccurate; and
(d) Complying with the prohibitions in 15 U.S.C. 1681m on the
sale, transfer, and placement for collection of certain debts
resulting from identity theft.
Supplement A to Appendix B
In addition to incorporating Red Flags from the sources
recommended in section II(b) of the Guidelines in Appendix B of this
part, each financial institution or creditor may consider
incorporating into its Identity Theft Prevention Program, whether
singly or in combination, Red Flags from the following illustrative
examples in connection with covered accounts:
Alerts, Notifications or Warnings From a Consumer Reporting Agency
1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 603(f) of the Fair Credit Reporting
Act (15 U.S.C. 1681a(f)).
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.
Suspicious Documents
5. Documents provided for identification appear to have been
altered or forged.
6. The photograph or physical description on the identification
is not consistent with the appearance of the applicant or customer
presenting the identification.
7. Other information on the identification is not consistent
with information provided by the person opening a new covered
account or customer presenting the identification.
8. Other information on the identification is not consistent
with readily accessible information that is on file with the
financial institution or creditor, such as a signature card or a
recent check.
9. An application appears to have been altered or forged, or
gives the appearance of having been destroyed and reassembled.
Suspicious Personal Identifying Information
10. Personal identifying information provided is inconsistent
when compared against external information sources used by the
financial institution or creditor. For example:
a. The address does not match any address in the consumer
report; or
b. The Social Security Number (SSN) has not been issued, or is
listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the customer is
not consistent with other personal identifying information provided
by the customer. For example, there is a lack of correlation between
the SSN range and date of birth.
12. Personal identifying information provided is associated with
known fraudulent activity as indicated by internal or third-party
sources used by the financial institution or creditor. For example:
a. The address on an application is the same as the address
provided on a fraudulent application; or
b. The phone number on an application is the same as the number
provided on a fraudulent application.
13. Personal identifying information provided is of a type
commonly associated with fraudulent activity as indicated by
internal or third-party sources used by the financial institution or
creditor. For example:
a. The address on an application is fictitious, a mail drop, or
a prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other
persons opening an account or other customers.
15. The address or telephone number provided is the same as or
similar to the address or telephone number submitted by an unusually
large number of other persons opening accounts or by other
customers.
16. The person opening the covered account or the customer fails
to provide all required personal identifying information on an
application or in response to notification that the application is
incomplete.
17. Personal identifying information provided is not consistent
with personal identifying information that is on file with the
financial institution or creditor.
18. For financial institutions or creditors that use challenge
questions, the person opening the covered account or the customer
cannot provide authenticating information beyond that which
generally would be available from a wallet or consumer report.
Unusual Use of, or Suspicious Activity Related to, the Covered Account
19. Shortly following the notice of a change of address for a
covered account, the institution or creditor receives a request for
a new, additional, or replacement means of accessing the account or
for the addition of an authorized user on the account.
20. A new revolving credit account is used in a manner commonly
associated with known patterns of fraud. For example:
[[Page 23663]]
a. The majority of available credit is used for cash advances or
merchandise that is easily convertible to cash (e.g., electronics
equipment or jewelry); or
b. The customer fails to make the first payment or makes an
initial payment but no subsequent payments.
21. A covered account is used in a manner that is not consistent
with established patterns of activity on the account. There is, for
example:
a. Nonpayment when there is no history of late or missed
payments;
b. A material increase in the use of available credit;
c. A material change in purchasing or spending patterns;
d. A material change in electronic fund transfer patterns in
connection with a deposit account; or
e. A material change in telephone call patterns in connection
with a cellular phone account.
22. A covered account that has been inactive for a reasonably
lengthy period of time is used (taking into consideration the type
of account, the expected pattern of usage and other relevant
factors).
23. Mail sent to the customer is returned repeatedly as
undeliverable although transactions continue to be conducted in
connection with the customer's covered account.
24. The financial institution or creditor is notified that the
customer is not receiving paper account statements.
25. The financial institution or creditor is notified of
unauthorized charges or transactions in connection with a customer's
covered account.
Notice From Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Financial Institution or
Creditor
26. The financial institution or creditor is notified by a
customer, a victim of identity theft, a law enforcement authority,
or any other person that it has opened a fraudulent account for a
person engaged in identity theft.
