2012-5157

Federal Register, Volume 77 Issue 44 (Tuesday, March 6, 2012)[Federal Register Volume 77, Number 44 (Tuesday, March 6, 2012)]

[Proposed Rules]

[Pages 13450-13478]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2012-5157]

[[Page 13449]]

Vol. 77

Tuesday,

No. 44

March 6, 2012

Part III

Commodity Futures Trading Commission

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17 CFR Part 162

Securities and Exchange Commission

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17 CFR Part 248

Identity Theft Red Flags Rules; Proposed Rule

Federal Register / Vol. 77 , No. 44 / Tuesday, March 6, 2012 /

Proposed Rules

[[Page 13450]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 162

RIN 3038-AD14

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 248

[Release No. IC-29969; 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 proposed rules and guidelines.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the

Securities and Exchange Commission (``SEC,'' together with the CFTC,

the ``Commissions'') are jointly issuing proposed rules and guidelines

to implement new statutory provisions enacted by Title X of the Dodd-

Frank Wall Street Reform and Consumer Protection Act. These provisions

amend section 615(e) of the Fair Credit Reporting Act and direct the

Commissions to prescribe rules requiring entities that are subject to

the Commissions' jurisdiction to address identity theft in two ways.

First, the proposed rules and guidelines would require financial

institutions and creditors to develop and implement a written identity

theft prevention program that is designed to detect, prevent, and

mitigate identity theft in connection with certain existing accounts or

the opening of new accounts. The Commissions also are proposing

guidelines to assist entities in the formulation and maintenance of a

program that would satisfy the requirements of the proposed rules.

Second, the proposed rules would establish special requirements for any

credit and debit card issuers that are subject to the Commissions'

jurisdiction, to assess the validity of notifications of changes of

address under certain circumstances.

DATES: Comments must be received on or before May 7, 2012.

ADDRESSES: Comments may be submitted by any of the following methods:

CFTC:

Agency Web site, via its Comments Online Process: Comments

may be submitted to http://comments.cftc.gov. Follow the instructions

for submitting comments on the Internet Web site.

Mail: David A. Stawick, Secretary, Commodity Futures

Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,

Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

www.cftc.gov. You should submit only information that you wish to make

available publicly. If you wish the CFTC to consider information that

may be exempt from disclosure under the Freedom of Information Act, a

petition for confidential treatment of the exempt information may be

submitted according to the established procedures in 17 CFR 145.9.

The CFTC reserves the right, but shall not have the obligation, to

review, pre-screen, filter, redact, refuse, or remove any or all

submissions from www.cftc.gov that it may deem to be inappropriate for

publication, such as obscene language. All submissions that have been

redacted or removed that contain comments on the merits of the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act, 5 U.S.C.

551, et seq., and other applicable laws, and may be accessible under

the Freedom of Information Act, 5 U.S.C. 552.

SEC:

Electronic Comments

Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

Send an email to [email protected] Please include

File Number S7-02-12 on the subject line; or

Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,

Secretary, Securities and Exchange Commission, 100 F Street NE.,

Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-12.

This file number should be included on the subject line if email is

used. To help us process and review your comments more efficiently,

please use only one method. The SEC will post all comments on the SEC's

Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also

available for Web site viewing and printing in the SEC's Public

Reference Room, 100 F Street NE., Washington, DC 20549 on official

business days between the hours of 10 a.m. and 3 p.m. All comments

received will be posted without change; we do not edit personal

identifying information from submissions. You should submit only

information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Carl E. Kennedy, Counsel, at

Commodity Futures Trading Commission, Office of the General Counsel,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,

telephone number (202) 418-6625, facsimile number (202) 418-5524, email

[email protected]; SEC: with regard to investment companies and

investment advisers, contact Thoreau Bartmann, Senior Counsel, 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, or

Joseph Furey, Assistant 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 proposing new rules and

guidelines on identity theft red flags for entities subject to their

respective jurisdiction. The CFTC is proposing to add new subpart C

(``Identity Theft Red Flags'') to part 162 of the CFTC's regulations

[17 CFR part 162] and the SEC is proposing to add 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 of 1970 [15 U.S.C. 1681], the Commodity Exchange Act [7 U.S.C. 1],

the Securities Exchange Act of 1934 [15 U.S.C. 78], 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 Proposed Rules and Guidelines

A. Proposed Identity Theft Red Flags Rules

1. Which Financial Institutions and Creditors Would Be Required

to Have a Program

2. The Objectives of the Program

3. The Elements of the Program

4. Administration of the Program

B. Proposed Guidelines

1. Section I of the Proposed Guidelines--Identity Theft

Prevention Program

[[Page 13451]]

2. Section II of the Proposed Guidelines--Identifying Relevant

Red Flags

3. Section III of the Proposed Guidelines--Detecting Red Flags

4. Section IV of the Proposed Guidelines--Preventing and

Mitigating Identity Theft

5. Section V of the Proposed Guidelines--Updating the Identity

Theft Prevention Program

6. Section VI of the Proposed Guidelines--Methods for

Administering the Identity Theft Prevention Program

7. Section VII of the Proposed Guidelines--Other Applicable

Legal Requirements

8. Proposed Supplement A to the Guidelines

C. Proposed Card Issuer Rules

1. Definition of ``Cardholder'' and Other Terms

2. Address Validation Requirements

3. Form of Notice

D. Proposed Effective and Compliance Dates

III. Related Matters

A. Cost-Benefit Analysis (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 Proposed Amendments

I. Background

The growth and advancement of information technology and electronic

communication have made it increasingly easy to collect, maintain and

transfer personal information about individuals. Advancements in

technology also have led to increasing threats to the integrity and

privacy of personal information.\1\ 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.\2\

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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\ See, e.g., Report of President's Identity Theft Task Force

(Sept. 2008) (available at http://www.ftc.gov/os/2008/10/081021taskforcereport.pdf) (documenting governmental efforts to

reduce identity theft); Testimony of Edith Ramirez, Commissioner of

Federal Trade Commission, on Data Security, before House

Subcommittee on Commerce, Manufacturing, and Trade, June 15, 2011

(available at http://www.ftc.gov/os/testimony/110615datasecurityhouse.pdf) (describing efforts of the Federal

Trade Commission to promote data security).

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The Fair Credit Reporting Act of 1970 \3\ (``FCRA'') sets standards

for the collection, communication, and use of information about

consumers by consumer reporting agencies.\4\ Congress has amended the

FCRA numerous times since 1970 to augment the protections the law

provides. For example, the Fair and Accurate Credit Transactions Act of

2003 (``FACT Act'') \5\ amended the FCRA to enhance the ability of

consumers to combat identity theft.\6\ The FACT Act also amended the

FCRA to direct certain federal agencies to jointly issue rules and

guidelines related to identity theft.\7\

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\3\ Public Law 91-508, 84 Stat. 1114 (1970), codified at 15

U.S.C. 1681 et seq.

\4\ The FCRA states that its purpose is ``to require that

consumer reporting agencies adopt reasonable procedures for meeting

the needs of commerce for consumer credit, personnel, insurance, and

other information in a manner which is fair and equitable to the

consumer, with regard to the confidentiality, accuracy, relevancy,

and proper utilization of such information * * *.'' Id.

\5\ See Public Law 108-159, 117 Stat. 1952 (2003).

\6\ The Federal Trade Commission has defined ``identity theft''

as ``a fraud committed or attempted using the identifying

information of another person without authority.'' See 16 CFR

603.2(a).

\7\ Section 114 of the FACT Act.

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Under the FACT Act's amendments to the FCRA, the Office of the

Comptroller of the Currency, the Board of Governors of the Federal

Reserve System, the Federal Deposit Insurance Corporation, the Office

of Thrift Supervision, the National Credit Union Administration, and

the Federal Trade Commission (the ``FTC'') (together, the ``Agencies'')

were required to issue joint rules and guidelines regarding the

detection, prevention, and mitigation of identity theft for entities

that are subject to their respective enforcement authority (the

``identity theft red flags rules and guidelines'').\8\ The Agencies

also were required 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'').\9\ In 2007, the Agencies

issued joint final identity theft rules and guidelines, and joint final

card issuer rules.\10\

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\8\ See sections 615(e)(1)(A)-(B) of the FCRA, 15 U.S.C.

1681m(e)(1)(A)--(B). Section 615(e)(1)(A) of the FCRA provides that

the Agencies shall 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) provides that the Agencies shall 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.''

\9\ Section 615(e)(1)(C) of the FCRA provides that the Agencies

shall jointly ``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'' follows certain

procedures (including notifying the cardholder at the former

address) to assess the validity of the change of address. 15 U.S.C.

1681m(e)(1)(C).

\10\ 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 Agencies'

final rules also implemented section 315 of the FACT Act, which

required the Agencies to adopt joint rules providing guidance

regarding reasonable policies and procedures that a user of consumer

reports must employ when a consumer reporting agency sends the user

a notice of address discrepancy. See 15 U.S.C. 1681c(h). The Dodd-

Frank Act does not authorize the Commissions to propose rules under

section 315 of the FACT Act, and therefore entities under the

authority of the Commissions, for purposes of the identity theft red

flags rules and guidelines, will be subject to other agencies' rules

on address discrepancies. See, e.g., 16 CFR 641.1 (FTC).

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On July 21, 2010, President Obama signed into law the Dodd-Frank

Wall Street Reform and Consumer Protection Act (``Dodd-Frank

Act'').\11\ Title X of the Dodd-Frank Act, which is titled the Consumer

Financial Protection Act of 2010 (``CFP Act''), established a Bureau of

Consumer Financial Protection within the Federal Reserve System and

gave this new agency certain rulemaking, enforcement, and supervisory

powers over many consumer financial products and services, as well as

the entities that sell them. In addition, Title X amended a number of

other federal consumer protection laws enacted prior to the Dodd-Frank

Act, including the FCRA.

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\11\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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Within Title X, section 1088(a)(8),(10) of the Dodd-Frank Act

amended the FCRA by adding the Commissions (CFTC and SEC) to the list

of federal agencies required to jointly prescribe and enforce identity

theft red flags rules and guidelines and card issuer rules.\12\

[[Page 13452]]

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 under their respective jurisdiction.

Accordingly, the Commissions are now jointly proposing for public

notice and comment identity theft rules and guidelines and card issuer

rules.\13\ The proposed rules and guidelines \14\ are substantially

similar to those adopted by the Agencies in 2007.\15\ As discussed

further below, the Commissions recognize that most of the entities over

which they have jurisdiction are likely to be already in compliance

with the final rules and guidelines that the Agencies adopted in 2007,

to the extent that these entities' activities fall within the scope of

the Agencies' final rules and guidelines. The proposed rules and

guidelines, if adopted, would not contain new requirements not already

in the Agencies' final rules, nor would they expand the scope of those

rules to include new entities that were not already previously covered

by the Agencies' rules.\16\ The proposed rules and guidelines do

contain examples and minor language changes designed to help guide

entities under the Commissions' jurisdiction in complying with the

rules. The Commissions anticipate that the proposed rules, if adopted,

may help some entities discern whether and how the identity theft rules

and guidelines apply to their circumstances.

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\12\ See section 615(e)(1) of the FCRA, 15 U.S.C. 1681m(e)(1).

In addition, section 1088(a)(10) 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 19. 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).

\13\ The CFTC is proposing to add the proposed rules and

guidelines in this release as a new subpart C to part 162 of the

CFTC's regulations, 17 CFR 162. See Business Affiliate Marketing and

Disposal of Consumer Information Rules, 76 FR 43879 (July 22, 2011).

As a result, the purpose, scope, and definitions in part 162 would

apply to the proposed identity theft red flags rules and guidelines,

as well as to the proposed card issuer rules. The new subpart C

would be titled ``Identity Theft Red Flags.'' The SEC is proposing

to add the proposed rules and guidelines in this release as a new

subpart C to part 248 of the SEC's regulations. 17 CFR part 248. The

new subpart C is titled ``Regulation S-ID: Identity Theft Red

Flags.''

\14\ For ease of reference, unless the context indicates

otherwise, our general use of the term ``rules and guidelines'' in

this preamble will refer to both the identity theft red flags rules

and guidelines and the card issuer rules.

\15\ See 15 U.S.C. 1681m(e)(1).

\16\ The CFTC notes that the Dodd-Frank Act creates two new

entities that must comply with these proposed rules and guidelines:

Swap dealers and major swap participants. The CFTC anticipates that

to the extent that these new entities currently maintain or offer

covered accounts (as discussed below), they also may be in

compliance with the Agencies' final rules.

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II. Explanation of the Proposed Rules and Guidelines

A. Proposed 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 prescribe rules requiring such institutions and

creditors to establish reasonable policies and procedures for the

implementation of those guidelines.\17\ The Commissions have sought to

propose identity theft red flags rules and guidelines that are

substantially similar to the Agencies' final identity theft red flags

rules and guidelines, and that would provide flexibility and guidance

to the entities subject to the Commissions' jurisdiction. To that end,

the proposed rules discussed below would specify: (1) Which financial

institutions and creditors would be required to develop and implement a

written identity theft prevention program (``Program''); (2) the

objectives of the Program; (3) the elements that the Program would be

required to contain; and (4) the steps financial institutions and

creditors would need to take to administer the Program.

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\17\ 15 U.S.C. 1681m(e)(1)(A) and (B). Key terms such as

financial institution and creditor are defined in the proposed rules

and discussed later in this Section.

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1. Which Financial Institutions and Creditors Would Be Required To Have

a Program

The ``scope'' subsections of the proposed rules generally set forth

the types of entities that would be subject to the Commissions'

identity theft red flags rules and guidelines.\18\ Under these proposed

subsections, the rules would apply to entities over which the

Commissions have recently been granted enforcement authority under the

FCRA.\19\ The Commissions' proposed scope provisions are similar to the

scope provisions of the rules adopted by the Agencies.\20\

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\18\ Proposed Sec. 162.30(a) (CFTC); Sec. 248.201(a) (SEC).

