Identity Theft Red Flags Rules, 23637-23666 [2013-08830]

Agencies

• Commodity Futures Trading Commission
• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 76 (Friday, April 19, 2013)]
[Rules and Regulations]
[Pages 23637-23666]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08830]



[[Page 23637]]

Vol. 78

Friday,

No. 76

April 19, 2013

Part II





Commodity Futures Trading Commission





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7 CFR Part 162





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Securities and Exchange Commission





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17 CFR Part 248





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Identity Theft Red Flags Rules; Final Rule

Federal Register / Vol. 78 , No. 76 / Friday, April 19, 2013 / Rules 
and Regulations

[[Page 23638]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 162

RIN 3038-AD14

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 248

[Release Nos. 34-69359, IA-3582, IC-30456; File No. S7-02-12]
RIN 3235-AL26


Identity Theft Red Flags Rules

AGENCY: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION:  Joint final rules and guidelines.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (together, the 
``Commissions'') are jointly issuing final rules and guidelines to 
require certain regulated entities to establish programs to address 
risks of identity theft. These rules and guidelines implement 
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, which amended the Fair Credit Reporting Act and directed the 
Commissions to adopt rules requiring entities that are subject to the 
Commissions' respective enforcement authorities to address identity 
theft. First, the rules require financial institutions and creditors to 
develop and implement a written identity theft prevention program 
designed to detect, prevent, and mitigate identity theft in connection 
with certain existing accounts or the opening of new accounts. The 
rules include guidelines to assist entities in the formulation and 
maintenance of programs that would satisfy the requirements of the 
rules. Second, the rules establish special requirements for any credit 
and debit card issuers that are subject to the Commissions' respective 
enforcement authorities, to assess the validity of notifications of 
changes of address under certain circumstances.

DATES: Effective date: May 20, 2013; Compliance date: November 20, 
2013.

FOR FURTHER INFORMATION CONTACT: CFTC: Sue McDonough, Counsel, at 
Commodity Futures Trading Commission, Office of the General Counsel, 
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581, 
telephone number (202) 418-5132, facsimile number (202) 418-5524, email 
smcdonough@cftc.gov; SEC: with regard to investment companies and 
investment advisers, contact Andrea Ottomanelli Magovern, Senior 
Counsel, Amanda Wagner, Senior Counsel, Thoreau Bartmann, Branch Chief, 
or Hunter Jones, Assistant Director, Office of Regulatory Policy, 
Division of Investment Management, (202) 551-6792, or with regard to 
brokers, dealers, or transfer agents, contact Brice Prince, Special 
Counsel, Joseph Furey, Assistant Chief Counsel, or David Blass, Chief 
Counsel, Office of Chief Counsel, Division of Trading and Markets, 
(202) 551-5550, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commissions are adopting new rules and 
guidelines on identity theft red flags for entities subject to their 
respective enforcement authorities. The CFTC is adding new subpart C 
(``Identity Theft Red Flags'') to part 162 of the CFTC's regulations 
[17 CFR part 162] and the SEC is adding new subpart C (``Regulation S-
ID: Identity Theft Red Flags'') to part 248 of the SEC's regulations 
[17 CFR part 248], under the Fair Credit Reporting Act [15 U.S.C. 1681-
1681x], the Commodity Exchange Act [7 U.S.C. 1-27f], the Securities 
Exchange Act of 1934 [15 U.S.C. 78a-78pp], the Investment Company Act 
of 1940 [15 U.S.C. 80a], and the Investment Advisers Act of 1940 [15 
U.S.C. 80b].

Table of Contents

I. Background
II. Explanation of the Final Rules and Guidelines
    A. Final Identity Theft Red Flags Rules
    1. Which Financial Institutions and Creditors Are Required to 
Have a Program
    2. The Objectives of the Program
    3. The Elements of the Program
    4. Administration of the Program
    B. Final Guidelines
    1. Section I of the Guidelines--Identity Theft Prevention 
Program
    2. Section II of the Guidelines--Identifying Relevant Red Flags
    3. Section III of the Guidelines--Detecting Red Flags
    4. Section IV of the Guidelines--Preventing and Mitigating 
Identity Theft
    5. Section V of the Guidelines--Updating the Identity Theft 
Prevention Program
    6. Section VI of the Guidelines--Methods for Administering the 
Identity Theft Prevention Program
    7. Section VII of the Guidelines--Other Applicable Legal 
Requirements
    8. Supplement A to the Guidelines
    C. Final Card Issuer Rules
III. Related Matters
    A. Cost-Benefit Considerations (CFTC) and Economic Analysis 
(SEC)
    B. Analysis of Effects on Efficiency, Competition, and Capital 
Formation
    C. Paperwork Reduction Act
    D. Regulatory Flexibility Act
IV. Statutory Authority and Text of Amendments

I. Background

    The growth and expansion of information technology and electronic 
communication have made it increasingly easy to collect, maintain, and 
transfer personal information about individuals.\1\ Advancements in 
technology also have led to increasing threats to the integrity and 
privacy of personal information.\2\ During recent decades, the federal 
government has taken steps to help protect individuals, and to help 
individuals protect themselves, from the risks of theft, loss, and 
abuse of their personal information.\3\
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    \1\ See, e.g., U.S. Government Accountability Office, 
Information Security: Federal Guidance Needed to Address Control 
Issues with Implementing Cloud Computing (May 2010), available at 
https://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 https://www.ntia.doc.gov/reports/2010/iptf_
privacy_greenpaper_ 12162010.pdf (reviewing recent technological 
changes that necessitate a new approach to commercial data 
protection). See also Fred H. Cate, Privacy in the Information Age, 
at 13-16 (1997) (discussing the privacy and data security issues 
that arose during early increases in the use of digital data).
    \2\ A recent survey found that in 2012, over 5% of Americans 
were victims of identity fraud. See Javelin Strategy & Research, 
2013 Identity Fraud Report: Data Breaches Becoming a Treasure Trove 
for Fraudsters (Feb. 2013), available at https://www.javelinstrategy.com/uploads/web_brochure/1303.R_2013IdentityFraudBrochure.pdf; see also Comment Letter of Tyler 
Krulla (``Tyler Krulla Comment Letter'') (Apr. 27, 2012) (``In 
today's technology driven world it is easier than ever for anyone to 
acquire and exploit someone's identity and cause severe financial 
problems.'').
    \3\ See, e.g., Consumer Data Privacy in a Networked World: A 
Framework for Protecting Privacy and Promoting Innovation in the 
Global Digital Economy (Feb. 2012), available at https://www.whitehouse.gov/sites/default/files/privacy-final.pdf (a White 
House proposal to establish a consumer privacy bill of rights); The 
President's Identity Theft Task Force Report (Sept. 2008), available 
at https://www.ftc.gov/os/2008/10/081021taskforcereport.pdf; 
Securities and Exchange Commission, Online Brokerage Accounts: What 
you can do to Safeguard Your Money and Your Personal Information, 
available at https://www.sec.gov/investor/pubs/onlinebrokerage.htm.
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    The Fair Credit Reporting Act of 1970 (``FCRA''),\4\ as amended in 
2003,\5\ required several federal agencies to issue joint rules and 
guidelines regarding the detection, prevention, and mitigation of 
identity theft for entities that are subject to their respective 
enforcement authorities (also known as

[[Page 23639]]

the ``identity theft red flags rules'').\6\ Those agencies were the 
Office of the Comptroller of the Currency (``OCC''), the Board of 
Governors of the Federal Reserve System (``Federal Reserve Board''), 
the Federal Deposit Insurance Corporation (``FDIC''), the Office of 
Thrift Supervision (``OTS''), the National Credit Union Administration 
(``NCUA''), and the Federal Trade Commission (``FTC'') (together, the 
``Agencies'').\7\ In 2007, the Agencies issued joint final identity 
theft red flags rules.\8\ At the time the Agencies adopted their rules, 
the FCRA did not require or authorize the CFTC and SEC to issue 
identity theft red flags rules. Instead, the Agencies' rules applied to 
entities that registered with the CFTC and SEC, such as futures 
commission merchants, broker-dealers, investment companies, and 
investment advisers.\9\
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    \4\ Pub. L. 91-508, 84 Stat. 1114 (1970), codified at 15 U.S.C. 
1681-1681x.
    \5\ See Fair and Accurate Credit Transactions Act of 2003, Pub. 
L. 108-159, 117 Stat. 1952 (2003) (``FACT Act'').
    \6\ See FCRA sections 615(e)(1)(A)-(B), 15 U.S.C. 
1681m(e)(1)(A)-(B). Section 615(e)(1)(A) of the FCRA requires the 
Agencies to jointly ``establish and maintain guidelines for use by 
each financial institution and each creditor regarding identity 
theft with respect to account holders at, or customers of, such 
entities, and update such guidelines as often as necessary.'' 
Section 615(e)(1)(B) requires the Agencies to jointly ``prescribe 
regulations requiring each financial institution and each creditor 
to establish reasonable policies and procedures for implementing the 
guidelines established pursuant to [section 615(e)(1)(A)], to 
identify possible risks to account holders or customers or to the 
safety and soundness of the institution or customers.''
    \7\ The FCRA also required the Agencies to prescribe joint rules 
applicable to issuers of credit and debit cards, to require that 
such issuers assess the validity of notifications of changes of 
address under certain circumstances (the ``card issuer rules''). See 
FCRA section 615(e)(1)(C), 15 U.S.C. 1681m(e)(1)(C).
    \8\ See Identity Theft Red Flags and Address Discrepancies under 
the Fair and Accurate Credit Transactions Act of 2003, 72 FR 63718 
(Nov. 9, 2007) (``2007 Adopting Release''). The rules included card 
issuer rules. See supra note 7. The OCC, Federal Reserve Board, 
FDIC, OTS, and NCUA began enforcing their identity theft red flags 
rules on November 1, 2008. The FTC began enforcing its identity 
theft red flags rules on January 1, 2011.
    \9\ See 2007 Adopting Release, supra note 8.
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    In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (``Dodd-Frank Act'') \10\ amended the FCRA to add the CFTC and SEC 
to the list of federal agencies that must jointly adopt and 
individually enforce identity theft red flags rules.\11\ Thus, the 
Dodd-Frank Act provides for the transfer of rulemaking responsibility 
and enforcement authority to the CFTC and SEC with respect to the 
entities subject to each agency's enforcement authority. In February 
2012, the Commissions jointly proposed for public notice and comment 
identity theft red flags rules and guidelines and card issuer 
rules.\12\
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    \10\ Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act is available at https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \11\ See FCRA section 615(e)(1), 15 U.S.C. 1681m(e)(1). In 
addition, section 1088(a)(10)(A) of the Dodd-Frank Act added the 
Commissions to the list of federal administrative agencies 
responsible for enforcement of rules pursuant to section 621(b) of 
the FCRA. See infra note 24. Section 1100H of the Dodd-Frank Act 
provides that the Commissions' new enforcement authority (as well as 
other changes in various agencies' authority under other provisions) 
becomes effective as of the ``designated transfer date'' to be 
established by the Secretary of the Treasury, as described in 
section 1062 of that Act. On September 20, 2010, the Secretary of 
the Treasury designated July 21, 2011 as the transfer date. See 
Designated Transfer Date, 75 FR 57252 (Sept. 20, 2010).
    \12\ The Commissions' joint proposed rules and guidelines were 
published in the Federal Register on March 6, 2012. See Identity 
Theft Red Flags Rules, 77 FR 13450 (Mar. 6, 2012) (``Proposing 
Release''). For ease of reference, unless the context indicates 
otherwise, our general use of the terms ``identity theft red flags 
rules'' or ``rules'' in this release will refer to both the identity 
theft red flags rules and guidelines. In addition, unless the 
context indicates otherwise, the general use of these terms in this 
preamble and Section III of this release will refer to both the 
identity theft red flags rules and guidelines, and the card issuer 
rules (which are discussed in further detail later in this release).
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    The CFTC and SEC received a total of 27 comment letters on the 
proposal.\13\ Most commenters generally supported the proposal, and 
many stated that the rules would benefit individuals.\14\ Commenters 
expressed concern about the prevalence of identity theft and supported 
our efforts to reduce it.\15\ Commenters also supported the 
Commissions' proposal to adopt rules that would be substantially 
similar to the rules the Agencies adopted in 2007.\16\ Some commenters 
raised questions about the scope of the proposal and the meaning of 
certain definitions.\17\ One commenter stated that benefits to 
consumers would outweigh the costs of the rules,\18\ while another took 
issue with the estimated costs of complying with the rules.\19\
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    \13\ Comments on the proposal, including comments referenced in 
this release, are available on the SEC's Web site at https://www.sec.gov/comments/s7-02-12/s70212.shtml and the CFTC's Web site 
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1171.
    \14\ See, e.g., Comment Letter of MarketCounsel (Apr. 25, 2012) 
(``MarketCounsel Comment Letter'') (``MarketCounsel supports the 
Commission's attempt to help protect individuals from the risk of 
theft, loss, and abuse of their personal information through the 
Proposed Rule.''); Comment Letter of Erik Speicher (``Erik Speicher 
Comment Letter'') (Mar. 17, 2012) (``Identity theft is a major 
concern of all citizens. The effects and burdens associated with 
having ones [sic] identity stolen necessitate these proposed 
regulations. The affirmative duty placed on the covered entities 
will better protect all of us from the possibility of having our 
identity stolen.''); Comment Letter of Lauren L. (Mar. 12, 2012) 
(``Lauren L. Comment Letter'') (``[R]equirements to implement an 
identity theft prevention plan and to verify change of personal 
information [have] the [potential] to protect people.'').
    \15\ See, e.g., Tyler Krulla Comment Letter; Lauren L. Comment 
Letter (``I agree with the proposed changes. With the market 
shifting to an IT based world, identity theft is increasing. 
Therefore, more stringent rules and regulations should be in place 
to protect those that may be affected.'').
    \16\ See, e.g., Comment Letter of the Investment Company 
Institute (May 1, 2012) (``ICI Comment Letter'').
    \17\ See, e.g., Comment Letter of the Investment Adviser 
Association (May 7, 2012) (``IAA Comment Letter'') (requesting that 
the SEC and CFTC clarify the definitions of ``financial 
institution'' and ``creditor'' and exclude investment advisers from 
the categories of entities specifically mentioned in the scope 
section of the rule); Comment Letter of the Options Clearing 
Corporation (May 3, 2012) (``OCC Comment Letter'') (requesting that 
the SEC and CFTC clarify the definition of ``creditor'' and 
expressly exclude clearing organizations from the scope section of 
the rule); Comment Letter of the Financial Services Roundtable and 
the Securities Industry and Financial Markets Association (May 2, 
2012) (``FSR/SIFMA Comment Letter'') (requesting that the SEC 
specifically exclude certain categories of entities from the 
definitions of ``financial institution'' and ``covered account,'' 
and that the SEC and CFTC specifically define the types of accounts 
that would qualify as covered accounts).
    \18\ See Erik Speicher Comment Letter.
    \19\ See FSR/SIFMA Comment Letter. We discuss estimated costs 
and benefits in the Section III of this release.
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    Today, the CFTC and SEC are adopting the identity theft red flags 
rules. The final rules are substantially similar to the rules the 
Commissions proposed,\20\ and to the rules the Agencies adopted in 
2007.\21\ The final rules apply to ``financial institutions'' and 
``creditors'' subject to the Commissions' respective enforcement 
authorities, and as discussed further below, do not exclude any 
entities registered with the Commissions from their scope. The 
Commissions recognize that entities subject to their respective 
enforcement authorities, whose activities fall within the scope of the 
rules, should already be in compliance with the Agencies' joint rules. 
The rules we are adopting today do not contain requirements that were 
not already in the Agencies' rules, nor do they expand the scope of 
those rules to include new categories of entities that the Agencies' 
rules did not already cover. The rules and this adopting release do 
contain examples and minor language changes designed to help guide 
entities within the SEC's enforcement authority in complying with the 
rules, which may lead some entities that had not previously complied 
with the Agencies' rules to determine that they fall within the scope 
of the rules we are adopting today.
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    \20\ See infra Section II.A.1.ii (discussing a revision to 
proposed definition of ``creditor''); see also Sec.  
248.201(b)(2)(i) (SEC) (revising the term ``non U.S. based financial 
institution or creditor,'' which was included in the proposed 
definition of ``board of directors,'' to ``foreign financial 
institution or creditor,'' for clarity and consistency with the 
CFTC's and Agencies' respective identity theft red flags rules).
    \21\ See 2007 Adopting Release.

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II. Explanation of the Final Rules and Guidelines

A. Final Identity Theft Red Flags Rules

    Sections 615(e)(1)(A) and (B) of the FCRA, as amended by the Dodd-
Frank Act, require that the Commissions jointly establish and maintain 
guidelines for ``financial institutions'' and ``creditors'' regarding 
identity theft, and adopt rules requiring such institutions and 
creditors to establish reasonable policies and procedures for the 
implementation of those guidelines.\22\ Under the final rules, a 
financial institution or creditor that offers or maintains ``covered 
accounts'' must establish an identity theft red flags program designed 
to detect, prevent, and mitigate identity theft. To that end, the final 
rules discussed below specify: (1) Which financial institutions and 
creditors must develop and implement a written identity theft 
prevention program (``Program''); (2) the objectives of the Program; 
(3) the elements that the Program must contain; and (4) the steps 
financial institutions and creditors need to take to administer the 
Program.
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    \22\ 15 U.S.C. 1681m(e)(1)(A) and (B). Key terms such as 
``financial institution'' and ``creditor'' are defined in the rules 
and discussed later in this Section.
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1. Which Financial Institutions and Creditors Are Required To Have a 
Program
    The ``scope'' subsections of the rules generally set forth the 
types of entities that are subject to the Commissions' identity theft 
red flags rules.\23\ Under these subsections, the rules apply to 
entities over which Congress recently granted the Commissions 
enforcement authority under the FCRA.\24\ The Commissions' scope 
provisions are similar to those contained in the rules adopted by the 
Agencies, which limit the rules' scope to entities that are within the 
Agencies' respective enforcement authorities.\25\
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    \23\ Sec.  162.30(a) (CFTC); Sec.  248.201(a) (SEC).
    \24\ Section 1088(a)(10)(A) of the Dodd-Frank Act amended 
section 621(b) of the FCRA to add the Commissions to the list of 
federal agencies responsible for enforcement of the FCRA. As 
amended, section 621(b) of the FCRA specifically provides that 
enforcement of the requirements imposed under the FCRA ``shall be 
enforced under * * * the Commodity Exchange Act, with respect to a 
person subject to the jurisdiction of the [CFTC]; [and under] the 
Federal securities laws, and any other laws that are subject to the 
jurisdiction of the [SEC], with respect to a person that is subject 
to the jurisdiction of the [SEC] * * *'' 15 U.S.C. 1681s(b)(1)(F)-
(G). See also 15 U.S.C. 1681a(f) (defining ``consumer reporting 
agency'').
    \25\ See, e.g., 12 CFR 334.90(a) (stating that the FDIC's red 
flags rule ``applies to a financial institution or creditor that is 
an insured state nonmember bank, insured state licensed branch of a 
foreign bank, or a subsidiary of such entities (except brokers, 
dealers, persons providing insurance, investment companies, and 
investment advisers)''); 12 CFR 717.90(a) (stating that the NCUA's 
red flags rule ``applies to a financial institution or creditor that 
is a federal credit union'').
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    As noted above, the CFTC's ``scope'' subsection ``applies to 
financial institutions and creditors that are subject to'' the CFTC's 
enforcement authority under the FCRA.\26\ The CFTC's proposed 
definitions of ``financial institution'' and ``creditor'' describe the 
entities to which its identity theft red flags rules and guidelines 
apply. In the Proposing Release, the CFTC defined ``financial 
institution'' as having the same meaning as in section 603(t) of the 
FCRA.\27\ In addition, the CFTC's proposed definition of ``financial 
institution'' also specified that the term includes any futures 
commission merchant (``FCM''), retail foreign exchange dealer 
(``RFED''), commodity trading advisor (``CTA''), commodity pool 
operator (``CPO''), introducing broker (``IB''), swap dealer (``SD''), 
or major swap participant (``MSP'') that directly or indirectly holds a 
transaction account belonging to a consumer.\28\ Similarly, in the 
CFTC's proposed definition of ``creditor,'' the CFTC applies the 
definition of ``creditor'' from 15 U.S.C. 1681m(e)(4) to any FCM, RFED, 
CTA, CPO, IB, SD, or MSP that ``regularly extends, renews, or continues 
credit; regularly arranges for the extension, renewal, or continuation 
of credit; or in acting as an assignee of an original creditor, 
participates in the decision to extend, renew, or continue credit.'' 
\29\ The CFTC has determined that the final identity theft red flags 
rules apply to these entities because of the increased likelihood that 
these entities open or maintain covered accounts, or pose a reasonably 
foreseeable risk to customers, or to the safety and soundness of the 
financial institution or creditor, from identity theft. This approach 
is consistent with the general scope of part 162 of the CFTC's 
regulations.\30\
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    \26\ Sec.  162.30(a); see also supra note 24.
    \27\ See 15 U.S.C. 1681a(t) (defining ``financial institution'' 
to include certain banks and credit unions, and ``any other person 
that, directly or indirectly, holds a transaction account (as 
defined in Section 19(b) of the Federal Reserve Act) belonging to a 
consumer''). Section 19(b) of the Federal Reserve Act defines a 
transaction account as ``a deposit or account on which the depositor 
or account holder is permitted to make withdrawals by negotiable or 
transferable instrument, payment orders or withdrawal, telephone 
transfers, or other similar items for the purpose of making payments 
or transfers to third parties or others.'' 12 U.S.C. 461(b)(1)(C).)
    \28\ Sec.  162.30(b)(7).
    \29\ Sec.  162.30(b)(5).
    \30\ Sec.  162.1(b) (specifying that ``[t]his part applies to 
certain consumer information held by * * * futures commission 
merchants, retail foreign exchange dealers, commodity trading 
advisors, commodity pool operators, introducing brokers, major swap 
participants and swap dealers.'')
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    One commenter suggested that the CFTC follow the SEC's approach and 
simply cross-reference the FCRA definition of ``financial institution'' 
and the FCRA definition of ``creditor'' as amended by the Red Flag 
Program Clarification Act of 2010 (``Clarification Act'') \31\ rather 
than including named entities in the definition.\32\ The commenter 
argued that cross-referencing the FCRA definitions, as amended by the 
Clarification Act, rather than including specific types of entities 
that are subject to the CFTC's enforcement authority in the definitions 
of ``financial institution'' and ``creditor,'' would be more consistent 
with the SEC's and the Agencies' regulations and would allow the 
agencies to easily adapt to any changes to the FCRA over time.\33\
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    \31\ In December 2010, President Obama signed into law the Red 
Flag Program Clarification Act of 2010, which amended the definition 
of ``creditor'' in the FCRA for purposes of identity theft red flags 
rules. Red Flag Program Clarification Act of 2010, Public Law 111-
319 (2010) (inserting new section 4 at the end of section 615(e) of 
the FCRA), codified at 15 U.S.C. 1681m(e)(4).
    \32\ IAA Comment Letter.
    \33\ The commenter also noted that the CFTC's proposed 
definition of ``creditor'' would include certain entities such as 
CPOs and CTAs--entities that do not extend credit.
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    After considering these concerns, the CFTC has concluded that if it 
were to follow the SEC's approach and simply cross-reference the FCRA 
definitions of ``financial institution'' and ``creditor,'' the general 
scope provisions of 17 CFR part 162 would still apply and specify that 
part 162 applies to FCMs, RFEDs, CTAs, CPOs, IBs, MSPs, and SDs. As a 
practical matter, a cross-reference to the FCRA definitions of 
``financial institution'' and ``creditor'' would not change the result 
because under the general scope provisions of part 162, the CFTC's 
identity theft red flags rules would still apply to the same list of 
entities. As a result, the CFTC believes that it should retain the same 
definition of ``financial institution'' and ``creditor'' contained in 
the Proposing Release.
    The SEC's ``scope'' subsection provides that the final rules apply 
to a financial institution or creditor, as defined by the FCRA, that 
is:
     A broker, dealer or any other person that is registered or 
required to be registered under the Securities Exchange Act of 1934 
(``Exchange Act'');
     An investment company that is registered or required to be 
registered under the Investment Company Act of 1940 (``Investment 
Company Act''), that has elected to be regulated as a business

