[Federal Register Volume 77, Number 44 (Tuesday, March 6, 2012)]
[Proposed Rules]
[Pages 13449-13478]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5157]



[[Page 13449]]

Vol. 77

Tuesday,

No. 44

March 6, 2012

Part III





Commodity Futures Trading Commission





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





17 CFR Part 162





Securities and Exchange Commission





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

17 CFR Part 248





Identity Theft Red Flags Rules; Proposed Rule

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

[[Page 13450]]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 162

RIN 3038-AD14

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 248

[Release No. IC-29969; File No. S7-02-12]
RIN 3235-AL26


Identity Theft Red Flags Rules

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

ACTION: Joint proposed rules and guidelines.

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

SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC,'' together with the CFTC, 
the ``Commissions'') are jointly issuing proposed rules and guidelines 
to implement new statutory provisions enacted by Title X of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. These provisions 
amend section 615(e) of the Fair Credit Reporting Act and direct the 
Commissions to prescribe rules requiring entities that are subject to 
the Commissions' jurisdiction to address identity theft in two ways. 
First, the proposed rules and guidelines would require financial 
institutions and creditors to develop and implement a written identity 
theft prevention program that is designed to detect, prevent, and 
mitigate identity theft in connection with certain existing accounts or 
the opening of new accounts. The Commissions also are proposing 
guidelines to assist entities in the formulation and maintenance of a 
program that would satisfy the requirements of the proposed rules. 
Second, the proposed rules would establish special requirements for any 
credit and debit card issuers that are subject to the Commissions' 
jurisdiction, to assess the validity of notifications of changes of 
address under certain circumstances.

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

ADDRESSES: Comments may be submitted by any of the following methods:
    CFTC:
     Agency Web site, via its Comments Online Process: Comments 
may be submitted to http://comments.cftc.gov. Follow the instructions 
for submitting comments on the Internet Web site.
     Mail: David A. Stawick, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW., 
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the CFTC to consider information that 
may be exempt from disclosure under the Freedom of Information Act, a 
petition for confidential treatment of the exempt information may be 
submitted according to the established procedures in 17 CFR 145.9.
    The CFTC reserves the right, but shall not have the obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all 
submissions from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act, 5 U.S.C. 
551, et seq., and other applicable laws, and may be accessible under 
the Freedom of Information Act, 5 U.S.C. 552.
    SEC:

Electronic Comments

     Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-02-12 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-12.
    This file number should be included on the subject line if email is 
used. To help us process and review your comments more efficiently, 
please use only one method. The SEC will post all comments on the SEC's 
Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also 
available for Web site viewing and printing in the SEC's Public 
Reference Room, 100 F Street NE., Washington, DC 20549 on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Carl E. Kennedy, Counsel, at 
Commodity Futures Trading Commission, Office of the General Counsel, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, 
telephone number (202) 418-6625, facsimile number (202) 418-5524, email 
c_kennedy@cftc.gov; SEC: with regard to investment companies and 
investment advisers, contact Thoreau Bartmann, Senior Counsel, or 
Hunter Jones, Assistant Director, Office of Regulatory Policy, Division 
of Investment Management, (202) 551-6792, or with regard to brokers, 
dealers, or transfer agents, contact Brice Prince, Special Counsel, or 
Joseph Furey, Assistant Chief Counsel, Office of Chief Counsel, 
Division of Trading and Markets, (202) 551-5550, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commissions are proposing new rules and 
guidelines on identity theft red flags for entities subject to their 
respective jurisdiction. The CFTC is proposing to add new subpart C 
(``Identity Theft Red Flags'') to part 162 of the CFTC's regulations 
[17 CFR part 162] and the SEC is proposing to add new subpart C 
(``Regulation S-ID: Identity Theft Red Flags'') to part 248 of the 
SEC's regulations [17 CFR part 248], under the Fair Credit Reporting 
Act of 1970 [15 U.S.C. 1681], the Commodity Exchange Act [7 U.S.C. 1], 
the Securities Exchange Act of 1934 [15 U.S.C. 78], the Investment 
Company Act of 1940 [15 U.S.C. 80a], and the Investment Advisers Act of 
1940 [15 U.S.C. 80b].

Table of Contents

I. Background
II. Explanation of the Proposed Rules and Guidelines
    A. Proposed Identity Theft Red Flags Rules
    1. Which Financial Institutions and Creditors Would Be Required 
to Have a Program
    2. The Objectives of the Program
    3. The Elements of the Program
    4. Administration of the Program
    B. Proposed Guidelines
    1. Section I of the Proposed Guidelines--Identity Theft 
Prevention Program

[[Page 13451]]

    2. Section II of the Proposed Guidelines--Identifying Relevant 
Red Flags
    3. Section III of the Proposed Guidelines--Detecting Red Flags
    4. Section IV of the Proposed Guidelines--Preventing and 
Mitigating Identity Theft
    5. Section V of the Proposed Guidelines--Updating the Identity 
Theft Prevention Program
    6. Section VI of the Proposed Guidelines--Methods for 
Administering the Identity Theft Prevention Program
    7. Section VII of the Proposed Guidelines--Other Applicable 
Legal Requirements
    8. Proposed Supplement A to the Guidelines
    C. Proposed Card Issuer Rules
    1. Definition of ``Cardholder'' and Other Terms
    2. Address Validation Requirements
    3. Form of Notice
    D. Proposed Effective and Compliance Dates
III. Related Matters
    A. Cost-Benefit Analysis (CFTC) and Economic Analysis (SEC)
    B. Analysis of Effects on Efficiency, Competition, and Capital 
Formation
    C. Paperwork Reduction Act
    D. Regulatory Flexibility Act
IV. Statutory Authority and Text of Proposed Amendments

I. Background

    The growth and advancement of information technology and electronic 
communication have made it increasingly easy to collect, maintain and 
transfer personal information about individuals. Advancements in 
technology also have led to increasing threats to the integrity and 
privacy of personal information.\1\ During recent decades, the federal 
government has taken steps to help protect individuals, and to help 
individuals protect themselves, from the risks of theft, loss, and 
abuse of their personal information.\2\
---------------------------------------------------------------------------

    \1\ See, e.g., U.S. Government Accountability Office, 
Information Security: Federal Guidance Needed to Address Control 
Issues with Implementing Cloud Computing (May 2010) (available at 
http://www.gao.gov/new.items/d10513.pdf) (discussing information 
security implications of cloud computing); Department of Commerce, 
Internet Policy Task Force, Commercial Data Privacy and Innovation 
in the Internet Economy: A Dynamic Policy Framework, at Section I 
(2010) (available at http://www.ntia.doc.gov/reports/2010/iptf_privacy_greenpaper_12162010.pdf) (reviewing recent technological 
changes that necessitate a new approach to commercial data 
protection). See also Fred H. Cate, Privacy in the Information Age, 
at 13-16 (1997) (discussing the privacy and data security issues 
that arose during early increases in the use of digital data).
    \2\ See, e.g., Report of President's Identity Theft Task Force 
(Sept. 2008) (available at http://www.ftc.gov/os/2008/10/081021taskforcereport.pdf) (documenting governmental efforts to 
reduce identity theft); Testimony of Edith Ramirez, Commissioner of 
Federal Trade Commission, on Data Security, before House 
Subcommittee on Commerce, Manufacturing, and Trade, June 15, 2011 
(available at http://www.ftc.gov/os/testimony/110615datasecurityhouse.pdf) (describing efforts of the Federal 
Trade Commission to promote data security).
---------------------------------------------------------------------------

    The Fair Credit Reporting Act of 1970 \3\ (``FCRA'') sets standards 
for the collection, communication, and use of information about 
consumers by consumer reporting agencies.\4\ Congress has amended the 
FCRA numerous times since 1970 to augment the protections the law 
provides. For example, the Fair and Accurate Credit Transactions Act of 
2003 (``FACT Act'') \5\ amended the FCRA to enhance the ability of 
consumers to combat identity theft.\6\ The FACT Act also amended the 
FCRA to direct certain federal agencies to jointly issue rules and 
guidelines related to identity theft.\7\
---------------------------------------------------------------------------

    \3\ Public Law 91-508, 84 Stat. 1114 (1970), codified at 15 
U.S.C. 1681 et seq.
    \4\ The FCRA states that its purpose is ``to require that 
consumer reporting agencies adopt reasonable procedures for meeting 
the needs of commerce for consumer credit, personnel, insurance, and 
other information in a manner which is fair and equitable to the 
consumer, with regard to the confidentiality, accuracy, relevancy, 
and proper utilization of such information * * *.'' Id.
    \5\ See Public Law 108-159, 117 Stat. 1952 (2003).
    \6\ The Federal Trade Commission has defined ``identity theft'' 
as ``a fraud committed or attempted using the identifying 
information of another person without authority.'' See 16 CFR 
603.2(a).
    \7\ Section 114 of the FACT Act.
---------------------------------------------------------------------------

    Under the FACT Act's amendments to the FCRA, the Office of the 
Comptroller of the Currency, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the Office 
of Thrift Supervision, the National Credit Union Administration, and 
the Federal Trade Commission (the ``FTC'') (together, the ``Agencies'') 
were required to issue joint rules and guidelines regarding the 
detection, prevention, and mitigation of identity theft for entities 
that are subject to their respective enforcement authority (the 
``identity theft red flags rules and guidelines'').\8\ The Agencies 
also were required to prescribe joint rules applicable to issuers of 
credit and debit cards, to require that such issuers assess the 
validity of notifications of changes of address under certain 
circumstances (the ``card issuer rules'').\9\ In 2007, the Agencies 
issued joint final identity theft rules and guidelines, and joint final 
card issuer rules.\10\
---------------------------------------------------------------------------

    \8\ See sections 615(e)(1)(A)-(B) of the FCRA, 15 U.S.C. 
1681m(e)(1)(A)--(B). Section 615(e)(1)(A) of the FCRA provides that 
the Agencies shall jointly ``establish and maintain guidelines for 
use by each financial institution and each creditor regarding 
identity theft with respect to account holders at, or customers of, 
such entities, and update such guidelines as often as necessary.'' 
Section 615(e)(1)(B) provides that the Agencies shall jointly 
``prescribe regulations requiring each financial institution and 
each creditor to establish reasonable policies and procedures for 
implementing the guidelines established pursuant to [section 
615(e)(1)(A)], to identify possible risks to account holders or 
customers or to the safety and soundness of the institution or 
customers.''
    \9\ Section 615(e)(1)(C) of the FCRA provides that the Agencies 
shall jointly ``prescribe regulations applicable to card issuers to 
ensure that, if a card issuer receives notification of a change of 
address for an existing account, and within a short period of time 
(during at least the first 30 days after such notification is 
received) receives a request for an additional or replacement card 
for the same account, the card issuer may not issue the additional 
or replacement card, unless the card issuer'' follows certain 
procedures (including notifying the cardholder at the former 
address) to assess the validity of the change of address. 15 U.S.C. 
1681m(e)(1)(C).
    \10\ See Identity Theft Red Flags and Address Discrepancies 
Under the Fair and Accurate Credit Transactions Act of 2003, 72 FR 
63718 (Nov. 9, 2007) (``2007 Adopting Release''). The Agencies' 
final rules also implemented section 315 of the FACT Act, which 
required the Agencies to adopt joint rules providing guidance 
regarding reasonable policies and procedures that a user of consumer 
reports must employ when a consumer reporting agency sends the user 
a notice of address discrepancy. See 15 U.S.C. 1681c(h). The Dodd-
Frank Act does not authorize the Commissions to propose rules under 
section 315 of the FACT Act, and therefore entities under the 
authority of the Commissions, for purposes of the identity theft red 
flags rules and guidelines, will be subject to other agencies' rules 
on address discrepancies. See, e.g., 16 CFR 641.1 (FTC).
---------------------------------------------------------------------------

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'').\11\ Title X of the Dodd-Frank Act, which is titled the Consumer 
Financial Protection Act of 2010 (``CFP Act''), established a Bureau of 
Consumer Financial Protection within the Federal Reserve System and 
gave this new agency certain rulemaking, enforcement, and supervisory 
powers over many consumer financial products and services, as well as 
the entities that sell them. In addition, Title X amended a number of 
other federal consumer protection laws enacted prior to the Dodd-Frank 
Act, including the FCRA.
---------------------------------------------------------------------------

    \11\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
---------------------------------------------------------------------------

    Within Title X, section 1088(a)(8),(10) of the Dodd-Frank Act 
amended the FCRA by adding the Commissions (CFTC and SEC) to the list 
of federal agencies required to jointly prescribe and enforce identity 
theft red flags rules and guidelines and card issuer rules.\12\

[[Page 13452]]

Thus, the Dodd-Frank Act provides for the transfer of rulemaking 
responsibility and enforcement authority to the CFTC and SEC with 
respect to the entities under their respective jurisdiction. 
Accordingly, the Commissions are now jointly proposing for public 
notice and comment identity theft rules and guidelines and card issuer 
rules.\13\ The proposed rules and guidelines \14\ are substantially 
similar to those adopted by the Agencies in 2007.\15\ As discussed 
further below, the Commissions recognize that most of the entities over 
which they have jurisdiction are likely to be already in compliance 
with the final rules and guidelines that the Agencies adopted in 2007, 
to the extent that these entities' activities fall within the scope of 
the Agencies' final rules and guidelines. The proposed rules and 
guidelines, if adopted, would not contain new requirements not already 
in the Agencies' final rules, nor would they expand the scope of those 
rules to include new entities that were not already previously covered 
by the Agencies' rules.\16\ The proposed rules and guidelines do 
contain examples and minor language changes designed to help guide 
entities under the Commissions' jurisdiction in complying with the 
rules. The Commissions anticipate that the proposed rules, if adopted, 
may help some entities discern whether and how the identity theft rules 
and guidelines apply to their circumstances.
---------------------------------------------------------------------------

    \12\ See section 615(e)(1) of the FCRA, 15 U.S.C. 1681m(e)(1). 
In addition, section 1088(a)(10) of the Dodd-Frank Act added the 
Commissions to the list of federal administrative agencies 
responsible for enforcement of rules pursuant to section 621(b) of 
the FCRA. See infra note 19. Section 1100H of the Dodd-Frank Act 
provides that the Commissions' new enforcement authority (as well as 
other changes in various agencies' authority under other provisions) 
becomes effective as of the ``designated transfer date'' to be 
established by the Secretary of the Treasury, as described in 
section 1062 of that Act. On September 20, 2010, the Secretary of 
the Treasury designated July 21, 2011 as the transfer date. See 
Designated Transfer Date, 75 FR 57252 (Sept. 20, 2010).
    \13\ The CFTC is proposing to add the proposed rules and 
guidelines in this release as a new subpart C to part 162 of the 
CFTC's regulations, 17 CFR 162. See Business Affiliate Marketing and 
Disposal of Consumer Information Rules, 76 FR 43879 (July 22, 2011). 
As a result, the purpose, scope, and definitions in part 162 would 
apply to the proposed identity theft red flags rules and guidelines, 
as well as to the proposed card issuer rules. The new subpart C 
would be titled ``Identity Theft Red Flags.'' The SEC is proposing 
to add the proposed rules and guidelines in this release as a new 
subpart C to part 248 of the SEC's regulations. 17 CFR part 248. The 
new subpart C is titled ``Regulation S-ID: Identity Theft Red 
Flags.''
    \14\ For ease of reference, unless the context indicates 
otherwise, our general use of the term ``rules and guidelines'' in 
this preamble will refer to both the identity theft red flags rules 
and guidelines and the card issuer rules.
    \15\ See 15 U.S.C. 1681m(e)(1).
    \16\ The CFTC notes that the Dodd-Frank Act creates two new 
entities that must comply with these proposed rules and guidelines: 
Swap dealers and major swap participants. The CFTC anticipates that 
to the extent that these new entities currently maintain or offer 
covered accounts (as discussed below), they also may be in 
compliance with the Agencies' final rules.
---------------------------------------------------------------------------

II. Explanation of the Proposed Rules and Guidelines

A. Proposed Identity Theft Red Flags Rules

    Sections 615(e)(1)(A) and (B) of the FCRA, as amended by the Dodd-
Frank Act, require that the Commissions jointly establish and maintain 
guidelines for ``financial institutions'' and ``creditors'' regarding 
identity theft, and prescribe rules requiring such institutions and 
creditors to establish reasonable policies and procedures for the 
implementation of those guidelines.\17\ The Commissions have sought to 
propose identity theft red flags rules and guidelines that are 
substantially similar to the Agencies' final identity theft red flags 
rules and guidelines, and that would provide flexibility and guidance 
to the entities subject to the Commissions' jurisdiction. To that end, 
the proposed rules discussed below would specify: (1) Which financial 
institutions and creditors would be required to develop and implement a 
written identity theft prevention program (``Program''); (2) the 
objectives of the Program; (3) the elements that the Program would be 
required to contain; and (4) the steps financial institutions and 
creditors would need to take to administer the Program.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 1681m(e)(1)(A) and (B). Key terms such as 
financial institution and creditor are defined in the proposed rules 
and discussed later in this Section.
---------------------------------------------------------------------------

1. Which Financial Institutions and Creditors Would Be Required To Have 
a Program
    The ``scope'' subsections of the proposed rules generally set forth 
the types of entities that would be subject to the Commissions' 
identity theft red flags rules and guidelines.\18\ Under these proposed 
subsections, the rules would apply to entities over which the 
Commissions have recently been granted enforcement authority under the 
FCRA.\19\ The Commissions' proposed scope provisions are similar to the 
scope provisions of the rules adopted by the Agencies.\20\
---------------------------------------------------------------------------

    \18\ Proposed Sec.  162.30(a) (CFTC); Sec.  248.201(a) (SEC).
    \19\ Section 1088(a)(10)(A) of the Dodd-Frank Act amended 
section 621(b) of the FCRA to add the Commissions to the list of 
federal agencies responsible for enforcement of the FCRA. As 
amended, section 621(b) of the FCRA specifically provides that 
enforcement of the requirements imposed under the FCRA ``with 
respect to consumer reporting agencies, persons who use consumer 
reports from such agencies, persons who furnish information to such 
agencies, and users of [certain information] shall be enforced under 
* * *. the Commodity Exchange Act, with respect to a person subject 
to the jurisdiction of the [CFTC]; [and under] the Federal 
securities laws, and any other laws that are subject to the 
jurisdiction of the [SEC], with respect to a person that is subject 
to the jurisdiction of the [SEC] * * *'' 15 U.S.C. 1681s(b)(1)(F)-
(G). See also 15 U.S.C. 1681a(f) (defining ``consumer reporting 
agency'').
    \20\ See, e.g., 12 CFR 717.90 (stating that the National Credit 
Union Administration red flags rule ``applies to a financial 
institution or creditor that is a federal credit union''). The 
Commissions do not have general regulatory jurisdiction over banks, 
savings and loan associations, or credit unions that hold a 
transaction account, although the Commissions may have supervisory 
authority over specific activities of those persons. For example, 
the CFTC may have jurisdiction over those persons to the extent that 
they engage in the trading of, or the provision of advice related 
to, futures or swaps. Similarly, the SEC may have jurisdiction over 
these persons to the extent that they engage in the trading of, or 
the provision of advice related to, securities or security-based 
swaps.
---------------------------------------------------------------------------

    The CFTC has tailored its proposed ``scope'' subsection, as well as 
the definitions of ``financial institution'' and ``creditor,'' to 
describe the entities to which its proposed identity theft red flags 
rules and guidelines would apply.\21\ The CFTC's proposed rule states 
that it would apply to futures commission merchants (``FCMs''), retail 
foreign exchange dealers, commodity trading advisors (``CTAs''), 
commodity pool operators (``CPOs''), introducing brokers (``IBs''), 
swap dealers, and major swap participants.\22\
---------------------------------------------------------------------------