\19\ 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 ``with

respect to consumer reporting agencies, persons who use consumer

reports from such agencies, persons who furnish information to such

agencies, and users of [certain information] 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'').

\20\ See, e.g., 12 CFR 717.90 (stating that the National Credit

Union Administration red flags rule ``applies to a financial

institution or creditor that is a federal credit union''). The

Commissions do not have general regulatory jurisdiction over banks,

savings and loan associations, or credit unions that hold a

transaction account, although the Commissions may have supervisory

authority over specific activities of those persons. For example,

the CFTC may have jurisdiction over those persons to the extent that

they engage in the trading of, or the provision of advice related

to, futures or swaps. Similarly, the SEC may have jurisdiction over

these persons to the extent that they engage in the trading of, or

the provision of advice related to, securities or security-based

swaps.

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The CFTC has tailored its proposed ``scope'' subsection, as well as

the definitions of ``financial institution'' and ``creditor,'' to

describe the entities to which its proposed identity theft red flags

rules and guidelines would apply.\21\ The CFTC's proposed rule states

that it would apply to futures commission merchants (``FCMs''), retail

foreign exchange dealers, commodity trading advisors (``CTAs''),

commodity pool operators (``CPOs''), introducing brokers (``IBs''),

swap dealers, and major swap participants.\22\

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\21\ Proposed Sec. 162.30(a).

\22\ The CFTC has determined that the proposed identity theft

red flags rules and guidelines would 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

scope of part 162. See 76 FR at 43884.

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The SEC's proposed ``scope'' subsection provides that the proposed

rules and guidelines would 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, 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

an investment adviser that is registered or required to be

registered under the Investment Advisers Act of 1940.\23\

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\23\ Proposed Sec. 248.201(a).

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The entities listed in the proposed scope section are the entities

regulated by the SEC that are most likely to be ``financial

institutions'' or ``creditors,'' i.e., registered brokers or dealers

(``broker-dealers''), investment

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companies and investment advisers.\24\ The proposed scope section also

would include other entities that are registered or are required to

register under the Exchange Act. The section would not specifically

identify those entities, such as nationally recognized statistical

ratings organizations, self-regulatory organizations, and municipal

advisors and municipal securities dealers, because, as discussed below,

they are unlikely to qualify as ``financial institutions'' or

``creditors'' under the FCRA.\25\ The proposed scope section also would

not include entities that are not themselves registered with the

Commission,\26\ even if they register securities under the Securities

Act of 1933 or the Exchange Act, or report information under the

Investment Advisers Act of 1940.\27\

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\24\ The SEC's proposed rules would define the scope of the

proposed identity theft red flags rules and guidelines, proposed

Sec. 248.201(a), differently than Regulation S-AM, the affiliate

marketing rule the SEC adopted under 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 Commission). 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 over which the SEC has jurisdiction. By

contrast, the Dodd-Frank Act specifies that the SEC's identity theft

red flags rules and guidelines should apply to a ``person that is

subject to the jurisdiction'' of the SEC. See Dodd-Frank Act section

1088(a)(8), (10).

The scope of the SEC's proposed rules also would differ 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 of 1940. See 15 U.S.C. 6805(a)(3)-(5).

\25\ Although the Commission preliminarily believes that

municipal advisors and municipal securities dealers are unlikely to

qualify as ``financial institutions'' because they are unlikely to

maintain transaction accounts for consumers, we welcome comment on

this point specifically, as well as on the general issue of whether

the list of entities in the proposed scope section should include

any other entities.

\26\ The Dodd-Frank Act defines a ``person regulated by the

[SEC],'' for other purposes of that 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

section 1002(21) of the Dodd-Frank Act.

\27\ See 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 Commissions solicit comment on the ``scope'' section

of the proposed identity theft red flags rules.

Should the SEC's proposed scope section specifically list

all of the entities that would be covered by the rule if they were to

qualify as financial institutions or creditors under the FCRA? Are the

entities specifically listed in the proposed rule the registered

entities that are most likely to be financial institutions or creditors

under the FCRA? Should the SEC exclude any entities that are listed?

Should it include any other entities that are not listed? Should the

SEC include entities that register securities with the SEC or that

report certain information to the SEC even if the entities themselves

do not register with the SEC?

i. Definition of Financial Institution

As discussed above, the Commissions' proposed red flags rules and

guidelines would apply to ``financial institutions'' and ``creditors.''

The Commissions are proposing to define the term ``financial

institution'' by reference to the definition of the term in section

603(t) of the FCRA.\28\ That section defines a 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.''

\29\ 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 of withdrawal, telephone transfers, or other

similar items for the purpose of making payments or transfers to third

parties or others.'' \30\

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\28\ 15 U.S.C. 1681a(t). See proposed Sec. 162.30(b)(7) (CFTC);

proposed Sec. 248.201(b)(7) (SEC). The Agencies also defined

``financial institution,'' in their identity theft red flags rules

and guidelines, 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).'').

\29\ 15 U.S.C. 1681a(t).

\30\ 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.''

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Accordingly, the Commissions are proposing to define ``financial

institution'' as having the same meaning as in the FCRA. The CFTC's

proposed definition, however, also specifies that the term ``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 customer.'' \31\

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\31\ See proposed Sec. 162.30(b)(7).

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The SEC is not proposing to mention specific entities in its

definition of ``financial institution'' because the SEC's proposed

scope section lists specific entities subject to the SEC's rule.\32\

The SEC notes that entities under its jurisdiction that may be

financial institutions because they hold customers' transaction

accounts would likely include broker-dealers that offer custodial

accounts and investment companies that enable investors to make wire

transfers to other parties or that offer check-writing privileges. The

SEC recognizes that most registered investment advisers are unlikely to

hold transaction accounts and thus would not qualify as financial

institutions. The proposed definition nonetheless does not exclude

investment advisers or any other entities regulated by the SEC because

they may hold transaction accounts or otherwise meet the definition of

``financial institution.''

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\32\ See proposed Sec. 248.201(a).

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The Commissions solicit comment on their proposed

definitions of financial institution. Should the Commissions provide

further guidance on the types of accounts that an entity might hold

that would qualify the entity as a financial institution? Should the

Commissions tailor the definition in any way to reflect the

characteristics of the entities that would be subject to the rule? If

so, how? Would defining ``financial institution'' instead in a way that

differs from the Agencies' definition compromise the substantial

similarity of the red flags rules?

What type of entities regulated by the Commissions would

most likely qualify as financial institutions under the proposed

definition?

Should the SEC's rule omit investment advisers or any

other SEC-registered entity from the list of entities covered by the

proposed rule?

ii. Definition of Creditor

The Commissions are proposing to define ``creditor'' to reflect a

recent statutory definition of the term. In December 2010, President

Obama signed into law the Red Flag Program Clarification Act of 2010

(``Clarification Act''), which amended the definition of ``creditor''

in the FCRA for purposes of identity theft red flag rules and

guidelines.\33\ The Commissions' proposed definition of ``creditor''

would

[[Page 13454]]

refer to the definition in the FCRA as amended by the Clarification

Act.\34\

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\33\ 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).

\34\ See proposed Sec. 162.30(b)(5) (CFTC); proposed Sec.

248.201(b)(5) (SEC). The Commissions understand that the Agencies

are likely to amend their red flags rules and guidelines to reflect

the new definition of ``creditor'' in the FCRA enacted by the Red

Flag Program Clarification Act.

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The FCRA now defines a ``creditor,'' for purposes of the red flags

rules and guidelines, as a creditor as defined in the Equal Credit

Opportunity Act \35\ (``ECOA'') (i.e., a person that regularly extends,

renews or continues credit,\36\ or makes those arrangements) that

``regularly and in the course of business [hellip] 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.'' \37\ 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 * * *.'' \38\ 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 does indicate 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 and

guidelines.\39\

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\35\ 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).

\36\ The Commissions are proposing to define ``credit'' by

reference to its definition in the FCRA. See proposed Sec.

162.30(b)(4) (CFTC); proposed 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).

\37\ 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).

\38\ Section 615(e)(4)(B) of the FCRA, 15 U.S.C. 1681m(e)(4)(B).

The definition of ``creditor'' also authorizes the Agencies and the

Commissions to include other entities in the definition of

``creditor'' if those entities are determined to offer or maintain

accounts that are subject to a reasonably foreseeable risk of

identity theft. 15 U.S.C. 1681m(e)(4)(C). The Commissions are not at

this time proposing to include other types of entities in the

definition of ``creditor'' that are not included in the statutory

definition.

\39\ See 156 Cong. Rec. S8288-9 (daily ed. Nov. 30, 2010)

(statements of Senators Thune and Dodd).

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As discussed above, the Commissions propose to define ``creditor''

by reference to its definition in section 615(e)(4) of the FCRA as

added by the Clarification Act.\40\ The CFTC's proposed definition also

would include certain entities (such as FCMs and CTAs) that regularly

extend, renew or continue credit or make those credit arrangements.\41\

The SEC's proposed definition also would include ``lenders such as

brokers or dealers offering margin accounts, securities lending

services, and short selling services.'' \42\ These entities are likely

to qualify as ``creditors'' under the proposed definition because the

funds that are advanced in these accounts do not appear to be for

``expenses incidental to a service provided.'' The proposed definition

of ``creditor'' would not include, however, CTAs or investment advisers

because they bill in arrears, i.e., on a deferred basis, if they do not

``advance'' funds to investors and clients.\43\

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\40\ See proposed Sec. 162.30(b)(5); proposed Sec.

248.201(b)(5).

\41\ See proposed Sec. 162.30(b)(5).

\42\ See proposed Sec. 248.201(b)(5).

\43\ Investment advisers that bill for their services on a

quarterly or other deferred basis might have qualified as

``creditors'' if the term were defined as under section 702 of the

Equal Credit Opportunity Act, but they would not qualify as

creditors under the definition the Commissions are proposing because

they are not ``advanc[ing] funds.''

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The Commissions request comment on their proposed

definitions of the terms credit and creditor. Should the proposed terms

be tailored to take into account the particular characteristics of the

entities regulated by the Commissions? If so, how? Should the

Commissions provide further guidance, in the rule text or elsewhere,

regarding the types of activities that might qualify an entity as a

creditor? Should the Commissions provide guidance regarding the

circumstances in which expenses, paid for by advanced funds, are

``incidental'' to services provided?

Do commenters agree that broker-dealers that offer margin

accounts, securities lending services, or short-selling services are

likely to qualify as ``creditors'' under the proposed definition? Are

there other activities that would likely cause SEC-registered entities

to qualify as ``creditors''?

Are there any other entities under the CFTC's or SEC's

jurisdiction that maintain accounts that pose a reasonably foreseeable

risk of identity theft and that the Commissions should include as

``creditors'' under the definition? \44\

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\44\ See 15 U.S.C. 1681m(e)(4)(C).

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iii. Definition of Covered Account and Other Terms

Under the proposed rules, entities that adopt red flags Programs

would focus their attention on ``covered accounts'' for indicia of

possible identity theft. The Commissions propose to define a ``covered

account'' 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 \45\ or to the safety and soundness of

the financial institution or creditor from identity theft, including

financial, operational, compliance, reputation, or litigation

risks.\46\ The CFTC's proposed definition includes a margin account as

an example of a covered account.\47\ The SEC's proposed definition

includes 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 as examples of such an account.\48\

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\45\ Proposed Sec. 162.30(b)(6) (CFTC) and proposed Sec.

248.201(b)(6) (SEC) would define a ``customer'' to mean a person who

has a covered account with a financial institution or creditor. The

Commissions propose this definition for two reasons. First, this

definition is the same as the definition of ``customer'' in the

Agencies' final rules and guidelines. Second, because the definition

uses the term ``person,'' it would cover 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, a financial institution or creditor would be required to

determine which type of accounts its Program will cover, because the

proposed identity theft red flags rules and guidelines are risk-

based.

\46\ Proposed Sec. 162.30(b)(3) (CFTC); proposed Sec.

248.201(b)(3) (SEC).

\47\ See proposed Sec. 162.30(b)(3)(i).

\48\ See proposed Sec. 248.201(b)(3)(i).

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The Commissions are proposing to define ``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.'' \49\ The CFTC's proposed

definition would specifically include an extension of credit, such as

the purchase of property or services involving a deferred payment.\50\

The SEC's proposed definition would specifically

[[Page 13455]]

include ``a brokerage account, a `mutual fund' account (i.e., an

account with an open-end investment company, which may be maintained by

a transfer agent or other service provider), and an investment advisory

account.'' \51\ Both the CFTC's and SEC's proposed definitions would

differ from the definitions in the Agencies' final rules and guidelines

by not including a ``deposit account.'' Deposit accounts typically are

offered by banks in connection with their banking activities, and not

by the entities regulated by the Commissions.\52\

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\49\ Proposed Sec. 162.30(b)(1) (CFTC) and proposed Sec.

248.201(b)(1) (SEC).

\50\ Proposed Sec. 162.30(b)(1).

\51\ Proposed Sec. 248.201(b)(1).

\52\ See, e.g., Uniform Commercial Code Sec. 9-102(a)(29) (``

`Deposit account' means a demand, time, savings, passbook, or

similar account maintained with a bank.'').

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The proposed identity theft red flags rules and guidelines would

define several other terms as the Agencies defined them in their final

rules and guidelines, where appropriate, to avoid needless conflicts

among regulations.\53\ In addition, terms that are not defined in

Regulation S-ID would have the same meaning as in the FCRA.\54\

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\53\ See, e.g., proposed Sec. 162.30(b)(10) (CFTC); proposed

Sec. 248.201(b)(10) (SEC) (definition of ``Red Flag'').