[[Page 23641]]

development company (``BDC'') under that Act, or that operates as an 
employees' securities company (``ESC'') under that Act; or
     An investment adviser that is registered or required to be 
registered under the Investment Advisers Act of 1940 (``Investment 
Advisers Act'').\34\
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    \34\ Sec.  248.201(a).
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    The types of entities listed by name in the scope section are the 
registered entities regulated by the SEC that are most likely to be 
financial institutions or creditors, i.e., brokers or dealers 
(``broker-dealers''), investment companies, and investment 
advisers.\35\ The scope section also includes any other entities that 
are registered or are required to register under the Exchange Act.\36\ 
Some types of entities required to register under the Exchange Act, 
such as nationally recognized statistical rating organizations 
(``NRSROs''), self-regulatory organizations (``SROs''), municipal 
advisors, and municipal securities dealers, are not listed by name in 
the scope section because they may be less likely to qualify as 
financial institutions or creditors under the FCRA.\37\ Nevertheless, 
if any entity of a type not listed qualifies as a financial institution 
or creditor, it is covered by the SEC's rules. The scope section does 
not include entities that are not themselves registered or required to 
register with the SEC (with the exception of certain non-registered 
investment companies that nonetheless are regulated by the SEC \38\), 
even if they register securities under the Securities Act of 1933 or 
the Exchange Act, or report information under the federal securities 
laws.\39\
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    \35\ The SEC's final rules define the scope of the identity 
theft red flags rules, section 248.201(a), differently than 
Regulation S-AM, the affiliate marketing rule the SEC adopted under 
the FCRA, defines its scope. See 17 CFR 248.101(b) (providing that 
Regulation S-AM applies to any brokers or dealers (other than 
notice-registered brokers or dealers), any investment companies, and 
any investment advisers or transfer agents registered with the SEC). 
Section 214(b) of the FACT Act, pursuant to which the SEC adopted 
Regulation S-AM, did not specify the types of entities that would be 
subject to the SEC's rules, and did not state that the affiliate 
marketing rules should apply to all persons subject to the SEC's 
enforcement authority. By contrast, the Dodd-Frank Act specifies 
that the SEC's identity theft red flags rules should apply to a 
``person that is subject to the jurisdiction'' of the SEC. See Dodd-
Frank Act sections 1088(a)(8), (10). Therefore, the SEC's identity 
theft red flags rules apply to BDCs, ESCs, and ``any * * * person 
that is registered or required to be registered under the Securities 
Exchange Act of 1934,'' as well as to those entities within the 
scope of Regulation S-AM.
     The scope of the SEC's final rules also differs from that of 
Regulation S-P, 17 CFR part 248, subpart A, the privacy rule the SEC 
adopted in 2000 pursuant to the Gramm-Leach-Bliley Act. Public Law 
106-102 (1999). Regulation S-P was adopted under Title V of that 
Act, which, unlike the FCRA, limited the SEC's regulatory authority 
to: (i) Brokers and dealers; (ii) investment companies; and (iii) 
investment advisers registered under the Investment Advisers Act. 
See 15 U.S.C. 6805(a)(3)-(5).
    \36\ The Dodd-Frank Act defines a ``person regulated by the 
[SEC],'' for other purposes of the Act, as certain entities that are 
registered or required to be registered with the SEC, and certain 
employees, agents, and contractors of those entities. See Dodd-Frank 
Act section 1002(21).
    \37\ The SEC believes that municipal advisors and municipal 
securities dealers may be less likely to qualify as financial 
institutions because they may be less likely to maintain transaction 
accounts for consumers. A commenter agreed with us that municipal 
advisors and municipal securities dealers may be less likely to 
qualify as financial institutions. See FSR/SIFMA Comment Letter. For 
further discussion, see infra notes 43-47 and accompanying text.
    \38\ As noted above, the scope of the final rules covers BDCs 
and ESCs, which typically do not register as investment companies 
with the SEC but are regulated by the SEC. BDCs file with the SEC 
notices of reliance on the BDC provisions of the Investment Company 
Act and the SEC's rules thereunder. See Form N-54A (``Notification 
of Election to be Subject to Sections 55 through 65 of the 
Investment Company Act of 1940 Filed Pursuant to Section 54(a) of 
the Act'') [17 CFR 274.53]. ESCs operate pursuant to individual 
exemptive orders issued by the SEC that govern the companies' 
operations. See Investment Company Act section 6(b) [15 U.S.C. 80a-
6(b)].
    \39\ See, e.g., Exemptions for Advisers to Venture Capital 
Funds, Private Fund Advisers With Less Than $150 Million in Assets 
Under Management, and Foreign Private Advisers, Investment Advisers 
Act Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)] 
(adopting rules related to investment advisers exempt from 
registration with the SEC, including ``exempt reporting advisers'').
---------------------------------------------------------------------------

    The SEC received four comment letters arguing that it should 
specifically exclude certain entities from the scope of the rules.\40\ 
These commenters recommended that the scope section exclude registered 
investment advisers,\41\ clearing organizations,\42\ SROs, municipal 
securities dealers, municipal advisors, or NRSROs.\43\ The commenters 
argued that these entities are unlikely to be financial institutions or 
creditors and that, without a specific exclusion, the scope of the 
rules is unclear and the rules would require these entities to 
periodically review their operations to ensure compliance with rules 
that are not relevant to their businesses.\44\ Another commenter 
recommended that the rules not list any of the types of entities 
subject to the rules, because such a list could confuse entities that 
are on the list but do not qualify as financial institutions or 
creditors.\45\
---------------------------------------------------------------------------

    \40\ See IAA Comment Letter; Comment Letter of the National 
Society of Compliance Professionals, Inc. (May 4, 2012) (``NSCP 
Comment Letter''); OCC Comment Letter; FSR/SIFMA Comment Letter.
    \41\ See, e.g., IAA Comment Letter (``[W]e believe a cleaner 
approach would be to eliminate investment advisers from the entities 
specifically mentioned in the scope section.''); NSCP Comment Letter 
(``We would urge the Commission to specifically exclude investment 
advisers from the scope of the rule since it is our view that any 
adviser that is a financial institution would already be covered by 
FCRA.''). For further discussion, see infra notes 55-60 and 73-76 
and accompanying text.
    \42\ See OCC Comment Letter (``[W]e encourage the Commissions to 
expressly exclude clearing organizations from the scope of the 
Proposed Rules because, as explained below, clearing organizations 
like OCC should not be considered `creditors' for these 
purposes.''). For further discussion, see infra note 75.
    \43\ See FSR/SIFMA Comment Letter (``Specifically, we ask that 
the SEC exclude * * * those entities that are unlikely to be deemed 
financial institutions or creditors under the FCRA, such as NRSROs, 
SROs, municipal advisors, municipal securities dealers, and 
registered investment advisers.'').
    \44\ See, e.g., NSCP Comment Letter.
    \45\ See MarketCounsel Comment Letter.
---------------------------------------------------------------------------

    We appreciate these concerns, and seek to minimize potential 
unnecessary burdens on regulated entities. As we acknowledge above, the 
entities that are not listed in the rule's scope section may be less 
likely to qualify as financial institutions or creditors under the 
FCRA, e.g., because they do not hold transaction accounts for 
consumers.\46\ The Dodd-Frank Act required the SEC to adopt identity 
theft red flags rules with respect to persons that are ``subject to the 
jurisdiction of the Securities and Exchange Commission.'' \47\ 
Expressly excluding from certain requirements of the rules any entities 
that are registered with the SEC, are subject to the SEC's enforcement 
authority, and are covered by the scope of the rules likely would not 
effectively implement the purposes of the Dodd-Frank Act and the FCRA, 
which are described in this release. In addition, we continue to 
believe that specifically listing in the scope section the entities 
that are likely to be subject to the rules--if they qualify as 
financial institutions or creditors--will provide useful guidance to 
those entities in determining their status under the rules. Therefore, 
we are adopting the scope section of the rules as proposed.
---------------------------------------------------------------------------

    \46\ See supra note 37 and accompanying text. For further 
discussion of the extent to which investment advisers, which are 
specifically listed in the rules' scope section, may qualify as 
financial institutions or creditors, see infra notes 55-60 and 73-76 
and accompanying text.
    \47\ 15 U.S.C. 1681s(b)(1)(G).
---------------------------------------------------------------------------

i. Definition of Financial Institution
    As discussed above, the Commissions' final red flags rules apply to 
``financial institutions'' and ``creditors.'' As in the proposed rules, 
the Commissions are defining the term ``financial institution'' in the 
final rules by reference to the definition of the term in section 
603(t) of the FCRA.\48\ That section defines a

[[Page 23642]]

financial institution to include certain banks and credit unions, and 
``any other person that, directly or indirectly, holds a transaction 
account (as defined in section 19(b) of the Federal Reserve Act) 
belonging to a consumer.'' \49\ Section 19(b) of the Federal Reserve 
Act defines ``transaction account'' to include an ``account on which 
the * * * account holder is permitted to make withdrawals by negotiable 
or transferable instrument, payment orders of withdrawal, telephone 
transfers, or other similar items for the purpose of making payments or 
transfers to third persons or others.'' \50\ Section 603(c) of the FCRA 
defines ``consumer'' as an individual; \51\ thus, to qualify as a 
financial institution, an entity must hold a transaction account 
belonging to an individual. The following are illustrative examples of 
an SEC-regulated entity that could fall within the meaning of the term 
``financial institution'' because it holds transaction accounts 
belonging to individuals: (i) A broker-dealer that offers custodial 
accounts; (ii) a registered investment company that enables investors 
to make wire transfers to other parties or that offers check-writing 
privileges; and (iii) an investment adviser that directly or indirectly 
holds transaction accounts and that is permitted to direct payments or 
transfers out of those accounts to third parties.\52\
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    \48\ 15 U.S.C. 1681a(t). See Sec.  162.30(b)(7) (CFTC); Sec.  
248.201(b)(7) (SEC). The Agencies also defined ``financial 
institution,'' in their identity theft red flags rules, by reference 
to the FCRA. See, e.g., 16 CFR 681.1(b)(7) (FTC) (``Financial 
institution has the same meaning as in 15 U.S.C. 1681a(t).'').
    \49\ 15 U.S.C. 1681a(t). In full, the FCRA defines ``financial 
institution'' to mean ``a State or National bank, a State or Federal 
savings and loan association, a mutual savings bank, a State or 
Federal credit union, or any other person that, directly or 
indirectly, holds a transaction account [as defined in section 19(b) 
of the Federal Reserve Act] belonging to a consumer.'' Id.
    \50\ 12 U.S.C. 461(b)(1)(C). Section 19(b) further states that a 
transaction account ``includes demand deposits, negotiable order of 
withdrawal accounts, savings deposits subject to automatic 
transfers, and share draft accounts.'' Id.
    \51\ 15 U.S.C. 1681a(c).
    \52\ The CFTC's definition specifies that financial institution 
``includes any futures commission merchant, retail foreign exchange 
dealer, commodity trading advisor, commodity pool operator, 
introducing broker, swap dealer, or major swap participant that 
directly or indirectly holds a transaction account belonging to a 
consumer.'' See Sec.  162.30(b)(7).
---------------------------------------------------------------------------

    A few commenters raised concerns about the SEC's statements in the 
Proposing Release regarding the possibility that some investment 
advisers could be financial institutions under certain circumstances. 
These commenters argued that investment advisers generally do not 
``hold'' transaction accounts, thus meaning that they would not be 
financial institutions under the definition.\53\ One commenter 
requested that we state that investment advisers who are authorized to 
withdraw assets from investors' accounts to pay bills, or otherwise 
direct payments to third parties, on behalf of investors do not 
``indirectly'' hold such accounts and therefore are not financial 
institutions.\54\
---------------------------------------------------------------------------

    \53\ See, e.g., IAA Comment Letter (``Investment advisers are 
not banks or credit unions and do not hold transaction accounts, 
such as custodial accounts or accounts with check-writing 
privileges. Instead, any cash or securities managed by investment 
advisers must be held in custody with financial institutions that 
are qualified custodians (broker-dealers or banks, primarily).'').
    \54\ See MarketCounsel Comment Letter (``MarketCounsel requests 
additional clarification in the Proposed Rule to make it clear that 
an investment adviser will not be deemed to indirectly hold a 
transaction account simply because it has control over, or access 
to, the transaction account.'').
---------------------------------------------------------------------------

    The SEC has concluded otherwise. As described below, some 
investment advisers do hold transaction accounts, both directly and 
indirectly, and thus may qualify as financial institutions under the 
rules as we are adopting them. As discussed further in Section III of 
this release, SEC staff anticipates that the following examples of 
circumstances in which certain entities, particularly investment 
advisers, may qualify as financial institutions may lead some of these 
entities that had not previously complied with the Agencies' rules to 
now determine that they should comply with Regulation S-ID.\55\
---------------------------------------------------------------------------

    \55\ SEC staff understands, based on comment letters and 
communications with industry representatives, that a number of 
investment advisers may not currently have identity theft red flags 
Programs. See MarketCounsel Comment Letter; IAA Comment Letter. SEC 
staff also expects, based on Investment Adviser Registration 
Depository (IARD) data, that certain private fund advisers could 
potentially meet the definition of ``financial institution'' or 
``creditor.'' See infra note 190.
---------------------------------------------------------------------------

    Investment advisers who have the ability to direct transfers or 
payments from accounts belonging to individuals to third parties upon 
the individuals' instructions, or who act as agents on behalf of the 
individuals, are susceptible to the same types of risks of fraud as 
other financial institutions, and individuals who hold transaction 
accounts with these investment advisers bear the same types of risks of 
identity theft and loss of assets as consumers holding accounts with 
other financial institutions. If such an adviser does not have a 
program in place to verify investors' identities and detect identity 
theft red flags, another individual may deceive the adviser by posing 
as an investor. The red flags program of a bank or other qualified 
custodian \56\ that maintains physical custody of an investor's assets 
would not adequately protect individuals holding transaction accounts 
with such advisers, because the adviser could give an order to withdraw 
assets, but at the direction of an impostor.\57\ Investors who entrust 
their assets to registered investment advisers that directly or 
indirectly hold transaction accounts should receive the protections 
against identity theft provided by these rules.
---------------------------------------------------------------------------

    \56\ See 17 CFR 275.206(4)-2(d)(6) (setting forth the entities 
that fall within the definition of ``qualified custodian'').
    \57\ See, e.g., Byron Acohido, Cybercrooks fool financial 
advisers to steal from clients, USA Today, Aug. 26, 2012, available 
at https://usatoday30.usatoday.com/money/perfi/basics/story/2012-08-26/wire-transfer-fraud/57335540/1 (last visited March 4, 2013) (``In 
a new twist, cyber-robbers are using ginned-up email messages in 
attempts to con financial advisers into wiring cash out of their 
clients' online investment accounts. If the adviser falls for it, a 
wire transfer gets legitimately executed, and cash flows into a bank 
account controlled by the thieves--leaving the victim in a dispute 
with the financial adviser over getting made whole.'').
---------------------------------------------------------------------------

    For instance, even if an investor's assets are physically held with 
a qualified custodian, an adviser that has authority, by power of 
attorney or otherwise, to withdraw money from the investor's account 
and direct payments to third parties according to the investor's 
instructions would hold a transaction account. However, an adviser that 
has authority to withdraw money from an investor's account solely to 
deduct its own advisory fees would not hold a transaction account, 
because the adviser would not be making the payments to third 
parties.\58\
---------------------------------------------------------------------------

    \58\ See supra note 50 and accompanying text.
---------------------------------------------------------------------------

    Registered investment advisers to private funds also may directly 
or indirectly hold transaction accounts.\59\ If an individual invests 
money in a private fund, and the adviser to the fund has the authority, 
pursuant to an arrangement with the private fund or the individual, to 
direct such individual's investment proceeds (e.g., redemptions, 
distributions, dividends, interest, or other proceeds related to the 
individual's account) to third parties, then that adviser would 
indirectly hold a transaction account. For example, a private fund 
adviser would hold a transaction account if it has the authority to 
direct an investor's redemption proceeds to other persons upon 
instructions received from the investor.\60\
---------------------------------------------------------------------------

    \59\ A ``private fund'' is ``an issuer that would be an 
investment company, as defined in section 3 of the Investment 
Company Act, but for section 3(c)(1) or 3(c)(7) of that Act.'' 15 
U.S.C. 80b-2(a)(29).
    \60\ On the other hand, an investment adviser may not hold a 
transaction account if the adviser has a narrowly-drafted power of 
attorney with an investor under which the adviser has no authority 
to redirect the investor's investment proceeds to third parties or 
others upon instructions from the investor.
---------------------------------------------------------------------------

ii. Definition of Creditor
    The Commissions' final definitions of ``creditor'' refer to the 
definition of

[[Page 23643]]

``creditor'' in the FCRA as amended by the Clarification Act.\61\ The 
FCRA now defines ``creditor,'' for purposes of the red flags rules, as 
a creditor as defined in the Equal Credit Opportunity Act \62\ 
(``ECOA'') (i.e., a person that regularly extends, renews or continues 
credit,\63\ or makes those arrangements) that ``regularly and in the 
course of business * * * advances funds to or on behalf of a person, 
based on an obligation of the person to repay the funds or repayable 
from specific property pledged by or on behalf of the person.'' \64\ 
The FCRA excludes from this definition a creditor that ``advances funds 
on behalf of a person for expenses incidental to a service provided by 
the creditor to that person * * *'' \65\
---------------------------------------------------------------------------

    \61\ See Sec.  162.30(b)(5) (CFTC); Sec.  248.201(b)(5) (SEC); 
see also supra note 31.
    \62\ Section 702(e) of the ECOA defines ``creditor'' to mean 
``any person who regularly extends, renews, or continues credit; any 
person who regularly arranges for the extension, renewal, or 
continuation of credit; or any assignee of an original creditor who 
participates in the decision to extend, renew, or continue credit.'' 
15 U.S.C. 1691a(e).
    \63\ The Commissions are defining ``credit'' by reference to its 
definition in the FCRA. See Sec.  162.30(b)(4) (CFTC); Sec.  
248.201(b)(4) (SEC). That definition refers to the definition of 
credit in the ECOA, which means ``the right granted by a creditor to 
a debtor to defer payment of debt or to incur debts and defer its 
payment or to purchase property or services and defer payment 
therefor.'' The Agencies defined ``credit'' in the same manner in 
their identity theft red flags rules. See, e.g., 16 CFR 681.1(b)(4) 
(FTC) (defining ``credit'' as having the same meaning as in 15 
U.S.C. 1681a(r)(5), which defines ``credit'' as having the same 
meaning as in section 702 of the ECOA).
    \64\ 15 U.S.C. 1681m(e)(4)(A)(iii). The FCRA defines a 
``creditor'' also to include a creditor (as defined in the ECOA) 
that ``regularly and in the ordinary course of business (i) obtains 
or uses consumer reports, directly or indirectly, in connection with 
a credit transaction; (ii) furnishes information to consumer 
reporting agencies * * * in connection with a credit transaction * * 
*'' 15 U.S.C. 1681m(e)(4)(A)(i)-(ii).
    \65\ FCRA section 615(e)(4)(B), 15 U.S.C. 1681m(e)(4)(B). The 
Clarification Act does not define the extent to which the 
advancement of funds for expenses would be considered ``incidental'' 
to services rendered by the creditor. The legislative history 
indicates that the Clarification Act was intended to ensure that 
lawyers, doctors, and other small businesses that may advance funds 
to pay for services such as expert witnesses, or that may bill in 
arrears for services provided, should not be considered creditors 
under the red flags rules. See 156 Cong. Rec. S8288-9 (daily ed. 
Nov. 30, 2010) (statements of Senators Thune and Dodd).
---------------------------------------------------------------------------

    The CFTC's definition of ``creditor'' includes certain entities 
(such as FCMs and CTAs) that regularly extend, renew or continue credit 
or make those credit arrangements.\66\ The proposed definition applies 
the definition of ``creditor'' from 15 U.S.C. 1681m(e)(4) to ``any 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker, swap 
dealer, or major swap participant that regularly extends, renews, or 
continues credit; regularly arranges for the extension, renewal, or 
continuation of credit; or in acting as an assignee of an original 
creditor, participates in the decision to extend, renew, or continue 
credit.'' \67\ One commenter stated that the proposed definition was 
overly broad and unclear because it did not appear to include 
derivative clearing organizations (``DCOs'') such as the Options 
Clearing Corporation, while the SEC's definition could be read to 
include DCOs, and recommended that DCOs be explicitly excluded from the 
definition.\68\ The commenter further requested that the Commissions 
specifically exclude DCOs from the scope of the Proposed Rules.
---------------------------------------------------------------------------

    \66\ See Sec.  162.30(b)(5).
    \67\ See Sec.  162.30(b)(7).
    \68\ OCC Comment Letter.
---------------------------------------------------------------------------

    As the commenter noted, the CFTC's definition of ``creditor'' 
excludes DCOs because DCOs are not included on the list of entities 
that may qualify as creditors under the rule. Under the proposed CFTC 
rules, a ``creditor'' includes any FCM, RFED, CTA, CPO, IB, SD, or MSP 
that regularly extends, renews, or continues credit or makes credit 
arrangements. Unlike DCOs, the listed entities which are included in 
the CFTC definition of ``creditor'' engage in retail customer business 
and maintain retail customer accounts. These entities are included as 
potential creditors in the definition because they are the CFTC 
registrants most likely to collect personal consumer data. Moreover, 
this list of potential creditors is consistent with the general scope 
provisions of the part 162 rules, which also apply to FCMs, RFEDs, 
CTAs, CPOs, IBs, SDs, or MSPs.\69\ Accordingly, the CFTC declines to 
provide a specific exclusion for DCOs from the scope of the rule.
---------------------------------------------------------------------------

    \69\ See Sec.  162.1(b).
---------------------------------------------------------------------------

    As proposed, the SEC's definition of ``creditor'' referred to the 
definition of ``creditor'' under FCRA, and stated that it ``includes 
lenders such as brokers or dealers offering margin accounts, securities 
lending services, and short selling services.'' \70\ The SEC proposed 
to name these entities in the definition because they are likely to 
qualify as ``creditors,'' since the funds advanced in these accounts do 
not appear to be for ``expenses incidental to a service provided.'' One 
commenter, the Options Clearing Corporation, argued that the proposed 
definition's reference to securities lending services could be read to 
mean that an intermediary in securities lending transactions is a 
``creditor'' under the SEC's rules, even if the entity does not meet 
FCRA's definition of ``creditor.'' \71\ The SEC intended the proposed 
definition of ``creditor'' to be limited to the FCRA definition, and to 
include relevant examples of activities that could qualify an entity as 
a creditor. In order to clarify this definition and avoid an 
inadvertently broad meaning of the term ``creditor,'' we are revising 
the definition to rely on FCRA's statutory definition of the term and 
omit the references to specific types of lending, such as margin 
accounts, securities lending services, and short selling services.\72\
---------------------------------------------------------------------------

    \70\ See proposed Sec.  248.201(b)(5).
    \71\ OCC Comment Letter.
    \72\ See Sec.  248.201(b)(5).
---------------------------------------------------------------------------

    Some commenters stated that most investment advisers would probably 
not qualify as creditors under the definition.\73\ One commenter 
believed that the proposal might have implied that investment advisers 
were subject to a different standard than other entities under the 
definition of ``creditor,'' and requested that we clarify that 
investment advisers may, like all other entities, take advantage of the 
exception in the definition to advance funds on behalf of a person for 
expenses incidental to a service provided by the creditor to that 
person.\74\ Our final rules do not treat investment advisers 
differently than any other entity under the definition of ``creditor.'' 
\75\ An investment adviser could potentially qualify as a creditor if 
it ``advances funds'' to an investor that are not for expenses 
incidental to services provided by that adviser. For example, a private

[[Page 23644]]

fund adviser that regularly and in the ordinary course of business 
lends money, short-term or otherwise, to permit investors to make an 
investment in the fund, pending the receipt or clearance of an 
investor's check or wire transfer, could qualify as a creditor.\76\
---------------------------------------------------------------------------