    \21\ Proposed Sec.  162.30(a).
    \22\ The CFTC has determined that the proposed identity theft 
red flags rules and guidelines would apply to these entities because 
of the increased likelihood that these entities open or maintain 
covered accounts, or pose a reasonably foreseeable risk to customers 
or to the safety and soundness of the financial institution or 
creditor from identity theft. This approach is consistent with the 
scope of part 162. See 76 FR at 43884.
---------------------------------------------------------------------------

    The SEC's proposed ``scope'' subsection provides that the proposed 
rules and guidelines would apply to a financial institution or 
creditor, as defined by the FCRA, that is:
     A broker, dealer or any other person that is registered or 
required to be registered under the Securities Exchange Act of 1934 
(``Exchange Act'');
     an investment company that is registered or required to be 
registered under the Investment Company Act of 1940, that has elected 
to be regulated as a business development company under that Act, or 
that operates as an employees' securities company under that Act; or
     an investment adviser that is registered or required to be 
registered under the Investment Advisers Act of 1940.\23\
---------------------------------------------------------------------------

    \23\ Proposed Sec.  248.201(a).
---------------------------------------------------------------------------

    The entities listed in the proposed scope section are the entities 
regulated by the SEC that are most likely to be ``financial 
institutions'' or ``creditors,'' i.e., registered brokers or dealers 
(``broker-dealers''), investment

[[Page 13453]]

companies and investment advisers.\24\ The proposed scope section also 
would include other entities that are registered or are required to 
register under the Exchange Act. The section would not specifically 
identify those entities, such as nationally recognized statistical 
ratings organizations, self-regulatory organizations, and municipal 
advisors and municipal securities dealers, because, as discussed below, 
they are unlikely to qualify as ``financial institutions'' or 
``creditors'' under the FCRA.\25\ The proposed scope section also would 
not include entities that are not themselves registered with the 
Commission,\26\ even if they register securities under the Securities 
Act of 1933 or the Exchange Act, or report information under the 
Investment Advisers Act of 1940.\27\
---------------------------------------------------------------------------

    \24\ The SEC's proposed rules would define the scope of the 
proposed identity theft red flags rules and guidelines, proposed 
Sec.  248.201(a), differently than Regulation S-AM, the affiliate 
marketing rule the SEC adopted under FCRA, defines its scope. See 17 
CFR 248.101(b) (providing that Regulation S-AM applies to any 
brokers or dealers (other than notice-registered brokers or 
dealers), any investment companies, and any investment advisers or 
transfer agents registered with the Commission). Section 214(b) of 
the FACT Act, pursuant to which the SEC adopted Regulation S-AM, did 
not specify the types of entities that would be subject to the SEC's 
rules, and did not state that the affiliate marketing rules should 
apply to all persons over which the SEC has jurisdiction. By 
contrast, the Dodd-Frank Act specifies that the SEC's identity theft 
red flags rules and guidelines should apply to a ``person that is 
subject to the jurisdiction'' of the SEC. See Dodd-Frank Act section 
1088(a)(8), (10).
    The scope of the SEC's proposed rules also would differ from 
that of Regulation S-P, 17 CFR part 248, subpart A, the privacy rule 
the SEC adopted in 2000 pursuant to the Gramm-Leach-Bliley Act. 
Public Law 106-102 (1999). Regulation S-P was adopted under Title V 
of that Act, which, unlike the FCRA, limited the SEC's regulatory 
authority to (i) brokers and dealers, (ii) investment companies, and 
(iii) investment advisers registered under the Investment Advisers 
Act of 1940. See 15 U.S.C. 6805(a)(3)-(5).
    \25\ Although the Commission preliminarily believes that 
municipal advisors and municipal securities dealers are unlikely to 
qualify as ``financial institutions'' because they are unlikely to 
maintain transaction accounts for consumers, we welcome comment on 
this point specifically, as well as on the general issue of whether 
the list of entities in the proposed scope section should include 
any other entities.
    \26\ The Dodd-Frank Act defines a ``person regulated by the 
[SEC],'' for other purposes of that Act, as certain entities that 
are registered or required to be registered with the SEC, and 
certain employees, agents and contractors of those entities. See 
section 1002(21) of the Dodd-Frank Act.
    \27\ See Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers With Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, Investment Advisers Act 
Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)] 
(adopting rules related to investment advisers exempt from 
registration with the SEC, including ``exempt reporting advisers'').
---------------------------------------------------------------------------

     The Commissions solicit comment on the ``scope'' section 
of the proposed identity theft red flags rules.
     Should the SEC's proposed scope section specifically list 
all of the entities that would be covered by the rule if they were to 
qualify as financial institutions or creditors under the FCRA? Are the 
entities specifically listed in the proposed rule the registered 
entities that are most likely to be financial institutions or creditors 
under the FCRA? Should the SEC exclude any entities that are listed? 
Should it include any other entities that are not listed? Should the 
SEC include entities that register securities with the SEC or that 
report certain information to the SEC even if the entities themselves 
do not register with the SEC?
i. Definition of Financial Institution
    As discussed above, the Commissions' proposed red flags rules and 
guidelines would apply to ``financial institutions'' and ``creditors.'' 
The Commissions are proposing to define the term ``financial 
institution'' by reference to the definition of the term in section 
603(t) of the FCRA.\28\ That section defines a financial institution to 
include certain banks and credit unions, and ``any other person that, 
directly or indirectly, holds a transaction account (as defined in 
section 19(b) of the Federal Reserve Act) belonging to a consumer.'' 
\29\ Section 19(b) of the Federal Reserve Act defines a transaction 
account as ``a deposit or account on which the depositor or account 
holder is permitted to make withdrawals by negotiable or transferable 
instrument, payment orders of withdrawal, telephone transfers, or other 
similar items for the purpose of making payments or transfers to third 
parties or others.'' \30\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 1681a(t). See proposed Sec.  162.30(b)(7) (CFTC); 
proposed Sec.  248.201(b)(7) (SEC). The Agencies also defined 
``financial institution,'' in their identity theft red flags rules 
and guidelines, by reference to the FCRA. See, e.g., 16 CFR 
681.1(b)(7) (FTC) (``Financial institution has the same meaning as 
in 15 U.S.C. 1681a(t).'').
    \29\ 15 U.S.C. 1681a(t).
    \30\ 12 U.S.C. 461(b)(1)(C). Section 19(b) further states that a 
transaction account ``includes demand deposits, negotiable order of 
withdrawal accounts, savings deposits subject to automatic 
transfers, and share draft accounts.''
---------------------------------------------------------------------------

    Accordingly, the Commissions are proposing to define ``financial 
institution'' as having the same meaning as in the FCRA. The CFTC's 
proposed definition, however, also specifies that the term ``includes 
any futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
swap dealer, or major swap participant that directly or indirectly 
holds a transaction account belonging to a customer.'' \31\
---------------------------------------------------------------------------

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

    The SEC is not proposing to mention specific entities in its 
definition of ``financial institution'' because the SEC's proposed 
scope section lists specific entities subject to the SEC's rule.\32\ 
The SEC notes that entities under its jurisdiction that may be 
financial institutions because they hold customers' transaction 
accounts would likely include broker-dealers that offer custodial 
accounts and investment companies that enable investors to make wire 
transfers to other parties or that offer check-writing privileges. The 
SEC recognizes that most registered investment advisers are unlikely to 
hold transaction accounts and thus would not qualify as financial 
institutions. The proposed definition nonetheless does not exclude 
investment advisers or any other entities regulated by the SEC because 
they may hold transaction accounts or otherwise meet the definition of 
``financial institution.''
---------------------------------------------------------------------------

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

     The Commissions solicit comment on their proposed 
definitions of financial institution. Should the Commissions provide 
further guidance on the types of accounts that an entity might hold 
that would qualify the entity as a financial institution? Should the 
Commissions tailor the definition in any way to reflect the 
characteristics of the entities that would be subject to the rule? If 
so, how? Would defining ``financial institution'' instead in a way that 
differs from the Agencies' definition compromise the substantial 
similarity of the red flags rules?
     What type of entities regulated by the Commissions would 
most likely qualify as financial institutions under the proposed 
definition?
     Should the SEC's rule omit investment advisers or any 
other SEC-registered entity from the list of entities covered by the 
proposed rule?
ii. Definition of Creditor
    The Commissions are proposing to define ``creditor'' to reflect a 
recent statutory definition of the term. In December 2010, President 
Obama signed into law the Red Flag Program Clarification Act of 2010 
(``Clarification Act''), which amended the definition of ``creditor'' 
in the FCRA for purposes of identity theft red flag rules and 
guidelines.\33\ The Commissions' proposed definition of ``creditor'' 
would

[[Page 13454]]

refer to the definition in the FCRA as amended by the Clarification 
Act.\34\
---------------------------------------------------------------------------

    \33\ Red Flag Program Clarification Act of 2010, Public Law 111-
319 (2010) (inserting new section 4 at the end of section 615(e) of 
the FCRA), codified at 15 U.S.C. 1681m(e)(4).
    \34\ See proposed Sec.  162.30(b)(5) (CFTC); proposed Sec.  
248.201(b)(5) (SEC). The Commissions understand that the Agencies 
are likely to amend their red flags rules and guidelines to reflect 
the new definition of ``creditor'' in the FCRA enacted by the Red 
Flag Program Clarification Act.
---------------------------------------------------------------------------

    The FCRA now defines a ``creditor,'' for purposes of the red flags 
rules and guidelines, as a creditor as defined in the Equal Credit 
Opportunity Act \35\ (``ECOA'') (i.e., a person that regularly extends, 
renews or continues credit,\36\ or makes those arrangements) that 
``regularly and in the course of business [hellip] advances funds to or 
on behalf of a person, based on an obligation of the person to repay 
the funds or repayable from specific property pledged by or on behalf 
of the person.'' \37\ The FCRA excludes from this definition a creditor 
that ``advances funds on behalf of a person for expenses incidental to 
a service provided by the creditor to that person * * *.'' \38\ The 
Clarification Act does not define the extent to which the advancement 
of funds for expenses would be considered ``incidental'' to services 
rendered by the creditor. The legislative history does indicate that 
the Clarification Act was intended to ensure that lawyers, doctors, and 
other small businesses that may advance funds to pay for services such 
as expert witnesses, or that may bill in arrears for services provided, 
should not be considered creditors under the red flags rules and 
guidelines.\39\
---------------------------------------------------------------------------

    \35\ Section 702(e) of the ECOA defines ``creditor'' to mean 
``any person who regularly extends, renews, or continues credit; any 
person who regularly arranges for the extension, renewal, or 
continuation of credit; or any assignee of an original creditor who 
participates in the decision to extend, renew, or continue credit.'' 
15 U.S.C. 1691a(e).
    \36\ The Commissions are proposing to define ``credit'' by 
reference to its definition in the FCRA. See proposed Sec.  
162.30(b)(4) (CFTC); proposed Sec.  248.201(b)(4) (SEC). That 
definition refers to the definition of credit in the ECOA, which 
means ``the right granted by a creditor to a debtor to defer payment 
of debt or to incur debts and defer its payment or to purchase 
property or services and defer payment therefor.'' The Agencies 
defined ``credit'' in the same manner in their identity theft red 
flags rules. See, e.g., 16 CFR 681.1(b)(4) (FTC) (defining 
``credit'' as having the same meaning as in 15 U.S.C. 1681a(r)(5), 
which defines ``credit'' as having the same meaning as in section 
702 of the ECOA).
    \37\ 15 U.S.C. 1681m(e)(4)(A)(iii). The FCRA defines a 
``creditor'' also to include a creditor (as defined in the ECOA) 
that ``regularly and in the ordinary course of business (i) obtains 
or uses consumer reports, directly or indirectly, in connection with 
a credit transaction; (ii) furnishes information to consumer 
reporting agencies * * * in connection with a credit transaction * * 
*.'' 15 U.S.C. 1681m(e)(4)(A)(i)-(ii).
    \38\ Section 615(e)(4)(B) of the FCRA, 15 U.S.C. 1681m(e)(4)(B). 
The definition of ``creditor'' also authorizes the Agencies and the 
Commissions to include other entities in the definition of 
``creditor'' if those entities are determined to offer or maintain 
accounts that are subject to a reasonably foreseeable risk of 
identity theft. 15 U.S.C. 1681m(e)(4)(C). The Commissions are not at 
this time proposing to include other types of entities in the 
definition of ``creditor'' that are not included in the statutory 
definition.
    \39\ See 156 Cong. Rec. S8288-9 (daily ed. Nov. 30, 2010) 
(statements of Senators Thune and Dodd).
---------------------------------------------------------------------------

    As discussed above, the Commissions propose to define ``creditor'' 
by reference to its definition in section 615(e)(4) of the FCRA as 
added by the Clarification Act.\40\ The CFTC's proposed definition also 
would include certain entities (such as FCMs and CTAs) that regularly 
extend, renew or continue credit or make those credit arrangements.\41\ 
The SEC's proposed definition also would include ``lenders such as 
brokers or dealers offering margin accounts, securities lending 
services, and short selling services.'' \42\ These entities are likely 
to qualify as ``creditors'' under the proposed definition because the 
funds that are advanced in these accounts do not appear to be for 
``expenses incidental to a service provided.'' The proposed definition 
of ``creditor'' would not include, however, CTAs or investment advisers 
because they bill in arrears, i.e., on a deferred basis, if they do not 
``advance'' funds to investors and clients.\43\
---------------------------------------------------------------------------

    \40\ See proposed Sec.  162.30(b)(5); proposed Sec.  
248.201(b)(5).
    \41\ See proposed Sec.  162.30(b)(5).
    \42\ See proposed Sec.  248.201(b)(5).
    \43\ Investment advisers that bill for their services on a 
quarterly or other deferred basis might have qualified as 
``creditors'' if the term were defined as under section 702 of the 
Equal Credit Opportunity Act, but they would not qualify as 
creditors under the definition the Commissions are proposing because 
they are not ``advanc[ing] funds.''
---------------------------------------------------------------------------

     The Commissions request comment on their proposed 
definitions of the terms credit and creditor. Should the proposed terms 
be tailored to take into account the particular characteristics of the 
entities regulated by the Commissions? If so, how? Should the 
Commissions provide further guidance, in the rule text or elsewhere, 
regarding the types of activities that might qualify an entity as a 
creditor? Should the Commissions provide guidance regarding the 
circumstances in which expenses, paid for by advanced funds, are 
``incidental'' to services provided?
     Do commenters agree that broker-dealers that offer margin 
accounts, securities lending services, or short-selling services are 
likely to qualify as ``creditors'' under the proposed definition? Are 
there other activities that would likely cause SEC-registered entities 
to qualify as ``creditors''?
     Are there any other entities under the CFTC's or SEC's 
jurisdiction that maintain accounts that pose a reasonably foreseeable 
risk of identity theft and that the Commissions should include as 
``creditors'' under the definition? \44\
---------------------------------------------------------------------------

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

iii. Definition of Covered Account and Other Terms
    Under the proposed rules, entities that adopt red flags Programs 
would focus their attention on ``covered accounts'' for indicia of 
possible identity theft. The Commissions propose to define a ``covered 
account'' as: (i) An account that a financial institution or creditor 
offers or maintains, primarily for personal, family, or household 
purposes, that involves or is designed to permit multiple payments or 
transactions; and (ii) any other account that the financial institution 
or creditor offers or maintains for which there is a reasonably 
foreseeable risk to customers \45\ or to the safety and soundness of 
the financial institution or creditor from identity theft, including 
financial, operational, compliance, reputation, or litigation 
risks.\46\ The CFTC's proposed definition includes a margin account as 
an example of a covered account.\47\ The SEC's proposed definition 
includes a brokerage account with a broker-dealer or an account 
maintained by a mutual fund (or its agent) that permits wire transfers 
or other payments to third parties as examples of such an account.\48\
---------------------------------------------------------------------------

    \45\ Proposed Sec.  162.30(b)(6) (CFTC) and proposed Sec.  
248.201(b)(6) (SEC) would define a ``customer'' to mean a person who 
has a covered account with a financial institution or creditor. The 
Commissions propose this definition for two reasons. First, this 
definition is the same as the definition of ``customer'' in the 
Agencies' final rules and guidelines. Second, because the definition 
uses the term ``person,'' it would cover various types of business 
entities (e.g., small businesses) that could be victims of identity 
theft. 15 U.S.C. 1681a(b). Although the definition of ``customer'' 
is broad, a financial institution or creditor would be required to 
determine which type of accounts its Program will cover, because the 
proposed identity theft red flags rules and guidelines are risk-
based.
    \46\ Proposed Sec.  162.30(b)(3) (CFTC); proposed Sec.  
248.201(b)(3) (SEC).
    \47\ See proposed Sec.  162.30(b)(3)(i).
    \48\ See proposed Sec.  248.201(b)(3)(i).
---------------------------------------------------------------------------

    The Commissions are proposing to define ``account'' as a 
``continuing relationship established by a person with a financial 
institution or creditor to obtain a product or service for personal, 
family, household or business purposes.'' \49\ The CFTC's proposed 
definition would specifically include an extension of credit, such as 
the purchase of property or services involving a deferred payment.\50\ 
The SEC's proposed definition would specifically

[[Page 13455]]

include ``a brokerage account, a `mutual fund' account (i.e., an 
account with an open-end investment company, which may be maintained by 
a transfer agent or other service provider), and an investment advisory 
account.'' \51\ Both the CFTC's and SEC's proposed definitions would 
differ from the definitions in the Agencies' final rules and guidelines 
by not including a ``deposit account.'' Deposit accounts typically are 
offered by banks in connection with their banking activities, and not 
by the entities regulated by the Commissions.\52\
---------------------------------------------------------------------------

    \49\ Proposed Sec.  162.30(b)(1) (CFTC) and proposed Sec.  
248.201(b)(1) (SEC).
    \50\ Proposed Sec.  162.30(b)(1).
    \51\ Proposed Sec.  248.201(b)(1).
    \52\ See, e.g., Uniform Commercial Code Sec.  9-102(a)(29) (`` 
`Deposit account' means a demand, time, savings, passbook, or 
similar account maintained with a bank.'').
---------------------------------------------------------------------------

    The proposed identity theft red flags rules and guidelines would 
define several other terms as the Agencies defined them in their final 
rules and guidelines, where appropriate, to avoid needless conflicts 
among regulations.\53\ In addition, terms that are not defined in 
Regulation S-ID would have the same meaning as in the FCRA.\54\
---------------------------------------------------------------------------

    \53\ See, e.g., proposed Sec.  162.30(b)(10) (CFTC); proposed 
Sec.  248.201(b)(10) (SEC) (definition of ``Red Flag'').
    \54\ See proposed Sec.  248.201(b)(12)(vi) (SEC). The Agencies 
defined ``identity theft'' in their identity theft red flags rules 
and guidelines by referring to a definition previously adopted by 
the FTC. See, e.g., 12 CFR 334.90(b)(8) (FDIC). The FTC defined 
``identity theft'' as ``a fraud committed or attempted using the 
identifying information of another person without authority.'' See 
16 CFR 603.2(a) The FTC also has defined ``identifying 
information,'' a term used in its definition of ``identity theft.'' 
See 16 CFR 603.2(b). The Commissions are proposing to define the 
terms ``identifying information'' and ``identity theft'' by 
including the same definition of the terms as they appear in 16 CFR 
603.2. See proposed Sec.  162.30(b)(8) and (9) (CFTC); proposed 
Sec.  248.201(b)(8) and (9) (SEC).
---------------------------------------------------------------------------