\54\ See proposed Sec. 248.201(b)(12)(vi) (SEC). The Agencies

defined ``identity theft'' in their identity theft red flags rules

and guidelines 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 proposing to define the

terms ``identifying information'' and ``identity theft'' by

including the same definition of the terms as they appear in 16 CFR

603.2. See proposed Sec. 162.30(b)(8) and (9) (CFTC); proposed

Sec. 248.201(b)(8) and (9) (SEC).

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The Commissions request comment on the proposed definition

of ``covered account.'' Should the Commissions include the proposed

examples of covered accounts? Should the definition include additional

examples of accounts that may be covered accounts? If so, what other

types of examples should be included?

What other types of accounts that are offered or

maintained by financial institutions or creditors subject to the

Commissions' enforcement authority may pose a reasonably foreseeable

risk of identity theft? Should the Commissions explicitly identify them

and include them as examples in the proposed rule?

Are deposit accounts offered by any of the entities

regulated by the Commissions?

The Commissions request comment on other terms defined in

the proposed rules and guidelines.

iv. Determination of Whether a Covered Account Is Offered or Maintained

Under the proposed rules, each financial institution or creditor

would be required to periodically determine whether it offers or

maintains covered accounts.\55\ As a part of this periodic

determination, a financial institution or creditor would be required to

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.\56\ Under the proposed rules, 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 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 would maintain records concerning

their periodic determinations.\57\

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\55\ Proposed Sec. 162.30(c) (CFTC) and proposed Sec.

248.201(c) (SEC). As discussed above, the proposed rules would

define a ``covered account'' 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, 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. Proposed Sec. 162.30(b)(3) (CFTC); proposed Sec.

248.201(b)(3) (SEC).

\56\ Proposed Sec. 162.30(c) (CFTC) and proposed Sec.

248.201(c) (SEC).

\57\ 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.

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The Commissions acknowledge that some financial institutions or

creditors regulated by the Commissions may engage only 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 it does not need to develop and

implement a Program,\58\ or that it may develop and implement a Program

that applies only to a limited range of its activities, such as certain

accounts or types of accounts.\59\ Under the proposed rules, a

financial institution or creditor that initially determines that it

does not need to have a Program would be 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 proposed Sec. 162.30(c) (CFTC) and proposed

Sec. 248.201(c) (SEC).

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\58\ For example, an FCM that would otherwise be subject to the

proposed identity theft red flags rules and guidelines 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 would otherwise be

subject to the proposed 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.

\59\ Even a Program limited in scale, however, would need to

comply with all of the provisions of the proposed rules and

guidelines. See, e.g., proposed Sec. 162.30(d)-(f) (CFTC) and

proposed Sec. 248.201(d)-(f) (SEC) (Program requirements).

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The Commissions request comment regarding the proposed

requirement to periodically determine whether a financial institution

or creditor offers or maintains covered accounts. Do the proposed rules

provide adequate guidance for making the periodic determinations?

Should the rules specifically require the documentation of such

determinations?

2. The Objectives of the Program

The proposed rules would 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.\60\ These proposed provisions

also would 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 proposed rules are designed to be

scalable, by permitting Programs that take into account the operations

of smaller institutions.

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\60\ See proposed Sec. 162.30(d)(1) (CFTC) and proposed Sec.

248.201(d)(1) (SEC).

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The Commissions request comment on the proposed objectives

of the Program.

3. The Elements of the Program

The proposed rules set out the four elements that financial

institutions and creditors would be required to include

[[Page 13456]]

in their Programs.\61\ These elements are identical to the elements

required under the Agencies' final identity theft red flag rules.\62\

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\61\ See proposed Sec. 162.30(d)(2) (CFTC) and proposed Sec.

248.201(d)(2) (SEC).

\62\ See 2007 Adopting Release, supra note 10, at 63726-63730.

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First, the proposed rule would require financial institutions and

creditors to develop Programs that include reasonable policies and

procedures to identify relevant red flags \63\ for the covered accounts

that the financial institution or creditor offers or maintains, and

incorporate those red flags into its Program.\64\ Rather than singling

out specific red flags as mandatory or requiring specific policies and

procedures to identify possible red flags, this first element would

provide 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 proposed guidelines, which are

appended to the proposed rules.\65\ Given the changing nature of

identity theft, the Commissions believe that this element would allow

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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\63\ Proposed Sec. 162.30(b)(10) (CFTC) and proposed Sec.

248.201(b)(10) (SEC) define ``red flags'' to mean a pattern,

practice, or specific activity that indicates the possible existence

of identity theft.

\64\ See proposed Sec. 162.30(d)(2)(i) (CFTC) and proposed

Sec. 248.201(d)(2)(i) (SEC). The board of directors, appropriate

committee thereof, or designated 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.

However, the board (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 and

guidelines. See 2007 Adopting Release, supra note 10.

\65\ The factors and examples are discussed below in Section

II.B.2.

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Second, the proposed rule would require financial institutions and

creditors to have reasonable policies and procedures to detect red

flags that have been incorporated into the Program of the financial

institution or creditor.\66\ This element would not provide a specific

method of detection. Instead, section III of the proposed guidelines

provides examples of various means to detect red flags.\67\

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\66\ See proposed Sec. 162.30(d)(2)(ii) (CFTC) and proposed

Sec. 248.201(d)(2)(ii) (SEC).

\67\ These examples are discussed below in Section II.B.3.

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Third, the proposed rule would require financial institutions and

creditors to have reasonable policies and procedures to respond

appropriately to any red flags that are detected.\68\ This element

would incorporate the requirement that a financial institution or

creditor assess whether the red flags 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 proposed guidelines sets out a

list of aggravating factors and examples that a financial institution

or creditor should consider in determining the appropriate

response.\69\

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\68\ See proposed Sec. 162.30(d)(2)(iii) (CFTC) and proposed

Sec. 248.201(d)(2)(iii) (SEC).

\69\ The aggravating factors and examples are discussed below in

Section II.B.4.

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Finally, the proposed rule would require financial institutions and

creditors to have reasonable policies and procedures to ensure that 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.\70\ As discussed above, financial institutions and

creditors would be required to determine which red flags are relevant

to their businesses and the covered accounts they manage. The

Commissions are proposing a periodic update, rather than immediate or

continuous updates, to be parallel with the final identity theft red

flags rules of the Agencies and to avoid unnecessary regulatory

burdens. Section V of the proposed guidelines provides a set of factors

that should cause a financial institution or creditor to update its

Program.\71\

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\70\ See proposed Sec. 162.30(d)(2)(iv) (CFTC) and proposed

Sec. 248.201(d)(2)(iv) (SEC).

\71\ These factors are discussed below in Section II.B.5.

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The Commissions request comment on whether the proposed

four elements of the Program would provide effective protection against

identity theft and whether any additional elements should be included.

The Commissions anticipate that a financial institution or

creditor that adopts a Program could integrate the policies and

procedures with other policies and procedures it has adopted pursuant

to other legal requirements, such as compliance \72\ and safeguards

rules.\73\ Should the Commissions provide guidance on how financial

institutions or creditors could integrate identity theft policies and

procedures with other policies and procedures?

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\72\ See rule 38a-1 under the Investment Company Act, 17 CFR

270.38a-1; rule 206(4)-7 under the Investment Advisers Act, 17 CFR

275.206(4)-7.

\73\ Regulation S-P, 17 CFR 248.30 (applicable to broker-

dealers, investment companies, and investment advisers).

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4. Administration of the Program

The Commissions are proposing to provide direction to financial

institutions and creditors regarding the administration of Programs to

enhance the effectiveness of those Programs. Accordingly, the proposed

rule would prescribe the steps that financial institutions and

creditors would have to take to administer a Program.\74\ These

sections would provide that each financial institution or creditor that

is required to implement a Program must provide for the continued

administration of the Program and meet four additional requirements.

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\74\ See proposed Sec. 162.30(e) (CFTC) and proposed Sec.

248.201(e) (SEC).

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First, the proposed rules would require that a financial

institution or creditor obtain approval of the initial written Program

from either its board of directors or an appropriate committee of the

board of directors.\75\ This proposed requirement highlights the

responsibility of the board of directors and senior management in

approving a Program. This requirement would not mandate that a board be

responsible for the day-to-day operations of the Program. The proposed

rules provide that the board or appropriate committee must approve only

the initial written Program. This provision is designed to enable a

financial institution or creditor to update its Program in a timely

manner. After the initial approval, at the discretion of the entity,

the board, a committee, or senior management may update the Program.

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\75\ See proposed Sec. 162.30(e)(1) (CFTC) and proposed Sec.

248.201(e)(1) (SEC). Proposed Sec. 162.30(b)(2) (CFTC) and proposed

Sec. 248.201(b)(2) (SEC) define the term ``board of directors'' to

include: (i) in the case of a branch or agency of a non-U.S-based

financial institution or creditor, the managing official in charge

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 senior management employee.

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Second, the proposed rules would provide that financial

institutions and creditors must 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.\76\ The proposed rules would provide

discretion to a financial institution or creditor to determine who

would be responsible for the oversight, development, implementation,

and administration of the Program in

[[Page 13457]]

allowing the board of directors to delegate these functions. The

Commissions appreciate that boards of directors have many

responsibilities and that it generally is not feasible for a board to

involve itself in these functions on a daily basis. A designated

management official who is responsible for the oversight of a broker-

dealer's, investment company's or investment adviser's Program may also

be the entity's chief compliance officer.\77\

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\76\ See proposed Sec. 162.30(e)(2) (CFTC) and proposed Sec.

248.201(e)(2) (SEC). Section VI of the proposed guidelines

elaborates on the proposed provision.

\77\ See, e.g., rule 38a-1(a)(4) under the Investment Company

Act (description of chief compliance officer), 17 CFR 270.38a-

1(a)(4); rule 206(4)-7(c) under the Investment Advisers Act, 17 CFR

275.206(4)-7 (same).

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Third, the proposed rules would provide that financial institutions

and creditors must train staff, as necessary, to effectively implement

their Programs.\78\ The Commissions believe that proper training would

enable relevant staff to address the risk of identity theft. For

example, staff would be trained to detect red flags with regard to new

and existing accounts, such as discrepancies in identification

presented by a person opening an account. Staff also would need to be

trained to mitigate identity theft, for example, by recognizing when an

account should not be opened.

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\78\ See proposed Sec. 162.30(e)(3) (CFTC) and proposed Sec.

248.201(e)(3) (SEC).

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Finally, the proposed rules would provide that financial

institutions and creditors must exercise appropriate and effective

oversight of service provider arrangements.\79\ The Commissions believe

that it is important that the proposed rules address service provider

arrangements so that financial institutions and creditors would remain

legally responsible for compliance with the proposed rules,

irrespective of whether such institutions and creditors outsource their

identity theft red flags detection, prevention, and mitigation

operations to a third-party service provider.\80\ The proposed rules do

not prescribe a specific manner in which appropriate and effective

oversight of service provider arrangements must occur. Instead, the

proposed requirement would provide flexibility to financial

institutions and creditors in maintaining their service provider

arrangements, while making clear that such institutions and creditors

would still be required to fulfill their legal compliance

obligations.\81\ Section VI(c) of the proposed guidelines specifies

what a financial institution or creditor could do so 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.\82\

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\79\ See proposed Sec. 162.30(e)(4) (CFTC) and proposed Sec.

248.201(e)(4) (SEC). Proposed Sec. 162.30(b)(11) (CFTC) and

proposed Sec. 248.201(b)(11) (SEC) would define the term ``service

provider'' to mean a person that provides a service directly to the

financial institution or creditor.

\80\ 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 would remain responsible for

ensuring that the activity is being conducted in compliance with a

Program that meets the requirements of the proposed identity theft

red flags rules and guidelines.

\81\ These legal compliance obligations would include the

maintenance of records in connection with any service provider

arrangements.

\82\ Section VI(c) of the proposed guidelines is discussed below

in Section II.B.6.

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The Commissions solicit comment on whether the proposed

four steps to administer the Program are appropriate and whether any

additional or alternate steps should be included.

B. Proposed 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.'' \83\ Accordingly, the Commissions are jointly proposing

guidelines in an appendix to the proposed rules that are intended to

assist financial institutions and creditors in the formulation and

maintenance of a Program that would satisfy the requirements of those

proposed rules. These guidelines are substantially similar to the

guidelines adopted by the Agencies. The changes we are proposing to

make to the Agencies' guidelines are designed to tailor the guidelines

to the circumstances of the entities within the Commissions' regulatory

jurisdiction, such as by modifying the examples provided by the

guidelines. We believe this approach would meet the Commissions'

obligation under section 615(e)(1)(A) of the FCRA to jointly establish

and maintain guidelines for financial institutions and creditors.

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\83\ 15 U.S.C. 1681m(e)(1)(A).

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The proposed rules would explain the relationship of the proposed

rules to the proposed guidelines.\84\ In particular, they would require

each financial institution or creditor that is required to implement a

Program to consider the guidelines. The proposed guidelines set forth

policies and procedures that financial institutions and creditors would

be required to consider and use, if appropriate. Although a financial

institution or creditor could determine that a particular guideline is

not appropriate for its circumstances, its Program would need to

contain reasonable policies and procedures to fulfill the requirements

of the proposed rules. As discussed above, the proposed guidelines are

substantially similar to the final guidelines issued by the Agencies.

In the Commissions' view, the proposed guidelines would provide

financial institutions and creditors with flexibility to determine

``how best to develop and implement the required policies and

procedures.'' \85\

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\84\ See proposed Sec. 162.30(f) (CFTC) and proposed Sec.

248.201(f) (SEC).

\85\ See H.R. Rep. No. 108-263 at 43, Sept. 4, 2003

(accompanying H.R. 2622); S. Rep. No. 108-166 at 13, Oct. 17, 2003

(accompanying S. 1753).

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The proposed guidelines are organized into seven sections and a

supplement. Each section in the proposed guidelines corresponds with

the provisions in the proposed rules.