    \73\ See, e.g., MarketCounsel Comment Letter; NSCP Comment 
Letter (``We agree with the proposal that investment advisers are 
not creditors for purposes of the proposal because advisers 
generally do not bill in arrears. We are not aware of any situation 
where an investment adviser would advance funds and we would note 
that such advisers would likely run afoul of state rules that 
prohibit an adviser from loaning funds or borrowing funds from a 
client.'').
    \74\ MarketCounsel Comment Letter.
    \75\ The definition of ``creditor'' in FCRA also authorizes the 
Agencies and the Commissions to include other entities in the 
definition of ``creditor'' if the Commissions determine that those 
entities offer or maintain accounts that are subject to a reasonably 
foreseeable risk of identity theft. 15 U.S.C. 1681m(e)(4)(C). One 
commenter urged the Commissions not to exercise this authority, and 
particularly not to include clearing organizations as creditors 
under the definition. See OCC Comment Letter (``We believe there is 
no reasonable basis for concluding that the securities loan clearing 
services offered by OCC as described above would pose a reasonably 
foreseeable risk of identity theft or that such services should 
cause OCC to be considered a `creditor.'''). The Commissions did not 
propose to specifically include clearing organizations in the 
definition of ``creditor'' under this authority, and the final rules 
do not include any additional types of entities in the definition of 
``creditor'' that are not already included in the statutory 
definition.
    \76\ However, a private fund adviser would not qualify as a 
creditor solely because its private funds regularly borrow money 
from third-party credit facilities pending receipt of investor 
contributions, as the definition of ``creditor'' does not include 
``indirect'' creditors.
---------------------------------------------------------------------------

iii. Definition of Covered Account and Other Terms
    Under the final rules, a financial institution or creditor must 
establish a red flags Program if it offers or maintains ``covered 
accounts.'' As in the proposed rules, the Commissions are defining the 
term ``covered account'' in the final rules as: (i) An account that a 
financial institution or creditor offers or maintains, primarily for 
personal, family, or household purposes, that involves or is designed 
to permit multiple payments or transactions; and (ii) any other account 
that the financial institution or creditor offers or maintains for 
which there is a reasonably foreseeable risk to customers \77\ or to 
the safety and soundness of the financial institution or creditor from 
identity theft, including financial, operational, compliance, 
reputation, or litigation risks.\78\ The CFTC's definition includes a 
margin account as an example of a covered account.\79\ The SEC's 
definition includes, as examples of a covered account, a brokerage 
account with a broker-dealer or an account maintained by a mutual fund 
(or its agent) that permits wire transfers or other payments to third 
parties.\80\
---------------------------------------------------------------------------

    \77\ To be a financial institution, an entity must hold a 
transaction account with at least one ``consumer'' (defined as an 
``individual'' in 15 U.S.C. 1681a(c)). However, once an entity is a 
financial institution, it must periodically determine whether it 
offers or maintains ``covered accounts'' to or on behalf of its 
customers, which may be individuals or business entities. Sections 
162.30(b)(6) (CFTC) and 248.201(b)(6) (SEC) define ``customer'' to 
mean a person that has a covered account with a financial 
institution or creditor. The Commissions are including this 
definition for two reasons. First, this definition is the same as 
the definition of ``customer'' in the Agencies' final rules. Second, 
because the definition uses the term ``person,'' it covers various 
types of business entities (e.g., small businesses) that could be 
victims of identity theft. 15 U.S.C. 1681a(b). Although the 
definition of ``customer'' is broad, not every account held by or 
offered to a customer will be considered a covered account, as the 
identification of covered accounts under the identity theft red 
flags rules is based on a risk-based determination. See infra notes 
95-100 and accompanying text.
    \78\ Sec.  162.30(b)(3) (CFTC) and Sec.  248.201(b)(3) (SEC). 
The Agencies' 2007 Adopting Release (which included an identical 
definition of the term ``account'') noted that ``the definition of 
`account' still applies to fiduciary, agency, custodial, brokerage 
and investment advisory activities.'' 2007 Adopting Release supra 
note 8, at 63721.
    \79\ See Sec.  162.30(b)(3)(i).
    \80\ See Sec.  248.201(b)(3)(i).
---------------------------------------------------------------------------

    The Commissions are defining an ``account'' as a ``continuing 
relationship established by a person with a financial institution or 
creditor to obtain a product or service for personal, family, household 
or business purposes.''\81\ The CFTC's definition specifically includes 
an extension of credit, such as the purchase of property or services 
involving a deferred payment.\82\ The SEC's definition includes, as 
examples of accounts, ``a brokerage account, a mutual fund account 
(i.e., an account with an open-end investment company), and an 
investment advisory account.'' \83\
---------------------------------------------------------------------------

    \81\ Sec.  162.30(b)(1) (CFTC) and Sec.  248.201(b)(1) (SEC). 
Two commenters requested further guidance on the meaning of 
``continuing relationship'' in the proposed definition of the term 
``account.'' Comment Letter of Nathaniel Washburn (April 12, 2012); 
Comment Letter of Chris Barnard (``Chris Barnard Comment Letter'') 
(Mar. 29, 2012). The SEC and the CFTC's definition of ``account'' is 
the same as that adopted by the Agencies. The Agencies' 2007 
Adopting Release provides further guidance on the meaning of 
continuing relationship, noting that it is designed to exclude 
single, non-continuing transactions by non-customers. 2007 Adopting 
Release supra note 8, at 63721.
    \82\ Sec.  162.30(b)(1).
    \83\ Sec.  248.201(b)(1).
---------------------------------------------------------------------------

    In the Proposing Release, the Commissions noted that ``entities 
that adopt red flags Programs would focus their attention on `covered 
accounts' for indicia of possible identity theft.''\84\ In response to 
this statement, one commenter recommended revising the definition of 
``covered account'' such that entities adopting red flags Programs 
would focus particularly on protecting various types of information 
provided by customers, rather than focusing on particular categories of 
accounts.\85\ The Commissions have decided not to revise the definition 
of ``covered account'' as suggested by this commenter, because the 
Commissions believe that by focusing the rules on the types of accounts 
that might pose a reasonably foreseeable risk of identity theft, 
financial institutions and creditors are best able to protect the 
information that customers provide in the course of holding these 
accounts. Moreover, the current definition and scope of the term 
``covered account'' are similar to the provisions of the other 
Agencies' identity theft red flags rules.\86\ As discussed below, the 
Commissions believe that the final rules' terms should be defined as 
the Agencies defined them in their respective final rules, where 
appropriate, to foster consistent regulations.\87\
---------------------------------------------------------------------------

    \84\ 77 FR 13450, 13454.
    \85\ See Comment Letter of Kenneth Orgoglioso (May 7, 2012).
    \86\ See, e.g., 16 CFR 681.1(b)(3).
    \87\ See infra note 93 and accompanying text.
---------------------------------------------------------------------------

    Two commenters argued that insurance company separate accounts are 
unlikely to be covered accounts because they are not established for 
personal, family, or household purposes and do not pose a reasonably 
foreseeable risk of identity theft.\88\ They contended that insurance 
company separate accounts are investment vehicles underlying variable 
life and annuity insurance products, and generally individual customers 
do not have a direct relationship with these accounts. One of the 
commenters requested that the definition of ``covered account'' 
specifically exclude insurance company separate accounts.\89\ The 
commenter noted that because third parties and customers do not have 
direct access to insurance company separate accounts, there is little 
risk of identity theft in these accounts.\90\
---------------------------------------------------------------------------

    \88\ Comment Letter of the American Council of Life Insurers 
(May 7, 2012); FSR/SIFMA Comment Letter.
    \89\ FSR/SIFMA Comment Letter.
    \90\ See id. (``Further, third parties, including customers, do 
not have direct access to Separate Accounts, which means that the 
types of identity theft risks anticipated by the proposed Red Flags 
Rules are essentially nonexistent.'').
---------------------------------------------------------------------------

    The final rules require all financial institutions and creditors to 
assess whether they offer or maintain covered accounts. Although, as 
discussed above, some commenters suggested that insurance company 
separate accounts may not qualify as covered accounts under the 
definition, the final rule does not exclude insurance company separate 
accounts from the definition of ``covered account'' because it would be 
impracticable to provide an exhaustive list of account types that are 
not covered accounts. Similarly, one commenter requested that the SEC 
list all of the types of accounts that would be ``covered accounts'' 
under the rules.\91\ The rules provide examples of covered accounts, 
but we cannot anticipate all of the types of accounts that could be 
covered accounts. Any list that attempts to encompass all types of 
covered accounts would likely be under-inclusive and would not take 
into account future business practices.\92\ The

[[Page 23645]]

definition of ``covered account'' is deliberately designed to be 
flexible to allow the financial institution or creditor to determine 
which accounts pose a reasonably foreseeable risk of identity theft and 
protect them accordingly. Therefore, we are adopting the definitions of 
``account'' and ``covered account'' as they were proposed.
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    \91\ Id.
    \92\ For example, an institution that holds only business 
accounts may decide later to offer accounts for personal, family, or 
household purposes that permit multiple payments. The rule's 
requirement that a financial institution or creditor periodically 
determine whether it holds covered accounts is designed to require 
that these entities re-evaluate whether they in fact hold any 
covered accounts. See infra notes 95 and 96 and accompanying text.
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    The identity theft red flags rules also define several other terms 
as the Agencies defined them in their final rules, where appropriate, 
to foster consistent regulations.\93\ In addition, terms that the SEC's 
rules do not define have the same meaning they have in FCRA.\94\
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    \93\ See Sec.  162.30(b)(4) (CFTC) and Sec.  248.201(b)(4) (SEC) 
(definition of ``credit''); Sec.  162.30(b)(6) (CFTC) and Sec.  
248.201(b)(6) (SEC) (definition of ``customer''); Sec.  162.30(b)(7) 
(CFTC) and Sec.  248.201(b)(7) (SEC) (definition of ``financial 
institution''); Sec.  162.30(b)(10) (CFTC) and Sec.  248.201(b)(10) 
(SEC) (definition of ``red flag''); Sec.  162.30(b)(11) (CFTC) and 
Sec.  248.201(b)(11) (SEC) (definition of ``service provider'').
    The Agencies defined ``identity theft'' in their identity theft 
red flags rules by referring to a definition previously adopted by 
the FTC. See, e.g., 12 CFR 334.90(b)(8) (FDIC). The FTC defined 
``identity theft'' as ``a fraud committed or attempted using the 
identifying information of another person without authority.'' See 
16 CFR 603.2(a). The FTC also has defined ``identifying 
information,'' a term used in its definition of ``identity theft.'' 
See 16 CFR 603.2(b). The Commissions are defining the terms 
``identifying information'' and ``identity theft'' by including the 
same definitions of the terms as they appear in 16 CFR 603.2. See 
Sec.  162.30(b)(8) and (9) (CFTC); Sec.  248.201(b)(8) and (9) 
(SEC). One commenter suggested that we add the following highlighted 
language to the definition of ``identity theft'' so that it would 
read a ``fraud, deception, or other crime committed or attempted 
using the identifying information of another person without 
authority.'' Chris Barnard Comment Letter. Changing the definition 
of ``identity theft'' so that it differs from the definition used by 
the Agencies could lead to higher compliance costs, reduce 
comparability of the Agencies' rules in contravention of the 
statutory mandate, and pose difficulties for entities within the 
enforcement authority of multiple agencies. Accordingly, we are 
adopting the definition of ``identity theft'' as it was proposed.
    \94\ See Sec.  248.201(b)(12)(vi) (SEC).
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iv. Determination of Whether a Covered Account Is Offered or Maintained
    As under the proposed rules, under the final rules, each financial 
institution or creditor must periodically determine whether it offers 
or maintains covered accounts.\95\ As a part of this periodic 
determination, a financial institution or creditor must conduct a risk 
assessment that takes into consideration: (1) The methods it provides 
to open its accounts; (2) the methods it provides to access its 
accounts; and (3) its previous experiences with identity theft.\96\ A 
financial institution or creditor should consider whether, for example, 
a reasonably foreseeable risk of identity theft may exist in connection 
with accounts it offers or maintains that may be opened or accessed 
remotely or through methods that do not require face-to-face contact, 
such as through email or the Internet, or by telephone. In addition, if 
financial institutions or creditors offer or maintain accounts that 
have been the target of identity theft, they should factor those 
experiences into their determination. The Commissions anticipate that 
entities will be able to demonstrate that they have complied with 
applicable requirements, including their recurring determinations 
regarding covered accounts.\97\
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    \95\ Sec.  162.30(c) (CFTC) and Sec.  248.201(c) (SEC).
    \96\ Sec.  162.30(c) (CFTC) and Sec.  248.201(c) (SEC).
    \97\ See, e.g., Frequently Asked Questions: Identity Theft Red 
Flags and Address Discrepancies at I.1, available at https://www.ftc.gov/os/2009/06/090611redflagsfaq.pdf (noting in joint 
interpretive guidance provided by the Agencies' staff that, while 
the Agencies' 2007 identity theft rules do not contain specific 
record retention requirements, financial institutions and creditors 
must be able to demonstrate that they have complied with the rules' 
requirements).
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    The Commissions acknowledge that some financial institutions or 
creditors regulated by the Commissions do not offer or maintain 
accounts for personal, family, or household purposes,\98\ and engage 
predominantly in transactions with businesses, where the risk of 
identity theft is minimal. In these instances, the financial 
institution or creditor may determine after a preliminary risk 
assessment that the accounts it offers or maintains do not pose a 
reasonably foreseeable risk to customers or to its own safety and 
soundness from identity theft, and therefore it does not need to 
develop and implement a Program because it does not offer or maintain 
any ``covered accounts.'' \99\ Alternatively, the financial institution 
or creditor may determine that only a limited range of its accounts 
present a reasonably foreseeable risk to customers, and therefore may 
decide to develop and implement a Program that applies only to those 
accounts or types of accounts.\100\ As proposed, under the final rules, 
a financial institution or creditor that initially determines that it 
does not need to have a Program is required to periodically reassess 
whether it must develop and implement a Program in light of changes in 
the accounts that it offers or maintains and the various other factors 
set forth in sections 162.30(c) (CFTC) and 248.201(c) (SEC).
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    \98\ See Sec.  162.30(b)(3)(i) (CFTC) and Sec.  248.201(b)(3)(i) 
(SEC).
    \99\ See Sec.  162.30(b)(3)(ii) (CFTC) and Sec.  
248.201(b)(3)(ii) (SEC). For example, an FCM that is otherwise 
subject to the identity theft red flags rules and that handles 
accounts only for large, institutional investors might make a risk-
based determination that because it is subject to a low risk of 
identity theft, it does not need to develop and implement a Program. 
Similarly, a money market fund that is otherwise subject to the 
identity theft red flags rules but that permits investments only by 
other institutions and separately verifies and authenticates 
transaction requests might make such a risk-based determination that 
it need not develop a Program.
    \100\ Even a Program limited in scale, however, needs to comply 
with all of the provisions of the rules. See, e.g., Sec.  162.30(d)-
(f) (CFTC) and Sec.  248.201(d)-(f) (SEC) (program requirements).
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2. The Objectives of the Program
    The final rules provide that each financial institution or creditor 
that offers or maintains one or more covered accounts must develop and 
implement a written Program designed to detect, prevent, and mitigate 
identity theft in connection with the opening of a covered account or 
any existing covered account.\101\ These provisions also require that 
each Program be appropriate to the size and complexity of the financial 
institution or creditor and the nature and scope of its activities. 
Thus, the final rules are designed to be scalable, by permitting 
Programs that take into account the operations of smaller institutions. 
We received no comment on the proposed objectives of the Program and 
are adopting them as proposed.
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    \101\ See Sec.  162.30(d)(1) (CFTC) and Sec.  248.201(d)(1) 
(SEC).
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3. The Elements of the Program
    The final rules set out the four elements that financial 
institutions and creditors must include in their Programs.\102\ These 
elements are being adopted as proposed and are identical to the 
elements required under the Agencies' final identity theft red flags 
rules.\103\
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    \102\ See Sec.  162.30(d)(2) (CFTC) and Sec.  248.201(d)(2) 
(SEC).
    \103\ See 2007 Adopting Release, supra note 8, at 63726-63730.
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    First, the final rules require a financial institution or creditor 
to develop a Program that includes reasonable policies and procedures 
to identify relevant red flags \104\ for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those red flags into the Program.\105\ Rather than

[[Page 23646]]

singling out specific red flags as mandatory or requiring specific 
policies and procedures to identify possible red flags, this first 
element provides financial institutions and creditors with flexibility 
in determining which red flags are relevant to their businesses and the 
covered accounts they manage over time. The list of factors that a 
financial institution or creditor should consider (as well as examples) 
are included in Section II of the guidelines, which appear at the end 
of the final rules.\106\ Given the changing nature of identity theft, 
the Commissions believe that this element allows financial institutions 
or creditors to respond and adapt to new forms of identity theft and 
the attendant risks as they arise.
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    \104\ Sec.  162.30(b)(10) (CFTC) and Sec.  248.201(b)(10) (SEC) 
define ``red flag'' to mean a pattern, practice, or specific 
activity that indicates the possible existence of identity theft.
    \105\ See Sec.  162.30(d)(2)(i) (CFTC) Sec.  248.201(d)(2)(i) 
(SEC). The board of directors, appropriate committee thereof, or 
designated senior management employee may determine that a Program 
designed by a parent, subsidiary, or affiliated entity is also 
appropriate for use by the financial institution or creditor. In 
making such a determination, the board (or committee or designated 
employee) must conduct an independent review to ensure that the 
Program is suitable and complies with the requirements of the red 
flags rules. See 2007 Adopting Release, supra note 8, at 63730.
    \106\ See Section II.B.2 below.
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    Second, the final rules require financial institutions and 
creditors to have reasonable policies and procedures to detect the red 
flags that the Program incorporates.\107\ This element does not provide 
a specific method of detection. Instead, section III of the guidelines 
provides examples of various means to detect red flags.\108\
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    \107\ See Sec.  162.30(d)(2)(ii) (CFTC) and Sec.  
248.201(d)(2)(ii) (SEC).
    \108\ See Section II.B.3 below.
---------------------------------------------------------------------------

    Third, the final rules require financial institutions and creditors 
to have reasonable policies and procedures to respond appropriately to 
any red flags that they detect.\109\ This element incorporates the 
requirement that a financial institution or creditor assess whether the 
red flags that are detected evidence a risk of identity theft and, if 
so, determine how to respond appropriately based on the degree of risk. 
Section IV of the guidelines sets out a list of aggravating factors and 
examples that a financial institution or creditor should consider in 
determining the appropriate response.\110\
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    \109\ See Sec.  162.30(d)(2)(iii) (CFTC) and Sec.  
248.201(d)(2)(iii) (SEC).
    \110\ See Section II.B.4 below.
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    Finally, the rules require financial institutions and creditors to 
have reasonable policies and procedures to periodically update the 
Program (including the red flags determined to be relevant), to reflect 
changes in risks to customers and to the safety and soundness of the 
financial institution or creditor from identity theft.\111\ As 
discussed above, financial institutions and creditors are required to 
determine which red flags are relevant to their businesses and the 
covered accounts they offer or maintain. The Commissions are requiring 
a periodic update, rather than immediate or continuous updates, to be 
parallel with the identity theft red flags rules of the Agencies and to 
avoid unnecessary regulatory burdens. Section V of the guidelines 
provides a set of factors that should cause a financial institution or 
creditor to update its Program.\112\ We received no comment on the 
proposed elements of Programs and are adopting them as proposed.
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    \111\ See Sec.  162.30(d)(2)(iv) (CFTC) and Sec.  
248.201(d)(2)(iv) (SEC).
    \112\ See Section II.B.5 below.
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4. Administration of the Program
    The final rules provide direction to financial institutions and 
creditors regarding the administration of Programs as a means of 
enhancing the effectiveness of those Programs.\113\ First, the final 
rules require that a financial institution or creditor obtain approval 
of the initial written Program from either its board of directors, an 
appropriate committee of the board of directors, or if the entity does 
not have a board, from a designated senior management employee.\114\ 
This requirement highlights the responsibility of the board of 
directors in approving a Program. One commenter asked us to clarify 
that an entity that already has an existing Program in place, in 
compliance with the other Agencies' rules, need not have the board 
reapprove the Program to comply with this requirement.\115\ We agree 
that if a financial institution or creditor already has a Program in 
place, the board is not required to reapprove the existing Program in 
response to this requirement, provided the Program otherwise meets the 
requirements of the final rules.
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    \113\ See Sec.  162.30(e) (CFTC) and Sec.  248.201(e) (SEC).
    \114\ See Sec.  162.30(e)(1) (CFTC) and Sec.  248.201(e)(1) 
(SEC), see also Sec.  162.30(b)(2) (CFTC) and Sec.  248.201(b)(2) 
(SEC).
    \115\ ICI Comment Letter.
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    Second, the final rules provide that financial institutions and 
creditors must involve the board of directors, an appropriate committee 
thereof, or a designated senior management employee in the oversight, 
development, implementation, and administration of the Program.\116\ 
The designated senior management employee who is responsible for the 
oversight of a broker-dealer's, investment company's or investment 
adviser's Program may be the entity's chief compliance officer.\117\ 
Third, the final rules provide that financial institutions and 
creditors must train staff, as necessary, to effectively implement 
their Programs.\118\
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    \116\ See Sec.  162.30(e)(2) (CFTC) and Sec.  248.201(e)(2) 
(SEC). Section VI of the guidelines elaborates on this provision.
    \117\ See, e.g., rule 38a-1(a)(4) under the Investment Company 
Act (addressing the chief compliance officer position), 17 CFR 
270.38a-1(a)(4); rule 206(4)-7(c) under the Investment Advisers Act, 
17 CFR 275.206(4)-7 (same).
    \118\ See Sec.  162.30(e)(3) (CFTC) and Sec.  248.201(e)(3) 
(SEC).
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    Finally, the rules provide that financial institutions and 
creditors must exercise appropriate and effective oversight of service 
provider arrangements.\119\ The Commissions believe that it is 
important that the rules address service provider arrangements so that 
financial institutions and creditors remain legally responsible for 
compliance with the rules, irrespective of whether such financial 
institutions and creditors outsource their identity theft red flags 
detection, prevention, and mitigation operations to a service 
provider.\120\ The final rules do not prescribe a specific manner in 
which appropriate and effective oversight of service provider 
arrangements must occur. Instead, the requirement provides flexibility 
to financial institutions and creditors in maintaining their service 
provider arrangements, while making clear that such institutions and 
creditors are still required to fulfill their legal compliance 
obligations.\121\ We received no comments on the substance of this 
aspect of the proposal \122\ and are adopting the requirements related 
to the administration of Programs as proposed.
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    \119\ See Sec.  162.30(e)(4) (CFTC) and Sec.  248.201(e)(4) 
(SEC). Sec.  162.30(b)(11) (CFTC) and Sec.  248.201(b)(11) (SEC) 
define the term ``service provider'' to mean a person that provides 
a service directly to the financial institution or creditor.
    \120\ For example, a financial institution or creditor that uses 
a service provider to open accounts on its behalf, could reserve for 
itself the responsibility to verify the identity of a person opening 
a new account, may direct the service provider to do so, or may use 
another service provider to verify identity. Ultimately, however, 
the financial institution or creditor remains responsible for 
ensuring that the activity is conducted in compliance with a Program 
that meets the requirements of the identity theft red flags rules.
    \121\ These legal compliance obligations include, but are not 
limited to, the maintenance of records in connection with any 
service provider arrangements. See 17 CFR 240.17a-4(b)(7) (requiring 
that each broker-dealer maintain a record of all written agreements 
entered into by the broker-dealer relating to its business as such); 
17 CFR 275.204-2(a)(10) (requiring that each investment adviser 
maintain a record of all written agreements entered into by the 
investment adviser with any client or otherwise relating to the 
business of the investment adviser as such).
    \122\ But see infra note 143 and accompanying text (discussing a 
comment received on the costs associated with this aspect of the 
proposal).

