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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.
———————————————————————–
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).
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
23 Proposed Sec. 248.201(a).
—————————————————————————
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
[[Page 13453]]
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
—————————————————————————
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”).
—————————————————————————
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
—————————————————————————
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.”
—————————————————————————
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
—————————————————————————
31 See proposed Sec. 162.30(b)(7).
—————————————————————————
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.”
—————————————————————————
32 See proposed Sec. 248.201(a).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
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.”
—————————————————————————
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
—————————————————————————
44 See 15 U.S.C. 1681m(e)(4)(C).
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
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.”).
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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).
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
60 See proposed Sec. 162.30(d)(1) (CFTC) and proposed Sec.
248.201(d)(1) (SEC).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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?
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
74 See proposed Sec. 162.30(e) (CFTC) and proposed Sec.
248.201(e) (SEC).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
78 See proposed Sec. 162.30(e)(3) (CFTC) and proposed Sec.
248.201(e)(3) (SEC).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
83 15 U.S.C. 1681m(e)(1)(A).
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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:
—————————————————————————
86 See proposed Sec. 162.30(d) (CFTC) and Sec. 248.201(d)
(SEC).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
107 See Sec. 162.32 (CFTC) and Sec. 248.202 (SEC).
108 See supra Section II.A.1.
—————————————————————————
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
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
123 See proposed Sec. 162.32(d) (CFTC) and proposed Sec.
248.202(d) (SEC).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
125 7 U.S.C. 19(a)
—————————————————————————
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.
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
130 See id.
—————————————————————————
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.
—————————————————————————
131 See supra note 19.
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
136 See infra Section IV (setting forth statutory authority
under, among other things, the Exchange Act and Investment Company
Act for proposed rules).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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).
—————————————————————————
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.
—————————————————————————
159 Proposed Sec. 248.202(a).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
161 See 5 U.S.C. 601 et seq.
162 See 5 U.S.C. 601 et seq.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
165 15 U.S.C. 1681m(e).
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
—————————————————————————
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.
—————————————————————————
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
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