Securities and Exchange Commission
For the reasons stated in the preamble, the Securities and Exchange
Commission is amending 17 CFR part 248 as follows:
PART 248--REGULATIONS S-P, S-AM, AND S-ID
0
4. The authority citation for part 248 is revised to read as follows:
Authority: 15 U.S.C. 78q, 78q-1, 78o-4, 78o-5, 78w, 78mm, 80a-
30, 80a-37, 80b-4, 80b-11, 1681m(e), 1681s(b), 1681s-3 and note,
1681w(a)(1), 6801-6809, and 6825; Pub. L. 111-203, secs. 1088(a)(8),
(a)(10), and sec. 1088(b), 124 Stat. 1376 (2010).
0
5. Revise the heading for part 248 to read as set forth above.
0
6. Add subpart C to part 248 to read as follows:
Subpart C--Regulation S-ID: Identity Theft Red Flags
Sec.
248.201 Duties regarding the detection, prevention, and mitigation
of identity theft.
248.202 Duties of card issuers regarding changes of address.
Appendix A to Subpart C of Part 248--Interagency Guidelines on
Identity Theft Detection, Prevention, and Mitigation
Subpart C--Regulation S-ID: Identity Theft Red Flags
Sec. 248.201 Duties regarding the detection, prevention, and
mitigation of identity theft.
(a) Scope. This section applies to a financial institution or
creditor, as defined in the Fair Credit Reporting Act (15 U.S.C. 1681),
that is:
(1) A broker, dealer or any other person that is registered or
required to be registered under the Securities Exchange Act of 1934;
(2) An investment company that is registered or required to be
registered under the Investment Company Act of 1940, that has elected
to be regulated as a business development company under that Act, or
that operates as an employees' securities company under that Act; or
(3) An investment adviser that is registered or required to be
registered under the Investment Advisers Act of 1940.
(b) Definitions. For purposes of this subpart, and Appendix A of
this subpart, the following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes
a brokerage account, a mutual fund account (i.e., an account with an
open-end investment company), and an investment advisory account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign financial
institution or creditor, the managing official of that branch or
agency; and
(ii) In the case of a financial institution or creditor that does
not have a board of directors, a designated employee at the level of
senior management.
(3) Covered account means:
(i) An account that a financial institution or creditor offers or
maintains, primarily for personal, family, or household purposes, that
involves or is designed to permit multiple payments or transactions,
such as a brokerage account with a broker-dealer or an account
maintained by a mutual fund (or its agent) that permits wire transfers
or other payments to third parties; and
(ii) Any other account that the financial institution or creditor
offers or maintains for which there is a reasonably foreseeable risk to
customers or to the safety and soundness of the financial institution
or creditor from identity theft, including financial, operational,
compliance, reputation, or litigation risks.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4).
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identifying information means any name or number that may be
used, alone or in conjunction with any other information, to identify a
specific person, including any--
(i) Name, Social Security number, date of birth, official State or
government issued driver's license or identification number, alien
registration number, government passport number, employer or taxpayer
identification number;
(ii) Unique biometric data, such as fingerprint, voice print,
retina or iris image, or other unique physical representation;
(iii) Unique electronic identification number, address, or routing
code; or
(iv) Telecommunication identifying information or access device (as
defined in 18 U.S.C. 1029(e)).
(9) Identity theft means a fraud committed or attempted using the
identifying information of another person without authority.
(10) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(11) Service provider means a person that provides a service
directly to the financial institution or creditor.
(12) Other definitions.
(i) Broker has the same meaning as in section 3(a)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
(ii) Commission means the Securities and Exchange Commission.
(iii) Dealer has the same meaning as in section 3(a)(5) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
(iv) Investment adviser has the same meaning as in section
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)).
(v) Investment company has the same meaning as in section 3 of the
[[Page 23664]]
Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a
separate series of the investment company.
(vi) Other terms not defined in this subpart have the same meaning
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
(c) Periodic identification of covered accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program--
(1) Program requirement. Each financial institution or creditor
that offers or maintains one or more covered accounts must develop and
implement a written Identity Theft Prevention Program (Program) that is
designed to detect, prevent, and mitigate identity theft in connection
with the opening of a covered account or any existing covered account.
The Program must be appropriate to the size and complexity of the
financial institution or creditor and the nature and scope of its
activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix A to this subpart and include in its Program those guidelines
that are appropriate.
Sec. 248.202 Duties of card issuers regarding changes of address.
(a) Scope. This section applies to a person described in Sec.
248.201(a) that issues a credit or debit card (card issuer).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit card
or debit card as defined in 15 U.S.C. 1681a(r).