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[[Page 23647]]

B. Final Guidelines

    As amended by the Dodd-Frank Act, section 615(e)(1)(A) of the FCRA 
provides that the Commissions must jointly ``establish and maintain 
guidelines for use by each financial institution and each creditor 
regarding identity theft with respect to account holders at, or 
customers of, such entities, and update such guidelines as often as 
necessary.'' \123\ Accordingly, the Commissions are jointly adopting 
guidelines in an appendix to the final identity theft red flags rules 
that are intended to assist financial institutions and creditors in the 
formulation and maintenance of a Program that satisfies the 
requirements of the rules. These guidelines are substantially similar 
to the guidelines adopted by the Agencies.
---------------------------------------------------------------------------

    \123\ 15 U.S.C. 1681m(e)(1)(A).
---------------------------------------------------------------------------

    The final rules require each financial institution or creditor that 
is required to implement a Program to consider the guidelines and 
include in its Program those guidelines that are appropriate.\124\ The 
Program needs to contain reasonable policies and procedures to fulfill 
the requirements of the final rules, even if a financial institution or 
creditor determines that one or more guidelines are not appropriate for 
its circumstances. We received no comment on the guidelines, and the 
Commissions are adopting them as proposed.
---------------------------------------------------------------------------

    \124\ See Sec.  162.30(f) (CFTC) and Sec.  248.201(f) (SEC).
---------------------------------------------------------------------------

1. Section I of the Guidelines--Identity Theft Prevention Program
    Section I of the guidelines makes clear that a financial 
institution or creditor may incorporate into its Program, as 
appropriate, its existing policies, procedures, and other arrangements 
that control reasonably foreseeable risks to customers or to the safety 
and soundness of the financial institution or creditor from identity 
theft. An example of such existing policies, procedures, and other 
arrangements may include other policies, procedures, and arrangements 
that the financial institution or creditor has developed to prevent 
fraud or otherwise ensure compliance with applicable laws and 
regulations.
2. Section II of the Guidelines--Identifying Relevant Red Flags
    Section II(a) of the guidelines sets out several risk factors that 
a financial institution or creditor must consider in identifying 
relevant red flags for covered accounts, as appropriate. These risk 
factors are: (i) The types of covered accounts a financial institution 
or creditor offers or maintains; (ii) the methods it provides to open 
or access its covered accounts; and (iii) its previous experiences with 
identity theft. Thus, for example, red flags relevant to one type of 
covered account may differ from those relevant to another type of 
covered account. Under the guidelines, a financial institution or 
creditor also should consider identifying as relevant those red flags 
that directly relate to its previous experiences with identity theft.
    Section II(b) of the guidelines sets out examples of sources from 
which financial institutions and creditors should derive relevant red 
flags. As discussed in the Proposing Release, this section of the 
guidelines does not require financial institutions and creditors to 
incorporate relevant red flags strictly from these sources. Instead, 
financial institutions and creditors must consider them when developing 
a Program.
    Section II(c) of the guidelines identifies five categories of red 
flags that financial institutions and creditors must consider including 
in their Programs, as appropriate:
     Alerts, notifications, or other warnings received from 
consumer reporting agencies or service providers, such as fraud 
detection services;
     Presentation of suspicious documents, such as documents 
that appear to have been altered or forged;
     Presentation of suspicious personal identifying 
information, such as a suspicious address change;
     Unusual use of, or other suspicious activity related to, a 
covered account; and
     Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible identity 
theft in connection with covered accounts held by the financial 
institution or creditor.
    Supplement A to the guidelines includes a non-comprehensive list of 
examples of red flags from each of these categories.
3. Section III of the Guidelines--Detecting Red Flags
    Section III of the guidelines provides examples of policies and 
procedures that a financial institution or creditor must consider 
including in its Program's policies and procedures for the purpose of 
detecting red flags. As discussed in the Proposing Release, entities 
that are currently subject to the Agencies' identity theft red flags 
rules,\125\ the federal customer identification program (``CIP'') rules 
\126\ or other Bank Secrecy Act rules,\127\ the Federal Financial 
Institutions Examination Council's guidance on authentication,\128\ or 
the Interagency Guidelines Establishing Information Security Standards 
\129\ may already be engaged in detecting red flags. These entities may 
wish to integrate the policies and procedures already developed for 
purposes of complying with these rules and standards into their 
Programs. However, such policies and procedures may need to be 
supplemented.\130\
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    \125\ See 2007 Adopting Release, supra note 8.
    \126\ See, e.g., 31 CFR 1023.220 (broker-dealers), 1024.220 
(mutual funds), and 1026.220 (futures commission merchants and 
introducing brokers). The CIP regulations implement section 326 of 
the USA PATRIOT Act, codified at 31 U.S.C. 5318(l).
    \127\ See, e.g., 31 CFR 103.130 (anti-money laundering programs 
for mutual funds).
    \128\ See ``Authentication in an Internet Banking Environment,'' 
available at https://www.ffiec.gov/pdf/authentication_guidance.pdf.
    \129\ See 12 CFR part 30, app. B (national banks); 12 CFR part 
208, app. D-2 and part 225, app. F (state member banks and bank 
holding companies); 12 CFR part 364, app. B (state non-member 
banks); 12 CFR part 570, app. B (savings associations); 12 CFR part 
748, app. A (credit unions).
    \130\ For example, the CIP rules were written to implement 
section 326 (31 U.S.C. 5318(l)) of the USA PATRIOT Act (Pub. L. 107-
56 (2001)), and certain types of ``accounts,'' ``customers,'' and 
products are exempted or treated specially in the CIP rules because 
they pose a lower risk of money laundering or terrorist financing. 
Such special treatment may not be appropriate to accomplish the 
broader objective of detecting, preventing, and mitigating identity 
theft.
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4. Section IV of the Guidelines--Preventing and Mitigating Identity 
Theft
    Section IV of the guidelines states that a Program's policies and 
procedures should provide for appropriate responses to the red flags 
that a financial institution or creditor has detected, that are 
commensurate with the degree of risk posed by each red flag. In 
determining an appropriate response, under the guidelines, a financial 
institution or creditor is required to consider aggravating factors 
that may heighten the risk of identity theft. Section IV of the 
guidelines also provides several examples of appropriate responses. 
These examples are identical to those included in the Agencies' final 
guidelines. Financial institutions and creditors also may consider 
adopting measures to prevent and mitigate identity theft that are not 
listed in the guidelines.
5. Section V of the Guidelines--Updating the Identity Theft Prevention 
Program
    Section V of the guidelines includes a list of factors on which a 
financial institution or creditor could base the periodic updates to 
its Program. These factors are: (i) The experiences of the financial 
institution or creditor with identity theft; (ii) changes in methods of

[[Page 23648]]

identity theft; (iii) changes in methods to detect, prevent, and 
mitigate identity theft; (iv) changes in the types of accounts that the 
financial institution or creditor offers or maintains; and (v) changes 
in the business arrangements of the financial institution or creditor, 
including mergers, acquisitions, alliances, joint ventures, and service 
provider arrangements.
6. Section VI of the Guidelines--Methods for Administering the Identity 
Theft Prevention Program
    Section VI of the guidelines provides additional guidance for 
financial institutions and creditors to consider in administering their 
Programs. These guideline provisions are substantially identical to 
those prescribed by the Agencies in their final guidelines.
i. Oversight of Identity Theft Prevention Program
    Section VI(a) of the guidelines states that oversight by the board 
of directors, an appropriate committee of the board, or a designated 
senior management employee should include: (i) Assigning specific 
responsibility for the Program's implementation; (ii) reviewing reports 
prepared by staff regarding compliance by the financial institution or 
creditor with the final rules; and (iii) approving material changes to 
the Program as necessary to address changing identity theft risks.
ii. Reporting to the Board of Directors
    Section VI(b) of the guidelines states that staff of the financial 
institution or creditor responsible for development, implementation, 
and administration of its Program should report to the board of 
directors, an appropriate committee of the board, or a designated 
senior management employee, at least annually, on compliance by the 
financial institution or creditor with the final rules. In addition, 
section VI(b) of the guidelines provides that the report should address 
material matters related to the Program and evaluate issues such as 
recommendations for material changes to the Program.\131\
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    \131\ The other issues referenced in the guideline are: (i) The 
effectiveness of the policies and procedures of the financial 
institution or creditor in addressing the risk of identity theft in 
connection with the opening of covered accounts and with respect to 
existing covered accounts; (ii) service provider arrangements; and 
(iii) significant incidents involving identity theft and 
management's response.
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iii. Oversight of Service Provider Arrangements
    Section VI(c) of the guidelines provides that whenever a financial 
institution or creditor engages a service provider to perform an 
activity in connection with one or more covered accounts, the financial 
institution or creditor should take steps to ensure that the activity 
of the service provider is conducted in accordance with reasonable 
policies and procedures designed to detect, prevent, and mitigate the 
risk of identity theft. As discussed in the Proposing Release, the 
Commissions believe that these guidelines make clear that a service 
provider that provides services to multiple financial institutions and 
creditors may do so in accordance with its own program to prevent 
identity theft, as long as the service provider's program meets the 
requirements of the identity theft red flags rules.
    Section VI(c) of the guidelines also includes, as an example of how 
a financial institution or creditor may comply with this provision, 
that a financial institution or creditor could require the service 
provider by contract to have policies and procedures to detect relevant 
red flags that may arise in the performance of the service provider's 
activities, and either report the red flags to the financial 
institution or creditor, or to take appropriate steps to prevent or 
mitigate identity theft. In those circumstances, the Commissions expect 
that the contractual arrangements would include the provision of 
sufficient documentation by the service provider to the financial 
institution or creditor to enable it to assess compliance with the 
identity theft red flags rules.
7. Section VII of the Guidelines--Other Applicable Legal Requirements
    Section VII of the guidelines identifies other applicable legal 
requirements from the FCRA and USA PATRIOT Act that financial 
institutions and creditors should keep in mind when developing, 
implementing, and administering their Programs.
8. Supplement A to the Guidelines
    Supplement A to the guidelines provides illustrative examples of 
red flags that financial institutions and creditors are required to 
consider incorporating into their Programs, as appropriate. These 
examples are substantially similar to the examples identified in the 
Agencies' final guidelines. The examples are organized under the five 
categories of red flags that are set forth in section II(c) of the 
guidelines.
    The Commissions recognize that some of the examples of red flags 
may be more reliable indicators of identity theft, while others are 
more reliable when detected in combination with other red flags. The 
Commissions intend that Supplement A to the guidelines be flexible and 
allow a financial institution or creditor to tailor the red flags it 
chooses for its Program to its own operations. Although the final rules 
do not require a financial institution or creditor to justify to the 
Commissions failure to include in its Program a specific red flag from 
the list of examples, a financial institution or creditor has to 
account for the overall effectiveness of its Program, and ensure that 
the Program is appropriate to the entity's size and complexity, and to 
the nature and scope of its activities.

C. Final Card Issuer Rules

    Section 615(e)(1)(C) of the FCRA provides that the CFTC and SEC 
must ``prescribe regulations applicable to card issuers to ensure that, 
if a card issuer receives notification of a change of address for an 
existing account, and within a short period of time (during at least 
the first 30 days after such notification is received) receives a 
request for an additional or replacement card for the same account, the 
card issuer may not issue the additional or replacement card, unless 
the card issuer applies certain address validation procedures.''\132\ 
Accordingly, the Commissions are adopting rules that set out the duties 
of card issuers regarding changes of address.\133\ These rules are 
similar to the final card issuer rules adopted by the Agencies.\134\ 
The rules apply only to a person that issues a debit or credit card 
(``card issuer'') and that is subject to the enforcement authority of 
either Commission.\135\ The Commissions did not receive any comments on 
the card issuer rules, and are adopting them as proposed.
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    \132\ 15 U.S.C. 1681m(e)(1)(C).
    \133\ See Sec.  162.32 (CFTC) and Sec.  248.202 (SEC).
    \134\ See, e.g., 16 CFR 681.3 (FTC).
    \135\ See supra Section II.A.1.
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    As discussed in the Proposing Release, the CFTC is not aware of any 
entities subject to its enforcement authority that issue debit or 
credit cards and, as a matter of practice, believes that it is highly 
unlikely that CFTC-regulated entities would issue debit or credit 
cards. As also discussed in the Proposing Release, the SEC understands 
that a number of entities within its enforcement authority issue cards 
in partnership with affiliated or unaffiliated banks and financial 
institutions, but that these cards are generally issued by the partner 
bank, and not by the SEC-regulated entity. The SEC therefore expects 
that no entities within its enforcement authority will be subject to 
the card issuer rules.

[[Page 23649]]

III. Related Matters

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

CFTC
    Section 15(a) of the CEA \136\ requires the CFTC to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The CFTC considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) considerations.\137\ In the paragraphs that follow, the 
CFTC summarizes the proposal and comments to the same before 
considering the costs and benefits of the final rule in light of the 
15(a) considerations.
---------------------------------------------------------------------------

    \136\ 7 U.S.C. 19(a).
    \137\ Id.
---------------------------------------------------------------------------

Cost-Benefit Considerations of Identity Theft Red Flags Rules
    Background and Proposal. As discussed above, section 1088 of the 
Dodd-Frank Act transferred authority over certain parts of FCRA from 
the Agencies to the CFTC and the SEC for entities they regulate. On 
February 28, 2012, the CFTC, together with the SEC, issued proposed 
rules to help protect investors from identity theft by ensuring that 
FCMs, IBs, CPOs, and other CFTC-regulated entities create programs to 
detect and respond appropriately to red flags.\138\ The proposed rules, 
which were substantially similar to rules adopted in 2007 by the FTC 
and other federal financial regulatory agencies, would require CFTC-
regulated entities to adopt written identity theft programs that 
include reasonable policies and procedures to: (1) Identify relevant 
red flags; (2) detect the occurrence of red flags; (3) respond 
appropriately to the detected red flags; and (4) periodically update 
their programs. The proposed rules also included guidelines and 
examples of red flags to help regulated entities administer their 
programs.
---------------------------------------------------------------------------

    \138\ 77 FR 13450 (Mar. 6, 2012).
---------------------------------------------------------------------------

    In its proposed consideration of costs and benefits pursuant to CEA 
section 15(a), the CFTC stated that section 162.30 should not result in 
any significant new costs or benefits because it generally reflects a 
statutory transfer of enforcement authority from the FTC to the CFTC. 
The CFTC requested comment on all aspects of its proposed consideration 
of costs and benefits.
    Comments. The CFTC received two comments on its consideration of 
the costs and benefits of the joint proposal. These two commenters were 
divided on the reasonableness of the Commissions' estimated costs of 
compliance. In a letter focused on the SEC's proposed regulations 
(which are, of course, substantially similar to the CFTC's proposed 
regulations), one commenter stated that because Regulation S-ID ``is 
substantially similar to'' the existing FTC rules and guidelines, 
broker-dealers should not bear ``any new costs in coming into 
compliance with proposed Regulation S-ID.''\139\ This commenter further 
stated that ``broker-dealers should already have in place a program 
that complies with the FTC rule. While firms will need to update some 
of their procedures to reflect the SEC's new responsibility for the 
oversight of the application of this rule, many of the changes would be 
cosmetic and grammatical in nature.'' \140\ In marked contrast, another 
comment letter, submitted on behalf of the Financial Services 
Roundtable (``FSR'') and the Securities Industry and Financial Markets 
Association (``SIFMA''), stated that the ``consensus of our members is 
that the estimated compliance costs for the proposed Rules are 
extremely low and unrealistic.'' \141\
---------------------------------------------------------------------------

    \139\ See NSCP Comment Letter.
    \140\ Id.
    \141\ See FSR/SIFMA Comment Letter.
---------------------------------------------------------------------------

    The FSR/SIFMA Comment Letter also stated that the FSR and SIFMA 
members estimated that the initial compliance burden to implement the 
rules would average 2,000 hours for each line of business conducted by 
a ``large, complex financial institution,'' noting that the estimate 
would vary based on the number of ``covered accounts'' for each line of 
business. In addition, this comment letter also stated that continuing 
compliance monitoring for such an institution would average 400 hours 
annually. They did not provide any data or information from which the 
CFTC could replicate its estimates.
    The FSR/SIFMA Comment Letter also stated that ``financial 
institutions with an existing Red Flags program would experience an 
incremental burden due to reassessing the scope of the `covered 
accounts' and reevaluating whether a business activity would be defined 
as a `financial institution' or as a `creditor' for purposes of the 
Agencies' Rules.''\142\ The letter did not attribute a time estimate to 
this ``incremental burden.''
---------------------------------------------------------------------------

    \142\ Id.
---------------------------------------------------------------------------

    Finally, the FSR/SIFMA Comment Letter contended that the 
Commissions' ``estimated compliance costs further fail to consider the 
cost to third-party service providers, many of which may be required to 
implement an identity theft program even though they are not financial 
institutions or creditors.'' \143\
---------------------------------------------------------------------------

    \143\ Id.
---------------------------------------------------------------------------

    CFTC Response to Comments Regarding Costs and Benefits. In 
considering the costs and benefits of the final rules, the CFTC assumes 
that each CFTC-regulated entity covered by the final rules is already 
in existence and acting in compliance with the law, including the FTC's 
identity theft rules.\144\ Under this assumption, the CFTC believes, as 
one of the commenters did,\145\ that entities will incur few if any new 
costs in complying with the CFTC's regulations because they are largely 
unchanged in terms of scope and substance from the FTC's rules. The 
CFTC believes that the costs of compliance for such entities may 
actually decrease as a result of the additional guidance provided in 
this rulemaking. Without such guidance from the CFTC, entities might 
incur the costs of seeking advice from third parties. With respect to 
the comment that CFTC-regulated entities will experience an 
``incremental burden'' in reassessing covered accounts and determining 
whether their activities fall within the scope of the rules,\146\ the 
CFTC notes that the FTC's identity theft rules also include the 
requirement to periodically reassess covered accounts, and thus costs 
associated with this requirement are not new costs.
---------------------------------------------------------------------------

    \144\ As discussed above, the final rules implement a shift in 
oversight of identity theft red flags rules for CFTC-regulated 
entities from the FTC to the CFTC. The rules do not contain new 
requirements, nor do they substantially expand the scope of the 
FTC's rules. Most entities should already be in compliance with the 
FTC's existing rules, which the FTC began enforcing on January 1, 
2011.
    \145\ See NSCP Comment Letter.
    \146\ See supra note 142 and accompanying text.
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    With regard to the estimate in the FSR/SIFMA Comment Letter that a 
``large, complex financial institution'' will incur 2,000 hours of 
``initial compliance burden,''\147\ the CFTC is unaware of any such 
institution that is not already acting in compliance with the FCRA and 
the FTC's rules. But even if such a large, complex financial 
institution exists and is not already in compliance with FCRA and the 
FTC's rules, the ``initial burden'' that such an entity would incur is 
largely attributable to the FCRA, as amended by the Dodd-Frank Act. As 
discussed above,

[[Page 23650]]

Congress mandated that the CFTC promulgate rules to bring its regulated 
entities into compliance with FCRA, and the CFTC has elected to do so 
in a manner that imposes minimal incremental cost on CFTC-regulated 
entities. In response to the comments concerning the costs to ``third-
party service providers,'' the CFTC stresses these costs have already 
been taken into account, as CFTC-regulated entities that have 
outsourced identity theft detection, prevention, and mitigation 
operations to affiliates or third-party service providers have 
effectively shifted a burden that the CFTC-regulated entities otherwise 
would have carried themselves.
---------------------------------------------------------------------------

    \147\ See FSR/SIFMA Comment Letter.
---------------------------------------------------------------------------

    One commenter also stated that since it maintains no covered 
accounts and has no plans to, it should be specifically excluded from 
the scope of the rules to avoid any potential that it would be subject 
to the requirements of the final rules. According to this commenter, to 
include it within the scope of the final rules would require it 
needlessly to incur compliance costs associated with periodically 
reassessing whether they maintain any covered accounts and documenting 
the same.\148\
---------------------------------------------------------------------------

    \148\ See OCC Comment Letter.
---------------------------------------------------------------------------

    The majority of the per-entity costs associated with the final 
rules would be incurred by those financial institutions and creditors 
that maintain covered accounts.\149\ Additionally, even if financial 
institutions and creditors do not currently maintain, or intend to 
maintain, covered accounts, such entities must nevertheless 
periodically assess whether they maintain covered accounts, as certain 
accounts may be deemed to be ``covered accounts'' if reasonably 
foreseeable identity theft risks are associated with these 
accounts.\150\ Moreover, the CFTC reiterates that the final rules do 
not contain any new requirements or significantly expand the scope of 
the pre-existing FTC rules. Therefore, no financial institutions or 
creditors, regardless of whether they maintain covered accounts, should 
incur any additional costs other than the costs already being incurred 
under the previous regulatory framework.
---------------------------------------------------------------------------

    \149\ See infra notes 151 and 152.
    \150\ See supra notes 95-100 and accompanying text.
---------------------------------------------------------------------------

    Consideration of Costs and Benefits in Light of CEA Section 15(a). 
As discussed above, the Dodd-Frank Act shifted enforcement authority 
over CFTC-regulated entities that are subject to section 615(e) of the 
FCRA from the FTC to the CFTC. Section 615(e) of the FCRA, as amended 
by the Dodd-Frank Act, requires that the CFTC, jointly with the 
Agencies and the SEC, adopt identity theft red flags rules. To carry 
out this requirement, the CFTC is adopting section 162.30, which is 
substantially similar to the identity theft red flags rules adopted by 
the Agencies in 2007.
    Section 162.30 will shift oversight of identity theft rules of 
CFTC-regulated entities from the FTC to the CFTC. These entities should 
already be in compliance with the FTC's existing identity theft red 
flags rules, which the FTC began enforcing on January 1, 2011. Because 
section 162.30 is substantially similar to those existing rules, these 
entities should not bear any significant costs in coming into 
compliance with section 162.30. The new regulation does not contain new 
requirements, nor does it expand the scope of the rules significantly. 
The new regulation does contain examples and minor language changes 
designed to help guide entities within the CFTC's enforcement authority 
in complying with the rules, which the CFTC expects will mitigate costs 
of compliance. Moreover, section 162.30 would not impose any 
significant new costs on new entities since any newly-formed entities 
would already be covered under the FTC's existing rules.
    In the analysis for the Paperwork Reduction Act of 1995 (``PRA'') 
below, the staff identified certain initial and ongoing hour burdens 
and associated time costs related to compliance with section 162.30. 
However, these costs are not new costs, but are current costs 
associated with compliance with the Agencies' existing rules. CFTC-
regulated entities will incur these hours and costs regardless of 
whether the CFTC adopts section 162.30. These hours and costs would be 
transferred from the Agencies' PRA allotment to the CFTC. No new costs 
should result from the adoption of section 162.30.
    These existing costs related to section 162.30 would include, for 
newly-formed CFTC-regulated entities, the one-time cost for financial 
institutions and creditors to conduct initial assessments of covered 
accounts, create a Program, obtain board approval of the Program, and 
train staff.\151\ The existing costs would also include the ongoing 
cost to periodically review and update the Program, report periodically 
on the Program, and conduct periodic assessments of covered 
accounts.\152\
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    \151\ CFTC staff estimates that the one-time burden of 
compliance would include 2 hours to conduct initial assessments of 
covered accounts, 25 hours to develop and obtain board approval of a 
Program, and 4 hours to train staff. CFTC staff estimates that, of 
the 31 hours incurred, 12 hours would be spent by internal counsel 
at an hourly rate of $354, 17 hours would be spent by administrative 
assistants at an hourly rate of $66, and 2 hours would be spent by 
the board of directors as a whole, at an hourly rate of $4000, for a 
total cost of $13,370 per entity for entities that need to come into 
compliance with proposed subpart C to Part 162. This estimate is 
based on the following calculations: $354 x 12 hours = $4,248; $66 x 
17 = $1,122; $4,000 x 2 = $8,000; $4,248 + $1,122 + $8,000 = 
$13,370.
     As discussed in the PRA analysis, CFTC staff estimates that 
there are 702 CFTC-regulated entities that newly form each year and 
that would fall within the definitions of ``financial institution'' 
or ``creditor.'' Of these 702 entities, 54 entities would maintain 
covered accounts. See infra note 168 and text following note 168. 
CFTC staff estimates that 2 hours of internal counsel's time would 
be spent conducting an initial assessment to determine whether they 
have covered accounts and whether they are subject to the proposed 
rule (or 702 entities). The cost associated with this determination 
is $497,016 based on the following calculation: $354 x 2 = $708; 
$708 x 702 = $497,016. CFTC staff estimates that 54 entities would 
bear the remaining specified costs for a total cost of $683,748 (54 
x $12,662 = $683,748). See SIFMA's Office Salaries in the Securities 
Industry 2011.
     Staff also estimates that in response to Dodd-Frank, there will 
be approximately 125 newly registered SDs and MSPs. Staff believes 
that each of these SDs and MSPs will be a financial institution or 
creditor with covered accounts. The additional cost of these SDs and 
MSPs is $1,671,250 (125 x $13,370 = $1,671,250).
    \152\ CFTC staff estimates that the ongoing burden of compliance 
would include 2 hours to conduct periodic assessments of covered 
accounts, 2 hours to periodically review and update the Program, and 
4 hours to prepare and present an annual report to the board, for a 
total of 8 hours. CFTC staff estimates that, of the 8 hours 
incurred, 7 hours would be spent by internal counsel at an hourly 
rate of $354 and 1 hour would be spent by the board of directors as 
a whole, at an hourly rate of $4,000, for a total hourly cost of 
$6,500. This estimate is based on the following calculations rounded 
to two significant digits: $354 x 7 hours = $2,478; $4,000 x 1 hour 
= $4,000; $2,478 + $4,000 = $6,478 [ap] $6,500.
     As discussed in the PRA analysis, CFTC staff estimates that 
2,946 existing CFTC-regulated entities would be financial 
institutions or creditors, of which 260 maintain covered accounts. 
CFTC staff estimates that 2 hours of internal counsel's time would 
be spent conducting periodic assessments of covered accounts and 
that all financial institutions or creditors subject to the proposed 
rule (or 2,946 entities) would bear this cost for a total cost of 
$2,100,000 based on the following calculations rounded to two 
significant digits: $354 x 2 = $708; $708 x 2,946 = $2,085,768 [ap] 
$2,100,000. CFTC staff estimates that 260 entities would bear the 
remaining specified ongoing costs for a total cost of $1,500,000 
(260 x $5,770 = $1,500,200 [ap] $1,500,000).
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    The benefits related to adoption of section 162.30, which already 
exist in connection with the Agencies' identity theft red flags rules, 
would include a reduction in the risk of identity theft for investors 
(consumers) and cardholders, and a reduction in the risk of losses due 
to fraud for financial institutions and creditors. It is not 
practicable for the CFTC to estimate with precision the dollar value 
associated with the benefits that will inure to the public from the 
adoption of section 162.30, as the quantity or value of identity theft