The Commissions request comment on all sections, including

Supplement A, of the proposed guidelines described below.

1. Section I of the Proposed Guidelines--Identity Theft Prevention

Program

As noted above, proposed Sec. 162.30(d)(1) (CFTC) and proposed

Sec. 248.201(d)(1) (SEC) would require each financial institution or

creditor that offers or maintains one or more covered accounts to

develop and maintain a program that is designed to detect, prevent, and

mitigate identity theft. Section I of the proposed guidelines

corresponds with these provisions. Section I of the proposed guidelines

makes clear that a covered entity 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. The Commissions believe that this section of the proposed

guidelines would allow financial institutions and creditors to minimize

cost and time burdens associated with the development and

implementation of

[[Page 13458]]

new policies, procedures, and arrangements by leveraging existing

policies, procedures, and arrangements and avoiding unnecessary

duplication.

The Commissions request comment on this section of the

proposed guidelines.

2. Section II of the Proposed Guidelines--Identifying Relevant Red

Flags

As recently amended by the Dodd-Frank Act, section 615(e)(2)(A) of

the FCRA provides that, in developing identity theft red flags

guidelines as required by the FCRA, the Commissions must identify

patterns, practices, and specific forms of activity that indicate the

possible existence of identity theft. Section II of the proposed

guidelines would identify those patterns, practices and forms of

activity. Section II(a) of the proposed guidelines sets out several

risk factors that a financial institution or creditor would be required

to consider 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. Thus, for example, red flags

relevant to margin accounts may differ from those relevant to advisory

accounts, and those applicable to consumer accounts may differ from

those applicable to business accounts. Red flags relevant to accounts

that may be opened or accessed remotely may differ from those relevant

to accounts that require face-to-face contact. In addition, under the

proposed guidelines, a financial institution or creditor should

consider identifying as relevant those red flags that directly relate

to its previous experiences with identity theft.

Section II(b) of the proposed guidelines sets out examples of

sources from which financial institutions and creditors should derive

relevant red flags. This proposed section provides that a financial

institution or creditor should incorporate relevant red flags from such

sources 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 regulatory guidance

(i.e., guidance received from regulatory authorities). As discussed

above in Section II.B, this proposed section would not require

financial institutions and creditors to incorporate relevant red flags

strictly from these three sources. Instead, the section would require

that financial institutions and creditors consider them when developing

a Program.

As noted above, the proposed rules would not identify specific red

flags that financial institutions or creditors must include in their

Programs.\86\ Instead, under the proposed guidelines, a Program would

be required to identify and incorporate relevant red flags that are

appropriate to the size and complexity of the financial institution or

creditor and the nature and scope of its activities. Section II(c) of

the proposed guidelines identifies five categories of red flags that

financial institutions and creditors must consider including in their

Programs:

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\86\ See proposed Sec. 162.30(d) (CFTC) and Sec. 248.201(d)

(SEC).

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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.

In Supplement A to the proposed guidelines, the Commissions include

a non-comprehensive list of examples of red flags from each of these

categories that a financial institution or creditor may experience.\87\

---------------------------------------------------------------------------

\87\ These examples are discussed below in Section II.B.8.

---------------------------------------------------------------------------

The Commissions request comment on this section of the

proposed guidelines. Are there specific, additional red flags

associated with the types of institutions subject to the Commissions'

jurisdiction that the Commissions should identify?

Would the five categories of red flags discussed in the

proposed guidelines provide flexible and adequate guidance for

financial institutions and creditors that they can use to develop a

Program?

3. Section III of the Proposed Guidelines--Detecting Red Flags

As noted above, the proposed rules would provide that a financial

institution or creditor must have reasonable policies and procedures to

detect red flags in its Program.\88\ Section III of the proposed

guidelines would provide examples of policies and procedures that a

financial institution or creditor must consider including in its

Program for the purpose of detecting red flags. These would include (1)

in the case of the opening of a covered account, obtaining identifying

information about, and verifying the identity of, the person opening

the account, and (2) in the case of existing covered accounts,

authenticating customer identities, monitoring transactions, and

verifying the validity of change of address requests. Entities that are

currently subject to the Agencies' final identity theft red flag rules

and guidelines,\89\ the federal customer identification program

(``CIP'') rules \90\ or other Bank Secrecy Act rules,\91\ the Federal

Financial Institutions Examination Council's guidance on

authentication,\92\ or the Federal Information Processing Standards

\93\ may already be engaged in detecting red flags.

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\88\ See proposed Sec. 162.30(d)(2)(ii) (CFTC) and proposed

Sec. 248.201(d)(2)(ii) (SEC).

\89\ See 2007 Adopting Release, supra note 10.

\90\ 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).

\91\ See, e.g., 31 CFR 103.130 (anti-money laundering programs

for mutual funds).

\92\ See ``Authentication in an Internet Banking Environment,''

Oct. 12, 2005, available at: http://www.ffiec.gov/press/pr101205.htm.

\93\ The Federal Information Processing Standards are issued by

the National Institute of Standards and Technology (``NIST'') after

approval by the Secretary of Commerce pursuant to section 5131 of

the Information Technology Management Reform Act of 1996, Public Law

104-106, 110 Stat. 702, Feb. 10, 1996, and the Federal Information

Security Management Act of 2002, 44 U.S.C. 3541, et seq. NIST

manages and publishes the most current Federal Information

Processing Standards at: http://csrc.nist.gov/publications/PubsFIPS.html.

---------------------------------------------------------------------------

In developing the proposed rules and guidelines, the Commissions

sought to minimize the burdens that would be imposed on entities that

may be in compliance with existing similar laws. 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. For example, the CIP rules were written to implement

section 326 \94\ of the USA PATRIOT Act,\95\ an Act directed towards

facilitating the prevention, detection and prosecution of international

money laundering and the financing of terrorism. Certain types of

``accounts,'' ``customers,'' and

[[Page 13459]]

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.

Accordingly, the Commissions would expect that, if the proposed rules

are adopted, all financial institutions and creditors would evaluate

the adequacy of existing policies and procedures, and develop and

implement risk-based policies and procedures that detect red flags in

an effective and comprehensive manner.

---------------------------------------------------------------------------

\94\ 31 U.S.C. 5318(l).

\95\ Public Law 107-56 (2001).

---------------------------------------------------------------------------

The Commissions request comment on this section of the

proposed guidelines. Should the Commission provide further guidance on

the integration of or differentiation between identity theft red flags

programs and other existing procedures?

4. Section IV of the Proposed Guidelines--Preventing and Mitigating

Identity Theft

As noted above, the proposed rules would require that a Program

include reasonable policies and procedures to respond appropriately to

red flags that are detected.\96\ Section IV of the proposed guidelines

states that a Program's policies and procedures should include a list

of 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.\97\ In determining an appropriate response,

under the proposed guidelines, a financial institution or creditor

would be required to 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

Internet Web site.

---------------------------------------------------------------------------

\96\ See proposed Sec. 162.30(d)(2)(iii) (CFTC) and proposed

Sec. 248.201(d)(2)(iii) (SEC).

\97\ A financial institution or creditor, in order to respond

appropriately, would have to assess whether the red flags indicate

risk of identity theft, and must have a reasonable basis for

concluding that a red flag does not demonstrate a risk of identity

theft.

---------------------------------------------------------------------------

Section IV of the proposed guidelines also provides several

examples of appropriate responses, such as monitoring a covered account

for evidence of identity theft, contacting the customer, and changing

any passwords, security codes, or other security devices that permit

access to a covered account.\98\ The Commissions are proposing to

include the same list of examples presented in the Agencies' final

guidelines, because, upon review, the Commissions believe the list is

comprehensive, relevant to entities regulated by the Commissions, and

designed to enhance consistency of regulations and Programs.

---------------------------------------------------------------------------

\98\ Other examples of appropriate responses provided in the

proposed guidelines are: Reopening a covered account with a new

account number; not opening a new covered account; closing an

existing covered account; not attempting to collect on a covered

account or not selling a covered account to a debt collector;

notifying law enforcement; and determining that no response is

warranted under the particular circumstances. The final proposed

example--no response--might be appropriate, for example, when a

financial institution or creditor has a reasonable basis for

concluding that the red flags do not evidence a risk of identity

theft.

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The Commissions seek comment on this section of the

proposed guidelines. Should the Commission revise the guidelines to

add, modify, or delete any examples?

5. Section V of the Proposed Guidelines--Updating the Identity Theft

Prevention Program

As discussed above, the proposed rules would require each financial

institution or creditor to periodically update its Program (including

the relevant red flags) to reflect changes in risks to its customers or

to the safety and soundness of the financial institution or creditor

from identity theft.\99\ Section V of the proposed guidelines would

include a list of factors on which a financial institution or creditor

could base the updates to its Program: (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.

---------------------------------------------------------------------------

\99\ See proposed Sec. 162.30(d)(2)(iv) (CFTC) and proposed

Sec. 248.201(d)(2)(iv) (SEC).

---------------------------------------------------------------------------

The Commissions request comment on this section of the

proposed guidelines. Should the Commissions provide any further

guidance regarding the updating of Programs?

6. Section VI of the Proposed Guidelines--Methods for Administering the

Identity Theft Prevention Program

Section VI of the proposed guidelines would provide additional

guidance for financial institutions and creditors to consider in

administering their identity theft Programs.\100\ These proposed

guideline provisions are identical to those prescribed by the Agencies

in their final guidelines, which were modeled on sections of the

Federal Information Processing Standards.\101\

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\100\ See proposed Sec. 162.30(e) (CFTC) and proposed Sec.

248.201(e) (SEC) (administration of Programs).

\101\ See supra note 93 (brief explanation of the Federal

Information Processing Standards).

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i. Oversight of Identity Theft Prevention Program

Section VI(a) of the proposed guidelines would state that 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 Program's implementation; (2) reviewing

reports prepared by staff regarding compliance by the financial

institution or creditor with the proposed rules; and (3) 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 proposed 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 proposed rules. In

addition, section VI(b) of the proposed guidelines provides that the

report should address material matters related to the Program and

evaluate several issues, such as: (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; (iii) significant incidents involving identity

theft and management's response; and (iv) recommendations for material

changes to the Program.

iii. Oversight of Service Provider Arrangements

Section VI(c) of the proposed guidelines would provide that

whenever

[[Page 13460]]

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. The Commissions believe that these

guidelines would 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 proposed

identity theft red flags rules.

Section VI(c) of the proposed guidelines would also include, 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 would

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.

The Commissions request comment on section VI of the

proposed guidelines.

The SEC anticipates that information about compliance with

an entity's Program could be included in any periodic reports submitted

by the entity's chief compliance officer to its board of directors. The

SEC requests comment on whether such reports are an appropriate means

for reporting information to the board about the entity's compliance

with its identity theft Program.

7. Section VII of the Proposed Guidelines--Other Applicable Legal

Requirements

Section VII of the proposed guidelines would identify other

applicable legal requirements that financial institutions and creditors

should keep in mind when developing, implementing, and administering

their Programs. Specifically, section VII of the proposed guidelines

identifies section 351 of the USA PATRIOT Act, which sets out the

requirements for financial institutions that must file ``Suspicious

Activity Reports'' in accordance with applicable law and

regulation.\102\ In addition, section VII of the proposed guidelines

identifies the following three requirements under the FCRA, which a

financial institution or creditor should keep in mind: (1) Implementing

any requirements under section 605A(h) of the FCRA, 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;\103\ (2) implementing any requirements for furnishers of

information to consumer reporting agencies under section 623 of the

FCRA, 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 (3)

complying with the prohibitions in section 615 of the FCRA, 15 U.S.C.

1681m, regarding the sale, transfer, and placement for collection of

certain debts resulting from identity theft.

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\102\ 31 U.S.C. 5318(g).

\103\ Section 603(q)(2) of the FCRA defines the terms ``fraud

alert'' and ``active duty alert'' as ``a statement in the file of a

consumer that--(A) notifies all prospective users of a consumer

report relating to the consumer that the consumer may be a victim of

fraud, including identity theft, or is an active duty military

consumer, as applicable; and (B) is presented in a manner that

facilitates a clear and conspicuous view of the statement described

in subparagraph (A) by any person requesting such consumer report.''

15 U.S.C. 1681a(q)(2).

---------------------------------------------------------------------------

The Commissions request comment on this section of the

proposed guidelines.

8. Proposed Supplement A to the Guidelines

Proposed Supplement A to the proposed guidelines provides

illustrative examples of red flags that financial institutions and

creditors would be required to consider incorporating into their

Program, as appropriate. These proposed examples are substantially

similar to the examples identified in the Agencies' final guidelines,

to enhance consistency. The proposed examples are organized under the

five categories of red flags that are set forth in section II(c) of the

proposed guidelines:

Alerts, notifications, or warnings from a consumer

reporting agency;

Suspicious documents;

Suspicious personal identifying information;

Unusual use of, or suspicious activity related to, the

covered account; and

Notice from others regarding possible identity theft in

connection with covered accounts held by the financial institution or

creditor.\104\

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\104\ See supra Section II.B.2.

---------------------------------------------------------------------------

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. It is

the Commissions' intention that Supplement A to the proposed 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 proposed rules would not require a financial institution or

creditor to justify to the Commissions its failure to include in its

Program a specific red flag from the list of examples, a financial

institution or creditor would have 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.