     The Commissions request comment on the proposed definition 
of ``covered account.'' Should the Commissions include the proposed 
examples of covered accounts? Should the definition include additional 
examples of accounts that may be covered accounts? If so, what other 
types of examples should be included?
     What other types of accounts that are offered or 
maintained by financial institutions or creditors subject to the 
Commissions' enforcement authority may pose a reasonably foreseeable 
risk of identity theft? Should the Commissions explicitly identify them 
and include them as examples in the proposed rule?
     Are deposit accounts offered by any of the entities 
regulated by the Commissions?
     The Commissions request comment on other terms defined in 
the proposed rules and guidelines.
iv. Determination of Whether a Covered Account Is Offered or Maintained
    Under the proposed rules, each financial institution or creditor 
would be required to periodically determine whether it offers or 
maintains covered accounts.\55\ As a part of this periodic 
determination, a financial institution or creditor would be required to 
conduct a risk assessment that takes into consideration: (1) The 
methods it provides to open its accounts; (2) the methods it provides 
to access its accounts; and (3) its previous experiences with identity 
theft.\56\ Under the proposed rules, a financial institution or 
creditor should consider whether, for example, a reasonably foreseeable 
risk of identity theft may exist in connection with accounts it offers 
or maintains that may be opened or accessed remotely or through methods 
that do not require face-to-face contact, such as through the Internet 
or by telephone. In addition, if financial institutions or creditors 
offer or maintain accounts that have been the target of identity theft, 
they should factor those experiences into their determination. The 
Commissions anticipate that entities would maintain records concerning 
their periodic determinations.\57\
---------------------------------------------------------------------------

    \55\ Proposed Sec.  162.30(c) (CFTC) and proposed Sec.  
248.201(c) (SEC). As discussed above, the proposed rules would 
define a ``covered account'' as (i) an account that a financial 
institution or creditor offers or maintains, primarily for personal, 
family, or household purposes, that involves or is designed to 
permit multiple payments or transactions, such as a brokerage 
account with a broker-dealer or an account maintained by a mutual 
fund (or its agent) that permits wire transfers or other payments to 
third parties; and (ii) any other account that the financial 
institution or creditor offers or maintains for which there is a 
reasonably foreseeable risk to customers or to the safety and 
soundness of the financial institution or creditor from identity 
theft, including financial, operational, compliance, reputation, or 
litigation risks. Proposed Sec.  162.30(b)(3) (CFTC); proposed Sec.  
248.201(b)(3) (SEC).
    \56\ Proposed Sec.  162.30(c) (CFTC) and proposed Sec.  
248.201(c) (SEC).
    \57\ See, e.g., Frequently Asked Questions: Identity Theft Red 
Flags and Address Discrepancies at I.1, available at http://www.ftc.gov/os/2009/06/090611redflagsfaq.pdf.
---------------------------------------------------------------------------

    The Commissions acknowledge that some financial institutions or 
creditors regulated by the Commissions may engage only in transactions 
with businesses where the risk of identity theft is minimal. In these 
instances, the financial institution or creditor may determine after a 
preliminary risk assessment that it does not need to develop and 
implement a Program,\58\ or that it may develop and implement a Program 
that applies only to a limited range of its activities, such as certain 
accounts or types of accounts.\59\ Under the proposed rules, a 
financial institution or creditor that initially determines that it 
does not need to have a Program would be required to periodically 
reassess whether it must develop and implement a Program in light of 
changes in the accounts that it offers or maintains and the various 
other factors set forth in proposed Sec.  162.30(c) (CFTC) and proposed 
Sec.  248.201(c) (SEC).
---------------------------------------------------------------------------

    \58\ For example, an FCM that would otherwise be subject to the 
proposed identity theft red flags rules and guidelines and that 
handles accounts only for large, institutional investors might make 
a risk-based determination that because it is subject to a low risk 
of identity theft, it does not need to develop and implement a 
Program. Similarly, a money market fund that would otherwise be 
subject to the proposed red flags rules but that permits investments 
only by other institutions and separately verifies and authenticates 
transaction requests might make such a risk-based determination that 
it need not develop a Program.
    \59\ Even a Program limited in scale, however, would need to 
comply with all of the provisions of the proposed rules and 
guidelines. See, e.g., proposed Sec.  162.30(d)-(f) (CFTC) and 
proposed Sec.  248.201(d)-(f) (SEC) (Program requirements).
---------------------------------------------------------------------------

     The Commissions request comment regarding the proposed 
requirement to periodically determine whether a financial institution 
or creditor offers or maintains covered accounts. Do the proposed rules 
provide adequate guidance for making the periodic determinations? 
Should the rules specifically require the documentation of such 
determinations?
2. The Objectives of the Program
    The proposed rules would provide that each financial institution or 
creditor that offers or maintains one or more covered accounts must 
develop and implement a written Program designed to detect, prevent, 
and mitigate identity theft in connection with the opening of a covered 
account or any existing covered account.\60\ These proposed provisions 
also would require that each Program be appropriate to the size and 
complexity of the financial institution or creditor and the nature and 
scope of its activities. Thus, the proposed rules are designed to be 
scalable, by permitting Programs that take into account the operations 
of smaller institutions.
---------------------------------------------------------------------------

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

     The Commissions request comment on the proposed objectives 
of the Program.
3. The Elements of the Program
    The proposed rules set out the four elements that financial 
institutions and creditors would be required to include

[[Page 13456]]

in their Programs.\61\ These elements are identical to the elements 
required under the Agencies' final identity theft red flag rules.\62\
---------------------------------------------------------------------------

    \61\ See proposed Sec.  162.30(d)(2) (CFTC) and proposed Sec.  
248.201(d)(2) (SEC).
    \62\ See 2007 Adopting Release, supra note 10, at 63726-63730.
---------------------------------------------------------------------------

    First, the proposed rule would require financial institutions and 
creditors to develop Programs that include reasonable policies and 
procedures to identify relevant red flags \63\ for the covered accounts 
that the financial institution or creditor offers or maintains, and 
incorporate those red flags into its Program.\64\ Rather than singling 
out specific red flags as mandatory or requiring specific policies and 
procedures to identify possible red flags, this first element would 
provide financial institutions and creditors with flexibility in 
determining which red flags are relevant to their businesses and the 
covered accounts they manage over time. The list of factors that a 
financial institution or creditor should consider (as well as examples) 
are included in section II of the proposed guidelines, which are 
appended to the proposed rules.\65\ Given the changing nature of 
identity theft, the Commissions believe that this element would allow 
financial institutions or creditors to respond and adapt to new forms 
of identity theft and the attendant risks as they arise.
---------------------------------------------------------------------------

    \63\ Proposed Sec.  162.30(b)(10) (CFTC) and proposed Sec.  
248.201(b)(10) (SEC) define ``red flags'' to mean a pattern, 
practice, or specific activity that indicates the possible existence 
of identity theft.
    \64\ See proposed Sec.  162.30(d)(2)(i) (CFTC) and proposed 
Sec.  248.201(d)(2)(i) (SEC). The board of directors, appropriate 
committee thereof, or designated employee may determine that a 
Program designed by a parent, subsidiary, or affiliated entity is 
also appropriate for use by the financial institution or creditor. 
However, the board (or designated employee) must conduct an 
independent review to ensure that the Program is suitable and 
complies with the requirements of the red flags rules and 
guidelines. See 2007 Adopting Release, supra note 10.
    \65\ The factors and examples are discussed below in Section 
II.B.2.
---------------------------------------------------------------------------

    Second, the proposed rule would require financial institutions and 
creditors to have reasonable policies and procedures to detect red 
flags that have been incorporated into the Program of the financial 
institution or creditor.\66\ This element would not provide a specific 
method of detection. Instead, section III of the proposed guidelines 
provides examples of various means to detect red flags.\67\
---------------------------------------------------------------------------

    \66\ See proposed Sec.  162.30(d)(2)(ii) (CFTC) and proposed 
Sec.  248.201(d)(2)(ii) (SEC).
    \67\ These examples are discussed below in Section II.B.3.
---------------------------------------------------------------------------

    Third, the proposed rule would require financial institutions and 
creditors to have reasonable policies and procedures to respond 
appropriately to any red flags that are detected.\68\ This element 
would incorporate the requirement that a financial institution or 
creditor assess whether the red flags detected evidence a risk of 
identity theft and, if so, determine how to respond appropriately based 
on the degree of risk. Section IV of the proposed guidelines sets out a 
list of aggravating factors and examples that a financial institution 
or creditor should consider in determining the appropriate 
response.\69\
---------------------------------------------------------------------------

    \68\ See proposed Sec.  162.30(d)(2)(iii) (CFTC) and proposed 
Sec.  248.201(d)(2)(iii) (SEC).
    \69\ The aggravating factors and examples are discussed below in 
Section II.B.4.
---------------------------------------------------------------------------

    Finally, the proposed rule would require financial institutions and 
creditors to have reasonable policies and procedures to ensure that the 
Program (including the red flags determined to be relevant) is updated 
periodically, to reflect changes in risks to customers and to the 
safety and soundness of the financial institution or creditor from 
identity theft.\70\ As discussed above, financial institutions and 
creditors would be required to determine which red flags are relevant 
to their businesses and the covered accounts they manage. The 
Commissions are proposing a periodic update, rather than immediate or 
continuous updates, to be parallel with the final identity theft red 
flags rules of the Agencies and to avoid unnecessary regulatory 
burdens. Section V of the proposed guidelines provides a set of factors 
that should cause a financial institution or creditor to update its 
Program.\71\
---------------------------------------------------------------------------

    \70\ See proposed Sec.  162.30(d)(2)(iv) (CFTC) and proposed 
Sec.  248.201(d)(2)(iv) (SEC).
    \71\ These factors are discussed below in Section II.B.5.
---------------------------------------------------------------------------

     The Commissions request comment on whether the proposed 
four elements of the Program would provide effective protection against 
identity theft and whether any additional elements should be included.
     The Commissions anticipate that a financial institution or 
creditor that adopts a Program could integrate the policies and 
procedures with other policies and procedures it has adopted pursuant 
to other legal requirements, such as compliance \72\ and safeguards 
rules.\73\ Should the Commissions provide guidance on how financial 
institutions or creditors could integrate identity theft policies and 
procedures with other policies and procedures?
---------------------------------------------------------------------------

    \72\ See rule 38a-1 under the Investment Company Act, 17 CFR 
270.38a-1; rule 206(4)-7 under the Investment Advisers Act, 17 CFR 
275.206(4)-7.
    \73\ Regulation S-P, 17 CFR 248.30 (applicable to broker-
dealers, investment companies, and investment advisers).
---------------------------------------------------------------------------

4. Administration of the Program
    The Commissions are proposing to provide direction to financial 
institutions and creditors regarding the administration of Programs to 
enhance the effectiveness of those Programs. Accordingly, the proposed 
rule would prescribe the steps that financial institutions and 
creditors would have to take to administer a Program.\74\ These 
sections would provide that each financial institution or creditor that 
is required to implement a Program must provide for the continued 
administration of the Program and meet four additional requirements.
---------------------------------------------------------------------------

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

    First, the proposed rules would require that a financial 
institution or creditor obtain approval of the initial written Program 
from either its board of directors or an appropriate committee of the 
board of directors.\75\ This proposed requirement highlights the 
responsibility of the board of directors and senior management in 
approving a Program. This requirement would not mandate that a board be 
responsible for the day-to-day operations of the Program. The proposed 
rules provide that the board or appropriate committee must approve only 
the initial written Program. This provision is designed to enable a 
financial institution or creditor to update its Program in a timely 
manner. After the initial approval, at the discretion of the entity, 
the board, a committee, or senior management may update the Program.
---------------------------------------------------------------------------

    \75\ See proposed Sec.  162.30(e)(1) (CFTC) and proposed Sec.  
248.201(e)(1) (SEC). Proposed Sec.  162.30(b)(2) (CFTC) and proposed 
Sec.  248.201(b)(2) (SEC) define the term ``board of directors'' to 
include: (i) in the case of a branch or agency of a non-U.S-based 
financial institution or creditor, the managing official in charge 
of that branch or agency; and (ii) in the case of a financial 
institution or creditor that does not have a board of directors, a 
designated senior management employee.
---------------------------------------------------------------------------

    Second, the proposed rules would provide that financial 
institutions and creditors must involve the board of directors, an 
appropriate committee thereof, or a designated employee at the level of 
senior management in the oversight, development, implementation, and 
administration of the Program.\76\ The proposed rules would provide 
discretion to a financial institution or creditor to determine who 
would be responsible for the oversight, development, implementation, 
and administration of the Program in

[[Page 13457]]

allowing the board of directors to delegate these functions. The 
Commissions appreciate that boards of directors have many 
responsibilities and that it generally is not feasible for a board to 
involve itself in these functions on a daily basis. A designated 
management official who is responsible for the oversight of a broker-
dealer's, investment company's or investment adviser's Program may also 
be the entity's chief compliance officer.\77\
---------------------------------------------------------------------------

    \76\ See proposed Sec.  162.30(e)(2) (CFTC) and proposed Sec.  
248.201(e)(2) (SEC). Section VI of the proposed guidelines 
elaborates on the proposed provision.
    \77\ See, e.g., rule 38a-1(a)(4) under the Investment Company 
Act (description of chief compliance officer), 17 CFR 270.38a-
1(a)(4); rule 206(4)-7(c) under the Investment Advisers Act, 17 CFR 
275.206(4)-7 (same).
---------------------------------------------------------------------------

    Third, the proposed rules would provide that financial institutions 
and creditors must train staff, as necessary, to effectively implement 
their Programs.\78\ The Commissions believe that proper training would 
enable relevant staff to address the risk of identity theft. For 
example, staff would be trained to detect red flags with regard to new 
and existing accounts, such as discrepancies in identification 
presented by a person opening an account. Staff also would need to be 
trained to mitigate identity theft, for example, by recognizing when an 
account should not be opened.
---------------------------------------------------------------------------

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

    Finally, the proposed rules would provide that financial 
institutions and creditors must exercise appropriate and effective 
oversight of service provider arrangements.\79\ The Commissions believe 
that it is important that the proposed rules address service provider 
arrangements so that financial institutions and creditors would remain 
legally responsible for compliance with the proposed rules, 
irrespective of whether such institutions and creditors outsource their 
identity theft red flags detection, prevention, and mitigation 
operations to a third-party service provider.\80\ The proposed rules do 
not prescribe a specific manner in which appropriate and effective 
oversight of service provider arrangements must occur. Instead, the 
proposed requirement would provide flexibility to financial 
institutions and creditors in maintaining their service provider 
arrangements, while making clear that such institutions and creditors 
would still be required to fulfill their legal compliance 
obligations.\81\ Section VI(c) of the proposed guidelines specifies 
what a financial institution or creditor could do so that the activity 
of the service provider is conducted in accordance with reasonable 
policies and procedures designed to detect, prevent, and mitigate the 
risk of identity theft.\82\
---------------------------------------------------------------------------

    \79\ See proposed Sec.  162.30(e)(4) (CFTC) and proposed Sec.  
248.201(e)(4) (SEC). Proposed Sec.  162.30(b)(11) (CFTC) and 
proposed Sec.  248.201(b)(11) (SEC) would define the term ``service 
provider'' to mean a person that provides a service directly to the 
financial institution or creditor.
    \80\ For example, a financial institution or creditor that uses 
a service provider to open accounts on its behalf, could reserve for 
itself the responsibility to verify the identity of a person opening 
a new account, may direct the service provider to do so, or may use 
another service provider to verify identity. Ultimately, however, 
the financial institution or creditor would remain responsible for 
ensuring that the activity is being conducted in compliance with a 
Program that meets the requirements of the proposed identity theft 
red flags rules and guidelines.
    \81\ These legal compliance obligations would include the 
maintenance of records in connection with any service provider 
arrangements.
    \82\ Section VI(c) of the proposed guidelines is discussed below 
in Section II.B.6.
---------------------------------------------------------------------------

     The Commissions solicit comment on whether the proposed 
four steps to administer the Program are appropriate and whether any 
additional or alternate steps should be included.

B. Proposed Guidelines

    As amended by the Dodd-Frank Act, section 615(e)(1)(A) of the FCRA 
provides that the Commissions must jointly ``establish and maintain 
guidelines for use by each financial institution and each creditor 
regarding identity theft with respect to account holders at, or 
customers of, such entities, and update such guidelines as often as 
necessary.'' \83\ Accordingly, the Commissions are jointly proposing 
guidelines in an appendix to the proposed rules that are intended to 
assist financial institutions and creditors in the formulation and 
maintenance of a Program that would satisfy the requirements of those 
proposed rules. These guidelines are substantially similar to the 
guidelines adopted by the Agencies. The changes we are proposing to 
make to the Agencies' guidelines are designed to tailor the guidelines 
to the circumstances of the entities within the Commissions' regulatory 
jurisdiction, such as by modifying the examples provided by the 
guidelines. We believe this approach would meet the Commissions' 
obligation under section 615(e)(1)(A) of the FCRA to jointly establish 
and maintain guidelines for financial institutions and creditors.
---------------------------------------------------------------------------

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

    The proposed rules would explain the relationship of the proposed 
rules to the proposed guidelines.\84\ In particular, they would require 
each financial institution or creditor that is required to implement a 
Program to consider the guidelines. The proposed guidelines set forth 
policies and procedures that financial institutions and creditors would 
be required to consider and use, if appropriate. Although a financial 
institution or creditor could determine that a particular guideline is 
not appropriate for its circumstances, its Program would need to 
contain reasonable policies and procedures to fulfill the requirements 
of the proposed rules. As discussed above, the proposed guidelines are 
substantially similar to the final guidelines issued by the Agencies. 
In the Commissions' view, the proposed guidelines would provide 
financial institutions and creditors with flexibility to determine 
``how best to develop and implement the required policies and 
procedures.'' \85\
---------------------------------------------------------------------------

    \84\ See proposed Sec.  162.30(f) (CFTC) and proposed Sec.  
248.201(f) (SEC).
    \85\ See H.R. Rep. No. 108-263 at 43, Sept. 4, 2003 
(accompanying H.R. 2622); S. Rep. No. 108-166 at 13, Oct. 17, 2003 
(accompanying S. 1753).
---------------------------------------------------------------------------

    The proposed guidelines are organized into seven sections and a 
supplement. Each section in the proposed guidelines corresponds with 
the provisions in the proposed rules.
     The Commissions request comment on all sections, including 
Supplement A, of the proposed guidelines described below.
1. Section I of the Proposed Guidelines--Identity Theft Prevention 
Program
    As noted above, proposed Sec.  162.30(d)(1) (CFTC) and proposed 
Sec.  248.201(d)(1) (SEC) would require each financial institution or 
creditor that offers or maintains one or more covered accounts to 
develop and maintain a program that is designed to detect, prevent, and 
mitigate identity theft. Section I of the proposed guidelines 
corresponds with these provisions. Section I of the proposed guidelines 
makes clear that a covered entity may incorporate into its Program, as 
appropriate, its existing policies, procedures, and other arrangements 
that control reasonably foreseeable risks to customers or to the safety 
and soundness of the financial institution or creditor from identity 
theft. An example of such existing policies, procedures, and other 
arrangements may include other policies, procedures, and arrangements 
that the financial institution or creditor has developed to prevent 
fraud or otherwise ensure compliance with applicable laws and 
regulations. The Commissions believe that this section of the proposed 
guidelines would allow financial institutions and creditors to minimize 
cost and time burdens associated with the development and 
implementation of

[[Page 13458]]

new policies, procedures, and arrangements by leveraging existing 
policies, procedures, and arrangements and avoiding unnecessary 
duplication.
     The Commissions request comment on this section of the 
proposed guidelines.
2. Section II of the Proposed Guidelines--Identifying Relevant Red 
Flags
    As recently amended by the Dodd-Frank Act, section 615(e)(2)(A) of 
the FCRA provides that, in developing identity theft red flags 
guidelines as required by the FCRA, the Commissions must identify 
patterns, practices, and specific forms of activity that indicate the 
possible existence of identity theft. Section II of the proposed 
guidelines would identify those patterns, practices and forms of 
activity. Section II(a) of the proposed guidelines sets out several 
risk factors that a financial institution or creditor would be required 
to consider in identifying relevant red flags for covered accounts, as 
appropriate: (1) The types of covered accounts it offers or maintains; 
(2) the methods it provides to open its covered accounts; (3) the 
methods it provides to access its covered accounts; and (4) its 
previous experiences with identity theft. Thus, for example, red flags 
relevant to margin accounts may differ from those relevant to advisory 
accounts, and those applicable to consumer accounts may differ from 
those applicable to business accounts. Red flags relevant to accounts 
that may be opened or accessed remotely may differ from those relevant 
to accounts that require face-to-face contact. In addition, under the 
proposed guidelines, a financial institution or creditor should 
consider identifying as relevant those red flags that directly relate 
to its previous experiences with identity theft.
    Section II(b) of the proposed guidelines sets out examples of 
sources from which financial institutions and creditors should derive 
relevant red flags. This proposed section provides that a financial 
institution or creditor should incorporate relevant red flags from such 
sources as: (1) Incidents of identity theft that the financial 
institution or creditor has experienced; (2) methods of identity theft 
that the financial institution or creditor has identified that reflect 
changes in identity theft risks; and (3) applicable regulatory guidance 
(i.e., guidance received from regulatory authorities). As discussed 
above in Section II.B, this proposed section would not require 
financial institutions and creditors to incorporate relevant red flags 
strictly from these three sources. Instead, the section would require 
that financial institutions and creditors consider them when developing 
a Program.
    As noted above, the proposed rules would not identify specific red 
flags that financial institutions or creditors must include in their 
Programs.\86\ Instead, under the proposed guidelines, a Program would 
be required to identify and incorporate relevant red flags that are 
appropriate to the size and complexity of the financial institution or 
creditor and the nature and scope of its activities. Section II(c) of 
the proposed guidelines identifies five categories of red flags that 
financial institutions and creditors must consider including in their 
Programs:
---------------------------------------------------------------------------

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

     Alerts, notifications, or other warnings received from 
consumer reporting agencies or service providers, such as fraud 
detection services;
     Presentation of suspicious documents, such as documents 
that appear to have been altered or forged;
     Presentation of suspicious personal identifying 
information, such as a suspicious address change;
     Unusual use of, or other suspicious activity related to, a 
covered account; and
     Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible identity 
theft in connection with covered accounts held by the financial 
institution or creditor.