[[Page 23651]]

deterred or prevented is not knowable. The CFTC, however, recognizes 
that the cost of any given instance of identity theft may be 
substantial to the individual involved. Joint adoption of identity 
theft red flags rules in a form that is substantially similar to the 
Agencies' identity theft red flags rules might also benefit financial 
institutions and creditors because entities regulated by multiple 
federal agencies could comply with a single set of standards, which 
would reduce potential compliance costs. As is true of the Agencies' 
identity theft red flags rules, the CFTC has designed section 162.30 to 
provide financial institutions and creditors significant flexibility in 
developing and maintaining a Program that is tailored to the size and 
complexity of their business and the nature of their operations, as 
well as in satisfying the address verification procedures.
    Accordingly, as previously discussed, section 162.30 should not 
result in any significant new costs or benefits, because it generally 
reflects a statutory transfer of enforcement authority from the FTC to 
the CFTC, does not include any significant new requirements, and does 
not include new entities that were not previously covered by the 
Agencies' rules.
    Section 15(a) Analysis. As stated above, the CFTC is required to 
consider costs and benefits of proposed CFTC action in light of (1) 
protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. These rules protect market participants and 
the public by detecting, preventing, and mitigating identity theft, an 
illegal act that may be costly to them in both time and money.\153\ 
Because, however, these rules create no new requirements -- rather, as 
explained above, the CFTC is adopting rules that reflect requirements 
already in place -- the impact of the rules on the protection of market 
participants and the public will remain the same. The Commission is not 
aware of any effect of these rules on the efficiency, competitiveness, 
and financial integrity of futures markets, price discovery, sound risk 
management practices, or other public interest considerations. 
Customers of CFTC registrants will continue to benefit from these rules 
in the same way they have benefited from the rules as they were 
administered by the Agencies.
---------------------------------------------------------------------------

    \153\ According to the Javelin 2011 Identity Fraud Survey 
Report, consumer costs (the average out[hyphen]of[hyphen]pocket 
dollar amount victims pay) increased in 2010. See Javelin 2011 
Identity Fraud Survey Report (2011). The report attributed this 
increase to new account fraud, which showed longer periods of misuse 
and detection and therefore more dollar losses associated with it 
than any other type of fraud. Notwithstanding the increase in cost, 
the report stated that the number of identity theft victims has 
decreased in recent years. Id.
---------------------------------------------------------------------------

Cost-Benefit Considerations of Card Issuer Rules
    With respect to specific types of identity theft, section 615(e) of 
the FCRA identified the scenario involving credit and debit card 
issuers as being a possible indicator of identity theft. Accordingly, 
the card issuer rules in section 162.32 set out the duties of card 
issuers regarding changes of address. The card issuer rules will apply 
only to a person that issues a debit or credit card and that is subject 
to the CFTC's enforcement authority. The card issuer rules require a 
card issuer to comply with certain address validation procedures in the 
event that such issuer receives a notification of a change of address 
for an existing account from a cardholder, and within a short period of 
time (during at least the first 30 days after such notification is 
received) receives a request for an additional or replacement card for 
the same account. The card issuer may not issue the additional or 
replacement card unless it complies with those procedures. The 
procedures include: (1) Notifying the cardholder of the request in 
writing or electronically either at the cardholder's former address, or 
by any other means of communication that the card issuer and the 
cardholder have previously agreed to use; or (2) assessing the validity 
of the change of address in accordance with established policies and 
procedures.
    Section 162.32 will shift oversight of card issuer rules of CFTC-
regulated entities from the FTC to the CFTC. These entities should 
already be in compliance with the FTC's existing card issuer rules, 
which the FTC began enforcing on January 1, 2011. Because section 
162.32 is substantially similar to those existing card issuer rules, 
these entities should not bear any new costs in coming into compliance. 
The new regulation does not contain new requirements, nor does it 
expand the scope of the rules to include new entities that were not 
already previously covered by the Agencies' card issuer rules.
    The existing costs related to section 162.32 would include the cost 
for card issuers to establish policies and procedures that assess the 
validity of a change of address notification submitted shortly before a 
request for an additional card and, before issuing an additional or 
replacement card, either notify the cardholder at the previous address 
or through another previously agreed-upon form of communication, or 
alternatively assess the validity of the address change through 
existing policies and procedures. As discussed in the PRA analysis, 
CFTC staff does not expect that any CFTC-regulated entities would be 
subject to the requirements of section 162.32.
    The benefits related to adoption of section 162.32, which already 
exist in connection with the Agencies' card issuer rules, would include 
a reduction in the risk of identity theft for cardholders, and a 
reduction in the risk of losses due to fraud for card issuers. However, 
it is not practicable for the CFTC to estimate with precision the 
dollar value associated with the benefits that will inure to the public 
from these card issuer rules. As is true of the Agencies' card issuer 
rules, the CFTC has designed section 162.32 to provide card issuers 
significant flexibility in developing and maintaining a Program that is 
tailored to the size and complexity of their business and the nature of 
their operations.
    Accordingly, as previously discussed, the card issuer rules should 
not result in any significant new costs or benefits, because they 
generally reflect a statutory transfer of enforcement authority from 
the FTC to the CFTC, do not include any significant new requirements, 
and do not include new entities that were not previously covered by the 
Agencies' rules.
    Section 15(a) Analysis. As stated above, the CFTC is required to 
consider costs and benefits of proposed CFTC action in light of (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. These rules protect market participants and 
the public by preventing identity theft, an illegal act that may be 
costly to them in both time and money.\154\ Because, however, these 
rules create no new requirements--rather, as explained above, the CFTC 
is adopting rules that reflect requirements already in place--their 
cost and benefits have no incremental impact on the five section 15(a) 
factors. Customers of CFTC registrants will continue to benefit from 
these rules in the same way they have benefited from the rules as they 
were administered by the Agencies.
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    \154\ See id.

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[[Page 23652]]

SEC
    The SEC is sensitive to the costs and benefits imposed by its 
rules. As discussed above, the Dodd-Frank Act shifted enforcement 
authority over SEC-regulated entities that are subject to section 
615(e) of the FCRA from the Agencies to the SEC. Section 615(e) of the 
FCRA, as amended by the Dodd-Frank Act, requires that the SEC, jointly 
with the Agencies and the CFTC, adopt identity theft red flags rules 
and guidelines. To carry out this requirement, the SEC is adopting 
Regulation S-ID, which is substantially similar to the identity theft 
red flags rules and guidelines adopted by the Agencies in 2007, and 
whose scope covers the same categories of SEC-regulated entities that 
were covered under the Agencies' red flags rules.
    Regulation S-ID requires a financial institution or creditor that 
is subject to the SEC's enforcement authority and that offers or 
maintains covered accounts to develop, implement, and administer a 
written identity theft prevention Program. A financial institution or 
creditor must design its Program to detect, prevent, and mitigate 
identity theft in connection with the opening of a covered account or 
any existing covered account. A financial institution or creditor also 
must appropriately tailor its Program to its size and complexity, and 
to the nature and scope of its activities. In addition, a financial 
institution or creditor must take certain steps to comply with the 
requirements of the identity theft red flags rules, including training 
staff, providing annual reports to the board of directors, an 
appropriate committee thereof, or a designated senior management 
employee, and, if applicable, oversight of service providers.
    Section 615(e)(1)(C) of the FCRA singles out change of address 
notifications sent to credit and debit card issuers as a possible 
indicator of identity theft, and requires the SEC to prescribe 
regulations concerning such notifications. Accordingly, the card issuer 
rules in this release set out the duties of card issuers regarding 
changes of address. The card issuer rules apply only to SEC-regulated 
entities that issue credit or debit cards.\155\ The card issuer rules 
require a card issuer to comply with certain address validation 
procedures in the event that such issuer receives a notification of a 
change of address for an existing account, and within a short period of 
time (during at least the first 30 days after it receives such 
notification) receives a request for an additional or replacement card 
for the same account. The card issuer may not issue the additional or 
replacement card unless it complies with those procedures. The 
procedures include: (1) Notifying the cardholder of the request either 
at the cardholder's former address, or by any other means of 
communication that the card issuer and the cardholder have previously 
agreed to use; or (2) assessing the validity of the change of address 
in accordance with established policies and procedures.
---------------------------------------------------------------------------

    \155\ See Sec.  248.202(a) (defining scope of the SEC's rules).
---------------------------------------------------------------------------

    The baseline we use to analyze the economic effects of Regulation 
S-ID is the identity theft red flags regulatory scheme administered by 
the Agencies. Regulation S-ID, as discussed above, implements the 
transfer of oversight of identity theft red flags rules for SEC-
regulated entities from the Agencies to the SEC. Entities that qualify 
as a financial institution or creditor and offer or maintain covered 
accounts should already have existing identity theft red flags 
Programs. Regulation S-ID does not contain new requirements, nor does 
it expand the scope of the Agencies' rules to include new entities that 
the Agencies' rules did not previously cover. Regulation S-ID does 
contain examples and minor language changes designed to help guide 
entities within the SEC's enforcement authority in complying with the 
rules. Because Regulation S-ID is substantially similar to the 
Agencies' rules, the entities within its scope should not bear new 
costs in coming into compliance with Regulation S-ID.\156\
---------------------------------------------------------------------------

    \156\ See, e.g., NSCP Comment Letter (``Because proposed 
Regulation S-ID is substantially similar to [the Agencies'] existing 
rules and guidelines, broker-dealer firms should not bear any new 
costs in coming into compliance with proposed Regulation S-ID.''). 
As previously indicated, the SEC staff understands that a number of 
investment advisers may not currently have identity theft red flags 
Programs. See supra note 55 and infra notes 186 and 190. The new 
guidance in this release may lead some of these entities to 
determine that they should comply with Regulation S-ID. Although the 
costs and benefits of Regulation S-ID discussed below would be new 
to these entities, the costs would result not from Regulation S-ID 
but instead from the entities' recognition that these rules and the 
previously-existing rules apply to them. In that regard, the 
initial, one-time costs of Regulation S-ID could be up to $756 for 
each investment adviser that qualifies as a financial institution or 
creditor, and additional one-time costs of $13,885 for each such 
investment adviser that maintains covered accounts. See infra notes 
158 and 159. Not all investment advisers will bear the full extent 
of these costs, however, as some may already have in place certain 
identity theft protections. And, the guidance in this release could 
have the benefit of further reducing identity theft. See infra 
discussion of benefits in Part III.A of this release.
---------------------------------------------------------------------------

Costs
    The costs of complying with section 248.201 of Regulation S-ID 
include both ongoing costs and initial, one-time costs.\157\ These are 
the same costs that were associated with the requirements of the 
Agencies' red flags rules, and these costs will continue to apply after 
the adoption of the SEC's identity theft red flags rules (section 
248.201 of Regulation S-ID). The ongoing costs include the costs to 
periodically review and update the Program, report on the Program, and 
conduct assessments of covered accounts.\158\ All entities that qualify 
as financial institutions or creditors and that maintain covered 
accounts will bear these costs. Existing entities subject to Regulation 
S-ID should already bear, and will continue to be subject to, the 
ongoing costs.
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    \157\ See infra note 182 and accompanying text.
    \158\ Unless otherwise stated, all cost estimates for personnel 
time are derived from SIFMA's Management & Professional Earnings in 
the Securities Industry 2011, modified to account for an 1800-hour 
work-year and multiplied by 5.35 to account for bonuses, entity 
size, employee benefits, and overhead. The estimates in this 
release, both for salary rates and numbers of entities affected, 
have been updated from those in the Proposing Release to reflect 
recent SIFMA management and professional salary data.
     SEC staff estimates that the ongoing burden of compliance will 
include 2 hours to conduct periodic assessments of covered accounts, 
2 hours to periodically review and update the Program, and 4 hours 
to prepare and present an annual report to the board, for a total of 
8 hours. SEC staff estimates that, of the 8 hours incurred, 7 hours 
will be spent by internal counsel at an hourly rate of $378 and 1 
hour will be spent by the board of directors as a whole, at an 
hourly rate of $4500, for a total hourly cost of $7146 per entity. 
This estimate is based on the following calculations: $378 x 7 hours 
= $2646; $4500 x 1 hour = $4500; $2646 + $4500 = $7146. The cost 
estimate for the board of directors is derived from estimates made 
by SEC staff regarding typical board size and compensation that is 
based on information received from fund representatives and publicly 
available sources.
     As discussed in the PRA analysis, SEC staff estimates that 
10,339 existing SEC-regulated entities will be financial 
institutions or creditors under Regulation S-ID, and approximately 
90%, or 9305, of these entities will maintain covered accounts. See 
infra notes 190 and 191 and accompanying text. SEC staff estimates 
that 2 hours of internal counsel's time will be spent conducting 
periodic assessments of covered accounts and that all financial 
institutions or creditors subject to the rule (or 10,339 entities) 
will bear this cost for a total cost of $7,816,284 based on the 
following calculations: $378 x 2 = $756; $756 x 10,339 = $7,816,284. 
SEC staff estimates that 9305 entities will bear the remaining 
specified ongoing costs for a total cost of $59,458,950 (9305 x 
(($378 x 5) + ($4500 x 1)) = $59,458,950).
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    Initial, one-time costs relate to the initial assessments of 
covered accounts, creation of a Program, board approval of the Program, 
and the training of staff.\159\ New entities will bear these costs.
---------------------------------------------------------------------------

    \159\ SEC staff estimates that the incremental one-time burden 
of compliance includes 2 hours to conduct initial assessments of 
covered accounts, 25 hours to develop and obtain board approval of a 
Program, and 4 hours to train staff. SEC staff estimates that, of 
the 31 hours incurred, 12 hours will be spent by internal counsel at 
an hourly rate of $378, 17 hours will be spent by administrative 
assistants at an hourly rate of $65, and 2 hours will be spent by 
the board of directors as a whole, at an hourly rate of $4500, for a 
total cost of $14,641 per new entity. This estimate is based on the 
following calculations: $378 x 12 hours = $4536; $65 x 17 = $1105; 
$4500 x 2 = $9000; $4536 + $1105 + $9000 = $14,641. The cost 
estimate for administrative assistants is derived from SIFMA's 
Office Salaries in the Securities Industry 2011, modified to account 
for an 1800-hour work-year and multiplied by 2.93 to account for 
bonuses, entity size, employee benefits, and overhead.
     As discussed in the PRA analysis, SEC staff estimates that 
there are 1271 SEC-regulated entities that newly form each year and 
that could be financial institutions or creditors, of which 668 are 
likely to qualify as financial institutions or creditors. See infra 
note 186. Of these 668 entities that are likely to qualify as 
financial institutions or creditors, SEC staff estimates that 
approximately 90%, or 601, of these entities will maintain covered 
accounts. See infra note 188 and accompanying text. SEC staff 
estimates that 2 hours of internal counsel's time will be spent 
conducting an initial assessment of covered accounts and that all 
newly-formed financial institutions or creditors subject to 
Regulation S-ID (or 668 entities) will bear this cost for a total 
cost of $505,008 based on the following calculation: $378 x 2 = 
$756; $756 x 668 = $505,008. SEC staff estimates that the 601 
entities that will maintain covered accounts will bear the remaining 
specified costs for a total cost of $8,344,885 (601 x (($378 x 10) + 
($65 x 17) + ($4500 x 2)) = $8,344,885).

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[[Page 23653]]

    As discussed above, the final rules require financial institutions 
and creditors to tailor their Programs to the size and complexity of 
the entity and to the nature and scope of the entity's activities. 
Ongoing and one-time costs will therefore depend on the size and 
complexity of the SEC-regulated entity. Entities may already have other 
policies and procedures in place that are designed to reduce the risks 
of identity theft for their customers. The presence of other related 
policies and procedures could reduce the ongoing and one-time costs of 
compliance.
    Two commenters agreed with the SEC that the substantial similarity 
of Regulation S-ID to the Agencies' rules should minimize any 
compliance costs for entities that have previously complied with the 
Agencies' rules,\160\ and another commenter stated that the benefits of 
reduced risk of identity theft would outweigh the costs associated with 
the rules.\161\ Another commenter raised concerns with the cost 
estimates in the Proposing Release, and argued that actual costs of 
compliance could be much greater than estimated.\162\ This commenter 
provided hour burden estimates for large, complex financial 
institutions that were significantly higher than the estimates made for 
those entities in the Proposing Release. Additionally, the commenter 
stated that the Commissions' estimated compliance costs did not 
consider the costs to third-party service providers that may be 
required to implement an identity theft red flags Program, even though 
they are not financial institutions or creditors. The commenter also 
noted, however, that burdens placed upon entities currently complying 
with the Agencies' rules would be the same burdens that each of these 
entities already incurs in regularly assessing whether it maintains 
covered accounts and evaluating whether it falls within the rules' 
scope.
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    \160\ See NSCP Comment Letter (``Because proposed Regulation S-
ID is substantially similar to [the Agencies'] existing rules and 
guidelines, broker-dealer firms should not bear any new costs in 
coming into compliance with proposed Regulation S-ID.''); ICI 
Comment Letter (``We commend the Commission for proposing 
requirements that are consistent with those that have applied to 
certain SEC registrants since 2008 pursuant to rules of the [FTC] 
under [the FACT Act]. This consistency will facilitate registrants' 
transition from compliance with the FTC's rule to the Commission's 
rule with little or no disruption or added expense.'')
    \161\ See Eric Speicher Comment Letter.
    \162\ See FSR/SIFMA Comment Letter. FSR/SIFMA estimated that 
``the initial compliance burden to implement the [proposed rules] 
would average 2,000 hours for each line of business conducted by a 
large, complex financial institution . . .'' and that ``the 
continuing compliance monitoring for a large, complex financial 
institution . . . would average 400 hours annually.'' FSR/SIFMA also 
noted that ``financial institutions with an existing Red Flags 
program would experience an incremental burden'' in connection with 
the SEC's rules.
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    We note that the commenter who suggested that significantly higher 
hour burdens would be associated with the rules focused on large, 
complex financial institutions. Regulation S-ID requires each financial 
institution and creditor to tailor its Program to its size and 
complexity, and to the nature and scope of its activities. Our 
estimates take into account the hour burdens for small financial 
institutions and creditors, which we understand, based on discussions 
with industry representatives, to be significantly less than the 
estimates provided by this commenter. We also note that costs to 
service providers have already been taken into account, as SEC-
regulated entities that have outsourced identity theft detection, 
prevention, and mitigation operations to service providers have 
effectively shifted a burden that the SEC-regulated entities otherwise 
would have carried themselves.\163\ As mentioned above, the costs of 
Regulation S-ID are not new, and existing entities should already have 
identity theft red flags Programs and bear the ongoing costs associated 
with Regulation S-ID.
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    \163\ See infra Section III.C. (describing the SEC's PRA 
collection of information requirements).
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    The existing costs related to the card issuer rules (section 
248.202 of Regulation S-ID) include the cost for card issuers to 
establish policies and procedures that assess the validity of a change 
of address notification submitted shortly before a request for an 
additional or replacement card and, before issuing an additional or 
replacement card, either notify the cardholder at the previous address 
or through another previously agreed-upon form of communication, or 
alternatively assess the validity of the address change through 
existing policies and procedures. As discussed in the PRA analysis, SEC 
staff does not expect that any SEC-regulated entities will be subject 
to the card issuer rules.
    In the PRA analysis below, the staff identifies certain ongoing and 
initial hour burdens and associated time costs related to compliance 
with Regulation S-ID. These hour burdens and costs are consistent with 
those associated with the requirements of the Agencies' existing rules.
Benefits
    The benefits related to adoption of Regulation S-ID, which already 
exist in connection with the Agencies' identity theft red flags rules, 
include a reduction in the risk of identity theft for investors 
(consumers) and cardholders, and a reduction in the risk of losses due 
to fraud for financial institutions and creditors. The SEC is the 
federal agency best positioned to oversee the financial institutions 
and creditors subject to its enforcement authority because of its 
experience in overseeing these entities. Adoption of Regulation S-ID 
therefore may have the added benefit of increasing entities' adherence 
to their identity theft red flags Programs, thus further reducing the 
risk of identity theft for investors. As is true of the Agencies' 
identity theft red flags rules, the SEC has designed Regulation S-ID to 
provide financial institutions, creditors, and card issuers significant 
flexibility in developing and maintaining a Program that is tailored to 
the size and complexity of their business and the nature of their 
operations, as well as in satisfying the address verification 
procedures. Many of the benefits and costs discussed are difficult to 
quantify, in particular when discussing the potential reduction in the 
risk of identity theft. The SEC staff cannot quantify the benefits of 
the potential reduction in the risk of identity theft because of the 
uncertainty of its effect on customer behavior. Therefore, we discuss 
much of the benefits qualitatively but, where possible, the SEC staff 
attempted to quantify the costs.
Alternatives
    In analyzing the costs and benefits that could result from the 
implementation of Regulation S-ID, the

[[Page 23654]]

SEC also considered the costs and benefits of any plausible 
alternatives to the final rules as set forth in this release. As 
discussed above, section 615(e) of the FCRA, as amended by the Dodd-
Frank Act, requires that the SEC, jointly with the Agencies and the 
CFTC, adopt identity theft red flags rules and guidelines that are 
substantially similar to those adopted by the Agencies. The rules the 
SEC promulgates should achieve a similar outcome with respect to the 
reduction in the risk of identity theft as the rules of other Agencies. 
Alternatives to the identity theft red flags rules that would achieve a 
similar outcome may impose additional costs, especially for those 
entities that would need to alter existing Programs to conform to a new 
set of rules. The SEC does provide additional guidance in this release 
to better enable entities to determine whether they fall within the 
rules' scope. Although the SEC could have provided different guidance 
with this release, the SEC believes that the release provides 
sufficient guidance to enable entities to determine whether they need 
to adopt identity theft red flags Programs. Lastly, for the reasons 
discussed above, the SEC is not exempting certain entities from certain 
requirements of the identity theft red flags rules. The SEC believes 
that if an entity determines that it is a financial institution or a 
creditor that offers or maintains covered accounts, then the risk of 
identity theft that the rules are designed to address is present. Under 
such circumstances, we believe that the benefits of the rules justify 
the costs to the financial institution or creditor subject to the rules 
and, therefore, no exemptions are appropriate.