The Commissions request comment on Supplement A to the

proposed guidelines. Are there any additional examples of red flags

that the Supplement should include? For instance, should the Supplement

include examples of fraud by electronic mail, such as when a financial

institution or creditor receives an urgent request to wire money from a

covered account to a remote account from an email address that may have

been compromised? \105\

---------------------------------------------------------------------------

\105\ The Federal Bureau of Investigation (``FBI'') and other

organizations recently issued alerts that warned of thefts of

customer money through emails from compromised customer email

accounts. See FBI and Internet Crime Complaint Center, Fraud Alert

Involving Email Intrusions to Facilitate Wire Transfers Overseas,

available at http://www.ic3.gov/media/2012/EmailFraudWireTransferAlert.pdf; FINRA, Regulatory Notice 12-05,

Customer Account Protection, Verification of Emailed Instructions to

Transmit or Withdraw Assets from Customer Accounts, available at

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p125462.pdf (January, 2012); FINRA Investor Alert, Email

Hack Attack? Be Sure to Notify Brokerage Firms and Other Financial

Institutions, available at http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P125460.

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C. Proposed Card Issuer Rules

Section 615(e)(1)(C) of the FCRA now provides that the CFTC and SEC

must ``prescribe regulations applicable to card issuers to ensure that,

if a card 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 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

[[Page 13461]]

replacement card,'' unless the card issuer applies certain address

validation procedures discussed below.\106\ Congress singled out this

scenario involving card issuers as being a possible indicator of

identity theft. Accordingly, the Commissions are proposing the card

issuer rules in conjunction with the identity theft red flags rules.

---------------------------------------------------------------------------

\106\ 15 U.S.C. 1681m(e)(1)(C).

---------------------------------------------------------------------------

The Commissions are proposing rules that would set out the duties

of card issuers regarding changes of address, which would be similar to

the final card issuer rules adopted by the Agencies.\107\ The proposed

rules would provide that the card issuer rules apply only to a person

that issues a debit or credit card (``card issuer'') and that is

subject to the jurisdiction of either Commission.\108\

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\107\ See Sec. 162.32 (CFTC) and Sec. 248.202 (SEC).

\108\ See supra Section II.A.1.

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The CFTC is not aware of any entities subject to its jurisdiction

that issue debit or credit cards. The CFTC notes that several of the

CFTC regulated-entities that are identified as falling within the scope

of the proposed card issuer rules (e.g., FCMs, IBs, CPOs, CTAs, etc.)

do not typically engage in the type of activities that are the subject

of such rules and guidelines. As a matter of practice, it is highly

unlikely that these CFTC regulated-entities would issue debit or credit

cards. In fact, there are statutory provisions, regulations, or other

laws that expressly prohibit some of these entities from engaging in

many of these activities. For example, the Commodity Exchange Act

(``CEA'') and the CFTC's regulations expressly prohibit an IB from

extending credit in connection with their primary business

activities.\109\ With respect to FCMs, while the CEA permits an FCM to

extend credit to customers in lieu of accepting money, securities, or

property for the purposes of collecting margin on a commodity interest,

the CFTC's regulations prohibit an FCM from doing so.\110\ Lastly, the

National Futures Association's (``NFA'') rules prohibit its members

registered as CPOs from making loans to limited partners using

interests in the partnerships as collateral.\111\

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\109\ See 7 U.S.C. 1(a)(31) (An IB is defined as any person that

``is engaged in soliciting or in accepting orders for the purchase

or sale of any commodity for future delivery, security futures

product, [* * *] swap,'' any foreign exchange transaction, any

retail commodity transaction, any authorized commodity option, or

any authorized leverage transaction, ``and does not accept money

securities, or property (or extend credit in lieu thereof) to

margin, guarantee, or secure any trades or contracts that result or

may result therefrom.''); see also 17 CFR 1.57(c) (prohibiting IBs

from, among other things, extending credit in lieu of accepting

money, securities or property to margin, guarantee or secure any

trades or contracts of customers) and 17 CFR 1.56(b) (prohibiting

IBs from representing that they will guarantee any person against

loss with respect to any commodity interest in any account carried

by an FCM for or on behalf of any person).

\110\ See 17 CFR 1.56(b) (prohibiting FCMs from representing

that they will guarantee any person against loss with respect to any

commodity interest in any account carried by an FCM for or on behalf

of any person).

\111\ See NFA Rule 2-45, available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=RULE%202-45&Section=4, which provides that ``[n]o Member CPO may permit a

commodity pool to use any means to make a direct or indirect loan or

advance of pool assets to the CPO or any other affiliated person or

entity.''

---------------------------------------------------------------------------

The CFTC requests comment on the extent to which the

proposed card issuer rules would affect the business operations of

entities that would fall under the CFTC's jurisdiction.

The SEC understands that a number of entities under its

jurisdiction issue cards in partnership with affiliated or unaffiliated

banks and financial institutions. Generally, these cards are issued by

the partner bank, and not by the entity under the SEC's jurisdiction.

For example, a broker-dealer may offer automated teller machine (ATM)

access to a customer account through a debit card, but the debit card

would generally be issued by a partner bank and not by the broker-

dealer itself. The SEC therefore expects that few, if any, entities

under its jurisdiction would be subject to the proposed card issuer

rules. Nonetheless, the SEC is proposing the card issuer rules below so

that any entity under its jurisdiction that does issue cards provides

appropriate identity theft protection.

The SEC requests comment on the extent to which the

proposed card holder rules may affect the entities under its

jurisdiction. Do any SEC-regulated entities issue cards? What types of

arrangements are used to establish the card-issuing partnership between

SEC-regulated entities and issuing banks? Would the proposed card

issuer rules affect those arrangements?

1. Definition of ``Cardholder'' and Other Terms

Section 615(e)(1)(C) of the FCRA uses the term ``cardholder'' but

does not define the term. The legislative history on this provision

indicates that ``issuers of credit cards and debit cards who receive a

consumer request for an additional or replacement card for an existing

account'' may assess the validity of the request by notifying ``the

cardholder.'' \112\ The proposed rules provide that the term

``cardholder'' means a consumer \113\ who has been issued a credit or

debit card.\114\ Both ``credit card'' and ``debit card'' are defined in

section 603(r) of the FCRA.\115\ ``Credit card'' is defined by

reference to section 103 of the Truth in Lending Act.\116\ ``Debit

card'' is defined as any card issued by a financial institution to a

consumer for use in initiating an electronic fund transfer from the

account of a consumer at such financial institution for the purpose of

transferring money between accounts or obtaining money, property,

labor, or services.\117\ The term ``clear and conspicuous'' is defined

in Sec. 162.2(b) of the CFTC's regulations and in the SEC's proposed

Sec. 248.202(b)(2) to mean reasonably understandable and designed to

call attention to the nature and significance of the information

presented in the notice. The proposed definitions of ``cardholder'' and

``clear and conspicuous'' are identical to the definitions in the

Agencies' final card issuer rules because, upon review, the Commissions

believe that the definitions are comprehensive, likely to be relevant

to any entities regulated by the Commissions under these proposed

rules, and designed to enhance consistency and comparability of

regulations and Programs.\118\

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\112\ 149 Cong. Rec. E2513 (daily ed. Dec. 8, 2003) (statement

of Rep. Oxley).

\113\ A ``consumer'' means an individual person, as defined in

section 603(c) of the FCRA and Sec. 162.2(f) of the CFTC's

regulations. See 15 U.S.C. 1681a(c) and 76 FR at 43885. As mentioned

above, the rules proposed by the CFTC in this release would be a

part of part 162 of the CFTC's regulations, and therefore, all

definitions in part 162 would apply to these rules. See 76 FR at

43884-6. The SEC is proposing to define all terms that are not

defined in subpart C (including the term ``consumer'') to have the

same meaning as defined in the FCRA. See proposed Sec.

248.202(b)(3).

\114\ See proposed Sec. 162.32(b) (CFTC) and proposed Sec.

248.202(b) (SEC).

\115\ 15 U.S.C. 1681.

\116\ 15 U.S.C. 1601.

\117\ 15 U.S.C. 1681a(r)(3).

\118\ See 2007 Adopting Release, supra note 10, at 63733.

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The Commissions' proposed definition of ``cardholder''

refers to the definition of ``credit card'' and ``debit card'' in

section 603(r) of the FCRA. Should the proposed definition instead

separately define ``credit card'' and ``debit card''?

2. Address Validation Requirements

Section 615(e) of the FCRA provides the address validation

requirements and methods, and the proposed rules would set out the

address validation rules to reflect those requirements and

methods.\119\ These sections would require a card issuer to establish

and implement reasonable written policies

[[Page 13462]]

and procedures to assess the validity of a change of address if it (1)

receives notification of a change of address for a consumer's debit or

credit card account and (2) within a short period of time afterwards

(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. Under these circumstances, the proposed rules

would prohibit the card issuer from issuing an additional or

replacement card until, in accordance with its reasonable policies and

procedures, it uses one of two methods to assess the validity of the

change of address. Under the first method, the card issuer must notify

the cardholder of the request either at the cardholder's former

address,\120\ or by any other means of communication that the card

issuer and the cardholder have previously agreed to use.\121\ In

addition, the card issuer must provide the cardholder with a reasonable

means of promptly reporting incorrect address changes. Under the second

method, the card issuer would be required to otherwise assess the

validity of the change of address in accordance with the policies and

procedures the card issuer has established pursuant to the proposed

rules.\122\

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\119\ See proposed Sec. 162.32(c) (CFTC) and proposed Sec.

248.202(c) (SEC).

\120\ See 15 U.S.C. 1681m(e)(1)(C)(i).

\121\ See 15 U.S.C. 1681m(e)(1)(C)(ii).

\122\ See proposed Sec. 162.32(c) (CFTC) and proposed Sec.

248.202(c) (SEC).

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The proposed rules would provide card issuers with an alternative

time period in which to assess the validation of a cardholder's

address.\123\ Specifically, this section provides that the card issuer

would be able to satisfy the requirements of proposed Sec. 162.32(c)

(CFTC) and proposed Sec. 248.202(c) (SEC) if it validates an address

pursuant to the methods in proposed Sec. 162.32(c)(1) or (c)(2) (CFTC)

and proposed Sec. 248.202(c)(1) or (c)(2) (SEC) when it receives an

address change notification, before it receives a request for an

additional or replacement card. The proposed rules would not require a

card issuer that issues an additional or replacement card to validate

an address whenever it receives a request for such a card; section

615(e)(1)(C) of the FCRA (and proposed Sec. 162.32(c) (CFTC) and

proposed Sec. 248.202(c) (SEC)) would require the validation of an

address only when the card issuer also has received a notification of a

change in address. The Commissions believe, however, that a card issuer

that does not validate an address when it receives an address change

notification may find it prudent to validate the address before issuing

an additional or replacement card, even when it receives a request for

such a card more than 30 days after the notification of address change.

Ultimately, the Commissions expect card issuers to exercise diligence

commensurate with (i.e., augmented by) their own experiences with

identity theft.

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\123\ See proposed Sec. 162.32(d) (CFTC) and proposed Sec.

248.202(d) (SEC).

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The Commissions request comment on the proposed address

validation requirements for card issuers.

3. Form of Notice

To highlight the important and urgent nature of notice that a

consumer receives from a card issuer, the Commissions are proposing to

require that any written or electronic notice that the card issuer

provides under this section would be required to be clear and

conspicuous and be provided separately from its regular correspondence

with the cardholder.\124\ This proposed requirement would be consistent

with the requirement in the Agencies' final card issuer rules because,

upon review, the Commissions believe the requirement is comprehensive,

relevant to any entities regulated by the Commissions under these

proposed rules, and designed to enhance consistency and comparability

of regulations and Programs.

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\124\ See proposed Sec. 162.32(e) (CFTC) and proposed Sec.

248.202(e) (SEC). As noted above, ``clear and conspicuous'' would

mean reasonably understandable and designed to call attention to the

nature and significance of the information presented in the notice.

See supra Section II.C.1. See also Sec. 162.2(b) (CFTC) and

proposed Sec. 248.202(b)(2) (SEC).

---------------------------------------------------------------------------

The Commissions request comment on the proposed

requirements regarding the form of notice that must be sent to card

holders.

D. Proposed Effective and Compliance Dates

The Commissions propose to make the rules and guidelines effective

30 days after the date of publication of final rules in the Federal

Register. Financial institutions and creditors subject to the

Commissions' enforcement authority should already be in compliance with

the red flags rules of the FTC or the other Agencies. Newly formed

entities under the Commissions' enforcement authority likely comply

with the existing rules of the FTC or the other Agencies. The rules and

guidelines that the Commissions are proposing today are substantially

similar to the existing rules of the Agencies and should not require

significant changes to financial institution or creditor policies or

operations. As a result, the Commissions do not expect that entities

subject to their enforcement authority should have difficulty in

complying with the proposed rules and guidelines immediately, and are

not proposing a delayed compliance date.

The Commissions request comment on the proposed effective

and compliance dates for the proposed rules and guidelines. Should

there be a delayed effective or compliance date? If so, what should the

delay be (e.g., 30, 60, or 90 days, or longer)?

III. Related Matters

A. Cost-Benefit Considerations (CFTC) and Economic Analysis (SEC) CFTC

Section 15(a) of the CEA \125\ requires the CFTC to consider the

costs and benefits of its actions before promulgating a regulation

under the CEA or issuing an order. 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.

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\125\ 7 U.S.C. 19(a)

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The proposed rules and guidelines are broken down into two

categories of requirements. First, the proposed identity theft red flag

rules and guidelines found in proposed Sec. 162.30, and second, the

proposed card issuer rules found in proposed Sec. 162.32. A Section

15(a) analysis of each category is set out immediately below.

1. Cost Benefit Considerations of Proposed Identity Theft Red Flag

Rules and Guidelines

As noted above, the proposed identity theft red flags rules and

guidelines would require financial institutions and creditors that are

subject to CFTC's enforcement authority under the FCRA \126\ and that

offer or maintain covered accounts to develop, implement, and

administer a written Program. Each Program must be designed to detect,

prevent, and mitigate identity theft in connection with the opening of

a covered account or any existing covered account. In addition, each

Program must be appropriately tailored to the size and complexity of

the financial institution or creditor and

[[Page 13463]]

the nature and scope of its activities. There are various steps that a

financial institution or creditor must take in order to comply with the

requirements under the proposed identity theft red flags rules,

including training staff, providing annual reports to board of

directors, and when applicable, monitoring the use of third-party

service providers.