    In Supplement A to the proposed guidelines, the Commissions include 
a non-comprehensive list of examples of red flags from each of these 
categories that a financial institution or creditor may experience.\87\
---------------------------------------------------------------------------

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

     The Commissions request comment on this section of the 
proposed guidelines. Are there specific, additional red flags 
associated with the types of institutions subject to the Commissions' 
jurisdiction that the Commissions should identify?
     Would the five categories of red flags discussed in the 
proposed guidelines provide flexible and adequate guidance for 
financial institutions and creditors that they can use to develop a 
Program?
3. Section III of the Proposed Guidelines--Detecting Red Flags
    As noted above, the proposed rules would provide that a financial 
institution or creditor must have reasonable policies and procedures to 
detect red flags in its Program.\88\ Section III of the proposed 
guidelines would provide examples of policies and procedures that a 
financial institution or creditor must consider including in its 
Program for the purpose of detecting red flags. These would include (1) 
in the case of the opening of a covered account, obtaining identifying 
information about, and verifying the identity of, the person opening 
the account, and (2) in the case of existing covered accounts, 
authenticating customer identities, monitoring transactions, and 
verifying the validity of change of address requests. Entities that are 
currently subject to the Agencies' final identity theft red flag rules 
and guidelines,\89\ the federal customer identification program 
(``CIP'') rules \90\ or other Bank Secrecy Act rules,\91\ the Federal 
Financial Institutions Examination Council's guidance on 
authentication,\92\ or the Federal Information Processing Standards 
\93\ may already be engaged in detecting red flags.
---------------------------------------------------------------------------

    \88\ See proposed Sec.  162.30(d)(2)(ii) (CFTC) and proposed 
Sec.  248.201(d)(2)(ii) (SEC).
    \89\ See 2007 Adopting Release, supra note 10.
    \90\ See, e.g., 31 CFR 1023.220 (broker-dealers), 1024.220 
(mutual funds), and 1026.220 (futures commission merchants and 
introducing brokers). The CIP regulations implement section 326 of 
the USA PATRIOT Act, codified at 31 U.S.C. 5318(l).
    \91\ See, e.g., 31 CFR 103.130 (anti-money laundering programs 
for mutual funds).
    \92\ See ``Authentication in an Internet Banking Environment,'' 
Oct. 12, 2005, available at: http://www.ffiec.gov/press/pr101205.htm.
    \93\ The Federal Information Processing Standards are issued by 
the National Institute of Standards and Technology (``NIST'') after 
approval by the Secretary of Commerce pursuant to section 5131 of 
the Information Technology Management Reform Act of 1996, Public Law 
104-106, 110 Stat. 702, Feb. 10, 1996, and the Federal Information 
Security Management Act of 2002, 44 U.S.C. 3541, et seq. NIST 
manages and publishes the most current Federal Information 
Processing Standards at: http://csrc.nist.gov/publications/PubsFIPS.html.
---------------------------------------------------------------------------

    In developing the proposed rules and guidelines, the Commissions 
sought to minimize the burdens that would be imposed on entities that 
may be in compliance with existing similar laws. These entities may 
wish to integrate the policies and procedures already developed for 
purposes of complying with these rules and standards into their 
Programs. However, such policies and procedures may need to be 
supplemented. For example, the CIP rules were written to implement 
section 326 \94\ of the USA PATRIOT Act,\95\ an Act directed towards 
facilitating the prevention, detection and prosecution of international 
money laundering and the financing of terrorism. Certain types of 
``accounts,'' ``customers,'' and

[[Page 13459]]

products are exempted or treated specially in the CIP rules because 
they pose a lower risk of money laundering or terrorist financing. Such 
special treatment may not be appropriate to accomplish the broader 
objective of detecting, preventing, and mitigating identity theft. 
Accordingly, the Commissions would expect that, if the proposed rules 
are adopted, all financial institutions and creditors would evaluate 
the adequacy of existing policies and procedures, and develop and 
implement risk-based policies and procedures that detect red flags in 
an effective and comprehensive manner.
---------------------------------------------------------------------------

    \94\ 31 U.S.C. 5318(l).
    \95\ Public Law 107-56 (2001).
---------------------------------------------------------------------------

     The Commissions request comment on this section of the 
proposed guidelines. Should the Commission provide further guidance on 
the integration of or differentiation between identity theft red flags 
programs and other existing procedures?
4. Section IV of the Proposed Guidelines--Preventing and Mitigating 
Identity Theft
    As noted above, the proposed rules would require that a Program 
include reasonable policies and procedures to respond appropriately to 
red flags that are detected.\96\ Section IV of the proposed guidelines 
states that a Program's policies and procedures should include a list 
of appropriate responses to the red flags that a financial institution 
or creditor has detected, that are commensurate with the degree of risk 
posed by each red flag.\97\ In determining an appropriate response, 
under the proposed guidelines, a financial institution or creditor 
would be required to consider aggravating factors that may heighten the 
risk of identity theft, such as a data security incident that results 
in unauthorized access to a customer's account records held by the 
financial institution, creditor, or third party, or notice that a 
customer has provided information related to a covered account held by 
the financial institution or creditor to someone fraudulently claiming 
to represent the financial institution or creditor, or to a fraudulent 
Internet Web site.
---------------------------------------------------------------------------

    \96\ See proposed Sec.  162.30(d)(2)(iii) (CFTC) and proposed 
Sec.  248.201(d)(2)(iii) (SEC).
    \97\ A financial institution or creditor, in order to respond 
appropriately, would have to assess whether the red flags indicate 
risk of identity theft, and must have a reasonable basis for 
concluding that a red flag does not demonstrate a risk of identity 
theft.
---------------------------------------------------------------------------

    Section IV of the proposed guidelines also provides several 
examples of appropriate responses, such as monitoring a covered account 
for evidence of identity theft, contacting the customer, and changing 
any passwords, security codes, or other security devices that permit 
access to a covered account.\98\ The Commissions are proposing to 
include the same list of examples presented in the Agencies' final 
guidelines, because, upon review, the Commissions believe the list is 
comprehensive, relevant to entities regulated by the Commissions, and 
designed to enhance consistency of regulations and Programs.
---------------------------------------------------------------------------

    \98\ Other examples of appropriate responses provided in the 
proposed guidelines are: Reopening a covered account with a new 
account number; not opening a new covered account; closing an 
existing covered account; not attempting to collect on a covered 
account or not selling a covered account to a debt collector; 
notifying law enforcement; and determining that no response is 
warranted under the particular circumstances. The final proposed 
example--no response--might be appropriate, for example, when a 
financial institution or creditor has a reasonable basis for 
concluding that the red flags do not evidence a risk of identity 
theft.
---------------------------------------------------------------------------

     The Commissions seek comment on this section of the 
proposed guidelines. Should the Commission revise the guidelines to 
add, modify, or delete any examples?
5. Section V of the Proposed Guidelines--Updating the Identity Theft 
Prevention Program
    As discussed above, the proposed rules would require each financial 
institution or creditor to periodically update its Program (including 
the relevant red flags) to reflect changes in risks to its customers or 
to the safety and soundness of the financial institution or creditor 
from identity theft.\99\ Section V of the proposed guidelines would 
include a list of factors on which a financial institution or creditor 
could base the updates to its Program: (a) The experiences of the 
financial institution or creditor with identity theft; (b) changes in 
methods of identity theft; (c) changes in methods to detect, prevent, 
and mitigate identity theft; (d) changes in the types of accounts that 
the financial institution or creditor offers or maintains; and (e) 
changes in the business arrangements of the financial institution or 
creditor, including mergers, acquisitions, alliances, joint ventures, 
and service provider arrangements.
---------------------------------------------------------------------------

    \99\ See proposed Sec.  162.30(d)(2)(iv) (CFTC) and proposed 
Sec.  248.201(d)(2)(iv) (SEC).
---------------------------------------------------------------------------

     The Commissions request comment on this section of the 
proposed guidelines. Should the Commissions provide any further 
guidance regarding the updating of Programs?
6. Section VI of the Proposed Guidelines--Methods for Administering the 
Identity Theft Prevention Program
    Section VI of the proposed guidelines would provide additional 
guidance for financial institutions and creditors to consider in 
administering their identity theft Programs.\100\ These proposed 
guideline provisions are identical to those prescribed by the Agencies 
in their final guidelines, which were modeled on sections of the 
Federal Information Processing Standards.\101\
---------------------------------------------------------------------------

    \100\ See proposed Sec.  162.30(e) (CFTC) and proposed Sec.  
248.201(e) (SEC) (administration of Programs).
    \101\ See supra note 93 (brief explanation of the Federal 
Information Processing Standards).
---------------------------------------------------------------------------

i. Oversight of Identity Theft Prevention Program
    Section VI(a) of the proposed guidelines would state that oversight 
by the board of directors, an appropriate committee of the board, or a 
designated senior management employee should include: (1) Assigning 
specific responsibility for the Program's implementation; (2) reviewing 
reports prepared by staff regarding compliance by the financial 
institution or creditor with the proposed rules; and (3) approving 
material changes to the Program as necessary to address changing 
identity theft risks.
ii. Reporting to the Board of Directors
    Section VI(b) of the proposed guidelines states that staff of the 
financial institution or creditor responsible for development, 
implementation, and administration of its Program should report to the 
board of directors, an appropriate committee of the board, or a 
designated senior management employee, at least annually, on compliance 
by the financial institution or creditor with the proposed rules. In 
addition, section VI(b) of the proposed guidelines provides that the 
report should address material matters related to the Program and 
evaluate several issues, such as: (i) The effectiveness of the policies 
and procedures of the financial institution or creditor in addressing 
the risk of identity theft in connection with the opening of covered 
accounts and with respect to existing covered accounts; (ii) service 
provider arrangements; (iii) significant incidents involving identity 
theft and management's response; and (iv) recommendations for material 
changes to the Program.
iii. Oversight of Service Provider Arrangements
    Section VI(c) of the proposed guidelines would provide that 
whenever

[[Page 13460]]

a financial institution or creditor engages a service provider to 
perform an activity in connection with one or more covered accounts, 
the financial institution or creditor should take steps to ensure that 
the activity of the service provider is conducted in accordance with 
reasonable policies and procedures designed to detect, prevent, and 
mitigate the risk of identity theft. The Commissions believe that these 
guidelines would make clear that a service provider that provides 
services to multiple financial institutions and creditors may do so in 
accordance with its own program to prevent identity theft, as long as 
the service provider's program meets the requirements of the proposed 
identity theft red flags rules.
    Section VI(c) of the proposed guidelines would also include, as an 
example of how a financial institution or creditor may comply with this 
provision, that a financial institution or creditor could require the 
service provider by contract to have policies and procedures to detect 
relevant red flags that may arise in the performance of the service 
provider's activities, and either report the red flags to the financial 
institution or creditor, or to take appropriate steps to prevent or 
mitigate identity theft. In those circumstances, the Commissions would 
expect that the contractual arrangements would include the provision of 
sufficient documentation by the service provider to the financial 
institution or creditor to enable it to assess compliance with the 
identity theft red flags rules.
     The Commissions request comment on section VI of the 
proposed guidelines.
     The SEC anticipates that information about compliance with 
an entity's Program could be included in any periodic reports submitted 
by the entity's chief compliance officer to its board of directors. The 
SEC requests comment on whether such reports are an appropriate means 
for reporting information to the board about the entity's compliance 
with its identity theft Program.
7. Section VII of the Proposed Guidelines--Other Applicable Legal 
Requirements
    Section VII of the proposed guidelines would identify other 
applicable legal requirements that financial institutions and creditors 
should keep in mind when developing, implementing, and administering 
their Programs. Specifically, section VII of the proposed guidelines 
identifies section 351 of the USA PATRIOT Act, which sets out the 
requirements for financial institutions that must file ``Suspicious 
Activity Reports'' in accordance with applicable law and 
regulation.\102\ In addition, section VII of the proposed guidelines 
identifies the following three requirements under the FCRA, which a 
financial institution or creditor should keep in mind: (1) Implementing 
any requirements under section 605A(h) of the FCRA, 15 U.S.C. 1681c-
1(h), regarding the circumstances under which credit may be extended 
when the financial institution or creditor detects a fraud or active 
duty alert;\103\ (2) implementing any requirements for furnishers of 
information to consumer reporting agencies under section 623 of the 
FCRA, 15 U.S.C. 1681s-2, for example, to correct or update inaccurate 
or incomplete information, and to not report information that the 
furnisher has reasonable cause to believe is inaccurate; and (3) 
complying with the prohibitions in section 615 of the FCRA, 15 U.S.C. 
1681m, regarding the sale, transfer, and placement for collection of 
certain debts resulting from identity theft.
---------------------------------------------------------------------------

    \102\ 31 U.S.C. 5318(g).
    \103\ Section 603(q)(2) of the FCRA defines the terms ``fraud 
alert'' and ``active duty alert'' as ``a statement in the file of a 
consumer that--(A) notifies all prospective users of a consumer 
report relating to the consumer that the consumer may be a victim of 
fraud, including identity theft, or is an active duty military 
consumer, as applicable; and (B) is presented in a manner that 
facilitates a clear and conspicuous view of the statement described 
in subparagraph (A) by any person requesting such consumer report.'' 
15 U.S.C. 1681a(q)(2).
---------------------------------------------------------------------------

     The Commissions request comment on this section of the 
proposed guidelines.
8. Proposed Supplement A to the Guidelines
    Proposed Supplement A to the proposed guidelines provides 
illustrative examples of red flags that financial institutions and 
creditors would be required to consider incorporating into their 
Program, as appropriate. These proposed examples are substantially 
similar to the examples identified in the Agencies' final guidelines, 
to enhance consistency. The proposed examples are organized under the 
five categories of red flags that are set forth in section II(c) of the 
proposed guidelines:
     Alerts, notifications, or warnings from a consumer 
reporting agency;
     Suspicious documents;
     Suspicious personal identifying information;
     Unusual use of, or suspicious activity related to, the 
covered account; and
     Notice from others regarding possible identity theft in 
connection with covered accounts held by the financial institution or 
creditor.\104\
---------------------------------------------------------------------------

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

    The Commissions recognize that some of the examples of red flags 
may be more reliable indicators of identity theft, while others are 
more reliable when detected in combination with other red flags. It is 
the Commissions' intention that Supplement A to the proposed guidelines 
be flexible and allow a financial institution or creditor to tailor the 
red flags it chooses for its Program to its own operations. Although 
the proposed rules would not require a financial institution or 
creditor to justify to the Commissions its failure to include in its 
Program a specific red flag from the list of examples, a financial 
institution or creditor would have to account for the overall 
effectiveness of its Program, and ensure that the Program is 
appropriate to the entity's size and complexity, and to the nature and 
scope of its activities.
     The Commissions request comment on Supplement A to the 
proposed guidelines. Are there any additional examples of red flags 
that the Supplement should include? For instance, should the Supplement 
include examples of fraud by electronic mail, such as when a financial 
institution or creditor receives an urgent request to wire money from a 
covered account to a remote account from an email address that may have 
been compromised? \105\
---------------------------------------------------------------------------

    \105\ The Federal Bureau of Investigation (``FBI'') and other 
organizations recently issued alerts that warned of thefts of 
customer money through emails from compromised customer email 
accounts. See FBI and Internet Crime Complaint Center, Fraud Alert 
Involving Email Intrusions to Facilitate Wire Transfers Overseas, 
available at http://www.ic3.gov/media/2012/EmailFraudWireTransferAlert.pdf; FINRA, Regulatory Notice 12-05, 
Customer Account Protection, Verification of Emailed Instructions to 
Transmit or Withdraw Assets from Customer Accounts, available at 
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p125462.pdf (January, 2012); FINRA Investor Alert, Email 
Hack Attack? Be Sure to Notify Brokerage Firms and Other Financial 
Institutions, available at http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P125460.
---------------------------------------------------------------------------

C. Proposed Card Issuer Rules

    Section 615(e)(1)(C) of the FCRA now provides that the CFTC and SEC 
must ``prescribe regulations applicable to card issuers to ensure that, 
if a card issuer receives a notification of a change of address for an 
existing account, and within a short period of time (during at least 
the first 30 days after such notification is received) receives a 
request for an additional or replacement card for the same account, the 
card issuer may not issue the additional or

[[Page 13461]]

replacement card,'' unless the card issuer applies certain address 
validation procedures discussed below.\106\ Congress singled out this 
scenario involving card issuers as being a possible indicator of 
identity theft. Accordingly, the Commissions are proposing the card 
issuer rules in conjunction with the identity theft red flags rules.
---------------------------------------------------------------------------

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

    The Commissions are proposing rules that would set out the duties 
of card issuers regarding changes of address, which would be similar to 
the final card issuer rules adopted by the Agencies.\107\ The proposed 
rules would provide that the card issuer rules apply only to a person 
that issues a debit or credit card (``card issuer'') and that is 
subject to the jurisdiction of either Commission.\108\
---------------------------------------------------------------------------

    \107\ See Sec.  162.32 (CFTC) and Sec.  248.202 (SEC).
    \108\ See supra Section II.A.1.
---------------------------------------------------------------------------

    The CFTC is not aware of any entities subject to its jurisdiction 
that issue debit or credit cards. The CFTC notes that several of the 
CFTC regulated-entities that are identified as falling within the scope 
of the proposed card issuer rules (e.g., FCMs, IBs, CPOs, CTAs, etc.) 
do not typically engage in the type of activities that are the subject 
of such rules and guidelines. As a matter of practice, it is highly 
unlikely that these CFTC regulated-entities would issue debit or credit 
cards. In fact, there are statutory provisions, regulations, or other 
laws that expressly prohibit some of these entities from engaging in 
many of these activities. For example, the Commodity Exchange Act 
(``CEA'') and the CFTC's regulations expressly prohibit an IB from 
extending credit in connection with their primary business 
activities.\109\ With respect to FCMs, while the CEA permits an FCM to 
extend credit to customers in lieu of accepting money, securities, or 
property for the purposes of collecting margin on a commodity interest, 
the CFTC's regulations prohibit an FCM from doing so.\110\ Lastly, the 
National Futures Association's (``NFA'') rules prohibit its members 
registered as CPOs from making loans to limited partners using 
interests in the partnerships as collateral.\111\
---------------------------------------------------------------------------