B. Analysis of Effects on Efficiency, Competition, and Capital 
Formation

    Section 3(f) of the Exchange Act and section 2(c) of the Investment 
Company Act require the SEC, whenever it engages in rulemaking and must 
consider or determine if an action is necessary, appropriate, or 
consistent with the public interest, to consider, in addition to the 
protection of investors, whether the action would promote efficiency, 
competition, and capital formation. In addition, section 23(a)(2) of 
the Exchange Act requires the SEC, when making rules under the Exchange 
Act, to consider the impact the rules may have upon competition. 
Section 23(a)(2) of the Exchange Act prohibits the SEC from adopting 
any rule that would impose a burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\164\
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    \164\ See infra Section IV (setting forth statutory authority 
under, among other things, the Exchange Act and Investment Company 
Act for rulemakings).
---------------------------------------------------------------------------

    As discussed in the cost-benefit analysis above, Regulation S-ID 
will carry out the requirement in the Dodd-Frank Act that the SEC adopt 
rules governing identity theft protections, pursuant to section 615(e) 
of the FCRA with regard to entities that are subject to the SEC's 
enforcement authority. This requirement was designed to transfer 
regulatory oversight of identity theft red flags rules for SEC-
regulated entities from the Agencies to the SEC. Regulation S-ID is 
substantially similar to the identity theft red flags rules adopted by 
the Agencies in 2007, and does not contain new requirements. The 
entities covered by Regulation S-ID should already be in compliance 
with existing identity theft red flags rules.
    For the reasons discussed above, Regulation S-ID should have a 
negligible effect on efficiency, competition, and capital formation 
because it does not include new requirements and does not include new 
entities that were not previously covered by the Agencies' rules.\165\ 
The SEC thereby finds that, pursuant to Exchange Act section 23(a)(2), 
the adoption of Regulation S-ID would not result in any burden on 
competition, efficiency, or capital formation that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
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    \165\ See infra note 182 (discussing the entities that the SEC 
staff expects, based on discussions with industry representatives 
and a review of applicable law, will fall within the scope of 
Regulation S-ID). The SEC staff understands, however, that a number 
of investment advisers may not currently have identity theft red 
flags Programs. See supra note 55. The guidance in this release 
regarding situations in which certain SEC-regulated entities could 
qualify as financial institutions or creditors should not produce 
any significant effects. These entities may experience a negligible 
increase to business efficiency due to the industry-specific 
guidance in this release regarding the types of activities that 
could cause an entity to fall within the scope of Regulation S-ID. 
The guidance should also have a negligible effect on capital 
formation. Prior to Regulation S-ID, investors preferring to base 
their capital allocations on the existence of identity theft red 
flags Programs could have allocated capital with entities adhering 
to the Agencies' rules. The guidance therefore should have a 
negligible effect on the amount of capital allocated for investment 
purposes. In addition, all entities that conclude based on this 
guidance that they are subject to the final rules will be subject to 
the same requirements, and experience the same costs and benefits, 
as all other entities currently adhering to the Agencies' existing 
rules. The guidance therefore should have a negligible effect on 
competition.
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C. Paperwork Reduction Act

CFTC
    Provisions of sections 162.30 and 162.32 contain collection of 
information requirements within the meaning of the PRA. The CFTC 
submitted the proposal to the Office of Management and Budget (``OMB'') 
for review and public comment, in accordance with 44 U.S.C. 3507(d) and 
5 CFR 1320.11. The title for this collection of information is ``Part 
162 Subpart C--Identity Theft.'' Responses to this new collection of 
information are mandatory.
1. Information Provided by Reporting Entities/Persons
    Under part 162, subpart C, CFTC regulated entities--which presently 
would include approximately 260 CFTC registrants \166\ plus 125 new 
CFTC registrants pursuant to Title VII of the Dodd-Frank Act \167\--are 
required to design, develop and implement reasonable policies and 
procedures to identify relevant red flags, and potentially to notify 
cardholders of identity theft risks. In addition, CFTC-regulated 
entities are required to: (i) Collect information and keep records for 
the purpose of ensuring that their Programs met requirements to detect, 
prevent, and mitigate identity theft in

[[Page 23655]]

connection with the opening of a covered account or any existing 
covered account; (ii) develop and implement reasonable policies and 
procedures to identify, detect and respond to relevant red flags, as 
well as periodic reports related to the Program; and (iii) from time to 
time, notify cardholders of possible identity theft with respect to 
their covered accounts, as well as assess the validity of those 
accounts.
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    \166\ See the NFA's Internet Web site at https://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML 
for the most up-to-date number of CFTC regulated entities. For the 
purposes of the PRA calculation, CFTC staff used the number of 
registered FCMs, CTAs, CPOs IBs and RFEDs on the NFA's Internet Web 
site as of November 20, 2012. The NFA's site states that there are 
3,485 CFTC registrants as of October 31, 2012. (The total number of 
registrants also includes 7 exchanges which are not subject to this 
rule and not included in the calculation.) Of the 3,485 registrants, 
there are 104 FCMs, 1,284 IBs, 1,041 CTAs, 1,035 CPOs, and 14 RFEDs. 
CFTC staff has observed that approximately 50 percent of all CPOs 
(518) are dually registered as CTAs. Moreover, CFTC staff also has 
observed that all entities registering as RFEDs (14) also register 
as FCMs. Based on these observations, the CFTC has determined that 
the total number of entities is 2,946 (this total excludes the 7 
exchanges that are not subject to this rule, the 518 CPOs that are 
also registered as CTAs, and the 14 RFEDs that are also registered 
as FCMs).
    Of the total 2,946 entities, all of the FCMs (104) are likely to 
qualify as financial institutions or creditors carrying covered 
accounts, approximately 10 percent of CTAs (104) and CPOs (52) are 
likely to qualify as financial institutions or creditors carrying 
covered accounts and none of the IBs are likely to qualify as a 
financial institution or creditor carrying covered accounts, for a 
total of 260 financial institutions or creditors that would bear the 
initial one-time burden of compliance with the CFTC's rules.
    \167\ CFTC staff estimates that 125 SDs and MSPs will register 
with the CFTC upon the issuance of final rules under the Dodd-Frank 
Act further defining the terms ``swap dealers'' and ``major swap 
participants'' and setting forth a registration regime for these 
entities. The CFTC estimates the number of MSPs to be quite small, 
at six or fewer.
---------------------------------------------------------------------------

    These burden estimates assume that CFTC-regulated entities already 
comply with the identity theft red flags rules jointly adopted by the 
FTC with the Agencies, as of January 1, 2011. Consequently, these 
entities may already have in place many of the customary protections 
addressing identity theft and changes of address required by these 
regulations.
    Burden means the total time, effort, or financial resources 
expended by persons to generate, maintain, retain, disclose or provide 
information to or for a federal agency. Because compliance with 
identity theft red flags rules jointly adopted by the FTC with the 
Agencies may have occurred, the CFTC estimates the time and cost 
burdens of complying with part 162 to be both one-time and ongoing 
burdens. However, any initial or one-time burdens associated with 
compliance with part 162 would apply only to newly-formed entities, and 
the ongoing burden to all CFTC-regulated entities.
i. Initial Burden
    The CFTC estimates that the one-time burden of compliance with part 
162 for its regulated entities with covered accounts would be: (i) 25 
hours to develop and obtain board approval of a Program; (ii) 4 hours 
for staff training; and (iii) 2 hours to conduct an initial assessment 
of covered accounts, totaling 31 hours. Of the 31 hours, the CFTC 
estimates that 15 hours would involve internal counsel, 14 hours 
expended by administrative assistants, and 2 hours by the board of 
directors in total, for those newly-regulated entities.
    The CFTC estimates that approximately 702 FCMs, CTAs and CPOs \168\ 
would need to conduct an initial assessment of covered accounts. As 
noted above, the CFTC estimates that approximately 125 newly registered 
SDs and MSPs would need to conduct an initial assessment of covered 
accounts. The total number of newly registered CFTC registrants would 
be 827 entities. Each of these 827 entities would need to conduct an 
initial assessment of covered accounts, for a total of 1,654 
hours.\169\ Of these 827 entities, CFTC staff estimates that 
approximately 179 of these entities may maintain covered accounts. 
Accordingly, the CFTC estimates the one-time burden for these 179 
entities to be 5,191 hours,\170\ for a total burden among newly 
registered entities of 6,845 hours.\171\
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    \168\ Based on a review of new registrations typically filed 
with the CFTC each year, CFTC staff estimates that approximately 7 
FCMs, 225 IBs, 400 CTAs, and 140 CPOs are newly formed each year, 
for a total of 772 entities. CFTC staff also has observed that 
approximately 50 percent of all CPOs are duly registered as CTAs. 
With respect to RFEDs, CFTC staff has observed that all entities 
registering as RFEDs also register as FCMs. Based on these 
observations, CFTC has determined that the total number of newly-
formed financial institutions and creditors is 702 (772-70 CPOs that 
are also registered as CTAs). Each of these 702 financial 
institutions or creditors would bear the initial one-time burden of 
compliance with the proposed rules.
    Of the total 702 newly-formed entities, staff estimates that all 
of the FCMs are likely to carry covered accounts, 10 percent of CTAs 
and CPOs are likely to carry covered accounts, and none of the IBs 
are likely to carry covered accounts, for a total of 54 newly-formed 
financial institutions or creditors carrying covered accounts that 
would be required to conduct an initial one-time burden of 
compliance with subpart C or Part 162.
    \169\ This estimate is based on the following calculation: 827 
entities x 2 hours = 1,654 hours.
    \170\ This estimate is based on the following calculation: 179 
entities x 29 hours = 5,191 hours.
    \171\ This estimate is based on the following calculation: 1,654 
hours for all newly registered CFTC registrants + 5,191 hours for 
the one-time burden of newly registered entities with covered 
accounts, for a total of 6,845 hours.
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ii. Ongoing Burden
    The CFTC staff estimates that the ongoing compliance burden 
associated with part 162 would include: (i) 2 hours to periodically 
review and update the Program, review and preserve contracts with 
service providers, and review and preserve any documentation received 
from such providers; (ii) 4 hours to prepare and present an annual 
report to the board; and (iii) 2 hours to conduct periodic assessments 
to determine if the entity offers or maintains covered accounts, for a 
total of 8 hours. The CFTC staff estimates that of the 8 hours 
expended, 7 hours would be spent by internal counsel, and 1 hour would 
be spent by the board of directors as a whole.
    The CFTC estimates that approximately 3,071 entities may maintain 
covered accounts, and that they would be required to periodically 
review their accounts to determine if they comply with these rules, for 
a total of 6,142 hours for these entities.\172\ Of these 3,071 
entities, the CFTC estimates that approximately 385 maintain covered 
accounts, and thus would need to incur the additional burdens related 
to complying with the rule, for a total of 2,310 hours.\173\ The total 
ongoing burden for all CFTC registrants is 8,452 hours.\174\
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    \172\ This estimate is based on the following calculation: 3,071 
entities x 2 hours = 6,142 hours. (The Proposing Release contained 
an arithmetic error in the calculation for the total ongoing burden 
for all CFTC registrants. The total number of hours was erroneously 
calculated to total 76,498 hours rather than 6,498. See 77 FR 13450, 
13467.)
    \173\ This estimate is based on the following calculation: 385 
entities x 6 hours = 2,310 hours.
    \174\ This estimate is based on the following calculation: 6,142 
hours + 2,310 hours = 8,452 hours.
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    SEC:
    Provisions of sections 248.201 and 248.202 contain ``collection of 
information'' requirements within the meaning of the PRA. In the 
Proposing Release, the SEC solicited comment on the collection of 
information requirements. The SEC also submitted the proposed 
collections of information to the OMB for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for this collection of 
information is ``Part 248, Subpart C--Regulation S-ID.'' In response to 
this submission, the OMB issued control number 3235-0692.\175\ 
Responses to the new collection of information provisions are 
mandatory, and the information, when provided to the SEC in connection 
with staff examinations or investigations, is kept confidential to the 
extent permitted by law.
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    \175\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it 
displays a currently valid OMB control number.
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1. Description of the Collections
    Under Regulation S-ID, SEC-regulated entities are required to 
develop and implement reasonable policies and procedures to identify, 
detect and respond to relevant red flags and, in the case of entities 
that issue credit or debit cards, to assess the validity of, and 
communicate with cardholders regarding, address changes. Section 
248.201 of Regulation S-ID includes the following ``collections of 
information'' by SEC-regulated entities that are financial institutions 
or creditors if the entity maintains covered accounts: (1) Creation and 
periodic updating of a Program that is approved by the board of 
directors, an appropriate committee thereof, or a designated senior 
management employee; (2) periodic staff reporting on compliance with 
the identify theft red flags rules and guidelines, as required to be 
considered by section VI of the guidelines; and (3) training of staff 
to implement the Program. Section 248.202 of Regulation S-ID includes 
the following ``collections of information'' by SEC-regulated entities 
that are credit or debit card issuers: (1) Establishment of policies 
and procedures that assess the validity

[[Page 23656]]

of a change of address notification if a request for an additional or 
replacement card on the account follows soon after the address change; 
and (2) notification of a cardholder, before issuance of an additional 
or replacement card, at the previous address or through some other 
previously agreed-upon form of communication, or alternatively, 
assessment of the validity of the address change request through the 
entity's established policies and procedures.
    SEC-regulated entities that must comply with the collections of 
information required by Regulation S-ID should already be in compliance 
with the identity theft red flags rules that the Agencies jointly 
adopted in 2007.\176\ The requirements of those rules are substantially 
similar and comparable to the requirements of Regulation S-ID.\177\
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    \176\ SEC staff, however, understands that a number of 
investment advisers may not currently have identity theft red flags 
Programs. See supra note 55. Under the new guidance, for entities 
having now determined that they should comply with Regulation S-ID, 
the collections of information required by Regulation S-ID and the 
estimates of time and costs discussed below may be new. As discussed 
further below, SEC staff estimates that there are approximately 3791 
investment advisers that are currently registered with the SEC and 
are likely to qualify as financial institutions or creditors. SEC 
staff is unable to estimate how many of these investment advisers 
previously complied with the Agencies' identity theft red flags 
rules.
    \177\ See 2007 Adopting Release, supra note 8, at Section VI.A 
(discussing the PRA analysis with respect to the Agencies' identity 
theft red flags rules); ``FTC Extends Enforcement Deadline for 
Identity Theft Red Flags Rule'' at https://www.ftc.gov/opa/2010/05/redflags.shtm.
---------------------------------------------------------------------------

    In addition, SEC staff understands that most SEC-regulated entities 
that are financial institutions or creditors may otherwise have in 
place many of the protections regarding identity theft and changes of 
address that Regulation S-ID requires because they are usual and 
customary business practices that they engage in to minimize losses 
from fraud. Furthermore, SEC staff believes that many of them are 
likely to have already effectively implemented most of the requirements 
as a result of having to comply (or an affiliate having to comply) with 
other, existing statutes, regulations and guidance, such as the federal 
CIP rules implementing section 326 of the USA PATRIOT Act,\178\ the 
Interagency Guidelines Establishing Information Security Standards that 
implement section 501(b) of the Gramm-Leach-Bliley Act (GLBA),\179\ 
section 216 of the FACT Act,\180\ and guidance issued by the Agencies 
or the Federal Financial Institutions Examination Council regarding 
information security, authentication, identity theft, and response 
programs.\181\
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    \178\ 31 U.S.C. 5318(l) (requiring verification of the identity 
of persons opening accounts).
    \179\ 15 U.S.C. 6801.
    \180\ 15 U.S.C. 1681w.
    \181\ See 2007 Adopting Release, supra note 8, at nn.55-57 
(describing applicable statutes, regulations, and guidance).
---------------------------------------------------------------------------

    SEC staff estimates of time and cost burdens represent the one-time 
burden of complying with Regulation S-ID for newly-formed SEC-regulated 
entities, and the ongoing costs of compliance for all SEC-regulated 
entities.\182\ SEC staff estimates also attribute all burdens to 
entities that are directly subject to the requirements of the 
rulemaking. An entity directly subject to Regulation S-ID that 
outsources activities to a service provider is, in effect, shifting to 
that service provider the burden that it would otherwise have carried 
itself. Under these circumstances, the burden is, by contract, shifted 
from the entity that is directly subject to Regulation S-ID to the 
service provider, but the total amount of burden is not increased. 
Thus, service provider burdens are already included in the burden 
estimates provided for entities that are directly subject to Regulation 
S-ID. The time and cost estimates made here are based on conversations 
with industry representatives and on a review of comments received on 
the proposed rules as well as the estimates made in the regulatory 
analyses of the identity theft red flags rules previously issued by the 
Agencies.
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    \182\ Based on discussions with industry representatives and a 
review of applicable law, SEC staff expects that, of the SEC-
regulated entities that fall within the scope of Regulation S-ID, 
most broker-dealers, many investment companies (including almost all 
open-end investment companies and ESCs), and some registered 
investment advisers will likely qualify as financial institutions or 
creditors. SEC staff expects that other SEC-regulated entities 
described in the scope section of Regulation S-ID, such as BDCs, 
transfer agents, NRSROs, SROs, and clearing agencies may be less 
likely to be financial institutions or creditors as defined in the 
rules, and therefore we do not include these entities in our 
estimates.
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2. Section 248.201 (Duties Regarding the Detection, Prevention, and 
Mitigation of Identity Theft)
    The collections of information required by section 248.201 apply to 
SEC-regulated entities that are financial institutions or 
creditors.\183\ As stated above, SEC staff expects that SEC-regulated 
entities should already have incurred initial or one-time burdens 
associated with compliance with Regulation S-ID because they should 
already be in compliance with the substantially identical requirements 
of the Agencies' identity theft red flags rules.\184\ Any initial or 
one-time burden estimates associated with compliance with section 
248.201 of Regulation S-ID apply only to newly-formed entities. The 
ongoing burden estimates apply to all SEC-regulated entities that are 
financial institutions or creditors. Existing entities subject to 
Regulation S-ID should already bear, and will continue to be subject 
to, this burden. In the Proposing Release, the SEC solicited comment on 
its estimates of the burdens associated with the collections of 
information required by section 248.201; one commenter raised concerns 
with the estimates in the Proposing Release, arguing that actual 
burdens could be greater than estimated.\185\
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    \183\ Sec.  248.201(a).
    \184\ See 2007 Adopting Release, supra note 8, at Section VI.A 
(discussing the PRA analysis with respect to the Agencies' identity 
theft red flags rules). Because the requirements of Regulation S-ID 
are substantially identical to the requirements of the Agencies' 
identity theft red flags rules, the SEC staff took the Agencies' PRA 
analysis into account in estimating the regulatory burdens of 
Regulation S-ID.
    \185\ See supra note 162 and accompanying text.
---------------------------------------------------------------------------

i. Initial Burden
    SEC staff estimates that the one-time burden of compliance with 
section 248.201 for SEC-regulated financial institutions and creditors 
with covered accounts is: (i) 25 hours to develop and obtain board 
approval of a Program; (ii) 4 hours to train staff; and (iii) 2 hours 
to conduct an initial assessment of covered accounts, for a total of 31 
hours. SEC staff estimates that, of the 31 hours incurred, 12 hours 
will be spent by internal counsel, 17 hours will be spent by 
administrative assistants, and 2 hours will be spent by the board of 
directors as a whole for newly-formed entities.
    SEC staff estimates that approximately 668 SEC-regulated financial 
institutions and creditors are newly formed each year.\186\ Each of 
these 668 entities will need to conduct an initial assessment of 
covered accounts, for a total of 1336 hours.\187\ Of these 668 
entities, SEC staff estimates that approximately 90% (or

[[Page 23657]]

601) maintain covered accounts.\188\ Accordingly, SEC staff estimates 
that the total initial burden for the 601 newly formed SEC-regulated 
entities that are likely to qualify as financial institutions or 
creditors and maintain covered accounts is 18,631 hours, and the total 
initial burden for all newly formed SEC-regulated entities is 18,765 
hours.\189\
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    \186\ Based on a review of new registrations typically filed 
with the SEC each year, SEC staff estimates that approximately 900 
investment advisers, 231 broker-dealers, 139 investment companies, 
and 1 ESC typically apply for registration with the SEC or otherwise 
are newly formed each year, for a total of 1271 entities that could 
be financial institutions or creditors. Of these, SEC staff 
estimates that all of the investment companies, ESCs, and broker-
dealers are likely to qualify as financial institutions or 
creditors, and 33% (or 297) of investment advisers are likely to 
qualify, for a total of 668 total financial institutions or 
creditors that will bear the initial one-time burden of assessing 
covered accounts under Regulation S-ID. Information regarding the 
method used to estimate that 33% of investment advisers are likely 
to qualify as financial institutions or creditors can be found in 
note 190 below.
    \187\ This estimate is based on the following calculation: 668 
entities x 2 hours = 1336 hours.
    \188\ In the Proposing Release, the SEC requested comment on the 
estimate that approximately 90% of all financial institutions and 
creditors maintain covered accounts; the SEC received no comments on 
this estimate.
    \189\ These estimates are based on the following calculations: 
601 financial institutions and creditors that maintain covered 
accounts x 31 hours = 18,631 hours; 17,429 hours (601 financial 
institutions and creditors that maintain covered accounts x 29 
hours) + 1336 hours (burden for all SEC-regulated entities that are 
financial institutions or creditors to conduct an initial assessment 
of covered accounts) = 18,765 hours.
---------------------------------------------------------------------------

ii. Ongoing Burden
    SEC staff estimates that the ongoing burden of compliance with 
section 248.201 includes: (i) 2 hours to conduct periodic assessments 
to determine if the entity offers or maintains covered accounts; (ii) 4 
hours to prepare and present an annual report to the board; and (iii) 2 
hours to periodically review and update the Program, including review 
and preservation of contracts with service providers, and review and 
preservation of any documentation received from service providers, for 
a total of 8 hours. SEC staff estimates that, of the 8 hours incurred, 
7 hours will be spent by internal counsel and 1 hour will be spent by 
the board of directors as a whole.
    SEC staff estimates that there are 10,339 SEC-regulated entities 
that are either financial institutions or creditors, and that all of 
these are required to periodically review their accounts to determine 
if they offer or maintain covered accounts, for a total of 20,678 hours 
for these entities.\190\ Of these 10,339 entities, SEC staff estimates 
that approximately 90%, or 9305, maintain covered accounts, and thus 
will bear the additional burdens related to complying with the 
rules.\191\ Accordingly, SEC staff estimates that the total ongoing 
burden for these 9305 financial institutions and creditors that 
maintain covered accounts will be 74,440 hours.\192\ The estimated 
total ongoing burden for the 10,339 SEC-regulated entities that are 
financial institutions or creditors covered by Regulation S-ID will be 
76,508 hours.\193\
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    \190\ Based on a review of entities that the SEC regulates, SEC 
staff estimates that, as of July 1, 2012, there are approximately 
11,622 investment advisers, 4706 broker-dealers, 1692 active open-
end investment companies, and 150 ESCs. Of these, SEC staff 
estimates that all of the broker-dealers, open-end investment 
companies and ESCs are likely to qualify as financial institutions 
or creditors, and approximately 3791 investment advisers (or about 
33%, as explained further below) are likely to qualify, for a total 
of 10,339 total financial institutions or creditors that will bear 
the ongoing burden of assessing covered accounts under Regulation S-
ID. (The SEC staff estimates that the other types of entities that 
are covered by the scope of the SEC's rules will not be financial 
institutions or creditors and therefore will not be subject to the 
rules' requirements. See supra note 182.) The total hours estimate 
is based on the following calculation: 10,339 entities x 2 hours = 
20,678 hours.
    The SEC staff estimate that 33% of SEC-registered investment 
advisers will be subject to the requirements of Regulation S-ID is 
based on the following calculation. According to Investment Adviser 
Registration Depository (IARD) data, there are approximately 11,622 
investment advisers registered with the SEC as of July 1, 2012. Of 
these advisers, approximately 7327 could potentially be subject to 
the rule as financial institutions because they indicate they have 
customers who are natural persons. We estimate that approximately 
16%, or 1202 of these 7327 advisers, hold transaction accounts 
belonging to natural persons and therefore would qualify as 
financial institutions under the rule. Additionally, 4055 of the 
11,622 advisers registered with the SEC have private fund clients. 
We expect that most of the funds advised by these advisers would 
have at least one natural person investor, and thus they could 
potentially meet the definition of ``financial institution.'' In 
addition, some of these private fund advisers may engage in lending 
activities that would also qualify them as creditors under the rule. 
In order to avoid duplication, however, we are deducting 1466 
private fund advisers from the total number of advisers we estimate 
will be subject to the rule, because they also indicated on Form ADV 
that they have individual or high net worth clients and are already 
accounted for in our estimates above. Accordingly, the staff 
estimates that approximately 3791 (i.e., 1202 + 4055 - 1466) 
advisers registered with the SEC will be subject to the rule. These 
3791 advisers are about 33% of the 11,622 SEC-registered advisers.
    \191\ In the Proposing Release, the SEC requested comment on the 
estimate that approximately 90% of all financial institutions and 
creditors maintain covered accounts; the SEC received no comments on 
this estimate. See supra note 188 and accompanying text. If a 
financial institution or creditor does not maintain covered 
accounts, there will be no ongoing annual burden for purposes of the 
PRA.
    \192\ This estimate is based on the following calculation: 9305 
financial institutions and creditors that maintain covered accounts 
x 8 hours = 74,440 hours.
    \193\ This estimate is based on the following calculation: 
20,678 hours (10,339 financial institutions and creditors x 2 hours 
(for review of accounts)) + 55,830 hours (9305 financial 
institutions and creditors that maintain covered accounts x 6 hours 
(for report to board, and review and update of Program)) = 76,508 
hours.
---------------------------------------------------------------------------

2. Section 248.202 (Duties of Card Issuers Regarding Changes of 
Address).
    The collections of information required by section 248.202 apply 
only to SEC-regulated entities that issue credit or debit cards.\194\ 
SEC staff understands that SEC-regulated entities generally do not 
issue credit or debit cards, but instead have arrangements with other 
entities, such as banks, that issue cards on their behalf. These other 
entities, which are not regulated by the SEC, are already subject to 
substantially similar change of address obligations pursuant to the 
Agencies' identity theft red flags rules. In addition, SEC staff 
understands that card issuers already assess the validity of change of 
address requests and, for the most part, have automated the process of 
notifying the cardholder or using other means to assess the validity of 
changes of address. Therefore, implementation of this requirement poses 
no further burden.
---------------------------------------------------------------------------

    \194\ Sec.  248.202(a).
---------------------------------------------------------------------------

    SEC staff does not expect that any SEC-regulated entities will be 
subject to the information collection requirements of section 248.202. 
Accordingly, SEC staff estimates that there is no hourly or cost burden 
for SEC-regulated entities related to section 248.202. In the Proposing 
Release, the SEC solicited comment on this same estimate of the burdens 
associated with the collections of information required by section 
248.202 and received no comments on its burden estimate.