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\126\ As stated above, section 1088(a)(10) of the Dodd-Frank Act

amended section 621(b) of the FCRA to add the Commissions to the

list of federal agencies responsible for administrative enforcement

of the FCRA. See Public Law 111-203 (2010).

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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 and

guidelines. To carry out this requirement, the CFTC is proposing Sec.

162.30, which is substantially similar to the identity theft red flags

rules and guidelines adopted by the Agencies in 2007.

Proposed Sec. 162.30 would shift oversight of identity theft rules

and guidelines of CFTC-regulated entities from the FTC to the CFTC.

These entities should already be in compliance with the FTC's existing

rules and guidelines, which the FTC began enforcing on December 31,

2010. Because proposed Sec. 162.30 is substantially similar to those

existing rules and guidelines, these entities should not bear any new

costs in coming into compliance with proposed Sec. 162.30. 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' rules. The new regulation does

contain examples and minor language changes designed to help guide

entities under the CFTC's jurisdiction in complying with the 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 proposed Sec.

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 proposed Sec. 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 proposed Sec. 160.30.

These existing costs related to proposed Sec. 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.\127\ 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.\128\

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\127\ 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 153 and text following note 153. 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 ``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 $1,596,250 (125 x $12,770 = $1,596,250).

\128\ 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

3,124 existing CFTC-regulated entities would be financial

institutions or creditors, of which 268 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 3,124 entities) would bear this cost for a total cost of

$2,200,000 based on the following calculations rounded to two

significant digits: $354 x 2 = $708; $708 x 3,124 = $2,211,792 [ap]

$2,200,000. CFTC staff estimates that 268 entities would bear the

remaining specified ongoing costs for a total cost of $1,500,000

(268 x $5,770 = $1,546,360 [ap] $1,500,000).

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The benefits related to adoption of proposed Sec. 160.30, which

already exist in connection with the Agencies' red flags rules and

guidelines, 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 determine with precision the dollar value

associated with the benefits that will inure to the public from this

proposed rules and guidelines, as the quantity or value of identity

theft deterred or prevented is not knowable. The Commission, 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 and guidelines 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' rules and guidelines, the CFTC has designed proposed

Sec. 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, proposed Sec. 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 preventing identity theft, an illegal act that may be

costly to them in both time and money.\129\ Because,

[[Page 13464]]

however, these proposed rules and guidelines 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 proposed rules

and guidelines in the same way they have benefited from the rules as

they were administered by the Agencies.

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\129\ 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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2. 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 debit and credit card

issuers as being a possible indicator of identity theft. Accordingly,

the proposed card issuer rules in this release set out the duties of

card issuers regarding changes of address. The proposed card issuer

rules will apply only to a person that issues a debit or credit card

and that is subject to the CFTC's jurisdiction. The proposed 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.

Proposed Sec. 162.32 would 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 December 31, 2010. Because proposed

Sec. 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 proposed Sec. 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 proposed Sec. 162.32.

The benefits related to adoption of proposed Sec. 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 determine with precision

the dollar value associated with the benefits that will inure to the

public from these proposed card issuer rules. As is true of the

Agencies' card issuer rules, the CFTC has designed proposed Sec.

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 proposed 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 proposed rules and guidelines protect

market participants and the public by preventing identity theft, an

illegal act that may be costly to them in both time and money.\130\

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 proposed rules and guidelines in the

same way they have benefited from the rules as they were administered

by the Agencies.

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\130\ See id.

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3. Questions

The CFTC requests comment on all aspects of this cost-

benefit analysis, including identification, quantification, and

assessment of any costs and benefits, whether or not discussed in the

above analysis. The CFTC encourages commenters to identify, discuss,

analyze, and supply relevant data regarding any additional costs and

benefits.

The CFTC requests comment on the accuracy of the cost

estimates in each section of this analysis, and requests that

commenters provide data that may be relevant to these cost estimates,

including quantification.

In addition, the CFTC seeks estimates and views regarding these

costs and benefits for all affected entities, including small entities,

as well as any other costs or benefits that may result from the

adoption of proposed subpart C to Part 162.

SEC:

The SEC is sensitive to the costs and benefits imposed by its

rules. Proposed Regulation S-ID would require financial institutions

and creditors that are subject to the SEC's enforcement authority under

the FCRA \131\ and that offer or maintain covered accounts to develop,

implement, and administer a written identity theft prevention Program.

A financial institution or creditor would have to design its Program to

detect, prevent, and mitigate identity theft in connection with the

opening of a covered account or any existing covered account. In

addition, a financial institution or creditor would have to

appropriately tailor its Program to its size and complexity, and to the

nature and scope of its activities. There are various steps that a

financial institution or creditor would have to take in order to comply

with the requirements under the proposed identity theft red flags

rules, including training staff, providing annual reports to board of

directors, and, when applicable, monitoring the use of third-party

service providers.

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\131\ See supra note 19.

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Section 615(e)(1)(C) of the FCRA singles out change of address

[[Page 13465]]

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 proposed

card issuer rules in this release set out the duties of card issuers

regarding changes of address. The proposed card issuer rules would

apply only to SEC-regulated entities that issue credit or debit

cards.\132\ The proposed card issuer rules would 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 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.

---------------------------------------------------------------------------

\132\ See proposed Sec. 248.202(a) (defining scope of proposed

rule).

---------------------------------------------------------------------------

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 FTC 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 proposing

Regulation S-ID, which is substantially similar to the identity theft

red flags rules and guidelines adopted by the Agencies in 2007.

Proposed Regulation S-ID would shift oversight of identity theft

rules and guidelines of SEC-regulated entities from the FTC to the SEC.

These entities should already be in compliance with the FTC's existing

rules and guidelines, which the FTC began enforcing on December 31,

2010. Because proposed Regulation S-ID is substantially similar to

those existing rules and guidelines, these entities should not bear any

new costs in coming into compliance with proposed Regulation S-ID. 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' rules. The new regulation does

contain examples and minor language changes designed to help guide

entities under the SEC's jurisdiction in complying with the 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 proposed

Regulation S-ID.\133\ However, these costs are not new costs, but are

current costs associated with compliance with the Agencies' existing

rules. SEC-regulated entities will incur these hours and costs

regardless of whether the SEC adopts proposed Regulation S-ID. These

hours and costs would be transferred from the Agencies' PRA allotment

to the SEC. No new costs should result from the adoption of proposed

Regulation S-ID.

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\133\ Unless otherwise stated, all cost estimates for personnel

time are derived from SIFMA's Management & Professional Earnings in

the Securities Industry 2010, modified to account for an 1800-hour

work-year and multiplied by 5.35 to account for bonuses, firm size,

employee benefits, and overhead.

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These existing costs related to Sec. 248.201 of proposed

Regulation S-ID would include, for newly formed SEC-regulated entities,

the incremental 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.\134\ The

existing costs would also include the incremental ongoing cost to

periodically review and update the program, report periodically on the

Program, and conduct periodic assessments of covered accounts.\135\ The

existing costs related to Sec. 248.202 of proposed Regulation S-ID

would include the incremental 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, SEC staff does not expect that any SEC-

regulated entities would be subject to the requirements of Sec.

248.202 of proposed Regulation S-ID.

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\134\ SEC staff estimates that the incremental 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. SEC 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 Regulation S-ID.

This estimate is based on the following calculations: $354 x 12

hours = $4248; $66 x 17 = $1,122; $4000 x 2 = $8000; $4248 + $1,122

+ $8000 = $13,370.

As discussed in the PRA analysis, SEC staff estimates that there

are 1327 SEC-regulated entities that newly form each year and would

be financial institutions or creditors, of which 465 would maintain

covered accounts. See infra note 153 and following text. SEC staff

estimates that 2 hours of internal counsel's time would be spent

conducting an initial assessment of covered accounts and that all

newly formed financial institutions or creditors subject to the

proposed rule (or 1327 entities) would bear this cost for a total

cost of $939,516 based on the following calculation: $354 x 2 =

$708; $708 x 1327 = $939,516. SEC staff estimates that 465 entities

would bear the remaining specified costs for a total cost of

$5,887,830 (465 x $12,662 = $5,887,830).

\135\ SEC staff estimates that the incremental 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. SEC 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 $4000, for a total hourly

cost of $6478. This estimate is based on the following calculations:

$354 x 7 hours = $2478; $4000 x 1 hour = $4000; $2478 + $4000 =

$6478.

As discussed in the PRA analysis, SEC staff estimates that 7978

existing SEC-regulated entities would be financial institutions or

creditors under the proposal and 7180 of these entities maintain

covered accounts. See infra note 156 and following text. SEC 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

7978 entities) would bear this cost for a total cost of $5,648,424

based on the following calculations: $354 x 2 = $708; $708 x 7978 =

$5,648,424. SEC staff estimates that 7180 entities would bear the

remaining specified ongoing costs for a total cost of $41,428,600

(7180 x $5770 = $41,428,600).

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The benefits related to adoption of Regulation S-ID, which already

exist in connection with the Agencies' red flags rules and guidelines,

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. Joint adoption by

the Commissions of identity theft red flags rules in a form that is

substantially similar to the Agencies' identity theft red flags rules

and guidelines 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' rules and guidelines, the SEC has

designed proposed 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

[[Page 13466]]

nature of their operations, as well as in satisfying the address

verification procedures.

Accordingly, as previously discussed, proposed Regulation S-ID

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 SEC, does not include any significant new requirements,

and does not include new entities that were not previously covered by

the Agencies' rules.

The SEC requests comment on all aspects of this cost-

benefit analysis, including identification and assessment of any costs

and benefits not discussed in this analysis. The SEC encourages

commenters to identify, discuss, analyze, and supply relevant data

regarding any additional costs and benefits.

The SEC requests comment on the accuracy of the cost

estimates in each section of this analysis, and requests that

commenters provide data that may be relevant to these cost estimates.

In addition, the SEC seeks estimates and views regarding

these costs and benefits for all affected entities, including small

entities, as well as any other costs or benefits that may result from

the adoption of proposed Regulation S-ID.

B. Analysis of Effects on Efficiency, Competition, and Capital

Formation

Section 3(f) of the Securities 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 or

appropriate in 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 proposing rules under the

Exchange Act, to consider the impact the proposed 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.\136\

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\136\ See infra Section IV (setting forth statutory authority

under, among other things, the Exchange Act and Investment Company

Act for proposed rules).

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As discussed in the cost benefit analysis above, proposed

Regulation S-ID would carry out the requirement in the Dodd-Frank Act

that the SEC adopt rules and guidelines governing identity theft

protections, pursuant to section 615(e) of the FCRA with regard to

entities that are subject to the SEC's jurisdiction. This requirement

was designed to transfer regulatory oversight of identity theft rules

and guidelines of SEC-regulated entities from the FTC to the SEC.

Proposed Regulation S-ID is substantially similar to the identity theft

red flags rules and guidelines adopted by the FTC and other regulatory

agencies in 2007, and does not contain new requirements. The entities

covered by proposed Regulation S-ID should already be in compliance

with existing rules and guidelines, which the FTC began to enforce on

December 31, 2010.

For the reasons discussed above, proposed Regulation S-ID should

not have an effect on efficiency, competition, or capital formation

because it does not include new requirements and does not include new

entities that were not previously covered by the Agencies' rules.

The SEC seeks comment on the potential impact of the

proposed rules on efficiency, competition, and capital formation. For

purposes of the Small Business Regulatory Enforcement Fairness Act of

1996 (SBREFA), the SEC also requests information regarding the

potential effect of the proposed rules on the U.S. economy on an annual

basis. Commenters are requested to provide empirical data to support

their views.

C. Paperwork Reduction Act

CFTC:

Provisions of proposed Sec. Sec. 162.30 and 162.32 would result in

new collection of information requirements within the meaning of the

PRA. The CFTC, therefore, is submitting this proposal to the Office of

Management and Budget (``OMB'') for review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11. OMB has not yet assigned a control number to

the new collection. The title for this collection of information is

``Part 162 Subpart C--Identity Theft.'' If adopted, responses to this

new collection of information would be mandatory.

1. Information Provided by Reporting Entities/Persons

Under proposed part 162, subpart C, CFTC regulated entities--which

presently would include approximately 268 CFTC registrants \137\ plus

125 new CFTC registrants pursuant to Title VII of the Dodd-Frank Act

\138\--may be required to design, develop and implement reasonable

policies and procedures to identify relevant red flags, and potentially

notifying cardholders of identity theft risks. In addition, CFTC-

regulated entities would be 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

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 accounts, as well as assess the validity of those accounts.

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\137\ 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 October 31, 2011. The NFA's site states that there are

3,663 CFTC registrants as of September 30, 2011. Of this total,

there are 111 FCMs, 1,441 IBs, 1,054 CTAs, 1,035 CPOs, and 14 RFEDs.

CFTC staff has observed that approximately 50 percent of all CPOs

are dually registered as CTAs. Based on this observation, CFTC has

determined that the total number of entities is 3,124 (518 CPOs that

are also registered as CTAs). With respect to RFEDs, CFTC staff also

has observed that all entities registering as RFEDs also register as

FCMs.

Of the total 3,124 entities, all of the FCMs are likely to

qualify as financial institutions or creditors carrying covered

accounts, 10 percent of CTAs and CPOs 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 268 financial

institutions or creditors that would bear the initial one-time

burden of compliance with the CFTC's proposed identity theft rules

and guidelines and proposed card issuer rules.

\138\ CFTC staff estimates that 125 swap dealers and major swap

participants will register with the CFTC following 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 and guidelines jointly

adopted by the FTC with the Agencies, as of December 31, 2010.