    \109\ See 7 U.S.C. 1(a)(31) (An IB is defined as any person that 
``is engaged in soliciting or in accepting orders for the purchase 
or sale of any commodity for future delivery, security futures 
product, [* * *] swap,'' any foreign exchange transaction, any 
retail commodity transaction, any authorized commodity option, or 
any authorized leverage transaction, ``and does not accept money 
securities, or property (or extend credit in lieu thereof) to 
margin, guarantee, or secure any trades or contracts that result or 
may result therefrom.''); see also 17 CFR 1.57(c) (prohibiting IBs 
from, among other things, extending credit in lieu of accepting 
money, securities or property to margin, guarantee or secure any 
trades or contracts of customers) and 17 CFR 1.56(b) (prohibiting 
IBs from representing that they will guarantee any person against 
loss with respect to any commodity interest in any account carried 
by an FCM for or on behalf of any person).
    \110\ See 17 CFR 1.56(b) (prohibiting FCMs from representing 
that they will guarantee any person against loss with respect to any 
commodity interest in any account carried by an FCM for or on behalf 
of any person).
    \111\ See NFA Rule 2-45, available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=RULE%202-45&Section=4, which provides that ``[n]o Member CPO may permit a 
commodity pool to use any means to make a direct or indirect loan or 
advance of pool assets to the CPO or any other affiliated person or 
entity.''
---------------------------------------------------------------------------

     The CFTC requests comment on the extent to which the 
proposed card issuer rules would affect the business operations of 
entities that would fall under the CFTC's jurisdiction.
    The SEC understands that a number of entities under its 
jurisdiction issue cards in partnership with affiliated or unaffiliated 
banks and financial institutions. Generally, these cards are issued by 
the partner bank, and not by the entity under the SEC's jurisdiction. 
For example, a broker-dealer may offer automated teller machine (ATM) 
access to a customer account through a debit card, but the debit card 
would generally be issued by a partner bank and not by the broker-
dealer itself. The SEC therefore expects that few, if any, entities 
under its jurisdiction would be subject to the proposed card issuer 
rules. Nonetheless, the SEC is proposing the card issuer rules below so 
that any entity under its jurisdiction that does issue cards provides 
appropriate identity theft protection.
     The SEC requests comment on the extent to which the 
proposed card holder rules may affect the entities under its 
jurisdiction. Do any SEC-regulated entities issue cards? What types of 
arrangements are used to establish the card-issuing partnership between 
SEC-regulated entities and issuing banks? Would the proposed card 
issuer rules affect those arrangements?
1. Definition of ``Cardholder'' and Other Terms
    Section 615(e)(1)(C) of the FCRA uses the term ``cardholder'' but 
does not define the term. The legislative history on this provision 
indicates that ``issuers of credit cards and debit cards who receive a 
consumer request for an additional or replacement card for an existing 
account'' may assess the validity of the request by notifying ``the 
cardholder.'' \112\ The proposed rules provide that the term 
``cardholder'' means a consumer \113\ who has been issued a credit or 
debit card.\114\ Both ``credit card'' and ``debit card'' are defined in 
section 603(r) of the FCRA.\115\ ``Credit card'' is defined by 
reference to section 103 of the Truth in Lending Act.\116\ ``Debit 
card'' is defined as any card issued by a financial institution to a 
consumer for use in initiating an electronic fund transfer from the 
account of a consumer at such financial institution for the purpose of 
transferring money between accounts or obtaining money, property, 
labor, or services.\117\ The term ``clear and conspicuous'' is defined 
in Sec.  162.2(b) of the CFTC's regulations and in the SEC's proposed 
Sec.  248.202(b)(2) to mean reasonably understandable and designed to 
call attention to the nature and significance of the information 
presented in the notice. The proposed definitions of ``cardholder'' and 
``clear and conspicuous'' are identical to the definitions in the 
Agencies' final card issuer rules because, upon review, the Commissions 
believe that the definitions are comprehensive, likely to be relevant 
to any entities regulated by the Commissions under these proposed 
rules, and designed to enhance consistency and comparability of 
regulations and Programs.\118\
---------------------------------------------------------------------------

    \112\ 149 Cong. Rec. E2513 (daily ed. Dec. 8, 2003) (statement 
of Rep. Oxley).
    \113\ A ``consumer'' means an individual person, as defined in 
section 603(c) of the FCRA and Sec.  162.2(f) of the CFTC's 
regulations. See 15 U.S.C. 1681a(c) and 76 FR at 43885. As mentioned 
above, the rules proposed by the CFTC in this release would be a 
part of part 162 of the CFTC's regulations, and therefore, all 
definitions in part 162 would apply to these rules. See 76 FR at 
43884-6. The SEC is proposing to define all terms that are not 
defined in subpart C (including the term ``consumer'') to have the 
same meaning as defined in the FCRA. See proposed Sec.  
248.202(b)(3).
    \114\ See proposed Sec.  162.32(b) (CFTC) and proposed Sec.  
248.202(b) (SEC).
    \115\ 15 U.S.C. 1681.
    \116\ 15 U.S.C. 1601.
    \117\ 15 U.S.C. 1681a(r)(3).
    \118\ See 2007 Adopting Release, supra note 10, at 63733.
---------------------------------------------------------------------------

     The Commissions' proposed definition of ``cardholder'' 
refers to the definition of ``credit card'' and ``debit card'' in 
section 603(r) of the FCRA. Should the proposed definition instead 
separately define ``credit card'' and ``debit card''?
2. Address Validation Requirements
    Section 615(e) of the FCRA provides the address validation 
requirements and methods, and the proposed rules would set out the 
address validation rules to reflect those requirements and 
methods.\119\ These sections would require a card issuer to establish 
and implement reasonable written policies

[[Page 13462]]

and procedures to assess the validity of a change of address if it (1) 
receives notification of a change of address for a consumer's debit or 
credit card account and (2) within a short period of time afterwards 
(during at least the first 30 days after it receives such 
notification), receives a request for an additional or replacement card 
for the same account. Under these circumstances, the proposed rules 
would prohibit the card issuer from issuing an additional or 
replacement card until, in accordance with its reasonable policies and 
procedures, it uses one of two methods to assess the validity of the 
change of address. Under the first method, the card issuer must notify 
the cardholder of the request either at the cardholder's former 
address,\120\ or by any other means of communication that the card 
issuer and the cardholder have previously agreed to use.\121\ In 
addition, the card issuer must provide the cardholder with a reasonable 
means of promptly reporting incorrect address changes. Under the second 
method, the card issuer would be required to otherwise assess the 
validity of the change of address in accordance with the policies and 
procedures the card issuer has established pursuant to the proposed 
rules.\122\
---------------------------------------------------------------------------

    \119\ See proposed Sec.  162.32(c) (CFTC) and proposed Sec.  
248.202(c) (SEC).
    \120\ See 15 U.S.C. 1681m(e)(1)(C)(i).
    \121\ See 15 U.S.C. 1681m(e)(1)(C)(ii).
    \122\ See proposed Sec.  162.32(c) (CFTC) and proposed Sec.  
248.202(c) (SEC).
---------------------------------------------------------------------------

    The proposed rules would provide card issuers with an alternative 
time period in which to assess the validation of a cardholder's 
address.\123\ Specifically, this section provides that the card issuer 
would be able to satisfy the requirements of proposed Sec.  162.32(c) 
(CFTC) and proposed Sec.  248.202(c) (SEC) if it validates an address 
pursuant to the methods in proposed Sec.  162.32(c)(1) or (c)(2) (CFTC) 
and proposed Sec.  248.202(c)(1) or (c)(2) (SEC) when it receives an 
address change notification, before it receives a request for an 
additional or replacement card. The proposed rules would not require a 
card issuer that issues an additional or replacement card to validate 
an address whenever it receives a request for such a card; section 
615(e)(1)(C) of the FCRA (and proposed Sec.  162.32(c) (CFTC) and 
proposed Sec.  248.202(c) (SEC)) would require the validation of an 
address only when the card issuer also has received a notification of a 
change in address. The Commissions believe, however, that a card issuer 
that does not validate an address when it receives an address change 
notification may find it prudent to validate the address before issuing 
an additional or replacement card, even when it receives a request for 
such a card more than 30 days after the notification of address change. 
Ultimately, the Commissions expect card issuers to exercise diligence 
commensurate with (i.e., augmented by) their own experiences with 
identity theft.
---------------------------------------------------------------------------

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

     The Commissions request comment on the proposed address 
validation requirements for card issuers.
3. Form of Notice
    To highlight the important and urgent nature of notice that a 
consumer receives from a card issuer, the Commissions are proposing to 
require that any written or electronic notice that the card issuer 
provides under this section would be required to be clear and 
conspicuous and be provided separately from its regular correspondence 
with the cardholder.\124\ This proposed requirement would be consistent 
with the requirement in the Agencies' final card issuer rules because, 
upon review, the Commissions believe the requirement is comprehensive, 
relevant to any entities regulated by the Commissions under these 
proposed rules, and designed to enhance consistency and comparability 
of regulations and Programs.
---------------------------------------------------------------------------

    \124\ See proposed Sec.  162.32(e) (CFTC) and proposed Sec.  
248.202(e) (SEC). As noted above, ``clear and conspicuous'' would 
mean reasonably understandable and designed to call attention to the 
nature and significance of the information presented in the notice. 
See supra Section II.C.1. See also Sec.  162.2(b) (CFTC) and 
proposed Sec.  248.202(b)(2) (SEC).
---------------------------------------------------------------------------

     The Commissions request comment on the proposed 
requirements regarding the form of notice that must be sent to card 
holders.

D. Proposed Effective and Compliance Dates

    The Commissions propose to make the rules and guidelines effective 
30 days after the date of publication of final rules in the Federal 
Register. Financial institutions and creditors subject to the 
Commissions' enforcement authority should already be in compliance with 
the red flags rules of the FTC or the other Agencies. Newly formed 
entities under the Commissions' enforcement authority likely comply 
with the existing rules of the FTC or the other Agencies. The rules and 
guidelines that the Commissions are proposing today are substantially 
similar to the existing rules of the Agencies and should not require 
significant changes to financial institution or creditor policies or 
operations. As a result, the Commissions do not expect that entities 
subject to their enforcement authority should have difficulty in 
complying with the proposed rules and guidelines immediately, and are 
not proposing a delayed compliance date.
     The Commissions request comment on the proposed effective 
and compliance dates for the proposed rules and guidelines. Should 
there be a delayed effective or compliance date? If so, what should the 
delay be (e.g., 30, 60, or 90 days, or longer)?

III. Related Matters

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

    Section 15(a) of the CEA \125\ requires the CFTC to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations.
---------------------------------------------------------------------------

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

    The proposed rules and guidelines are broken down into two 
categories of requirements. First, the proposed identity theft red flag 
rules and guidelines found in proposed Sec.  162.30, and second, the 
proposed card issuer rules found in proposed Sec.  162.32. A Section 
15(a) analysis of each category is set out immediately below.
1. Cost Benefit Considerations of Proposed Identity Theft Red Flag 
Rules and Guidelines
    As noted above, the proposed identity theft red flags rules and 
guidelines would require financial institutions and creditors that are 
subject to CFTC's enforcement authority under the FCRA \126\ and that 
offer or maintain covered accounts to develop, implement, and 
administer a written Program. Each Program must be designed to detect, 
prevent, and mitigate identity theft in connection with the opening of 
a covered account or any existing covered account. In addition, each 
Program must be appropriately tailored to the size and complexity of 
the financial institution or creditor and

[[Page 13463]]

the nature and scope of its activities. There are various steps that a 
financial institution or creditor must take in order to comply with the 
requirements under the proposed identity theft red flags rules, 
including training staff, providing annual reports to board of 
directors, and when applicable, monitoring the use of third-party 
service providers.
---------------------------------------------------------------------------

    \126\ As stated above, section 1088(a)(10) of the Dodd-Frank Act 
amended section 621(b) of the FCRA to add the Commissions to the 
list of federal agencies responsible for administrative enforcement 
of the FCRA. See Public Law 111-203 (2010).
---------------------------------------------------------------------------

    As discussed above, the Dodd-Frank Act shifted enforcement 
authority over CFTC-regulated entities that are subject to section 
615(e) of the FCRA from the FTC to the CFTC. Section 615(e) of the 
FCRA, as amended by the Dodd-Frank Act, requires that the CFTC, jointly 
with the Agencies and the SEC, adopt identity theft red flags rules and 
guidelines. To carry out this requirement, the CFTC is proposing Sec.  
162.30, which is substantially similar to the identity theft red flags 
rules and guidelines adopted by the Agencies in 2007.
    Proposed Sec.  162.30 would shift oversight of identity theft rules 
and guidelines of CFTC-regulated entities from the FTC to the CFTC. 
These entities should already be in compliance with the FTC's existing 
rules and guidelines, which the FTC began enforcing on December 31, 
2010. Because proposed Sec.  162.30 is substantially similar to those 
existing rules and guidelines, these entities should not bear any new 
costs in coming into compliance with proposed Sec.  162.30. The new 
regulation does not contain new requirements, nor does it expand the 
scope of the rules to include new entities that were not already 
previously covered by the Agencies' rules. The new regulation does 
contain examples and minor language changes designed to help guide 
entities under the CFTC's jurisdiction in complying with the rules.
    In the analysis for the Paperwork Reduction Act of 1995 (``PRA'') 
below, the staff identified certain initial and ongoing hour burdens 
and associated time costs related to compliance with proposed Sec.  
162.30. However, these costs are not new costs, but are current costs 
associated with compliance with the Agencies' existing rules. CFTC-
regulated entities will incur these hours and costs regardless of 
whether the CFTC adopts proposed Sec.  162.30. These hours and costs 
would be transferred from the Agencies' PRA allotment to the CFTC. No 
new costs should result from the adoption of proposed Sec.  160.30.
    These existing costs related to proposed Sec.  162.30 would 
include, for newly formed CFTC-regulated entities, the one-time cost 
for financial institutions and creditors to conduct initial assessments 
of covered accounts, create a Program, obtain board approval of the 
Program, and train staff.\127\ The existing costs would also include 
the ongoing cost to periodically review and update the program, report 
periodically on the Program, and conduct periodic assessments of 
covered accounts.\128\
---------------------------------------------------------------------------

    \127\ CFTC staff estimates that the one-time burden of 
compliance would include 2 hours to conduct initial assessments of 
covered accounts, 25 hours to develop and obtain board approval of a 
Program, and 4 hours to train staff. CFTC staff estimates that, of 
the 31 hours incurred, 12 hours would be spent by internal counsel 
at an hourly rate of $354, 17 hours would be spent by administrative 
assistants at an hourly rate of $66, and 2 hours would be spent by 
the board of directors as a whole, at an hourly rate of $4000, for a 
total cost of $13,370 per entity for entities that need to come into 
compliance with proposed subpart C to Part 162. This estimate is 
based on the following calculations: $354 x 12 hours = $4,248; $66 x 
17 = $1,122; $4,000 x 2 = $8,000; $4,248 + $1,122 + $8,000 = 
$13,370.
    As discussed in the PRA analysis, CFTC staff estimates that 
there are 702 CFTC-regulated entities that newly form each year and 
that would fall within the definitions of financial institution or 
creditor. Of these 702 entities, 54 entities would maintain covered 
accounts. See infra note 153 and text following note 153. CFTC staff 
estimates that 2 hours of internal counsel's time would be spent 
conducting an initial assessment to determine whether they have 
covered accounts and whether they are subject to the proposed rule 
(or 702 entities). The cost associated with this determination is 
$497,016 based on the following calculation: $354 x 2 = $708; $708 x 
702 = $497,016. CFTC staff estimates that 54 entities would bear the 
remaining specified costs for a total cost of $683,748 (54 x $12,662 
= $683,748). See SIFMA ``Office Salaries in the Securities Industry 
2011.
    Staff also estimates that in response to Dodd-Frank, there will 
be approximately 125 newly registered SDs and MSPs. Staff believes 
that each of these SDs and MSPs will be a financial institution or 
creditor with covered accounts. The additional cost of these SDs and 
MSPs is $1,596,250 (125 x $12,770 = $1,596,250).
    \128\ CFTC staff estimates that the ongoing burden of compliance 
would include 2 hours to conduct periodic assessments of covered 
accounts, 2 hours to periodically review and update the Program, and 
4 hours to prepare and present an annual report to the board, for a 
total of 8 hours. CFTC staff estimates that, of the 8 hours 
incurred, 7 hours would be spent by internal counsel at an hourly 
rate of $354 and 1 hour would be spent by the board of directors as 
a whole, at an hourly rate of $4,000, for a total hourly cost of 
$6,500. This estimate is based on the following calculations rounded 
to two significant digits: $354 x 7 hours = $2,478; $4,000 x 1 hour 
= $4,000; $2,478 + $4,000 = $6,478 [ap] $6,500.
    As discussed in the PRA analysis, CFTC staff estimates that 
3,124 existing CFTC-regulated entities would be financial 
institutions or creditors, of which 268 maintain covered accounts. 
CFTC staff estimates that 2 hours of internal counsel's time would 
be spent conducting periodic assessments of covered accounts and 
that all financial institutions or creditors subject to the proposed 
rule (or 3,124 entities) would bear this cost for a total cost of 
$2,200,000 based on the following calculations rounded to two 
significant digits: $354 x 2 = $708; $708 x 3,124 = $2,211,792 [ap] 
$2,200,000. CFTC staff estimates that 268 entities would bear the 
remaining specified ongoing costs for a total cost of $1,500,000 
(268 x $5,770 = $1,546,360 [ap] $1,500,000).
---------------------------------------------------------------------------

    The benefits related to adoption of proposed Sec.  160.30, which 
already exist in connection with the Agencies' red flags rules and 
guidelines, would include a reduction in the risk of identity theft for 
investors (consumers) and cardholders, and a reduction in the risk of 
losses due to fraud for financial institutions and creditors. It is not 
practicable for the CFTC to determine with precision the dollar value 
associated with the benefits that will inure to the public from this 
proposed rules and guidelines, as the quantity or value of identity 
theft deterred or prevented is not knowable. The Commission, however, 
recognizes that the cost of any given instance of identity theft may be 
substantial to the individual involved. Joint adoption of identity 
theft red flags rules in a form that is substantially similar to the 
Agencies' identity theft red flags rules and guidelines might also 
benefit financial institutions and creditors because entities regulated 
by multiple federal agencies could comply with a single set of 
standards, which would reduce potential compliance costs. As is true of 
the Agencies' rules and guidelines, the CFTC has designed proposed 
Sec.  162.30 to provide financial institutions and creditors 
significant flexibility in developing and maintaining a Program that is 
tailored to the size and complexity of their business and the nature of 
their operations, as well as in satisfying the address verification 
procedures.
    Accordingly, as previously discussed, proposed Sec.  162.30 should 
not result in any significant new costs or benefits, because it 
generally reflects a statutory transfer of enforcement authority from 
the FTC to the CFTC, does not include any significant new requirements, 
and does not include new entities that were not previously covered by 
the Agencies' rules.
    Section 15(a) Analysis. As stated above, the CFTC is required to 
consider costs and benefits of proposed CFTC action in light of (1) 
protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. These rules protect market participants and 
the public by preventing identity theft, an illegal act that may be 
costly to them in both time and money.\129\ Because,