D. Regulatory Flexibility Act

CFTC
    The Regulatory Flexibility Act (``RFA'') requires that federal 
agencies consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis respecting the 
impact.\195\ The CFTC has already established certain definitions of 
``small entities'' to be used in evaluating the impact of its rules on 
such small entities in accordance with the RFA.\196\ The CFTC's final 
identity theft red flags regulations affect FCMs, RFEDs, IBs, CTAs, 
CPOs, SDs, and MSPs. SDs and MSPs are new categories of registrants. 
Accordingly, the CFTC has noted in other rule proposals that it has not 
previously addressed the question of whether such persons were, in 
fact, small entities for purposes of the RFA.\197\
---------------------------------------------------------------------------

    \195\ See 5 U.S.C. 601-612.
    \196\ 47 FR 18618 (Apr. 30, 1982).
    \197\ See 75 FR 81519 (Dec. 28, 2010); 76 FR 6708 (Feb. 8, 
2011); 76 FR 6715 (Feb. 8, 2011).
---------------------------------------------------------------------------

    In this regard, the CFTC has previously determined that FCMs should 
not be considered to be small entities for purposes of the RFA, based, 
in part, upon FCMs' obligation to meet the minimum financial 
requirements established by the CFTC to enhance the protection of 
customers' segregated funds and protect the financial condition of FCMs 
generally.\198\ Like FCMs, SDs will be subject to minimum capital and 
margin requirements, and

[[Page 23658]]

are expected to comprise the largest global financial institutions--and 
the CFTC is required to exempt from designation as an SD entities that 
engage in a de minimis level of swaps dealing in connection with 
transactions with or on behalf of customers. Accordingly, for purposes 
of the RFA, the CFTC has determined that SDs not be considered ``small 
entities'' for essentially the same reasons that it has previously 
determined FCMs not to be small entities.\199\
---------------------------------------------------------------------------

    \198\ See, e.g., 75 FR 81519 (Dec. 28, 2010).
    \199\ Id.
---------------------------------------------------------------------------

    The CFTC also has previously determined that large traders are not 
``small entities'' for RFA purposes, with the CFTC considering the size 
of a trader's position to be the only appropriate test for the purpose 
of large trader reporting.\200\ The CFTC also has noted that MSPs 
maintain substantial positions in swaps, creating substantial 
counterparty exposure that could have serious adverse effects on the 
financial stability of the United States banking system or financial 
markets.\201\ Accordingly, for purposes of the RFA, the CFTC has 
determined that MSPs not be considered ``small entities'' for 
essentially the same reasons that it has previously determined large 
traders not to be small entities.\202\
---------------------------------------------------------------------------

    \200\ See 47 FR 18618 (Apr. 30, 1982).
    \201\ See, e.g., 75 FR 81519 (Dec. 28, 2010).
    \202\ Id.
---------------------------------------------------------------------------

    The CFTC did not receive any comments on its analysis of the 
application of the RFA to SDs and MSPs. Moreover, the CFTC has issued 
final rules in which it determined that the registration and regulation 
of SDs and MSPs would not have a significant economic impact on a 
substantial number of small entities.\203\
---------------------------------------------------------------------------

    \203\ See, e.g., 77 FR 2613 (Jan. 19, 2012); 77 FR 20128 (Apr. 
3, 2012).
---------------------------------------------------------------------------

    Further, the CFTC has determined that the requirements on financial 
institutions and creditors, and card issuers set forth in the identity 
theft red flags rules, respectively, will not have a significant 
economic impact on a substantial number of small entities because many 
of these entities are already complying with the identity theft red 
flags rules of the Agencies. Moreover, the CFTC believes that the rules 
include a great deal of flexibility to assist its regulated entities in 
complying with such rules and guidelines.
    In accordance with 5 U.S.C. 605(b), the CFTC Chairman, on behalf of 
the CFTC, certifies that these rules will not have a significant 
economic impact on a substantial number of small entities.
SEC
    The SEC has prepared the following Final Regulatory Flexibility 
Analysis (``FRFA'') regarding Regulation S-ID in accordance with 5 
U.S.C. 604. The SEC included an Initial Regulatory Flexibility Analysis 
(``IRFA'') in the Proposing Release in February 2012.\204\
---------------------------------------------------------------------------

    \204\ See Proposing Release, supra note 12.
---------------------------------------------------------------------------

1. Need for Regulation S-ID
    The FACT Act, which amended FCRA to address identity theft red 
flags, was enacted in part to help prevent the theft of consumer 
information. The statute contains several provisions relating to the 
detection, prevention, and mitigation of identity theft. Section 
1088(a) of the Dodd-Frank Act amended section 615(e) of the FCRA by 
adding the SEC (and CFTC) to the list of federal agencies required to 
adopt rules related to the detection, prevention, and mitigation of 
identity theft. Regulation S-ID implements the statutory directives in 
section 615(e) of the FCRA, which require the SEC to adopt identity 
theft rules jointly with the Agencies and the CFTC.
    Section 615(e) requires the SEC to adopt rules that require 
financial institutions and creditors to establish policies and 
procedures to implement guidelines established by the SEC that address 
identity theft with respect to account holders and customers. Section 
615(e) also requires the SEC to adopt rules applicable to credit and 
debit card issuers to implement policies and procedures to assess the 
validity of change of address requests.
2. Significant Issues Raised by Public Comment
    In the Proposing Release, we requested comment on the IRFA. None of 
the comment letters we received specifically addressed the IRFA. None 
of the comment letters made specific comments about Regulation S-ID's 
impact on smaller financial institutions and creditors.
3. Small Entities Subject to the Rule
    For purposes of the Regulatory Flexibility Act (``RFA''), an 
investment company is a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year. SEC staff estimates that approximately 119 of the 1692 
active open-end investment companies registered on Form N-1A meet this 
definition.\205\
---------------------------------------------------------------------------

    \205\ This information is based on staff analysis of information 
from filings on Form N-SAR and from databases compiled by third-
party information providers, including Lipper Inc.
---------------------------------------------------------------------------

    Under SEC rules, for purposes of the Investment Advisers Act and 
the RFA, an investment adviser generally is a small entity if it: (i) 
Has assets under management having a total value of less than $25 
million; (ii) did not have total assets of $5 million or more on the 
last day of its most recent fiscal year; and (iii) does not control, is 
not controlled by, and is not under common control with another 
investment adviser that has assets under management of $25 million or 
more, or any person (other than a natural person) that had total assets 
of $5 million or more on the last day of its most recent fiscal 
year.\206\ Based on information in filings submitted to the SEC, 561 of 
the approximately 11,622 investment advisers registered with the SEC 
are small entities.\207\
---------------------------------------------------------------------------

    \206\ 17 CFR 275.0-7(a).
    \207\ This information is based on data from the Investment 
Adviser Registration Depository (IARD) as of July 1, 2012.
---------------------------------------------------------------------------

    For purposes of the RFA, a broker-dealer is a small business if it 
had total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the date in the prior fiscal year as of which its 
audited financial statements were prepared pursuant to rule 17a-5(d) of 
the Exchange Act or, if not required to file such statements, a broker-
dealer that had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the last business day of the preceding fiscal 
year (or in the time that it has been in business, if shorter) and if 
it is not an affiliate of an entity that is not a small business.\208\ 
SEC staff estimates that approximately 797 broker-dealers meet this 
definition.\209\
---------------------------------------------------------------------------

    \208\ 17 CFR 240.0-10(c).
    \209\ This estimate is based on information provided in FOCUS 
Reports filed with the SEC as of July 1, 2012. There are 
approximately 4706 broker-dealers registered with the SEC.
---------------------------------------------------------------------------

4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    Section 615(e) of the FCRA, as amended by section 1088 of the Dodd-
Frank Act, requires the SEC to adopt rules that require financial 
institutions and creditors to establish reasonable policies and 
procedures to implement guidelines established by the SEC that address 
identity theft with respect to account holders and customers. Section 
248.201 of Regulation S-ID implements this mandate by requiring a 
covered financial institution or creditor that offers or maintains 
certain accounts to create an identity theft prevention Program that 
detects, prevents, and

[[Page 23659]]

mitigates the risk of identity theft applicable to these accounts.
    Section 615(e) also requires the SEC to adopt rules applicable to 
credit and debit card issuers to implement policies and procedures to 
assess the validity of change of address requests. Section 248.202 of 
Regulation S-ID implements this requirement by requiring credit and 
debit card issuers to establish reasonable policies and procedures to 
assess the validity of a change of address if it receives notification 
of a change of address for a credit or debit card account and within a 
short period of time afterwards (within 30 days), the issuer receives a 
request for an additional or replacement card for the same account.
    Because all SEC-regulated entities, including small entities, 
should already be in compliance with the substantially similar identity 
theft red flags rules that the Agencies began enforcing in 2008 and 
2011,\210\ Regulation S-ID should not impose new compliance, 
recordkeeping, or reporting burdens. If a SEC-regulated small entity is 
not already in compliance with the existing identity theft red flags 
rules issued by the Agencies, the burden of compliance with Regulation 
S-ID should be minimal because we understand that these entities 
already engage in various activities to minimize losses due to fraud as 
part of their usual and customary business practices. In particular, 
the rules allow these entities to consolidate their existing policies 
and procedures into their written Program and may require some 
additional staff training. Accordingly, the impact of the requirements 
should be largely incremental and not significant, and we do not 
anticipate that Regulation S-ID will disproportionately affect small 
entities.
---------------------------------------------------------------------------

    \210\ See supra note 8.
---------------------------------------------------------------------------

    The SEC has estimated the costs of Regulation S-ID for all entities 
(including small entities) in the PRA and economic analysis included in 
this release. No new classes of skills are required to comply with 
Regulation S-ID. SEC staff does not anticipate that small entities will 
face unique or special burdens when complying with Regulation S-ID.
5. Agency Action To Minimize Effect on Small Entities
    The RFA directs the SEC to consider significant alternatives that 
would accomplish our stated objective, while minimizing any significant 
economic impact on small issuers. In connection with Regulation S-ID, 
the SEC considered the following alternatives: (i) The establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (ii) the 
clarification, consolidation, or simplification of compliance 
requirements under Regulation S-ID for small entities; (iii) the use of 
performance rather than design standards; and (iv) an exemption from 
coverage of Regulation S-ID, or any part thereof, for small entities.
    Regulation S-ID requires covered financial institutions and 
creditors that offer or maintain certain accounts to create an identity 
theft prevention Program and report to the board of directors, an 
appropriate committee thereof, or a designated senior management 
employee at least annually on compliance with the regulations. Credit 
and debit card issuers are required to respond to a change of address 
request by notifying the cardholder or using other means to assess the 
validity of a change of address.
    The standards in Regulation S-ID are flexible, and take into 
account a covered financial institution or creditor's size and 
sophistication, as well as the costs and benefits of alternative 
compliance methods. A Program under Regulation S-ID should be tailored 
to the risk of identity theft in a financial institution or creditor's 
covered accounts, thereby permitting small entities whose accounts pose 
a low risk of identity theft to avoid much of the cost of compliance. 
Because small entities maintain covered accounts that pose a risk of 
identity theft for consumers just as larger entities do, providing an 
exemption from Regulation S-ID for small entities could subject 
consumers with covered accounts at small entities to a higher risk of 
identity theft.
    Pursuant to section 615(e) of the FCRA, as amended by section 1088 
of the Dodd-Frank Act, the SEC and the CFTC are jointly adopting 
identity theft red flags rules that are substantially similar and 
comparable to the identity theft red flags rules previously adopted by 
the Agencies. Providing a new exemption for small entities, or further 
consolidating or simplifying the regulations for small entities, could 
result in significant differences between the identity theft red flags 
rules adopted by the Commissions and the rules adopted by the Agencies. 
Because SEC-regulated entities, including small entities, should 
already be in compliance with the substantially similar identity theft 
red flags rules that the Agencies began enforcing in 2008 and 2011, SEC 
staff does not expect that small entities will need a delayed effective 
or compliance date beyond that already provided to all entities subject 
to the rules.

IV. Statutory Authority and Text of Amendments

    The CFTC is amending Part 162 under the authority set forth in 
sections 1088(a)(8), 1088(a)(10), and 1088(b) of the Dodd-Frank 
Act,\211\ and sections 615(e), 621(b), 624, and 628 of the FCRA.\212\
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    \211\ Pub. L. 111-203, Sec. Sec.  1088(a)(8), 1088(a)(10), and 
Sec.  1088(b), 124 Stat. 1376 (2010).
    \212\ 15 U.S.C 1681-(e), 1681s(b), 1681s-3 and note, and 
1681w(a)(1).
---------------------------------------------------------------------------

    The SEC is adopting Regulation S-ID under the authority set forth 
in sections 1088(a)(8), 1088(a)(10), and 1088(b) of the Dodd-Frank 
Act,\213\ section 615(e) of the FCRA,\214\ sections 17 and 23 of the 
Exchange Act,\215\ sections 31 and 38 of the Investment Company 
Act,\216\ and sections 204 and 211 of the Investment Advisers Act.\217\
---------------------------------------------------------------------------

    \213\ Pub. L. 111-203, Sec. Sec.  1088(a)(8), 1088(a)(10), 
1088(b), 124 Stat. 1376 (2010).
    \214\ 15 U.S.C. 1681m(e).
    \215\ 15 U.S.C. 78q and 78w.
    \216\ 15 U.S.C. 80a-30 and 80a-37.
    \217\ 15 U.S.C. 80b-4 and 80b-11.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 162

    Cardholders, Card issuers, Commodity pool operators, Commodity 
trading advisors, Confidential business information, Consumer reports, 
Credit, Creditors, Consumer, Customer, Financial institutions, Futures 
commission merchants, Identity theft, Introducing brokers, Major swap 
participants, Privacy, Red flags, Reporting and recordkeeping 
requirements, Retail foreign exchange dealers, Self-regulatory 
organizations, Service provider, Swap dealers.

17 CFR Part 248

    Affiliate marketing, Brokers, Cardholders, Card issuers, 
Confidential business information, Consumers, Consumer financial 
information, Consumer reports, Credit, Creditors, Customers, Dealers, 
Financial institutions, Identity theft, Investment advisers, Investment 
companies, Privacy, Red flags, Reporting and recordkeeping 
requirements, Securities, Security measures, Self-regulatory 
organizations, Service providers, Transfer agents.

Text of Final Rules

Commodity Futures Trading Commission

    For the reasons stated above in the preamble, the Commodity Futures

[[Page 23660]]

Trading Commission is amending 17 CFR part 162 as follows:

PART 162--PROTECTION OF CONSUMER INFORMATION UNDER THE FAIR CREDIT 
REPORTING ACT

0
1. The authority citation for part 162 continues to read as follows:

    Authority: Sec. 1088, Pub. L. 111-203; 124 Stat. 1376 (2010).


0
2. Add subpart C to part 162 read as follows:
Subpart C--Identity Theft Red Flags
Sec.
162.30 Duties regarding the detection, prevention, and mitigation of 
identity theft.
162.31 [Reserved]
162.32 Duties of card issuers regarding changes of address.

Subpart C--Identity Theft Red Flags


Sec.  162.30  Duties regarding the detection, prevention, and 
mitigation of identity theft.

    (a) Scope of this subpart. This section applies to financial 
institutions or creditors that are subject to administrative 
enforcement of the FCRA by the Commission pursuant to Sec. 621(b)(1) of 
the FCRA, 15 U.S.C. 1681s(b)(1).
    (b) Special definitions for this subpart. For purposes of this 
section, and Appendix B to this part, the following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a financial institution or creditor to obtain a product or service 
for personal, family, household or business purposes. Account includes 
an extension of credit, such as the purchase of property or services 
involving a deferred payment.
    (2) The term board of directors includes:
    (i) In the case of a branch or agency of a foreign bank, the 
managing official in charge of the branch or agency; and
    (ii) In the case of any other creditor that does not have a board 
of directors, a designated senior management employee.
    (3) Covered account means:
    (i) An account that a financial institution or creditor offers or 
maintains, primarily for personal, family, or household purposes, that 
involves or is designed to permit multiple payments or transactions, 
such as a margin account; and
    (ii) Any other account that the financial institution or creditor 
offers or maintains for which there is a reasonably foreseeable risk to 
customers or to the safety and soundness of the financial institution 
or creditor from identity theft, including financial, operational, 
compliance, reputation, or litigation risks.
    (4) Credit has the same meaning in Sec. 603(r)(5) of the FCRA, 15 
U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4), and 
includes any futures commission merchant, retail foreign exchange 
dealer, commodity trading advisor, commodity pool operator, introducing 
broker, swap dealer, or major swap participant that regularly extends, 
renews, or continues credit; regularly arranges for the extension, 
renewal, or continuation of credit; or in acting as an assignee of an 
original creditor, participates in the decision to extend, renew, or 
continue credit.
    (6) Customer means a person that has a covered account with a 
financial institution or creditor.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t) and includes any futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator, 
introducing broker, swap dealer, or major swap participant that 
directly or indirectly holds a transaction account belonging to a 
consumer.
    (8) Identifying information means any name or number that may be 
used, alone or in conjunction with any other information, to identify a 
specific person, including any--
    (i) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, employer or taxpayer 
identification number;
    (ii) Unique biometric data, such as fingerprint, voice print, 
retina or iris image, or other unique physical representation;
    (iii) Unique electronic identification number, address, or routing 
code; or
    (iv) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
    (9) Identity theft means a fraud committed or attempted using the 
identifying information of another person without authority.
    (10) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (11) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (c) Periodic identification of covered accounts. Each financial 
institution or creditor must periodically determine whether it offers 
or maintains covered accounts. As a part of this determination, a 
financial institution or creditor shall conduct a risk assessment to 
determine whether it offers or maintains covered accounts described in 
paragraph (b)(3)(ii) of this section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program-(1) 
Program requirement. Each financial institution or creditor that offers 
or maintains one or more covered accounts must develop and implement a 
written Identity Theft Prevention Program that is designed to detect, 
prevent, and mitigate identity theft in connection with the opening of 
a covered account or any existing covered account. The Identity Theft 
Prevention Program must be appropriate to the size and complexity of 
the financial institution or creditor and the nature and scope of its 
activities.
    (2) Elements of the Identity Theft Prevention Program. The Identity 
Theft Prevention Program must include reasonable policies and 
procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Identity Theft Prevention Program;
    (ii) Detect Red Flags that have been incorporated into the Identity 
Theft Prevention Program of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and 
mitigate identity theft; and
    (iv) Ensure the Identity Theft Prevention Program (including the 
Red Flags determined to be relevant) is updated periodically, to 
reflect changes in risks to customers and to the safety and soundness 
of the financial institution or creditor from identity theft.
    (e) Administration of the Identity Theft Prevention Program. Each 
financial institution or creditor that is required to implement an 
Identity Theft Prevention Program must provide for the continued 
administration of the Identity Theft Prevention Program and must:
    (1) Obtain approval of the initial written Identity Theft 
Prevention Program from either its board of directors or an appropriate 
committee of the board of directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a

[[Page 23661]]

designated employee at the level of senior management in the oversight, 
development, implementation and administration of the Identity Theft 
Prevention Program;
    (3) Train staff, as necessary, to effectively implement the 
Identity Theft Prevention Program; and
    (4) Exercise appropriate and effective oversight of service 
provider arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement an Identity Theft Prevention Program must 
consider the guidelines in appendix B of this part and include in its 
Identity Theft Prevention Program those guidelines that are 
appropriate.


Sec.  162.31  [Reserved]


Sec.  162.32  Duties of card issuers regarding changes of address.

    (a) Scope. This section applies to a person described in Sec.  
162.30(a) that issues a debit or credit card (card issuer).
    (b) Definition of cardholder. For purposes of this section, a 
cardholder means a consumer who has been issued a credit or debit card.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days 
after it receives such notification), the card issuer receives a 
request for an additional or replacement card for the same account. 
Under these circumstances, the card issuer may not issue an additional 
or replacement card, until, in accordance with its reasonable policies 
and procedures and for the purpose of assessing the validity of the 
change of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and 
the cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec.  162.30.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the 
cardholder.

0
3. Add Appendix B to part 162 to read as follows:

Appendix B to Part 162--Interagency Guidelines on Identity Theft 
Detection, Prevention, and Mitigation

    Section 162.30 requires each financial institution or creditor 
that offers or maintains one or more covered accounts, as defined in 
Sec.  162.30(b)(3), to develop and provide for the continued 
administration of a written Identity Theft Prevention Program to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. These 
guidelines are intended to assist financial institutions and 
creditors in the formulation and maintenance of an Identity Theft 
Prevention Program that satisfies the requirements of Sec.  162.30.

I. The Identity Theft Prevention Program

    In designing its Identity Theft Prevention Program, a financial 
institution or creditor may incorporate, as appropriate, its 
existing policies, procedures, and other arrangements that control 
reasonably foreseeable risks to customers or to the safety and 
soundness of the financial institution or creditor from identity 
theft.

II. Identifying Relevant Red Flags

    (a) Risk factors. A financial institution or creditor should 
consider the following factors in identifying relevant Red Flags for 
covered accounts, as appropriate:
    (1) The types of covered accounts it offers or maintains;
    (2) The methods it provides to open its covered accounts;
    (3) The methods it provides to access its covered accounts; and
    (4) Its previous experiences with identity theft.
    (b) Sources of Red Flags. Financial institutions and creditors 
should incorporate relevant Red Flags from sources such as:
    (1) Incidents of identity theft that the financial institution 
or creditor has experienced;
    (2) Methods of identity theft that the financial institution or 
creditor has identified that reflect changes in identity theft 
risks; and
    (3) Applicable supervisory guidance.
    (c) Categories of Red Flags. The Identity Theft Prevention 
Program should include relevant Red Flags from the following 
categories, as appropriate. Examples of Red Flags from each of these 
categories are appended as Supplement A to this Appendix B.
    (1) Alerts, notifications, or other warnings received from 
consumer reporting agencies or service providers, such as fraud 
detection services;
    (2) The presentation of suspicious documents;
    (3) The presentation of suspicious personal identifying 
information, such as a suspicious address change;
    (4) The unusual use of, or other suspicious activity related to, 
a covered account; and
    (5) Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible 
identity theft in connection with covered accounts held by the 
financial institution or creditor.

III. Detecting Red Flags

    The Identity Theft Prevention Program's policies and procedures 
should address the detection of Red Flags in connection with the 
opening of covered accounts and existing covered accounts, such as 
by:
    (a) Obtaining identifying information about, and verifying the 
identity of, a person opening a covered account; and
    (b) Authenticating customers, monitoring transactions, and 
verifying the validity of change of address requests, in the case of 
existing covered accounts.

IV. Preventing and Mitigating Identity Theft

    The Identity Theft Prevention Program's policies and procedures 
should provide for appropriate responses to the Red Flags the 
financial institution or creditor has detected that are commensurate 
with the degree of risk posed. In determining an appropriate 
response, a financial institution or creditor should consider 
aggravating factors that may heighten the risk of identity theft, 
such as a data security incident that results in unauthorized access 
to a customer's account records held by the financial institution or 
creditor, or third party, or notice that a customer has provided 
information related to a covered account held by the financial 
institution or creditor to someone fraudulently claiming to 
represent the financial institution or creditor or to a fraudulent 
Internet Web site. Appropriate responses may include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the customer;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;
    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not 
selling a covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the 
particular circumstances.

V. Updating the Identity Theft Prevention Program

    Financial institutions and creditors should update the Identity 
Theft Prevention Program (including the Red Flags determined to be 
relevant) periodically, to reflect changes in risks to customers or 
to the safety and

[[Page 23662]]

soundness of the financial institution or creditor from identity 
theft, based on factors such as:
    (a) The experiences of the financial institution or creditor 
with identity theft;
    (b) Changes in methods of identity theft;
    (c) Changes in methods to detect, prevent, and mitigate identity 
theft;
    (d) Changes in the types of accounts that the financial 
institution or creditor offers or maintains; and
    (e) Changes in the business arrangements of the financial 
institution or creditor, including mergers, acquisitions, alliances, 
joint ventures, and service provider arrangements.