Consequently, these entities may already have in place many of the

customary protections addressing identity theft and changes of address

proposed 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 rules

and guidelines jointly adopted by the FTC with the Agencies may have

occurred, the CFTC estimates the time and cost burdens of complying

with proposed part 162 to be both one-time and ongoing burdens.

However, any initial or one-time burdens associated with compliance

with proposed part

[[Page 13467]]

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

proposed 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 \139\

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.\140\ 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 5,549 hours,\141\ for a total burden among newly

registered entities of 7,203 hours.\142\

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\139\ 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.

Based on this observation, 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). With respect to RFEDs, CFTC

staff has observed that all entities registering as RFEDs also

register as FCMs. Each of these 702 financial institutions or

creditors would bear the initial one-time burden of compliance with

the proposed identity theft rules and guidelines and proposed card

issuer 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.

\140\ This estimate is based on the following calculation: 827

entities x 2 hours = 1,654 hours.

\141\ This estimate is based on the following calculation: 179

entities x 31 hours = 5,549 hours.

\142\ This estimate is based on the following calculation: 1,654

hours for all newly registered CFTC registrants + 7,203 hours for

the one-time burden of newly registered entities with covered

accounts.

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The CFTC requests comments on these estimates of numbers of persons

affected and the total hours involved.

ii. Ongoing Burden

The CFTC staff estimates that the ongoing compliance burden

associated with proposed 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 3,249 persons may maintain

covered accounts, and that they would be required to periodically

review their accounts to determine if they comply with these proposed

rules, for a total of 76,498 hours for these entities.\143\ Of these

3,249 persons, the CFTC estimates that approximately 393 maintain

covered accounts, and thus would need to incur the additional burdens

related to complying with the rule, for a total of 2,358.\144\ The

total ongoing burden for all CFTC registrants is 11,256.\145\

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\143\ This estimate is based on the following calculation: 3,249

entities x hours = 6,498 hours.

\144\ This estimate is based on the following calculation: 393

entities x 6 hours = 2,358 hours.

\145\ This estimate is based on the following calculation: 6,498

hours + 2,358 hours = 8,856 hours.

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2. Information Collection Comments

The CFTC invites the public and other federal agencies to comment

on any aspect of the burdens discussed above. Pursuant to 44 U.S.C.

3506(c)(2)(B), the CFTC solicits comments in order to: (i) Evaluate

whether the proposed collection of information is necessary for the

proper performance of the functions of the CFTC, including whether the

information will have practical utility; (ii) evaluate the accuracy of

the CFTC's estimate of the burden of the proposed collection of

information; (iii) determine whether there are ways to enhance the

quality, utility, and clarity of the information to be collected; and

(iv) minimize the burden of the collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566 or by email at

[email protected] Please provide the CFTC with a copy of

submitted comments so that all comments can be summarized and addressed

in the final rule preamble. Refer to the Addresses section of this

notice of proposed rules and guidelines for comment submission

instructions to the CFTC. A copy of the supporting statements for the

collections of information discussed above may be obtained by visiting

RegInfo.gov. OMB is required to make a decision concerning the

collection of information between 30 and 60 days after publication of

this release. Consequently, a comment to OMB is most assured of being

fully effective if received by OMB (and the CFTC) within 30 days after

publication of this notice of proposed rulemaking.

SEC:

Provisions of proposed Sec. Sec. 248.201 and 248.202 would result

in new collection of information requirements within the meaning of the

PRA. The SEC therefore is submitting this proposal to the Office of

Management and Budget (``OMB'') for review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11. OMB has not yet assigned a control number to

the new collection. The title for this collection of information is

``Part 248, Subpart C--Regulation S-ID.'' 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. If

the rules are adopted, responses to the new collection of information

provisions would be mandatory, and the information, when provided to

the Commission in connection with staff examinations or investigations,

would be kept confidential to the extent permitted by law.

1. Description of the Collections

Under proposed Regulation S-ID, SEC-regulated entities would be

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. Proposed

Sec. 248.201 of Regulation S-ID would include 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

[[Page 13468]]

Program that is approved by the board of directors; (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 proposed

guidelines; and (3) training of staff to implement the Program.

Proposed Sec. 248.202 of Regulation S-ID would include the following

``collections of information'' by any SEC-regulated entities that are

credit or debit card issuers: (1) Establishment of policies and

procedures that assess the validity of a change of address notification

if a request for an additional card on the account follows soon after

the address change, (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 staff expects that SEC-regulated entities that would comply

with the collections of information required by proposed Regulation S-

ID should already be fully in compliance with the identity theft red

flags rules and guidelines that the FTC jointly adopted with the

Agencies and began enforcing on December 31, 2010. The requirements of

those rules and guidelines are substantially similar and comparable to

the requirements of proposed Regulation S-ID.\146\

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\146\ See 2007 Adopting Release, supra note 10; ``FTC Extends

Enforcement Deadline for Identity Theft Red Flags Rule'' at http://www.ftc.gov/opa/2010/05/redflags.shtm.

---------------------------------------------------------------------------

In addition, SEC staff understands that most SEC-regulated entities

that are financial institutions or creditors would likely already have

in place many of the protections regarding identity theft and changes

of address that the proposed regulations would require 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 proposed

requirements as a result of having to comply (or an affiliate having to

comply) with other, existing regulations and guidance, such as the

Customer Identification Program regulations implementing section 326 of

the USA PATRIOT Act,\147\ the Federal Information Processing Standards

that implement section 501(b) of the Gramm-Leach-Bliley Act

(GLBA),\148\ section 216 of the FACT Act,\149\ and guidance issued by

the Agencies or the Federal Financial Institutions Examination Council

regarding information security, authentication, identity theft, and

response programs.\150\

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\147\ 31 U.S.C. 5318(l) (requiring verification of the identity

of persons opening new accounts).

\148\ 15 U.S.C. 6801.

\149\ 15 U.S.C. 1681w.

\150\ See 2007 Adopting Release, supra note 10, at nn. 55-57

(describing applicable regulations and guidance).

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As a result, SEC staff estimates of time and cost burdens here

represent the incremental one-time burden of complying with proposed

Regulation S-ID for newly formed SEC-regulated entities, and the

incremental ongoing costs of compliance for all SEC-regulated

entities.\151\ SEC staff estimates also attribute all burdens to

covered entities, which are entities directly subject to the

requirements of the proposed rulemaking. A covered entity that

outsources activities to an affiliate or a third-party service provider

is, in effect, reallocating to that affiliate or service provider the

burden that it would otherwise have carried itself. Under these

circumstances, the burden is, by contract, shifted from the covered

entity to the service provider, but the total amount of burden is not

increased. Thus, affiliate and third-party service provider burdens are

already included in the burden estimates provided for covered entities.

The time and cost estimates made here are based on conversations with

industry representatives and on a review of the estimates made in the

regulatory analyses of the identity theft red flags rules and

guidelines previously issued by the Agencies.

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\151\ 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 proposed Regulation

S-ID, most broker-dealers, many investment companies (including

almost all open-end investment companies and employees' securities

companies (``ESCs'')), and some registered investment advisers would

likely qualify as financial institutions or creditors. SEC staff

expects that most other SEC-regulated entities described in the

scope section of proposed Regulation S-ID, such as transfer agents,

NRSROs, SROs, and clearing agencies are unlikely to be financial

institutions or creditors as defined in the proposed rule, and

therefore we do not include these entities in our estimates.

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2. Proposed Sec. 248.201 (Duties Regarding the Detection, Prevention,

and Mitigation of Identity Theft)

The collections of information required by proposed Sec. 248.201

would apply to SEC-regulated entities that are financial institutions

or creditors.\152\ As stated above, SEC staff expects that all existing

SEC-regulated entities would already have incurred one-time burdens

associated with compliance with proposed Regulation S-ID because they

should already be in compliance with the substantially identical

requirements of the Agencies' red flags rules and guidelines.

Therefore, any initial or one-time burdens associated with compliance

with Sec. 248.201 of proposed Regulation S-ID would apply only to

newly formed entities. The ongoing burden would apply to all SEC-

regulated entities that are financial institutions or creditors.

---------------------------------------------------------------------------

\152\ Proposed Sec. 248.201(a).

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i. Initial Burden

SEC staff estimates that the incremental one-time burden of

compliance with proposed Sec. 248.201 for SEC-regulated financial

institutions and creditors with covered accounts would be: (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 would be spent by internal counsel, 17

hours would be spent by administrative assistants, and 2 hours would be

spent by the board of directors as a whole for entities that need to

come into compliance with proposed Regulation S-ID.

SEC staff estimates that approximately 517 SEC-regulated financial

institutions and creditors are newly formed each year.\153\ Each of

these 517 entities would need to conduct an initial assessment of

covered accounts, for a total of 1034 hours.\154\ Of these, SEC staff

estimates that approximately 90% (or 465) maintain covered accounts.

Accordingly, SEC staff estimates that the total one-time burden for the

465 entities would be 14,415 hours, and the total one-time burden for

all SEC

[[Page 13469]]

regulated entities would be 15,449 hours.\155\

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\153\ Based on a review of new registrations typically filed

with the SEC each year, SEC staff estimates that approximately 900

investment advisers, 300 broker dealers, 117 open-end investment

companies and 10 employees' securities companies typically apply for

registration with the SEC or otherwise are newly formed each year,

for a total of 1327 entities that would be financial institutions or

creditors. The staff estimate of 900 investment advisers is made in

light of the recently adopted amendments to rules under the

Investment Advisers Act that carry out requirements of the Dodd-

Frank Act to transfer oversight of certain investment advisers from

the SEC to state regulators and to require certain investment

advisers to private funds to register with the SEC. See Rules

Implementing Amendments to the Investment Advisers Act of 1940,

Investment Advisers Act Release No. 3221 (June 22, 2011) [76 FR

42950 (July 19, 2011)]. Of these, SEC staff estimates that all of

the investment companies and broker-dealers are likely to qualify as

financial institutions or creditors, and 10% (or 90) of investment

advisers are likely to also qualify, for a total of 517 total newly

formed financial institutions or creditors that would bear the

initial one-time burden of compliance with proposed Regulation S-ID.

\154\ This estimate is based on the following calculation: 517

entities x 2 hours = 1034 hours.

\155\ These estimates are based on the following calculations:

465 entities x 31 hours = 14,415 hours; 14,415 hours + 1034 hours =

15,449 hours.

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The SEC requests comments on these estimates. Is the

estimate that 90% of all financial institutions and creditors maintain

covered accounts correct?

ii. Ongoing Burden

SEC staff estimates that the incremental ongoing burden of

compliance with proposed Sec. 248.201 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 service 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. SEC staff estimates that of

the 8 hours incurred, 7 hours would be spent by internal counsel and 1

hour would be spent by the board of directors as a whole.

SEC staff estimates that there are 7978 SEC regulated entities that

are either financial institutions or creditors, and that all of these

would be required to periodically review their accounts to determine if

they offer or maintain covered accounts, for a total of 15,956 hours

for these entities.\156\ Of these 7978 entities, SEC staff estimates

that approximately 90 percent, or 7180, maintain covered accounts, and

thus would need to bear the additional burdens related to complying

with the rule.\157\ Accordingly, SEC staff estimates that the total

ongoing burden for the 7180 entities to be 43,080 hours, and the total

ongoing burden for all SEC-regulated entities as a whole to be 59,036

hours.\158\

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\156\ Based on a review of entities that the SEC regulates, SEC

staff estimates that, as of the end of December 2010, there are

approximately 5063 broker-dealers, 1790 active open-end investment

companies and 150 employees' securities companies. In light of

recently adopted amendments to rules under the Investment Advisers

Act that carry out requirements of the Dodd-Frank Act to transfer

oversight of certain investment advisers from the SEC to state

regulators and to require certain investment advisers to private

funds to register with the SEC, SEC staff estimates that, when these

amendments become effective, there will be approximately 9750

investment advisers registered with the SEC. See supra note 153. Of

these, SEC staff estimates that all of the broker-dealers, open-end

investment companies and employees' securities companies are likely

to qualify as financial institutions or creditors, and 10% (or 975)

of investment advisers are likely to qualify, for a total of 7978

total financial institutions or creditors that would bear the

ongoing burden of compliance with proposed Regulation S-ID. The SEC

staff estimates that the other types of entities that are covered by

the scope of the SEC's proposed rule would not be financial

institutions or creditors that maintain covered accounts. See

proposed Sec. 248.201(a). This estimate is based on the following

calculation: (7978 entities x 2 hours = 15,956 hours).

\157\ If a financial institution or creditor does not maintain

covered accounts, there would be no ongoing annual burden for

purposes of the PRA.

\158\ These estimates are based on the following calculations:

(7180 entities x 6 hours = 43,080 hours; 43,080 hours + 15,956 hours

= 59,036 hours).

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SEC staff requests comments on these estimates.

3. Proposed Sec. 248.202 (Duties of Card Issuers Regarding Changes of

Address)

The collections of information required by proposed Sec. 248.202

would apply only to SEC-regulated entities that issue credit or debit

cards.\159\ SEC staff understands that SEC-regulated entities generally

do not issue credit or debit cards, but instead partner with other

entities, such as banks, that issue cards on their behalf. These

partner 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 and guidelines. 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 would pose no further burden.

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\159\ Proposed Sec. 248.202(a).

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SEC staff does not expect that any SEC-regulated entities would be

subject to the information collection requirements of proposed Sec.

248.202. Accordingly, SEC staff estimates that there will be no hourly

or cost burden for SEC-regulated entities related to proposed Sec.

248.202.\160\

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\160\ When the Agencies adopted their red flags rules, they

estimated that it would require approximately 4 hours to develop

policies and procedures to assess the validity of changes of

address, and that there would be no burden associated with notifying

cardholders because all entities already have such a process in

place. See 2007 Adopting Release, supra note 10, at text following

n.57. SEC staff estimates that if any SEC-regulated entities do

issue cards, the burden for complying with proposed Sec. 248.202

would be comparable to the Agencies' estimates.