[[Page 13464]]

however, these proposed rules and guidelines create no new 
requirements--rather, as explained above, the CFTC is adopting rules 
that reflect requirements already in place--their cost and benefits 
have no incremental impact on the five section 15(a) factors. Customers 
of CFTC-registrants will continue to benefit from these proposed rules 
and guidelines in the same way they have benefited from the rules as 
they were administered by the Agencies.
---------------------------------------------------------------------------

    \129\ According to the Javelin 2011 Identity Fraud Survey 
Report, consumer costs (the average out[hyphen]of[hyphen]pocket 
dollar amount victims pay) increased in 2010. See Javelin 2011 
Identity Fraud Survey Report (2011). The report attributed this 
increase to new account fraud, which showed longer periods of misuse 
and detection and therefore more dollar losses associated with it 
than any other type of fraud. Notwithstanding the increase in cost, 
the report stated that the number of identity theft victims has 
decreased in recent years. Id.
---------------------------------------------------------------------------

2. Cost Benefit Considerations of Card Issuer Rules
    With respect to specific types of identity theft, section 615(e) of 
the FCRA identified the scenario involving debit and credit card 
issuers as being a possible indicator of identity theft. Accordingly, 
the proposed card issuer rules in this release set out the duties of 
card issuers regarding changes of address. The proposed card issuer 
rules will apply only to a person that issues a debit or credit card 
and that is subject to the CFTC's jurisdiction. The proposed card 
issuer rules require a card issuer to comply with certain address 
validation procedures in the event that such issuer receives a 
notification of a change of address for an existing account from a 
cardholder, and within a short period of time (during at least the 
first 30 days after such notification is received) receives a request 
for an additional or replacement card for the same account. The card 
issuer may not issue the additional or replacement card unless it 
complies with those procedures. The procedures include: (1) Notifying 
the cardholder of the request in writing or electronically either at 
the cardholder's former address, or by any other means of communication 
that the card issuer and the cardholder have previously agreed to use; 
or (2) assessing the validity of the change of address in accordance 
with established policies and procedures.
    Proposed Sec.  162.32 would shift oversight of card issuer rules of 
CFTC-regulated entities from the FTC to the CFTC. These entities should 
already be in compliance with the FTC's existing card issuer rules, 
which the FTC began enforcing on December 31, 2010. Because proposed 
Sec.  162.32 is substantially similar to those existing card issuer 
rules, these entities should not bear any new costs in coming into 
compliance. The new regulation does not contain new requirements, nor 
does it expand the scope of the rules to include new entities that were 
not already previously covered by the Agencies' card issuer rules.
    The existing costs related to proposed Sec.  162.32 would include 
the cost for card issuers to establish policies and procedures that 
assess the validity of a change of address notification submitted 
shortly before a request for an additional card and, before issuing an 
additional or replacement card, either notify the cardholder at the 
previous address or through another previously agreed-upon form of 
communication, or alternatively assess the validity of the address 
change through existing policies and procedures. As discussed in the 
PRA analysis, CFTC staff does not expect that any CFTC-regulated 
entities would be subject to the requirements of proposed Sec.  162.32.
    The benefits related to adoption of proposed Sec.  162.32, which 
already exist in connection with the Agencies' card issuer rules, would 
include a reduction in the risk of identity theft for cardholders, and 
a reduction in the risk of losses due to fraud for card issuers. 
However, it is not practicable for the CFTC to determine with precision 
the dollar value associated with the benefits that will inure to the 
public from these proposed card issuer rules. As is true of the 
Agencies' card issuer rules, the CFTC has designed proposed Sec.  
162.32 to provide card issuers significant flexibility in developing 
and maintaining a Program that is tailored to the size and complexity 
of their business and the nature of their operations.
    Accordingly, as previously discussed, the proposed card issuer 
rules should not result in any significant new costs or benefits, 
because they generally reflect a statutory transfer of enforcement 
authority from the FTC to the CFTC, do not include any significant new 
requirements, and do not include new entities that were not previously 
covered by the Agencies' rules.
    Section 15(a) Analysis. As stated above, the CFTC is required to 
consider costs and benefits of proposed CFTC action in light of (1) 
protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. These proposed rules and guidelines protect 
market participants and the public by preventing identity theft, an 
illegal act that may be costly to them in both time and money.\130\ 
Because, however, these rules create no new requirements--rather, as 
explained above, the CFTC is adopting rules that reflect requirements 
already in place--their cost and benefits have no incremental impact on 
the five section 15(a) factors. Customers of CFTC-registrants will 
continue to benefit from these proposed rules and guidelines in the 
same way they have benefited from the rules as they were administered 
by the Agencies.
---------------------------------------------------------------------------

    \130\ See id.
---------------------------------------------------------------------------

3. Questions
     The CFTC requests comment on all aspects of this cost-
benefit analysis, including identification, quantification, and 
assessment of any costs and benefits, whether or not discussed in the 
above analysis. The CFTC encourages commenters to identify, discuss, 
analyze, and supply relevant data regarding any additional costs and 
benefits.
     The CFTC requests comment on the accuracy of the cost 
estimates in each section of this analysis, and requests that 
commenters provide data that may be relevant to these cost estimates, 
including quantification.
    In addition, the CFTC seeks estimates and views regarding these 
costs and benefits for all affected entities, including small entities, 
as well as any other costs or benefits that may result from the 
adoption of proposed subpart C to Part 162.
    SEC:
    The SEC is sensitive to the costs and benefits imposed by its 
rules. Proposed Regulation S-ID would require financial institutions 
and creditors that are subject to the SEC's enforcement authority under 
the FCRA \131\ and that offer or maintain covered accounts to develop, 
implement, and administer a written identity theft prevention Program. 
A financial institution or creditor would have to design its Program to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. In 
addition, a financial institution or creditor would have to 
appropriately tailor its Program to its size and complexity, and to the 
nature and scope of its activities. There are various steps that a 
financial institution or creditor would have to take in order to comply 
with the requirements under the proposed identity theft red flags 
rules, including training staff, providing annual reports to board of 
directors, and, when applicable, monitoring the use of third-party 
service providers.
---------------------------------------------------------------------------

    \131\ See supra note 19.
---------------------------------------------------------------------------

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

[[Page 13465]]

notifications sent to credit and debit card issuers as a possible 
indicator of identity theft, and requires the SEC to prescribe 
regulations concerning such notifications. Accordingly, the proposed 
card issuer rules in this release set out the duties of card issuers 
regarding changes of address. The proposed card issuer rules would 
apply only to SEC-regulated entities that issue credit or debit 
cards.\132\ The proposed card issuer rules would require a card issuer 
to comply with certain address validation procedures in the event that 
such issuer receives a notification of a change of address for an 
existing account from a cardholder, and within a short period of time 
(during at least the first 30 days after it receives such notification) 
receives a request for an additional or replacement card for the same 
account. The card issuer may not issue the additional or replacement 
card unless it complies with those procedures. The procedures include: 
(1) Notifying the cardholder of the request either at the cardholder's 
former address, or by any other means of communication that the card 
issuer and the cardholder have previously agreed to use; or (2) 
assessing the validity of the change of address in accordance with 
established policies and procedures.
---------------------------------------------------------------------------

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

    As discussed above, the Dodd-Frank Act shifted enforcement 
authority over SEC-regulated entities that are subject to section 
615(e) of the FCRA from the FTC to the SEC. Section 615(e) of the FCRA, 
as amended by the Dodd-Frank Act, requires that the SEC, jointly with 
the Agencies and the CFTC, adopt identity theft red flags rules and 
guidelines. To carry out this requirement, the SEC is proposing 
Regulation S-ID, which is substantially similar to the identity theft 
red flags rules and guidelines adopted by the Agencies in 2007.
    Proposed Regulation S-ID would shift oversight of identity theft 
rules and guidelines of SEC-regulated entities from the FTC to the SEC. 
These entities should already be in compliance with the FTC's existing 
rules and guidelines, which the FTC began enforcing on December 31, 
2010. Because proposed Regulation S-ID is substantially similar to 
those existing rules and guidelines, these entities should not bear any 
new costs in coming into compliance with proposed Regulation S-ID. The 
new regulation does not contain new requirements, nor does it expand 
the scope of the rules to include new entities that were not already 
previously covered by the Agencies' rules. The new regulation does 
contain examples and minor language changes designed to help guide 
entities under the SEC's jurisdiction in complying with the rules.
    In the analysis for the Paperwork Reduction Act of 1995 (``PRA'') 
below, the staff identified certain initial and ongoing hour burdens 
and associated time costs related to compliance with proposed 
Regulation S-ID.\133\ However, these costs are not new costs, but are 
current costs associated with compliance with the Agencies' existing 
rules. SEC-regulated entities will incur these hours and costs 
regardless of whether the SEC adopts proposed Regulation S-ID. These 
hours and costs would be transferred from the Agencies' PRA allotment 
to the SEC. No new costs should result from the adoption of proposed 
Regulation S-ID.
---------------------------------------------------------------------------

    \133\ Unless otherwise stated, all cost estimates for personnel 
time are derived from SIFMA's Management & Professional Earnings in 
the Securities Industry 2010, modified to account for an 1800-hour 
work-year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits, and overhead.
---------------------------------------------------------------------------

    These existing costs related to Sec.  248.201 of proposed 
Regulation S-ID would include, for newly formed SEC-regulated entities, 
the incremental one-time cost for financial institutions and creditors 
to conduct initial assessments of covered accounts, create a Program, 
obtain board approval of the Program, and train staff.\134\ The 
existing costs would also include the incremental ongoing cost to 
periodically review and update the program, report periodically on the 
Program, and conduct periodic assessments of covered accounts.\135\ The 
existing costs related to Sec.  248.202 of proposed Regulation S-ID 
would include the incremental cost for card issuers to establish 
policies and procedures that assess the validity of a change of address 
notification submitted shortly before a request for an additional card 
and, before issuing an additional or replacement card, either notify 
the cardholder at the previous address or through another previously 
agreed-upon form of communication, or alternatively assess the validity 
of the address change through existing policies and procedures. As 
discussed in the PRA analysis, SEC staff does not expect that any SEC-
regulated entities would be subject to the requirements of Sec.  
248.202 of proposed Regulation S-ID.
---------------------------------------------------------------------------

    \134\ SEC staff estimates that the incremental one-time burden 
of compliance would include 2 hours to conduct initial assessments 
of covered accounts, 25 hours to develop and obtain board approval 
of a Program, and 4 hours to train staff. SEC staff estimates that, 
of the 31 hours incurred, 12 hours would be spent by internal 
counsel at an hourly rate of $354, 17 hours would be spent by 
administrative assistants at an hourly rate of $66, and 2 hours 
would be spent by the board of directors as a whole, at an hourly 
rate of $4000, for a total cost of $13,370 per entity for entities 
that need to come into compliance with proposed Regulation S-ID. 
This estimate is based on the following calculations: $354 x 12 
hours = $4248; $66 x 17 = $1,122; $4000 x 2 = $8000; $4248 + $1,122 
+ $8000 = $13,370.
    As discussed in the PRA analysis, SEC staff estimates that there 
are 1327 SEC-regulated entities that newly form each year and would 
be financial institutions or creditors, of which 465 would maintain 
covered accounts. See infra note 153 and following text. SEC staff 
estimates that 2 hours of internal counsel's time would be spent 
conducting an initial assessment of covered accounts and that all 
newly formed financial institutions or creditors subject to the 
proposed rule (or 1327 entities) would bear this cost for a total 
cost of $939,516 based on the following calculation: $354 x 2 = 
$708; $708 x 1327 = $939,516. SEC staff estimates that 465 entities 
would bear the remaining specified costs for a total cost of 
$5,887,830 (465 x $12,662 = $5,887,830).
    \135\ SEC staff estimates that the incremental ongoing burden of 
compliance would include 2 hours to conduct periodic assessments of 
covered accounts, 2 hours to periodically review and update the 
Program, and 4 hours to prepare and present an annual report to the 
board, for a total of 8 hours. SEC staff estimates that, of the 8 
hours incurred, 7 hours would be spent by internal counsel at an 
hourly rate of $354 and 1 hour would be spent by the board of 
directors as a whole, at an hourly rate of $4000, for a total hourly 
cost of $6478. This estimate is based on the following calculations: 
$354 x 7 hours = $2478; $4000 x 1 hour = $4000; $2478 + $4000 = 
$6478.
     As discussed in the PRA analysis, SEC staff estimates that 7978 
existing SEC-regulated entities would be financial institutions or 
creditors under the proposal and 7180 of these entities maintain 
covered accounts. See infra note 156 and following text. SEC staff 
estimates that 2 hours of internal counsel's time would be spent 
conducting periodic assessments of covered accounts and that all 
financial institutions or creditors subject to the proposed rule (or 
7978 entities) would bear this cost for a total cost of $5,648,424 
based on the following calculations: $354 x 2 = $708; $708 x 7978 = 
$5,648,424. SEC staff estimates that 7180 entities would bear the 
remaining specified ongoing costs for a total cost of $41,428,600 
(7180 x $5770 = $41,428,600).
---------------------------------------------------------------------------

    The benefits related to adoption of Regulation S-ID, which already 
exist in connection with the Agencies' red flags rules and guidelines, 
would include a reduction in the risk of identity theft for investors 
(consumers) and cardholders, and a reduction in the risk of losses due 
to fraud for financial institutions and creditors. Joint adoption by 
the Commissions of identity theft red flags rules in a form that is 
substantially similar to the Agencies' identity theft red flags rules 
and guidelines might also benefit financial institutions and creditors 
because entities regulated by multiple federal agencies could comply 
with a single set of standards, which would reduce potential compliance 
costs. As is true of the Agencies' rules and guidelines, the SEC has 
designed proposed Regulation S-ID to provide financial institutions, 
creditors, and card issuers significant flexibility in developing and 
maintaining a Program that is tailored to the size and complexity of 
their business and the

[[Page 13466]]

nature of their operations, as well as in satisfying the address 
verification procedures.
    Accordingly, as previously discussed, proposed Regulation S-ID 
should not result in any significant new costs or benefits, because it 
generally reflects a statutory transfer of enforcement authority from 
the FTC to the SEC, does not include any significant new requirements, 
and does not include new entities that were not previously covered by 
the Agencies' rules.
     The SEC requests comment on all aspects of this cost-
benefit analysis, including identification and assessment of any costs 
and benefits not discussed in this analysis. The SEC encourages 
commenters to identify, discuss, analyze, and supply relevant data 
regarding any additional costs and benefits.
     The SEC requests comment on the accuracy of the cost 
estimates in each section of this analysis, and requests that 
commenters provide data that may be relevant to these cost estimates.
     In addition, the SEC seeks estimates and views regarding 
these costs and benefits for all affected entities, including small 
entities, as well as any other costs or benefits that may result from 
the adoption of proposed Regulation S-ID.

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

    Section 3(f) of the Securities Exchange Act and section 2(c) of the 
Investment Company Act require the SEC, whenever it engages in 
rulemaking and must consider or determine if an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action would promote efficiency, 
competition, and capital formation. In addition, section 23(a)(2) of 
the Exchange Act requires the SEC, when proposing rules under the 
Exchange Act, to consider the impact the proposed rules may have upon 
competition. Section 23(a)(2) of the Exchange Act prohibits the SEC 
from adopting any rule that would impose a burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.\136\
---------------------------------------------------------------------------

    \136\ See infra Section IV (setting forth statutory authority 
under, among other things, the Exchange Act and Investment Company 
Act for proposed rules).
---------------------------------------------------------------------------

    As discussed in the cost benefit analysis above, proposed 
Regulation S-ID would carry out the requirement in the Dodd-Frank Act 
that the SEC adopt rules and guidelines governing identity theft 
protections, pursuant to section 615(e) of the FCRA with regard to 
entities that are subject to the SEC's jurisdiction. This requirement 
was designed to transfer regulatory oversight of identity theft rules 
and guidelines of SEC-regulated entities from the FTC to the SEC. 
Proposed Regulation S-ID is substantially similar to the identity theft 
red flags rules and guidelines adopted by the FTC and other regulatory 
agencies in 2007, and does not contain new requirements. The entities 
covered by proposed Regulation S-ID should already be in compliance 
with existing rules and guidelines, which the FTC began to enforce on 
December 31, 2010.
    For the reasons discussed above, proposed Regulation S-ID should 
not have an effect on efficiency, competition, or capital formation 
because it does not include new requirements and does not include new 
entities that were not previously covered by the Agencies' rules.
     The SEC seeks comment on the potential impact of the 
proposed rules on efficiency, competition, and capital formation. For 
purposes of the Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA), the SEC also requests information regarding the 
potential effect of the proposed rules on the U.S. economy on an annual 
basis. Commenters are requested to provide empirical data to support 
their views.

C. Paperwork Reduction Act

    CFTC:
    Provisions of proposed Sec. Sec.  162.30 and 162.32 would result in 
new collection of information requirements within the meaning of the 
PRA. The CFTC, therefore, is submitting this proposal to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. OMB has not yet assigned a control number to 
the new collection. The title for this collection of information is 
``Part 162 Subpart C--Identity Theft.'' If adopted, responses to this 
new collection of information would be mandatory.
1. Information Provided by Reporting Entities/Persons
    Under proposed part 162, subpart C, CFTC regulated entities--which 
presently would include approximately 268 CFTC registrants \137\ plus 
125 new CFTC registrants pursuant to Title VII of the Dodd-Frank Act 
\138\--may be required to design, develop and implement reasonable 
policies and procedures to identify relevant red flags, and potentially 
notifying cardholders of identity theft risks. In addition, CFTC-
regulated entities would be required to: (i) Collect information and 
keep records for the purpose of ensuring that their Programs met 
requirements to detect, prevent, and mitigate identity theft in 
connection with the opening of a covered account or any existing 
covered account; (ii) develop and implement reasonable policies and 
procedures to identify, detect and respond to relevant red flags, as 
well as periodic reports related to the Program; and (iii) from time to 
time, notify cardholders of possible identity theft with respect to 
their accounts, as well as assess the validity of those accounts.
---------------------------------------------------------------------------

    \137\ See the NFA's Internet Web site at: http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML 
for the most up-to-date number of CFTC regulated entities. For the 
purposes of the PRA calculation, CFTC staff used the number of 
registered FCMs, CTAs, CPOs IBs and RFEDs on the NFA's Internet Web 
site as of October 31, 2011. The NFA's site states that there are 
3,663 CFTC registrants as of September 30, 2011. Of this total, 
there are 111 FCMs, 1,441 IBs, 1,054 CTAs, 1,035 CPOs, and 14 RFEDs. 
CFTC staff has observed that approximately 50 percent of all CPOs 
are dually registered as CTAs. Based on this observation, CFTC has 
determined that the total number of entities is 3,124 (518 CPOs that 
are also registered as CTAs). With respect to RFEDs, CFTC staff also 
has observed that all entities registering as RFEDs also register as 
FCMs.
    Of the total 3,124 entities, all of the FCMs are likely to 
qualify as financial institutions or creditors carrying covered 
accounts, 10 percent of CTAs and CPOs are likely to qualify as 
financial institutions or creditors carrying covered accounts and 
none of the IBs are likely to qualify as a financial institution or 
creditor carrying covered accounts, for a total of 268 financial 
institutions or creditors that would bear the initial one-time 
burden of compliance with the CFTC's proposed identity theft rules 
and guidelines and proposed card issuer rules.
    \138\ CFTC staff estimates that 125 swap dealers and major swap 
participants will register with the CFTC following the issuance of 
final rules under the Dodd-Frank Act further defining the terms 
``swap dealers'' and ``major swap participants'' and setting forth a 
registration regime for these entities. The CFTC estimates the 
number of MSPs to be quite small, at six or fewer.
---------------------------------------------------------------------------