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(3) Other terms not defined in this subpart have the same meaning
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
(c) Address validation requirements. A card issuer must establish
and implement reasonable written policies and procedures to assess the
validity of a change of address if it receives notification of a change
of address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days
after it receives such notification), the card issuer receives a
request for an additional or replacement card for the same account.
Under these circumstances, the card issuer may not issue an additional
or replacement card, until, in accordance with its reasonable policies
and procedures and for the purpose of assessing the validity of the
change of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 248.201.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
be provided separately from its regular correspondence with the
cardholder.
Appendix A to Subpart C of Part 248--Interagency Guidelines on Identity
Theft Detection, Prevention, and Mitigation
Section 248.201 requires each financial institution and creditor
that offers or maintains one or more covered accounts, as defined in
Sec. 248.201(b)(3), to develop and provide for the continued
administration of a written Program to detect, prevent, and mitigate
identity theft in connection with the opening of a covered account
or any existing covered account. These guidelines are intended to
assist financial institutions and creditors in the formulation and
maintenance of a Program that satisfies the requirements of Sec.
248.201.
I. The Program
In designing its Program, a financial institution or creditor
may incorporate, as appropriate, its existing policies, procedures,
and other arrangements that control reasonably foreseeable risks to
customers or to the safety and soundness of the financial
institution or creditor from identity theft.
II. Identifying Relevant Red Flags
(a) Risk Factors. A financial institution or creditor should
consider the following factors in identifying relevant Red Flags for
covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Financial institutions and creditors
should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution
or creditor has experienced;
(2) Methods of identity theft that the financial institution or
creditor has identified that reflect changes in identity theft
risks; and
[[Page 23665]]
(3) Applicable regulatory guidance.
(c) Categories of Red Flags. The Program should include relevant
Red Flags from the following categories, as appropriate. Examples of
Red Flags from each of these categories are appended as Supplement A
to this Appendix A.
(1) Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying
information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to,
a covered account; and
(5) Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible
identity theft in connection with covered accounts held by the
financial institution or creditor.
III. Detecting Red Flags
The Program's policies and procedures should address the
detection of Red Flags in connection with the opening of covered
accounts and existing covered accounts, such as by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account, for example, using
the policies and procedures regarding identification and
verification set forth in the Customer Identification Program rules
implementing 31 U.S.C. 5318(l) (31 CFR 1023.220 (broker-dealers) and
1024.220 (mutual funds)); and
(b) Authenticating customers, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.
IV. Preventing and Mitigating Identity Theft
The Program's policies and procedures should provide for
appropriate responses to the Red Flags the financial institution or
creditor has detected that are commensurate with the degree of risk
posed. In determining an appropriate response, a financial
institution or creditor should consider aggravating factors that may
heighten the risk of identity theft, such as a data security
incident that results in unauthorized access to a customer's account
records held by the financial institution, creditor, or third party,
or notice that a customer has provided information related to a
covered account held by the financial institution or creditor to
someone fraudulently claiming to represent the financial institution
or creditor or to a fraudulent Web site. Appropriate responses may
include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the customer;
(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not
selling a covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the
particular circumstances.
V. Updating the Program
Financial institutions and creditors should update the Program
(including the Red Flags determined to be relevant) periodically, to
reflect changes in risks to customers or to the safety and soundness
of the financial institution or creditor from identity theft, based
on factors such as:
(a) The experiences of the financial institution or creditor
with identity theft;
(b) Changes in methods of identity theft;
(c) Changes in methods to detect, prevent, and mitigate identity
theft;
(d) Changes in the types of accounts that the financial
institution or creditor offers or maintains; and
(e) Changes in the business arrangements of the financial
institution or creditor, including mergers, acquisitions, alliances,
joint ventures, and service provider arrangements.
VI. Methods for Administering the Program
(a) Oversight of Program. Oversight by the board of directors,
an appropriate committee of the board, or a designated employee at
the level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the financial institution or creditor with Sec. 248.201; and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports.
(1) In general. Staff of the financial institution or creditor
responsible for development, implementation, and administration of
its Program should report to the board of directors, an appropriate
committee of the board, or a designated employee at the level of
senior management, at least annually, on compliance by the financial
institution or creditor with Sec. 248.201.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: The
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.