VI. Methods for Administering the Identity Theft Prevention Program

    (a) Oversight of Identity Theft Prevention Program. Oversight by 
the board of directors, an appropriate committee of the board, or a 
designated senior management employee should include:
    (1) Assigning specific responsibility for the Identity Theft 
Prevention Program's implementation;
    (2) Reviewing reports prepared by staff regarding compliance by 
the financial institution or creditor with Sec.  162.30; and
    (3) Approving material changes to the Identity Theft Prevention 
Program as necessary to address changing identity theft risks.
    (b) Reports. (1) In general. Staff of the financial institution 
or creditor responsible for development, implementation, and 
administration of its Identity Theft Prevention Program should 
report to the board of directors, an appropriate committee of the 
board, or a designated senior management employee, at least 
annually, on compliance by the financial institution or creditor 
with Sec.  162.30.
    (2) Contents of report. The report should address material 
matters related to the Identity Theft Prevention Program and 
evaluate issues such as: The effectiveness of the policies and 
procedures of the financial institution or creditor in addressing 
the risk of identity theft in connection with the opening of covered 
accounts and with respect to existing covered accounts; service 
provider arrangements; significant incidents involving identity 
theft and management's response; and recommendations for material 
changes to the Identity Theft Prevention Program.
    (c) Oversight of service provider arrangements. Whenever a 
financial institution or creditor engages a service provider to 
perform an activity in connection with one or more covered accounts 
the financial institution or creditor should take steps to ensure 
that the activity of the service provider is conducted in accordance 
with reasonable policies and procedures designed to detect, prevent, 
and mitigate the risk of identity theft. For example, a financial 
institution or creditor could require the service provider by 
contract to have policies and procedures to detect relevant Red 
Flags that may arise in the performance of the service provider's 
activities, and either report the Red Flags to the financial 
institution or creditor, or to take appropriate steps to prevent or 
mitigate identity theft.

VII. Other Applicable Legal Requirements

    Financial institutions and creditors should be mindful of other 
related legal requirements that may be applicable, such as:
    (a) For financial institutions and creditors that are subject to 
31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance 
with applicable law and regulation;
    (b) Implementing any requirements under 15 U.S.C. 1681c-1(h) 
regarding the circumstances under which credit may be extended when 
the financial institution or creditor detects a fraud or active duty 
alert;
    (c) Implementing any requirements for furnishers of information 
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example, 
to correct or update inaccurate or incomplete information, and to 
not report information that the furnisher has reasonable cause to 
believe is inaccurate; and
    (d) Complying with the prohibitions in 15 U.S.C. 1681m on the 
sale, transfer, and placement for collection of certain debts 
resulting from identity theft.

Supplement A to Appendix B

    In addition to incorporating Red Flags from the sources 
recommended in section II(b) of the Guidelines in Appendix B of this 
part, each financial institution or creditor may consider 
incorporating into its Identity Theft Prevention Program, whether 
singly or in combination, Red Flags from the following illustrative 
examples in connection with covered accounts:

Alerts, Notifications or Warnings From a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer 
report.
    2. A consumer reporting agency provides a notice of credit 
freeze in response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as defined in Sec. 603(f) of the Fair Credit Reporting 
Act (15 U.S.C. 1681a(f)).
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit 
relationships;
    c. A material change in the use of credit, especially with 
respect to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse 
of account privileges by a financial institution or creditor.

Suspicious Documents

    5. Documents provided for identification appear to have been 
altered or forged.
    6. The photograph or physical description on the identification 
is not consistent with the appearance of the applicant or customer 
presenting the identification.
    7. Other information on the identification is not consistent 
with information provided by the person opening a new covered 
account or customer presenting the identification.
    8. Other information on the identification is not consistent 
with readily accessible information that is on file with the 
financial institution or creditor, such as a signature card or a 
recent check.
    9. An application appears to have been altered or forged, or 
gives the appearance of having been destroyed and reassembled.

Suspicious Personal Identifying Information

    10. Personal identifying information provided is inconsistent 
when compared against external information sources used by the 
financial institution or creditor. For example:
    a. The address does not match any address in the consumer 
report; or
    b. The Social Security Number (SSN) has not been issued, or is 
listed on the Social Security Administration's Death Master File.
    11. Personal identifying information provided by the customer is 
not consistent with other personal identifying information provided 
by the customer. For example, there is a lack of correlation between 
the SSN range and date of birth.
    12. Personal identifying information provided is associated with 
known fraudulent activity as indicated by internal or third-party 
sources used by the financial institution or creditor. For example:
    a. The address on an application is the same as the address 
provided on a fraudulent application; or
    b. The phone number on an application is the same as the number 
provided on a fraudulent application.
    13. Personal identifying information provided is of a type 
commonly associated with fraudulent activity as indicated by 
internal or third-party sources used by the financial institution or 
creditor. For example:
    a. The address on an application is fictitious, a mail drop, or 
a prison; or
    b. The phone number is invalid, or is associated with a pager or 
answering service.
    14. The SSN provided is the same as that submitted by other 
persons opening an account or other customers.
    15. The address or telephone number provided is the same as or 
similar to the address or telephone number submitted by an unusually 
large number of other persons opening accounts or by other 
customers.
    16. The person opening the covered account or the customer fails 
to provide all required personal identifying information on an 
application or in response to notification that the application is 
incomplete.
    17. Personal identifying information provided is not consistent 
with personal identifying information that is on file with the 
financial institution or creditor.
    18. For financial institutions or creditors that use challenge 
questions, the person opening the covered account or the customer 
cannot provide authenticating information beyond that which 
generally would be available from a wallet or consumer report.

Unusual Use of, or Suspicious Activity Related to, the Covered Account

    19. Shortly following the notice of a change of address for a 
covered account, the institution or creditor receives a request for 
a new, additional, or replacement means of accessing the account or 
for the addition of an authorized user on the account.
    20. A new revolving credit account is used in a manner commonly 
associated with known patterns of fraud. For example:

[[Page 23663]]

    a. The majority of available credit is used for cash advances or 
merchandise that is easily convertible to cash (e.g., electronics 
equipment or jewelry); or
    b. The customer fails to make the first payment or makes an 
initial payment but no subsequent payments.
    21. A covered account is used in a manner that is not consistent 
with established patterns of activity on the account. There is, for 
example:
    a. Nonpayment when there is no history of late or missed 
payments;
    b. A material increase in the use of available credit;
    c. A material change in purchasing or spending patterns;
    d. A material change in electronic fund transfer patterns in 
connection with a deposit account; or
    e. A material change in telephone call patterns in connection 
with a cellular phone account.
    22. A covered account that has been inactive for a reasonably 
lengthy period of time is used (taking into consideration the type 
of account, the expected pattern of usage and other relevant 
factors).
    23. Mail sent to the customer is returned repeatedly as 
undeliverable although transactions continue to be conducted in 
connection with the customer's covered account.
    24. The financial institution or creditor is notified that the 
customer is not receiving paper account statements.
    25. The financial institution or creditor is notified of 
unauthorized charges or transactions in connection with a customer's 
covered account.

Notice From Customers, Victims of Identity Theft, Law Enforcement 
Authorities, or Other Persons Regarding Possible Identity Theft in 
Connection With Covered Accounts Held by the Financial Institution or 
Creditor

    26. The financial institution or creditor is notified by a 
customer, a victim of identity theft, a law enforcement authority, 
or any other person that it has opened a fraudulent account for a 
person engaged in identity theft.

Securities and Exchange Commission

    For the reasons stated in the preamble, the Securities and Exchange 
Commission is amending 17 CFR part 248 as follows:

PART 248--REGULATIONS S-P, S-AM, AND S-ID

0
4. The authority citation for part 248 is revised to read as follows:

    Authority:  15 U.S.C. 78q, 78q-1, 78o-4, 78o-5, 78w, 78mm, 80a-
30, 80a-37, 80b-4, 80b-11, 1681m(e), 1681s(b), 1681s-3 and note, 
1681w(a)(1), 6801-6809, and 6825; Pub. L. 111-203, secs. 1088(a)(8), 
(a)(10), and sec. 1088(b), 124 Stat. 1376 (2010).


0
5. Revise the heading for part 248 to read as set forth above.

0
6. Add subpart C to part 248 to read as follows:
Subpart C--Regulation S-ID: Identity Theft Red Flags
Sec.
248.201 Duties regarding the detection, prevention, and mitigation 
of identity theft.
248.202 Duties of card issuers regarding changes of address.
Appendix A to Subpart C of Part 248--Interagency Guidelines on 
Identity Theft Detection, Prevention, and Mitigation

Subpart C--Regulation S-ID: Identity Theft Red Flags


Sec.  248.201  Duties regarding the detection, prevention, and 
mitigation of identity theft.

    (a) Scope. This section applies to a financial institution or 
creditor, as defined in the Fair Credit Reporting Act (15 U.S.C. 1681), 
that is:
    (1) A broker, dealer or any other person that is registered or 
required to be registered under the Securities Exchange Act of 1934;
    (2) An investment company that is registered or required to be 
registered under the Investment Company Act of 1940, that has elected 
to be regulated as a business development company under that Act, or 
that operates as an employees' securities company under that Act; or
    (3) An investment adviser that is registered or required to be 
registered under the Investment Advisers Act of 1940.
    (b) Definitions. For purposes of this subpart, and Appendix A of 
this subpart, the following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a financial institution or creditor to obtain a product or service 
for personal, family, household or business purposes. Account includes 
a brokerage account, a mutual fund account (i.e., an account with an 
open-end investment company), and an investment advisory account.
    (2) The term board of directors includes:
    (i) In the case of a branch or agency of a foreign financial 
institution or creditor, the managing official of that branch or 
agency; and
    (ii) In the case of a financial institution or creditor that does 
not have a board of directors, a designated employee at the level of 
senior management.
    (3) Covered account means:
    (i) An account that a financial institution or creditor offers or 
maintains, primarily for personal, family, or household purposes, that 
involves or is designed to permit multiple payments or transactions, 
such as a brokerage account with a broker-dealer or an account 
maintained by a mutual fund (or its agent) that permits wire transfers 
or other payments to third parties; and
    (ii) Any other account that the financial institution or creditor 
offers or maintains for which there is a reasonably foreseeable risk to 
customers or to the safety and soundness of the financial institution 
or creditor from identity theft, including financial, operational, 
compliance, reputation, or litigation risks.
    (4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4).
    (6) Customer means a person that has a covered account with a 
financial institution or creditor.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t).
    (8) Identifying information means any name or number that may be 
used, alone or in conjunction with any other information, to identify a 
specific person, including any--
    (i) Name, Social Security number, date of birth, official State or 
government issued driver's license or identification number, alien 
registration number, government passport number, employer or taxpayer 
identification number;
    (ii) Unique biometric data, such as fingerprint, voice print, 
retina or iris image, or other unique physical representation;
    (iii) Unique electronic identification number, address, or routing 
code; or
    (iv) Telecommunication identifying information or access device (as 
defined in 18 U.S.C. 1029(e)).
    (9) Identity theft means a fraud committed or attempted using the 
identifying information of another person without authority.
    (10) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (11) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (12) Other definitions.
    (i) Broker has the same meaning as in section 3(a)(4) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
    (ii) Commission means the Securities and Exchange Commission.
    (iii) Dealer has the same meaning as in section 3(a)(5) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
    (iv) Investment adviser has the same meaning as in section 
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)).
    (v) Investment company has the same meaning as in section 3 of the

[[Page 23664]]

Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a 
separate series of the investment company.
    (vi) Other terms not defined in this subpart have the same meaning 
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
    (c) Periodic identification of covered accounts. Each financial 
institution or creditor must periodically determine whether it offers 
or maintains covered accounts. As a part of this determination, a 
financial institution or creditor must conduct a risk assessment to 
determine whether it offers or maintains covered accounts described in 
paragraph (b)(3)(ii) of this section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--
    (1) Program requirement. Each financial institution or creditor 
that offers or maintains one or more covered accounts must develop and 
implement a written Identity Theft Prevention Program (Program) that is 
designed to detect, prevent, and mitigate identity theft in connection 
with the opening of a covered account or any existing covered account. 
The Program must be appropriate to the size and complexity of the 
financial institution or creditor and the nature and scope of its 
activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and 
mitigate identity theft; and
    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
customers and to the safety and soundness of the financial institution 
or creditor from identity theft.
    (e) Administration of the Program. Each financial institution or 
creditor that is required to implement a Program must provide for the 
continued administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the 
Program; and
    (4) Exercise appropriate and effective oversight of service 
provider arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement a Program must consider the guidelines in 
Appendix A to this subpart and include in its Program those guidelines 
that are appropriate.


Sec.  248.202  Duties of card issuers regarding changes of address.

    (a) Scope. This section applies to a person described in Sec.  
248.201(a) that issues a credit or debit card (card issuer).
    (b) Definitions. For purposes of this section:
    (1) Cardholder means a consumer who has been issued a credit card 
or debit card as defined in 15 U.S.C. 1681a(r).
    (2) Clear and conspicuous means reasonably understandable and 
designed to call attention to the nature and significance of the 
information presented.
    (3) Other terms not defined in this subpart have the same meaning 
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable written policies and procedures to assess the 
validity of a change of address if it receives notification of a change 
of address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days 
after it receives such notification), the card issuer receives a 
request for an additional or replacement card for the same account. 
Under these circumstances, the card issuer may not issue an additional 
or replacement card, until, in accordance with its reasonable policies 
and procedures and for the purpose of assessing the validity of the 
change of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and 
the cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec.  248.201.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
be provided separately from its regular correspondence with the 
cardholder.

Appendix A to Subpart C of Part 248--Interagency Guidelines on Identity 
Theft Detection, Prevention, and Mitigation

    Section 248.201 requires each financial institution and creditor 
that offers or maintains one or more covered accounts, as defined in 
Sec.  248.201(b)(3), to develop and provide for the continued 
administration of a written Program to detect, prevent, and mitigate 
identity theft in connection with the opening of a covered account 
or any existing covered account. These guidelines are intended to 
assist financial institutions and creditors in the formulation and 
maintenance of a Program that satisfies the requirements of Sec.  
248.201.

I. The Program

    In designing its Program, a financial institution or creditor 
may incorporate, as appropriate, its existing policies, procedures, 
and other arrangements that control reasonably foreseeable risks to 
customers or to the safety and soundness of the financial 
institution or creditor from identity theft.

II. Identifying Relevant Red Flags

    (a) Risk Factors. A financial institution or creditor should 
consider the following factors in identifying relevant Red Flags for 
covered accounts, as appropriate:
    (1) The types of covered accounts it offers or maintains;
    (2) The methods it provides to open its covered accounts;
    (3) The methods it provides to access its covered accounts; and
    (4) Its previous experiences with identity theft.
    (b) Sources of Red Flags. Financial institutions and creditors 
should incorporate relevant Red Flags from sources such as:
    (1) Incidents of identity theft that the financial institution 
or creditor has experienced;
    (2) Methods of identity theft that the financial institution or 
creditor has identified that reflect changes in identity theft 
risks; and

[[Page 23665]]

    (3) Applicable regulatory guidance.
    (c) Categories of Red Flags. The Program should include relevant 
Red Flags from the following categories, as appropriate. Examples of 
Red Flags from each of these categories are appended as Supplement A 
to this Appendix A.
    (1) Alerts, notifications, or other warnings received from 
consumer reporting agencies or service providers, such as fraud 
detection services;
    (2) The presentation of suspicious documents;
    (3) The presentation of suspicious personal identifying 
information, such as a suspicious address change;
    (4) The unusual use of, or other suspicious activity related to, 
a covered account; and
    (5) Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible 
identity theft in connection with covered accounts held by the 
financial institution or creditor.

III. Detecting Red Flags

    The Program's policies and procedures should address the 
detection of Red Flags in connection with the opening of covered 
accounts and existing covered accounts, such as by:
    (a) Obtaining identifying information about, and verifying the 
identity of, a person opening a covered account, for example, using 
the policies and procedures regarding identification and 
verification set forth in the Customer Identification Program rules 
implementing 31 U.S.C. 5318(l) (31 CFR 1023.220 (broker-dealers) and 
1024.220 (mutual funds)); and
    (b) Authenticating customers, monitoring transactions, and 
verifying the validity of change of address requests, in the case of 
existing covered accounts.

IV. Preventing and Mitigating Identity Theft

    The Program's policies and procedures should provide for 
appropriate responses to the Red Flags the financial institution or 
creditor has detected that are commensurate with the degree of risk 
posed. In determining an appropriate response, a financial 
institution or creditor should consider aggravating factors that may 
heighten the risk of identity theft, such as a data security 
incident that results in unauthorized access to a customer's account 
records held by the financial institution, creditor, or third party, 
or notice that a customer has provided information related to a 
covered account held by the financial institution or creditor to 
someone fraudulently claiming to represent the financial institution 
or creditor or to a fraudulent Web site. Appropriate responses may 
include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the customer;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;
    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not 
selling a covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the 
particular circumstances.

V. Updating the Program

    Financial institutions and creditors should update the Program 
(including the Red Flags determined to be relevant) periodically, to 
reflect changes in risks to customers or to the safety and soundness 
of the financial institution or creditor from identity theft, based 
on factors such as:
    (a) The experiences of the financial institution or creditor 
with identity theft;
    (b) Changes in methods of identity theft;
    (c) Changes in methods to detect, prevent, and mitigate identity 
theft;
    (d) Changes in the types of accounts that the financial 
institution or creditor offers or maintains; and
    (e) Changes in the business arrangements of the financial 
institution or creditor, including mergers, acquisitions, alliances, 
joint ventures, and service provider arrangements.

VI. Methods for Administering the Program

    (a) Oversight of Program. Oversight by the board of directors, 
an appropriate committee of the board, or a designated employee at 
the level of senior management should include:
    (1) Assigning specific responsibility for the Program's 
implementation;
    (2) Reviewing reports prepared by staff regarding compliance by 
the financial institution or creditor with Sec.  248.201; and
    (3) Approving material changes to the Program as necessary to 
address changing identity theft risks.
    (b) Reports.
    (1) In general. Staff of the financial institution or creditor 
responsible for development, implementation, and administration of 
its Program should report to the board of directors, an appropriate 
committee of the board, or a designated employee at the level of 
senior management, at least annually, on compliance by the financial 
institution or creditor with Sec.  248.201.
    (2) Contents of report. The report should address material 
matters related to the Program and evaluate issues such as: The 
effectiveness of the policies and procedures of the financial 
institution or creditor in addressing the risk of identity theft in 
connection with the opening of covered accounts and with respect to 
existing covered accounts; service provider arrangements; 
significant incidents involving identity theft and management's 
response; and recommendations for material changes to the Program.
    (c) Oversight of service provider arrangements. Whenever a 
financial institution or creditor engages a service provider to 
perform an activity in connection with one or more covered accounts 
the financial institution or creditor should take steps to ensure 
that the activity of the service provider is conducted in accordance 
with reasonable policies and procedures designed to detect, prevent, 
and mitigate the risk of identity theft. For example, a financial 
institution or creditor could require the service provider by 
contract to have policies and procedures to detect relevant Red 
Flags that may arise in the performance of the service provider's 
activities, and either report the Red Flags to the financial 
institution or creditor, or to take appropriate steps to prevent or 
mitigate identity theft.

VII. Other Applicable Legal Requirements

    Financial institutions and creditors should be mindful of other 
related legal requirements that may be applicable, such as:
    (a) For financial institutions and creditors that are subject to 
31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance 
with applicable law and regulation;
    (b) Implementing any requirements under 15 U.S.C. 1681c-1(h) 
regarding the circumstances under which credit may be extended when 
the financial institution or creditor detects a fraud or active duty 
alert;
    (c) Implementing any requirements for furnishers of information 
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example, 
to correct or update inaccurate or incomplete information, and to 
not report information that the furnisher has reasonable cause to 
believe is inaccurate; and
    (d) Complying with the prohibitions in 15 U.S.C. 1681m on the 
sale, transfer, and placement for collection of certain debts 
resulting from identity theft.

Supplement A to Appendix A

    In addition to incorporating Red Flags from the sources 
recommended in section II.b. of the Guidelines in Appendix A to this 
subpart, each financial institution or creditor may consider 
incorporating into its Program, whether singly or in combination, 
Red Flags from the following illustrative examples in connection 
with covered accounts:

Alerts, Notifications or Warnings From a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer 
report.
    2. A consumer reporting agency provides a notice of credit 
freeze in response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as referenced in Sec. 605(h) of the Fair Credit 
Reporting Act (15 U.S.C. 1681c(h)).
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit 
relationships;
    c. A material change in the use of credit, especially with 
respect to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse 
of account privileges by a financial institution or creditor.

Suspicious Documents

    5. Documents provided for identification appear to have been 
altered or forged.
    6. The photograph or physical description on the identification 
is not consistent with the appearance of the applicant or customer 
presenting the identification.
    7. Other information on the identification is not consistent 
with information provided

[[Page 23666]]

by the person opening a new covered account or customer presenting 
the identification.
    8. Other information on the identification is not consistent 
with readily accessible information that is on file with the 
financial institution or creditor, such as a signature card or a 
recent check.
    9. An application appears to have been altered or forged, or 
gives the appearance of having been destroyed and reassembled.

Suspicious Personal Identifying Information

    10. Personal identifying information provided is inconsistent 
when compared against external information sources used by the 
financial institution or creditor. For example:
    a. The address does not match any address in the consumer 
report; or
    b. The Social Security Number (SSN) has not been issued, or is 
listed on the Social Security Administration's Death Master File.
    11. Personal identifying information provided by the customer is 
not consistent with other personal identifying information provided 
by the customer. For example, there is a lack of correlation between 
the SSN range and date of birth.
    12. Personal identifying information provided is associated with 
known fraudulent activity as indicated by internal or third-party 
sources used by the financial institution or creditor. For example:
    a. The address on an application is the same as the address 
provided on a fraudulent application; or
    b. The phone number on an application is the same as the number 
provided on a fraudulent application.
    13. Personal identifying information provided is of a type 
commonly associated with fraudulent activity as indicated by 
internal or third-party sources used by the financial institution or 
creditor. For example:
    a. The address on an application is fictitious, a mail drop, or 
a prison; or
    b. The phone number is invalid, or is associated with a pager or 
answering service.
    14. The SSN provided is the same as that submitted by other 
persons opening an account or other customers.
    15. The address or telephone number provided is the same as or 
similar to the address or telephone number submitted by an unusually 
large number of other persons opening accounts or by other 
customers.
    16. The person opening the covered account or the customer fails 
to provide all required personal identifying information on an 
application or in response to notification that the application is 
incomplete.
    17. Personal identifying information provided is not consistent 
with personal identifying information that is on file with the 
financial institution or creditor.
    18. For financial institutions and creditors that use challenge 
questions, the person opening the covered account or the customer 
cannot provide authenticating information beyond that which 
generally would be available from a wallet or consumer report.

Unusual Use of, or Suspicious Activity Related to, the Covered Account

    19. Shortly following the notice of a change of address for a 
covered account, the institution or creditor receives a request for 
a new, additional, or replacement means of accessing the account or 
for the addition of an authorized user on the account.
    20. A covered account is used in a manner that is not consistent 
with established patterns of activity on the account. There is, for 
example:
    a. Nonpayment when there is no history of late or missed 
payments;
    b. A material increase in the use of available credit;
    c. A material change in purchasing or spending patterns; or
    d. A material change in electronic fund transfer patterns in 
connection with a deposit account.
    21. A covered account that has been inactive for a reasonably 
lengthy period of time is used (taking into consideration the type 
of account, the expected pattern of usage and other relevant 
factors).
    22. Mail sent to the customer is returned repeatedly as 
undeliverable although transactions continue to be conducted in 
connection with the customer's covered account.
    23. The financial institution or creditor is notified that the 
customer is not receiving paper account statements.
    24. The financial institution or creditor is notified of 
unauthorized charges or transactions in connection with a customer's 
covered account.

Notice From Customers, Victims of Identity Theft, Law Enforcement 
Authorities, or Other Persons Regarding Possible Identity Theft in 
Connection With Covered Accounts Held by the Financial Institution or 
Creditor

    25. The financial institution or creditor is notified by a 
customer, a victim of identity theft, a law enforcement authority, 
or any other person that it has opened a fraudulent account for a 
person engaged in identity theft.

    Dated: April 10, 2013.

    By the Commodity Futures Trading Commission.
Melissa Jurgens,
Secretary of the Commodity Futures Trading Commission.
    Dated: April 10, 2013

    By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary of the Securities and Exchange Commission.
[FR Doc. 2013-08830 Filed 4-18-13; 8:45 am]
BILLING CODE 6351-01-P; 8011-01-p