    These burden estimates assume that CFTC-regulated entities already 
comply with the identity theft red flags rules and guidelines jointly 
adopted by the FTC with the Agencies, as of December 31, 2010. 
Consequently, these entities may already have in place many of the 
customary protections addressing identity theft and changes of address 
proposed by these regulations.
    Burden means the total time, effort, or financial resources 
expended by persons to generate, maintain, retain, disclose or provide 
information to or for a federal agency. Because compliance with rules 
and guidelines jointly adopted by the FTC with the Agencies may have 
occurred, the CFTC estimates the time and cost burdens of complying 
with proposed part 162 to be both one-time and ongoing burdens. 
However, any initial or one-time burdens associated with compliance 
with proposed part

[[Page 13467]]

162 would apply only to newly formed entities, and the ongoing burden 
to all CFTC-regulated entities.
i. Initial Burden
    The CFTC estimates that the one-time burden of compliance with 
proposed part 162 for its regulated entities with covered accounts 
would be: (i) 25 hours to develop and obtain board approval of a 
Program, (ii) 4 hours for staff training, and (iii) 2 hours to conduct 
an initial assessment of covered accounts, totaling 31 hours. Of the 31 
hours, the CFTC estimates that 15 hours would involve internal counsel, 
14 hours expended by administrative assistants, and 2 hours by the 
board of directors in total, for those newly-regulated entities.
    The CFTC estimates that approximately 702 FCMs, CTAs and CPOs \139\ 
would need to conduct an initial assessment of covered accounts. As 
noted above, the CFTC estimates that approximately 125 newly registered 
SDs and MSPs would need to conduct an initial assessment of covered 
accounts. The total number of newly registered CFTC registrants would 
be 827 entities. Each of these 827 entities would need to conduct an 
initial assessment of covered accounts, for a total of 1,654 
hours.\140\ Of these 827 entities, CFTC staff estimates that 
approximately 179 of these entities may maintain covered accounts. 
Accordingly, the CFTC estimates the one-time burden for these 179 
entities to be 5,549 hours,\141\ for a total burden among newly 
registered entities of 7,203 hours.\142\
---------------------------------------------------------------------------

    \139\ Based on a review of new registrations typically filed 
with the CFTC each year, CFTC staff estimates that approximately, 7 
FCMs, 225 IBs, 400 CTAs, and 140 CPOs are newly formed each year, 
for a total of 772 entities. CFTC staff also has observed that 
approximately 50 percent of all CPOs are duly registered as CTAs. 
Based on this observation, CFTC has determined that the total number 
of newly formed financial institutions and creditors is 702 (772--70 
CPOs that are also registered as CTAs). With respect to RFEDs, CFTC 
staff has observed that all entities registering as RFEDs also 
register as FCMs. Each of these 702 financial institutions or 
creditors would bear the initial one-time burden of compliance with 
the proposed identity theft rules and guidelines and proposed card 
issuer rules.
    Of the total 702 newly formed entities, staff estimates that all 
of the FCMs are likely to carry covered accounts, 10 percent of CTAs 
and CPOs are likely to carry covered accounts, and none of the IBs 
are likely to carry covered accounts, for a total of 54 newly formed 
financial institutions or creditors carrying covered accounts that 
would be required to conduct an initial one-time burden of 
compliance with subpart C or Part 162.
    \140\ This estimate is based on the following calculation: 827 
entities x 2 hours = 1,654 hours.
    \141\ This estimate is based on the following calculation: 179 
entities x 31 hours = 5,549 hours.
    \142\ This estimate is based on the following calculation: 1,654 
hours for all newly registered CFTC registrants + 7,203 hours for 
the one-time burden of newly registered entities with covered 
accounts.
---------------------------------------------------------------------------

    The CFTC requests comments on these estimates of numbers of persons 
affected and the total hours involved.
ii. Ongoing Burden
    The CFTC staff estimates that the ongoing compliance burden 
associated with proposed part 162 would include: (i) 2 hours to 
periodically review and update the Program, review and preserve 
contracts with service providers, and review and preserve any 
documentation received from such providers (ii) 4 hours to prepare and 
present an annual report to the board, and (iii) 2 hours to conduct 
periodic assessments to determine if the entity offers or maintains 
covered accounts, for a total of 8 hours. The CFTC staff estimates that 
of the 8 hours expended, 7 hours would be spent by internal counsel and 
1 hour would be spent by the board of directors as a whole.
    The CFTC estimates that approximately 3,249 persons may maintain 
covered accounts, and that they would be required to periodically 
review their accounts to determine if they comply with these proposed 
rules, for a total of 76,498 hours for these entities.\143\ Of these 
3,249 persons, the CFTC estimates that approximately 393 maintain 
covered accounts, and thus would need to incur the additional burdens 
related to complying with the rule, for a total of 2,358.\144\ The 
total ongoing burden for all CFTC registrants is 11,256.\145\
---------------------------------------------------------------------------

    \143\ This estimate is based on the following calculation: 3,249 
entities x hours = 6,498 hours.
    \144\ This estimate is based on the following calculation: 393 
entities x 6 hours = 2,358 hours.
    \145\ This estimate is based on the following calculation: 6,498 
hours + 2,358 hours = 8,856 hours.
---------------------------------------------------------------------------

2. Information Collection Comments
    The CFTC invites the public and other federal agencies to comment 
on any aspect of the burdens discussed above. Pursuant to 44 U.S.C. 
3506(c)(2)(B), the CFTC solicits comments in order to: (i) Evaluate 
whether the proposed collection of information is necessary for the 
proper performance of the functions of the CFTC, including whether the 
information will have practical utility; (ii) evaluate the accuracy of 
the CFTC's estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email at 
OIRAsubmissions@omb.eop.gov. Please provide the CFTC with a copy of 
submitted comments so that all comments can be summarized and addressed 
in the final rule preamble. Refer to the Addresses section of this 
notice of proposed rules and guidelines for comment submission 
instructions to the CFTC. A copy of the supporting statements for the 
collections of information discussed above may be obtained by visiting 
RegInfo.gov. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is most assured of being 
fully effective if received by OMB (and the CFTC) within 30 days after 
publication of this notice of proposed rulemaking.
    SEC:
    Provisions of proposed Sec. Sec.  248.201 and 248.202 would result 
in new collection of information requirements within the meaning of the 
PRA. The SEC therefore is submitting this proposal to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. OMB has not yet assigned a control number to 
the new collection. The title for this collection of information is 
``Part 248, Subpart C--Regulation S-ID.'' An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number. If 
the rules are adopted, responses to the new collection of information 
provisions would be mandatory, and the information, when provided to 
the Commission in connection with staff examinations or investigations, 
would be kept confidential to the extent permitted by law.
1. Description of the Collections
    Under proposed Regulation S-ID, SEC-regulated entities would be 
required to develop and implement reasonable policies and procedures to 
identify, detect and respond to relevant red flags and, in the case of 
entities that issue credit or debit cards, to assess the validity of, 
and communicate with cardholders regarding, address changes. Proposed 
Sec.  248.201 of Regulation S-ID would include the following 
``collections of information'' by SEC-regulated entities that are 
financial institutions or creditors if the entity maintains covered 
accounts: (1) Creation and periodic updating of a

[[Page 13468]]

Program that is approved by the board of directors; (2) periodic staff 
reporting on compliance with the identify theft red flags rules and 
guidelines, as required to be considered by section VI of the proposed 
guidelines; and (3) training of staff to implement the Program. 
Proposed Sec.  248.202 of Regulation S-ID would include the following 
``collections of information'' by any SEC-regulated entities that are 
credit or debit card issuers: (1) Establishment of policies and 
procedures that assess the validity of a change of address notification 
if a request for an additional card on the account follows soon after 
the address change, (2) notification of a cardholder, before issuance 
of an additional or replacement card, at the previous address or 
through some other previously agreed-upon form of communication, or 
alternatively, assessment of the validity of the address change request 
through the entity's established policies and procedures.
    SEC staff expects that SEC-regulated entities that would comply 
with the collections of information required by proposed Regulation S-
ID should already be fully in compliance with the identity theft red 
flags rules and guidelines that the FTC jointly adopted with the 
Agencies and began enforcing on December 31, 2010. The requirements of 
those rules and guidelines are substantially similar and comparable to 
the requirements of proposed Regulation S-ID.\146\
---------------------------------------------------------------------------

    \146\ See 2007 Adopting Release, supra note 10; ``FTC Extends 
Enforcement Deadline for Identity Theft Red Flags Rule'' at http://www.ftc.gov/opa/2010/05/redflags.shtm.
---------------------------------------------------------------------------

    In addition, SEC staff understands that most SEC-regulated entities 
that are financial institutions or creditors would likely already have 
in place many of the protections regarding identity theft and changes 
of address that the proposed regulations would require because they are 
usual and customary business practices that they engage in to minimize 
losses from fraud. Furthermore, SEC staff believes that many of them 
are likely to have already effectively implemented most of the proposed 
requirements as a result of having to comply (or an affiliate having to 
comply) with other, existing regulations and guidance, such as the 
Customer Identification Program regulations implementing section 326 of 
the USA PATRIOT Act,\147\ the Federal Information Processing Standards 
that implement section 501(b) of the Gramm-Leach-Bliley Act 
(GLBA),\148\ section 216 of the FACT Act,\149\ and guidance issued by 
the Agencies or the Federal Financial Institutions Examination Council 
regarding information security, authentication, identity theft, and 
response programs.\150\
---------------------------------------------------------------------------

    \147\ 31 U.S.C. 5318(l) (requiring verification of the identity 
of persons opening new accounts).
    \148\ 15 U.S.C. 6801.
    \149\ 15 U.S.C. 1681w.
    \150\ See 2007 Adopting Release, supra note 10, at nn. 55-57 
(describing applicable regulations and guidance).
---------------------------------------------------------------------------

    As a result, SEC staff estimates of time and cost burdens here 
represent the incremental one-time burden of complying with proposed 
Regulation S-ID for newly formed SEC-regulated entities, and the 
incremental ongoing costs of compliance for all SEC-regulated 
entities.\151\ SEC staff estimates also attribute all burdens to 
covered entities, which are entities directly subject to the 
requirements of the proposed rulemaking. A covered entity that 
outsources activities to an affiliate or a third-party service provider 
is, in effect, reallocating to that affiliate or service provider the 
burden that it would otherwise have carried itself. Under these 
circumstances, the burden is, by contract, shifted from the covered 
entity to the service provider, but the total amount of burden is not 
increased. Thus, affiliate and third-party service provider burdens are 
already included in the burden estimates provided for covered entities. 
The time and cost estimates made here are based on conversations with 
industry representatives and on a review of the estimates made in the 
regulatory analyses of the identity theft red flags rules and 
guidelines previously issued by the Agencies.
---------------------------------------------------------------------------

    \151\ Based on discussions with industry representatives and a 
review of applicable law, SEC staff expects that, of the SEC-
regulated entities that fall within the scope of proposed Regulation 
S-ID, most broker-dealers, many investment companies (including 
almost all open-end investment companies and employees' securities 
companies (``ESCs'')), and some registered investment advisers would 
likely qualify as financial institutions or creditors. SEC staff 
expects that most other SEC-regulated entities described in the 
scope section of proposed Regulation S-ID, such as transfer agents, 
NRSROs, SROs, and clearing agencies are unlikely to be financial 
institutions or creditors as defined in the proposed rule, and 
therefore we do not include these entities in our estimates.
---------------------------------------------------------------------------

2. Proposed Sec.  248.201 (Duties Regarding the Detection, Prevention, 
and Mitigation of Identity Theft)
    The collections of information required by proposed Sec.  248.201 
would apply to SEC-regulated entities that are financial institutions 
or creditors.\152\ As stated above, SEC staff expects that all existing 
SEC-regulated entities would already have incurred one-time burdens 
associated with compliance with proposed Regulation S-ID because they 
should already be in compliance with the substantially identical 
requirements of the Agencies' red flags rules and guidelines. 
Therefore, any initial or one-time burdens associated with compliance 
with Sec.  248.201 of proposed Regulation S-ID would apply only to 
newly formed entities. The ongoing burden would apply to all SEC-
regulated entities that are financial institutions or creditors.
---------------------------------------------------------------------------

    \152\ Proposed Sec.  248.201(a).
---------------------------------------------------------------------------

i. Initial Burden
    SEC staff estimates that the incremental one-time burden of 
compliance with proposed Sec.  248.201 for SEC-regulated financial 
institutions and creditors with covered accounts would be: (i) 25 hours 
to develop and obtain board approval of a Program, (ii) 4 hours to 
train staff, and (iii) 2 hours to conduct an initial assessment of 
covered accounts, for a total of 31 hours. SEC staff estimates that, of 
the 31 hours incurred, 12 hours would be spent by internal counsel, 17 
hours would be spent by administrative assistants, and 2 hours would be 
spent by the board of directors as a whole for entities that need to 
come into compliance with proposed Regulation S-ID.
    SEC staff estimates that approximately 517 SEC-regulated financial 
institutions and creditors are newly formed each year.\153\ Each of 
these 517 entities would need to conduct an initial assessment of 
covered accounts, for a total of 1034 hours.\154\ Of these, SEC staff 
estimates that approximately 90% (or 465) maintain covered accounts. 
Accordingly, SEC staff estimates that the total one-time burden for the 
465 entities would be 14,415 hours, and the total one-time burden for 
all SEC

[[Page 13469]]

regulated entities would be 15,449 hours.\155\
---------------------------------------------------------------------------

    \153\ Based on a review of new registrations typically filed 
with the SEC each year, SEC staff estimates that approximately 900 
investment advisers, 300 broker dealers, 117 open-end investment 
companies and 10 employees' securities companies typically apply for 
registration with the SEC or otherwise are newly formed each year, 
for a total of 1327 entities that would be financial institutions or 
creditors. The staff estimate of 900 investment advisers is made in 
light of the recently adopted amendments to rules under the 
Investment Advisers Act that carry out requirements of the Dodd-
Frank Act to transfer oversight of certain investment advisers from 
the SEC to state regulators and to require certain investment 
advisers to private funds to register with the SEC. See Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Investment Advisers Act Release No. 3221 (June 22, 2011) [76 FR 
42950 (July 19, 2011)]. Of these, SEC staff estimates that all of 
the investment companies and broker-dealers are likely to qualify as 
financial institutions or creditors, and 10% (or 90) of investment 
advisers are likely to also qualify, for a total of 517 total newly 
formed financial institutions or creditors that would bear the 
initial one-time burden of compliance with proposed Regulation S-ID.
    \154\ This estimate is based on the following calculation: 517 
entities x 2 hours = 1034 hours.
    \155\ These estimates are based on the following calculations: 
465 entities x 31 hours = 14,415 hours; 14,415 hours + 1034 hours = 
15,449 hours.
---------------------------------------------------------------------------

     The SEC requests comments on these estimates. Is the 
estimate that 90% of all financial institutions and creditors maintain 
covered accounts correct?
ii. Ongoing Burden
    SEC staff estimates that the incremental ongoing burden of 
compliance with proposed Sec.  248.201 would include: (i) 2 hours to 
periodically review and update the Program, review and preserve 
contracts with service providers, and review and preserve any 
documentation received from service providers, (ii) 4 hours to prepare 
and present an annual report to the board, and (iii) 2 hours to conduct 
periodic assessments to determine if the entity offers or maintains 
covered accounts, for a total of 8 hours. SEC staff estimates that of 
the 8 hours incurred, 7 hours would be spent by internal counsel and 1 
hour would be spent by the board of directors as a whole.
    SEC staff estimates that there are 7978 SEC regulated entities that 
are either financial institutions or creditors, and that all of these 
would be required to periodically review their accounts to determine if 
they offer or maintain covered accounts, for a total of 15,956 hours 
for these entities.\156\ Of these 7978 entities, SEC staff estimates 
that approximately 90 percent, or 7180, maintain covered accounts, and 
thus would need to bear the additional burdens related to complying 
with the rule.\157\ Accordingly, SEC staff estimates that the total 
ongoing burden for the 7180 entities to be 43,080 hours, and the total 
ongoing burden for all SEC-regulated entities as a whole to be 59,036 
hours.\158\
---------------------------------------------------------------------------

    \156\ Based on a review of entities that the SEC regulates, SEC 
staff estimates that, as of the end of December 2010, there are 
approximately 5063 broker-dealers, 1790 active open-end investment 
companies and 150 employees' securities companies. In light of 
recently adopted amendments to rules under the Investment Advisers 
Act that carry out requirements of the Dodd-Frank Act to transfer 
oversight of certain investment advisers from the SEC to state 
regulators and to require certain investment advisers to private 
funds to register with the SEC, SEC staff estimates that, when these 
amendments become effective, there will be approximately 9750 
investment advisers registered with the SEC. See supra note 153. Of 
these, SEC staff estimates that all of the broker-dealers, open-end 
investment companies and employees' securities companies are likely 
to qualify as financial institutions or creditors, and 10% (or 975) 
of investment advisers are likely to qualify, for a total of 7978 
total financial institutions or creditors that would bear the 
ongoing burden of compliance with proposed Regulation S-ID. The SEC 
staff estimates that the other types of entities that are covered by 
the scope of the SEC's proposed rule would not be financial 
institutions or creditors that maintain covered accounts. See 
proposed Sec.  248.201(a). This estimate is based on the following 
calculation: (7978 entities x 2 hours = 15,956 hours).
    \157\ If a financial institution or creditor does not maintain 
covered accounts, there would be no ongoing annual burden for 
purposes of the PRA.
    \158\ These estimates are based on the following calculations: 
(7180 entities x 6 hours = 43,080 hours; 43,080 hours + 15,956 hours 
= 59,036 hours).
---------------------------------------------------------------------------

     SEC staff requests comments on these estimates.
3. Proposed Sec.  248.202 (Duties of Card Issuers Regarding Changes of 
Address)
    The collections of information required by proposed Sec.  248.202 
would apply only to SEC-regulated entities that issue credit or debit 
cards.\159\ SEC staff understands that SEC-regulated entities generally 
do not issue credit or debit cards, but instead partner with other 
entities, such as banks, that issue cards on their behalf. These 
partner entities, which are not regulated by the SEC, are already 
subject to substantially similar change of address obligations pursuant 
to the Agencies' identity theft red flags rules and guidelines. In 
addition, SEC staff understands that card issuers already assess the 
validity of change of address requests and, for the most part, have 
automated the process of notifying the cardholder or using other means 
to assess the validity of changes of address. Therefore, implementation 
of this requirement would pose no further burden.
---------------------------------------------------------------------------

    \159\ Proposed Sec.  248.202(a).
---------------------------------------------------------------------------

    SEC staff does not expect that any SEC-regulated entities would be 
subject to the information collection requirements of proposed Sec.  
248.202. Accordingly, SEC staff estimates that there will be no hourly 
or cost burden for SEC-regulated entities related to proposed Sec.  
248.202.\160\
---------------------------------------------------------------------------

    \160\ When the Agencies adopted their red flags rules, they 
estimated that it would require approximately 4 hours to develop 
policies and procedures to assess the validity of changes of 
address, and that there would be no burden associated with notifying 
cardholders because all entities already have such a process in 
place. See 2007 Adopting Release, supra note 10, at text following 
n.57. SEC staff estimates that if any SEC-regulated entities do 
issue cards, the burden for complying with proposed Sec.  248.202 
would be comparable to the Agencies' estimates.
---------------------------------------------------------------------------

     SEC staff requests comment on this estimate. Are there any 
SEC-regulated entities that issue credit or debit cards? If so, what 
incremental time or cost burden would be imposed by proposed Sec.  
248.202 of Regulation S-ID?
4. Request for Comment
    The SEC requests comment on the accuracy of the estimates provided 
in this description of collections of information. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the SEC solicits comments in order to: (i) 
Evaluate whether the proposed collections of information are necessary 
for the proper performance of the functions of the SEC, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of the SEC's estimate of the burden of the proposed 
collections of information; (iii) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (iv) minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments should direct them to the 
Office of Management and Budget, Attention Desk Officer for the 
Securities and Exchange Commission, Office of Information and 
Regulatory Affairs, Room 10102, New Executive Office Building, 
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. S7-02-12. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication of this release; therefore a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days after publication of this release. Requests 
for materials submitted to OMB by the SEC with regard to these 
collections of information should be in writing, refer to File No. S7-
02-12, and be submitted to the Securities and Exchange Commission, 
Office of Investor Education and Advocacy, 100 F Street NE., 
Washington, DC 20549-0213.