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SEC staff requests comment on this estimate. Are there any

SEC-regulated entities that issue credit or debit cards? If so, what

incremental time or cost burden would be imposed by proposed Sec.

248.202 of Regulation S-ID?

4. Request for Comment

The SEC requests comment on the accuracy of the estimates provided

in this description of collections of information. Pursuant to 44

U.S.C. 3506(c)(2)(B), the SEC solicits comments in order to: (i)

Evaluate whether the proposed collections of information are necessary

for the proper performance of the functions of the SEC, including

whether the information will have practical utility; (ii) evaluate the

accuracy of the SEC's estimate of the burden of the proposed

collections of information; (iii) determine whether there are ways to

enhance the quality, utility, and clarity of the information to be

collected; and (iv) minimize the burden of the collections of

information on those who are to respond, including through the use of

automated collection techniques or other forms of information

technology.

Persons wishing to submit comments on the collection of information

requirements of the proposed amendments should direct them to the

Office of Management and Budget, Attention Desk Officer for the

Securities and Exchange Commission, Office of Information and

Regulatory Affairs, Room 10102, New Executive Office Building,

Washington, DC 20503, and should send a copy to Elizabeth M. Murphy,

Secretary, Securities and Exchange Commission, 100 F Street NE.,

Washington, DC 20549-1090, with reference to File No. S7-02-12. OMB is

required to make a decision concerning the collections of information

between 30 and 60 days after publication of this release; therefore a

comment to OMB is best assured of having its full effect if OMB

receives it within 30 days after publication of this release. Requests

for materials submitted to OMB by the SEC with regard to these

collections of information should be in writing, refer to File No. S7-

02-12, and be submitted to the Securities and Exchange Commission,

Office of Investor Education and Advocacy, 100 F Street NE.,

Washington, DC 20549-0213.

D. Regulatory Flexibility Act

CFTC:

The Regulatory Flexibility Act (``RFA'') \161\ requires that

federal agencies consider whether the regulations 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.\162\ The regulations proposed by the CFTC shall

affect FCMs, retail foreign exchange dealers, IBs, CTAs, CPOs, swap

dealers, and major swap participants. The CFTC has determined

[[Page 13470]]

that the requirements on financial institutions and creditors, and card

issuers set forth in the proposed identity theft red flags rules and

guidelines and the proposed card issuer 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

final rules and guidelines of the Agencies. Moreover, the CFTC believes

that the proposed rules and guidelines include a great deal of

flexibility to assist its regulated entities in complying with such

rules and guidelines.

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\161\ See 5 U.S.C. 601 et seq.

\162\ See 5 U.S.C. 601 et seq.

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Notwithstanding this determination, the CFTC previously determined

that FCMs and CPOs are not small entities for the purposes of the

RFA.\163\ Similarly, in another proposed rulemaking promulgated under

the Dodd-Frank Act, the CFTC determined that swap dealers and major

swap participants are not, in fact, ``small entities'' for the purposes

of the RFA.\164\

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\163\ See the CFTC's previous determinations for FCMs and CPOs

at 47 FR 18618, 18619 (Apr. 30, 1982).

\164\ See Confirmation, Portfolio Reconciliation, and Portfolio

Compression Requirements for Swap Dealers and Major Swap

Participants, 75 FR 81519 (Dec. 28, 2010), in which the CFTC

reasoned that swap dealers will be subject to minimum capital and

margin requirements and are expected to comprise the largest global

financial firms. As a result, swap dealers are not likely to be

small entities for the purposes of the RFA. In addition, the CFTC

reasoned that major swap participants, by statutory definition,

maintain substantial positions in swaps or maintain outstanding swap

positions that create substantial counterparty exposure that could

have serious adverse effects on the financial stability of the U.S.

banking system or financial markets. Based on this analysis, the

CFTC concluded that major swap participants are not likely to be

small entities for the purposes of the RFA.

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Accordingly, the Chairman, on behalf of the CFTC, hereby certifies

pursuant to 5 U.S.C. 605(b) that the proposed rules and guidelines will

not have a significant impact on a substantial number of small

entities.

The CFTC invites public comments on its certification.

SEC:

The SEC's Initial Regulatory Flexibility Analysis (``IRFA'') has

been prepared in accordance with 5 U.S.C. 603. It relates to the SEC's

proposed identity theft red flags rules and guidelines in proposed

Regulation S-ID under section 615(e)(1)(C) of the FCRA.\165\

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\165\ 15 U.S.C. 1681m(e).

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1. Reasons for, and Objectives of, the Proposed Actions

The FACT Act, which amended FCRA, 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 prescribe rules related to the detection,

prevention, and mitigation of identity theft. The SEC is proposing

rules to implement the statutory directives in section 615(e) of the

FCRA, which require the SEC to prescribe identity theft regulations

jointly with other agencies.

Section 615(e) requires the SEC to prescribe regulations 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 regulations applicable to credit

and debit card issuers to implement policies and procedures to assess

the validity of change of address requests.

2. Legal Basis

The SEC is proposing Regulation S-ID under the authority set forth

in 15 U.S.C. 78q, 78q-1, 78o-4, 78o-5, 78w, 80a-30, 80a-37, 80b-4, 80b-

11, 1681m(e), 1681s(b), 1681s-3 and note, 1681w(a)(1), 6801-6809, and

6825; Public Law 111-203, sec. 1088(a)(8), (a)(10), and sec. 1088(b).

3. Small Entities Subject to the Rule

For purposes of the 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 122 investment companies of the 1790 total registered on

Form N-1A meet this definition.\166\

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\166\ 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.

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Under SEC rules, for purposes of the 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.\167\ Based on

information in filings submitted to the SEC, 570 of the approximately

11,500 investment advisers registered with the SEC are small

entities.\168\

---------------------------------------------------------------------------

\167\ Rule 0-7(a).

\168\ This information is based on data from the Investment

Adviser Registration Depository.

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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.\169\

SEC staff estimates that approximately 879 broker-dealers meet this

definition.\170\

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\169\ 17 CFR 240.0-10.

\170\ This estimate is based on information provided in FOCUS

Reports filed with the Commission. There are approximately 5063

broker-dealers registered with the Commission.

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4. 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 prescribe regulations that require

financial institutions and creditors to establish reasonable policies

and procedures to implement guidelines established by the SEC and other

federal agencies that address identity theft with respect to account

holders and customers. Section 248.201 of proposed Regulation S-ID

would implement this mandate by requiring a covered financial

institution or creditor to create an Identity Theft Prevention Program

that detects, prevents, and mitigates the risk of identity theft

applicable to its accounts.

Section 615(e) also requires the SEC to adopt regulations

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 proposed Regulation S-ID would implement 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 or more), the issuer receives a

[[Page 13471]]

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 red

flags rules and guidelines that the FTC began enforcing on December 31,

2010, proposed Regulation S-ID should not impose new compliance,

recordkeeping, or reporting burdens. If for any reason an SEC-regulated

small entity is not already in compliance with the existing red flags

rules and guidelines issued by the Agencies, the burden of compliance

with proposed Regulation S-ID should be minimal because entities

already engage in various activities to minimize losses due to fraud as

part of their usual and customary business practices. In particular,

the rule will direct many of these entities to consolidate their

existing policies and procedures into a written Program and may require

some additional staff training. Accordingly, the impact of the proposed

requirements would be merely incremental and not significant.

The SEC has estimated the costs of proposed Regulation S-ID for all

entities (including small entities) in the PRA and cost benefit

analyses included in this release. No new classes of skills would be

required to comply with proposed Regulation S-ID. SEC staff does not

anticipate that small entities would face unique or special burdens

when complying with proposed Regulation S-ID.

5. Duplicative, Overlapping, or Conflicting Federal Rules

SEC staff has not identified any federal rules that duplicate,

overlap, or conflict with the proposed rule or rule or form amendments.

6. Significant Alternatives

The Regulatory Flexibility Act 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 proposed 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 the

proposal for small entities; (iii) the use of performance rather than

design standards; and (iv) an exemption from coverage of the proposal,

or any part thereof, for small entities.

The proposed rules would require financial institutions and

creditors to create an identity theft prevention Program and report to

the board of directors, a committee of the board, or senior management

at least annually on compliance with the regulations. Credit and debit

card issuers would be 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 proposed Regulation S-ID are flexible, and take

into account a covered entity's size and sophistication, as well as the

costs and benefits of alternative compliance methods. An identity theft

prevention Program under proposed Regulation S-ID would 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 costs of compliance.

Because small entities maintain covered accounts that pose a risk of

identity theft for consumers just as larger entities do, we do not

believe that providing an exemption from proposed Regulation S-ID for

small entities would comply with the intent of section 615(e), and

could subject consumers with covered accounts at small entities to a

higher risk of identity theft.

Pursuant to the mandate of section 615(e) of the FCRA, as amended

by section 1088 of the Dodd-Frank Act, the SEC and the CFTC are

proposing identity theft red flags rules and guidelines jointly, and

they would be substantially similar and comparable to the identity

theft red flags rules and guidelines 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 proposed by the Commissions and the rules adopted by the

Agencies. Because all SEC-regulated entities, including small entities,

should already be in compliance with the substantially similar red

flags rules and guidelines that the FTC began enforcing on December 31,

2010, SEC staff does not expect that small entities would need a

delayed effective or compliance date.

The SEC seeks comment and information on any need for

alternative compliance methods that, consistent with the statutory

requirements, would reduce the economic impact of the rule on such

small entities, including whether to delay the rule's effective date to

provide additional time for small business compliance.

7. General Request for Comment

The SEC requests comments regarding this analysis. It requests

comment on the number of small entities that would be subject to the

proposed rules and guidelines and whether the proposed rules and

guidelines would have any effects that have not been discussed. The SEC

requests that commenters describe the nature of any effects on small

entities subject to the rules and provide empirical data to support the

nature and extent of such effects. It also requests comment on the

compliance burdens and how they would affect small entities.

IV. Statutory Authority and Text of Proposed Amendments

The CFTC is proposing to amend Part 162 under the authority set

forth in sections 1088(a)(8), 1088(a)(10) and 1088(b) of the Dodd-Frank

Act, Public Law 111-203, 124 Stat. 1376 (2010) and; sections 615(e) [15

U.S.C 1681m(e)], 621(b) [15 U.S.C 1681s(b)], 624 [15 U.S.C 1681s-3 and

note], 628 [15 U.S.C. 1681w(a)(1)] of the Fair Credit Reporting Act.

The SEC is proposing Regulation S-ID under the authority set forth

in Section 1088(a)(8) of the Dodd-Frank Act,\171\ Section 615(e) of the

FCRA,\172\ Sections 17 and 36 of the Exchange Act,\173\ Sections 31 and

38 of the Investment Company Act,\174\ and Sections 204 and 211 of the

Investment Advisers Act.\175\

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\171\ Public Law 111-203, Section 1088(a)(8), 124 Stat. 1376

(2010).

\172\ 15 U.S.C. 1681m(e).

\173\ 15 U.S.C. 78q and 78mm.

\174\ 15 U.S.C. 80a-30 and 80a-37.

\175\ 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, Fair and Accurate Credit

Transactions Act, Fair Credit Reporting Act, Financial institutions,

Futures commission merchants, Gramm-Leach-Bliley Act, 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

[[Page 13472]]

business information, Consumer reports, Credit, Creditors, Dealers,

Fair and Accurate Credit Transactions Act, Fair Credit Reporting Act,

Financial institutions, Gramm-Leach-Bliley Act, Identity theft,

Investment advisers, Investment companies, Privacy, Reporting and

recordkeeping requirements, Securities, Security measures, Self-

regulatory organizations, Transfer agents.

Text of Proposed Rules

Commodity Futures Trading Commission

For the reasons stated above in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR part 162 as follows:

PART 162--PROTECTION OF CONSUMER INFORMATION UNDER THE FAIR CREDIT

REPORTING ACT

1. The authority citation for part 162 continues to read as

follows:

Authority: Sec. 1088, Pub. L. 111-203; 124 Stat. 1376 (2010).

2. Add subpart C to part 162 read as follows:

Subpart C--Identity Theft Red Flags

Sec.

162.22-162.29 [Reserved]

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. Sec. 162.22-162.29 [Reserved]

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, 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 Section 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

[[Page 13473]]

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 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) of this part 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 of this part.

(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 (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.

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 of this part requires each financial institution

or creditor that offers or maintains one or more covered accounts,

as defined in Sec. 162.30(b)(3) of this part, 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 of this part.

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;

[[Page 13474]]

(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 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 of this

part; 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 of this part.

(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.

[[Page 13475]]

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:

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 above in the preamble, the Securities and

Exchange Commission proposes to amend 17 CFR part 248 as follows:

PART 248--REGULATIONS S-P, S-AM, AND S-ID

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, 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, sec. 1088(a)(8),

(a)(10), and sec. 1088(b).

5. Revise the heading for part 248 to read as set forth above.

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 non U.S. based 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), and

includes lenders such as brokers or dealers offering margin accounts,

securities lending services, and short selling services.

(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.

[[Page 13476]]

(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

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 of this part.

(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 of this part requires each financial institution

and creditor that offers or maintains one or more covered accounts,

as defined in Sec. 248.201(b)(3) of this part, 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 of this part.

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.

[[Page 13477]]

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 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 of this

part; 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 of this part.

(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

[[Page 13478]]

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 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: February 28, 2012.

By the Commodity Futures Trading Commission.

David A. Stawick,

Secretary of the Commodity Futures Trading Commission.

Dated: February 28, 2012.

By the Securities and Exchange Commission.

Elizabeth M. Murphy,

Secretary of the Securities and Exchange Commission.

[FR Doc. 2012-5157 Filed 3-5-12; 8:45 am]

BILLING CODE 6351-01-P; 8011-01-P

 

Last Updated: March 6, 2012