VII. Other Applicable Legal Requirements
Financial institutions and creditors should be mindful of other
related legal requirements that may be applicable, such as:
(a) For financial institutions and creditors that are subject to
31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance
with applicable law and regulation;
(b) Implementing any requirements under 15 U.S.C. 1681c-1(h)
regarding the circumstances under which credit may be extended when
the financial institution or creditor detects a fraud or active duty
alert;
(c) Implementing any requirements for furnishers of information
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example,
to correct or update inaccurate or incomplete information, and to
not report information that the furnisher has reasonable cause to
believe is inaccurate; and
(d) Complying with the prohibitions in 15 U.S.C. 1681m on the
sale, transfer, and placement for collection of certain debts
resulting from identity theft.
Supplement A to Appendix A
In addition to incorporating Red Flags from the sources
recommended in section II.b. of the Guidelines in Appendix A to this
subpart, each financial institution or creditor may consider
incorporating into its Program, whether singly or in combination,
Red Flags from the following illustrative examples in connection
with covered accounts:
Alerts, Notifications or Warnings From a Consumer Reporting Agency
1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as referenced in Sec. 605(h) of the Fair Credit
Reporting Act (15 U.S.C. 1681c(h)).
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.
Suspicious Documents
5. Documents provided for identification appear to have been
altered or forged.
6. The photograph or physical description on the identification
is not consistent with the appearance of the applicant or customer
presenting the identification.
7. Other information on the identification is not consistent
with information provided
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by the person opening a new covered account or customer presenting
the identification.
8. Other information on the identification is not consistent
with readily accessible information that is on file with the
financial institution or creditor, such as a signature card or a
recent check.
9. An application appears to have been altered or forged, or
gives the appearance of having been destroyed and reassembled.
Suspicious Personal Identifying Information
10. Personal identifying information provided is inconsistent
when compared against external information sources used by the
financial institution or creditor. For example:
a. The address does not match any address in the consumer
report; or
b. The Social Security Number (SSN) has not been issued, or is
listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the customer is
not consistent with other personal identifying information provided
by the customer. For example, there is a lack of correlation between
the SSN range and date of birth.
12. Personal identifying information provided is associated with
known fraudulent activity as indicated by internal or third-party
sources used by the financial institution or creditor. For example:
a. The address on an application is the same as the address
provided on a fraudulent application; or
b. The phone number on an application is the same as the number
provided on a fraudulent application.
13. Personal identifying information provided is of a type
commonly associated with fraudulent activity as indicated by
internal or third-party sources used by the financial institution or
creditor. For example:
a. The address on an application is fictitious, a mail drop, or
a prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other
persons opening an account or other customers.
15. The address or telephone number provided is the same as or
similar to the address or telephone number submitted by an unusually
large number of other persons opening accounts or by other
customers.
16. The person opening the covered account or the customer fails
to provide all required personal identifying information on an
application or in response to notification that the application is
incomplete.
17. Personal identifying information provided is not consistent
with personal identifying information that is on file with the
financial institution or creditor.
18. For financial institutions and creditors that use challenge
questions, the person opening the covered account or the customer
cannot provide authenticating information beyond that which
generally would be available from a wallet or consumer report.
Unusual Use of, or Suspicious Activity Related to, the Covered Account
19. Shortly following the notice of a change of address for a
covered account, the institution or creditor receives a request for
a new, additional, or replacement means of accessing the account or
for the addition of an authorized user on the account.
20. A covered account is used in a manner that is not consistent
with established patterns of activity on the account. There is, for
example:
a. Nonpayment when there is no history of late or missed
payments;
b. A material increase in the use of available credit;
c. A material change in purchasing or spending patterns; or
d. A material change in electronic fund transfer patterns in
connection with a deposit account.
21. A covered account that has been inactive for a reasonably
lengthy period of time is used (taking into consideration the type
of account, the expected pattern of usage and other relevant
factors).
22. Mail sent to the customer is returned repeatedly as
undeliverable although transactions continue to be conducted in
connection with the customer's covered account.
23. The financial institution or creditor is notified that the
customer is not receiving paper account statements.
24. The financial institution or creditor is notified of
unauthorized charges or transactions in connection with a customer's
covered account.
Notice From Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Financial Institution or
Creditor
25. The financial institution or creditor is notified by a
customer, a victim of identity theft, a law enforcement authority,
or any other person that it has opened a fraudulent account for a
person engaged in identity theft.
Dated: April 10, 2013.
By the Commodity Futures Trading Commission.
Melissa Jurgens,
Secretary of the Commodity Futures Trading Commission.
Dated: April 10, 2013
By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary of the Securities and Exchange Commission.
[FR Doc. 2013-08830 Filed 4-18-13; 8:45 am]
BILLING CODE 6351-01-P; 8011-01-p
Last Updated: April 19, 2013