D. Regulatory Flexibility Act

    CFTC:
    The Regulatory Flexibility Act (``RFA'') \161\ requires that 
federal agencies consider whether the regulations they propose will 
have a significant economic impact on a substantial number of small 
entities and, if so, provide a regulatory flexibility analysis 
respecting the impact.\162\ The regulations proposed by the CFTC shall 
affect FCMs, retail foreign exchange dealers, IBs, CTAs, CPOs, swap 
dealers, and major swap participants. The CFTC has determined

[[Page 13470]]

that the requirements on financial institutions and creditors, and card 
issuers set forth in the proposed identity theft red flags rules and 
guidelines and the proposed card issuer rules, respectively, will not 
have a significant economic impact on a substantial number of small 
entities because many of these entities are already complying with the 
final rules and guidelines of the Agencies. Moreover, the CFTC believes 
that the proposed rules and guidelines include a great deal of 
flexibility to assist its regulated entities in complying with such 
rules and guidelines.
---------------------------------------------------------------------------

    \161\ See 5 U.S.C. 601 et seq.
    \162\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    Notwithstanding this determination, the CFTC previously determined 
that FCMs and CPOs are not small entities for the purposes of the 
RFA.\163\ Similarly, in another proposed rulemaking promulgated under 
the Dodd-Frank Act, the CFTC determined that swap dealers and major 
swap participants are not, in fact, ``small entities'' for the purposes 
of the RFA.\164\
---------------------------------------------------------------------------

    \163\ See the CFTC's previous determinations for FCMs and CPOs 
at 47 FR 18618, 18619 (Apr. 30, 1982).
    \164\ See Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 81519 (Dec. 28, 2010), in which the CFTC 
reasoned that swap dealers will be subject to minimum capital and 
margin requirements and are expected to comprise the largest global 
financial firms. As a result, swap dealers are not likely to be 
small entities for the purposes of the RFA. In addition, the CFTC 
reasoned that major swap participants, by statutory definition, 
maintain substantial positions in swaps or maintain outstanding swap 
positions that create substantial counterparty exposure that could 
have serious adverse effects on the financial stability of the U.S. 
banking system or financial markets. Based on this analysis, the 
CFTC concluded that major swap participants are not likely to be 
small entities for the purposes of the RFA.
---------------------------------------------------------------------------

    Accordingly, the Chairman, on behalf of the CFTC, hereby certifies 
pursuant to 5 U.S.C. 605(b) that the proposed rules and guidelines will 
not have a significant impact on a substantial number of small 
entities.
     The CFTC invites public comments on its certification.
    SEC:
    The SEC's Initial Regulatory Flexibility Analysis (``IRFA'') has 
been prepared in accordance with 5 U.S.C. 603. It relates to the SEC's 
proposed identity theft red flags rules and guidelines in proposed 
Regulation S-ID under section 615(e)(1)(C) of the FCRA.\165\
---------------------------------------------------------------------------

    \165\ 15 U.S.C. 1681m(e).
---------------------------------------------------------------------------

1. Reasons for, and Objectives of, the Proposed Actions
    The FACT Act, which amended FCRA, was enacted in part to help 
prevent the theft of consumer information. The statute contains several 
provisions relating to the detection, prevention, and mitigation of 
identity theft. Section 1088(a) of the Dodd-Frank Act amended section 
615(e) of the FCRA by adding the SEC (and CFTC) to the list of federal 
agencies required to prescribe rules related to the detection, 
prevention, and mitigation of identity theft. The SEC is proposing 
rules to implement the statutory directives in section 615(e) of the 
FCRA, which require the SEC to prescribe identity theft regulations 
jointly with other agencies.
    Section 615(e) requires the SEC to prescribe regulations that 
require financial institutions and creditors to establish policies and 
procedures to implement guidelines established by the SEC that address 
identity theft with respect to account holders and customers. Section 
615(e) also requires the SEC to adopt regulations applicable to credit 
and debit card issuers to implement policies and procedures to assess 
the validity of change of address requests.
2. Legal Basis
    The SEC is proposing Regulation S-ID under the authority set forth 
in 15 U.S.C. 78q, 78q-1, 78o-4, 78o-5, 78w, 80a-30, 80a-37, 80b-4, 80b-
11, 1681m(e), 1681s(b), 1681s-3 and note, 1681w(a)(1), 6801-6809, and 
6825; Public Law 111-203, sec. 1088(a)(8), (a)(10), and sec. 1088(b).
3. Small Entities Subject to the Rule
    For purposes of the RFA, an investment company is a small entity if 
it, together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less as 
of the end of its most recent fiscal year. SEC staff estimates that 
approximately 122 investment companies of the 1790 total registered on 
Form N-1A meet this definition.\166\
---------------------------------------------------------------------------

    \166\ This information is based on staff analysis of information 
from filings on Form N-SAR and from databases compiled by third-
party information providers, including Lipper Inc.
---------------------------------------------------------------------------

    Under SEC rules, for purposes of the Advisers Act and the RFA, an 
investment adviser generally is a small entity if it: (i) Has assets 
under management having a total value of less than $25 million; (ii) 
did not have total assets of $5 million or more on the last day of its 
most recent fiscal year; and (iii) does not control, is not controlled 
by, and is not under common control with another investment adviser 
that has assets under management of $25 million or more, or any person 
(other than a natural person) that had total assets of $5 million or 
more on the last day of its most recent fiscal year.\167\ Based on 
information in filings submitted to the SEC, 570 of the approximately 
11,500 investment advisers registered with the SEC are small 
entities.\168\
---------------------------------------------------------------------------

    \167\ Rule 0-7(a).
    \168\ This information is based on data from the Investment 
Adviser Registration Depository.
---------------------------------------------------------------------------

    For purposes of the RFA, a broker-dealer is a small business if it 
had total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the date in the prior fiscal year as of which its 
audited financial statements were prepared pursuant to rule 17a-5(d) of 
the Exchange Act or, if not required to file such statements, a broker-
dealer that had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the last business day of the preceding fiscal 
year (or in the time that it has been in business, if shorter) and if 
it is not an affiliate of an entity that is not a small business.\169\ 
SEC staff estimates that approximately 879 broker-dealers meet this 
definition.\170\
---------------------------------------------------------------------------

    \169\ 17 CFR 240.0-10.
    \170\ This estimate is based on information provided in FOCUS 
Reports filed with the Commission. There are approximately 5063 
broker-dealers registered with the Commission.
---------------------------------------------------------------------------

4. Reporting, Recordkeeping, and Other Compliance Requirements
    Section 615(e) of the FCRA, as amended by section 1088 of the Dodd-
Frank Act, requires the SEC to prescribe regulations that require 
financial institutions and creditors to establish reasonable policies 
and procedures to implement guidelines established by the SEC and other 
federal agencies that address identity theft with respect to account 
holders and customers. Section 248.201 of proposed Regulation S-ID 
would implement this mandate by requiring a covered financial 
institution or creditor to create an Identity Theft Prevention Program 
that detects, prevents, and mitigates the risk of identity theft 
applicable to its accounts.
    Section 615(e) also requires the SEC to adopt regulations 
applicable to credit and debit card issuers to implement policies and 
procedures to assess the validity of change of address requests. 
Section 248.202 of proposed Regulation S-ID would implement this 
requirement by requiring credit and debit card issuers to establish 
reasonable policies and procedures to assess the validity of a change 
of address if it receives notification of a change of address for a 
credit or debit card account and within a short period of time 
afterwards (within 30 days or more), the issuer receives a

[[Page 13471]]

request for an additional or replacement card for the same account.
    Because all SEC-regulated entities, including small entities, 
should already be in compliance with the substantially similar red 
flags rules and guidelines that the FTC began enforcing on December 31, 
2010, proposed Regulation S-ID should not impose new compliance, 
recordkeeping, or reporting burdens. If for any reason an SEC-regulated 
small entity is not already in compliance with the existing red flags 
rules and guidelines issued by the Agencies, the burden of compliance 
with proposed Regulation S-ID should be minimal because entities 
already engage in various activities to minimize losses due to fraud as 
part of their usual and customary business practices. In particular, 
the rule will direct many of these entities to consolidate their 
existing policies and procedures into a written Program and may require 
some additional staff training. Accordingly, the impact of the proposed 
requirements would be merely incremental and not significant.
    The SEC has estimated the costs of proposed Regulation S-ID for all 
entities (including small entities) in the PRA and cost benefit 
analyses included in this release. No new classes of skills would be 
required to comply with proposed Regulation S-ID. SEC staff does not 
anticipate that small entities would face unique or special burdens 
when complying with proposed Regulation S-ID.
5. Duplicative, Overlapping, or Conflicting Federal Rules
    SEC staff has not identified any federal rules that duplicate, 
overlap, or conflict with the proposed rule or rule or form amendments.
6. Significant Alternatives
    The Regulatory Flexibility Act directs the SEC to consider 
significant alternatives that would accomplish our stated objective, 
while minimizing any significant economic impact on small issuers. In 
connection with proposed Regulation S-ID, the SEC considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance requirements under the 
proposal for small entities; (iii) the use of performance rather than 
design standards; and (iv) an exemption from coverage of the proposal, 
or any part thereof, for small entities.
    The proposed rules would require financial institutions and 
creditors to create an identity theft prevention Program and report to 
the board of directors, a committee of the board, or senior management 
at least annually on compliance with the regulations. Credit and debit 
card issuers would be required to respond to a change of address 
request by notifying the cardholder or using other means to assess the 
validity of a change of address.
    The standards in proposed Regulation S-ID are flexible, and take 
into account a covered entity's size and sophistication, as well as the 
costs and benefits of alternative compliance methods. An identity theft 
prevention Program under proposed Regulation S-ID would be tailored to 
the risk of identity theft in a financial institution or creditor's 
covered accounts, thereby permitting small entities whose accounts pose 
a low risk of identity theft to avoid much of the costs of compliance. 
Because small entities maintain covered accounts that pose a risk of 
identity theft for consumers just as larger entities do, we do not 
believe that providing an exemption from proposed Regulation S-ID for 
small entities would comply with the intent of section 615(e), and 
could subject consumers with covered accounts at small entities to a 
higher risk of identity theft.
    Pursuant to the mandate of section 615(e) of the FCRA, as amended 
by section 1088 of the Dodd-Frank Act, the SEC and the CFTC are 
proposing identity theft red flags rules and guidelines jointly, and 
they would be substantially similar and comparable to the identity 
theft red flags rules and guidelines previously adopted by the 
Agencies. Providing a new exemption for small entities, or further 
consolidating or simplifying the regulations for small entities could 
result in significant differences between the identity theft red flags 
rules proposed by the Commissions and the rules adopted by the 
Agencies. Because all SEC-regulated entities, including small entities, 
should already be in compliance with the substantially similar red 
flags rules and guidelines that the FTC began enforcing on December 31, 
2010, SEC staff does not expect that small entities would need a 
delayed effective or compliance date.
     The SEC seeks comment and information on any need for 
alternative compliance methods that, consistent with the statutory 
requirements, would reduce the economic impact of the rule on such 
small entities, including whether to delay the rule's effective date to 
provide additional time for small business compliance.
7. General Request for Comment
    The SEC requests comments regarding this analysis. It requests 
comment on the number of small entities that would be subject to the 
proposed rules and guidelines and whether the proposed rules and 
guidelines would have any effects that have not been discussed. The SEC 
requests that commenters describe the nature of any effects on small 
entities subject to the rules and provide empirical data to support the 
nature and extent of such effects. It also requests comment on the 
compliance burdens and how they would affect small entities.

IV. Statutory Authority and Text of Proposed Amendments

    The CFTC is proposing to amend Part 162 under the authority set 
forth in sections 1088(a)(8), 1088(a)(10) and 1088(b) of the Dodd-Frank 
Act, Public Law 111-203, 124 Stat. 1376 (2010) and; sections 615(e) [15 
U.S.C 1681m(e)], 621(b) [15 U.S.C 1681s(b)], 624 [15 U.S.C 1681s-3 and 
note], 628 [15 U.S.C. 1681w(a)(1)] of the Fair Credit Reporting Act.
    The SEC is proposing Regulation S-ID under the authority set forth 
in Section 1088(a)(8) of the Dodd-Frank Act,\171\ Section 615(e) of the 
FCRA,\172\ Sections 17 and 36 of the Exchange Act,\173\ Sections 31 and 
38 of the Investment Company Act,\174\ and Sections 204 and 211 of the 
Investment Advisers Act.\175\
---------------------------------------------------------------------------

    \171\ Public Law 111-203, Section 1088(a)(8), 124 Stat. 1376 
(2010).
    \172\ 15 U.S.C. 1681m(e).
    \173\ 15 U.S.C. 78q and 78mm.
    \174\ 15 U.S.C. 80a-30 and 80a-37.
    \175\ 15 U.S.C. 80b-4 and 80b-11.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 162

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

17 CFR Part 248

    Affiliate marketing, Brokers, Cardholders, Card issuers, 
Confidential

[[Page 13472]]

business information, Consumer reports, Credit, Creditors, Dealers, 
Fair and Accurate Credit Transactions Act, Fair Credit Reporting Act, 
Financial institutions, Gramm-Leach-Bliley Act, Identity theft, 
Investment advisers, Investment companies, Privacy, Reporting and 
recordkeeping requirements, Securities, Security measures, Self-
regulatory organizations, Transfer agents.

Text of Proposed Rules

Commodity Futures Trading Commission

    For the reasons stated above in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 162 as follows:

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

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

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

    2. Add subpart C to part 162 read as follows:
Subpart C--Identity Theft Red Flags
Sec.
162.22-162.29 [Reserved]
162.30 Duties regarding the detection, prevention, and mitigation of 
identity theft.
162.31 [Reserved]
162.32 Duties of card issuers regarding changes of address.

Subpart C--Identity Theft Red Flags


Sec. Sec.  162.22-162.29  [Reserved]


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

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

[[Page 13473]]

and soundness of the financial institution or creditor from identity 
theft.
    (e) Administration of the Identity Theft Prevention Program. Each 
financial institution or creditor that is required to implement an 
Identity Theft Prevention Program must provide for the continued 
administration of the Identity Theft Prevention Program and must:
    (1) Obtain approval of the initial written Identity Theft 
Prevention Program from either its board of directors or an appropriate 
committee of the board of directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Identity Theft Prevention Program;
    (3) Train staff, as necessary, to effectively implement the 
Identity Theft Prevention Program; and
    (4) Exercise appropriate and effective oversight of service 
provider arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement an Identity Theft Prevention Program must 
consider the guidelines in appendix B of this part and include in its 
Identity Theft Prevention Program those guidelines that are 
appropriate.


Sec.  162.31  [Reserved]


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

    (a) Scope. This section applies to a person described in Sec.  
162.30(a) of this part that issues a debit or credit card (card 
issuer).
    (b) Definition of cardholder. For purposes of this section, a 
cardholder means a consumer who has been issued a credit or debit card.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days 
after it receives such notification), the card issuer receives a 
request for an additional or replacement card for the same account. 
Under these circumstances, the card issuer may not issue an additional 
or replacement card, until, in accordance with its reasonable policies 
and procedures and for the purpose of assessing the validity of the 
change of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and 
the cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec.  162.30 of this part.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or (2) 
of this section when it receives an address change notification, before 
it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the 
cardholder.
    3. Add Appendix B to part 162 to read as follows:

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

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

I. The Identity Theft Prevention Program

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

II. Identifying Relevant Red Flags

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

III. Detecting Red Flags

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

IV. Preventing and Mitigating Identity Theft

    The Identity Theft Prevention Program's policies and procedures 
should provide for appropriate responses to the Red Flags the 
financial institution or creditor has detected that are commensurate 
with the degree of risk posed. In determining an appropriate 
response, a financial institution or creditor should consider 
aggravating factors that may heighten the risk of identity theft, 
such as a data security incident that results in unauthorized access 
to a customer's account records held by the financial institution or 
creditor, or third party, or notice that a customer has provided 
information related to a covered account held by the financial 
institution or creditor to someone fraudulently claiming to 
represent the financial institution or creditor or to a fraudulent 
Internet Web site. Appropriate responses may include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the customer;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;

[[Page 13474]]

    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not 
selling a covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the 
particular circumstances.

V. Updating the Identity Theft Prevention Program

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

VI. Methods for Administering the Identity Theft Prevention Program

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

VII. Other Applicable Legal Requirements

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

Supplement A to Appendix B

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

Alerts, Notifications or Warnings From a Consumer Reporting Agency

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

Suspicious Documents

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

Suspicious Personal Identifying Information

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

[[Page 13475]]

    18. For financial institutions or creditors that use challenge 
questions, the person opening the covered account or the customer 
cannot provide authenticating information beyond that which 
generally would be available from a wallet or consumer report.

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

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

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

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

Securities and Exchange Commission

    For the reasons stated above in the preamble, the Securities and 
Exchange Commission proposes to amend 17 CFR part 248 as follows:

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

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

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

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

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


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

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

[[Page 13476]]

    (11) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (12) Other definitions.
    (i) Broker has the same meaning as in section 3(a)(4) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
    (ii) Commission means the Securities and Exchange Commission.
    (iii) Dealer has the same meaning as in section 3(a)(5) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
    (iv) Investment adviser has the same meaning as in section 
202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)).
    (v) Investment company has the same meaning as in section 3 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3), and includes a 
separate series of the investment company.
    (vi) Other terms not defined in this subpart have the same meaning 
as in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.).
    (c) Periodic Identification of Covered Accounts. Each financial 
institution or creditor must periodically determine whether it offers 
or maintains covered accounts. As a part of this determination, a 
financial institution or creditor must conduct a risk assessment to 
determine whether it offers or maintains covered accounts described in 
paragraph (b)(3)(ii) of this section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--(1) 
Program requirement. Each financial institution or creditor that offers 
or maintains one or more covered accounts must develop and implement a 
written Identity Theft Prevention Program (Program) that is designed to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. The 
Program must be appropriate to the size and complexity of the financial 
institution or creditor and the nature and scope of its activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and 
mitigate identity theft; and
    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
customers and to the safety and soundness of the financial institution 
or creditor from identity theft.
    (e) Administration of the Program. Each financial institution or 
creditor that is required to implement a Program must provide for the 
continued administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the 
Program; and
    (4) Exercise appropriate and effective oversight of service 
provider arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement a Program must consider the guidelines in 
Appendix A to this subpart and include in its Program those guidelines 
that are appropriate.


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

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

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

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

I. The Program

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

[[Page 13477]]

II. Identifying Relevant Red Flags

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

III. Detecting Red Flags

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

IV. Preventing and Mitigating Identity Theft

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

V. Updating the Program

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

VI. Methods for Administering the Program

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

VII. Other Applicable Legal Requirements

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

Supplement A to Appendix A

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

Alerts, Notifications or Warnings From a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer 
report.
    2. A consumer reporting agency provides a notice of credit 
freeze in response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as referenced in Sec. 605(h) of the Fair Credit 
Reporting Act (15 U.S.C. 1681c(h)).
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history

[[Page 13478]]

and usual pattern of activity of an applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit 
relationships;
    c. A material change in the use of credit, especially with 
respect to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse 
of account privileges by a financial institution or creditor.

Suspicious Documents

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

Suspicious Personal Identifying Information

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

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

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

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

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

    Dated: February 28, 2012.

    By the Commodity Futures Trading Commission.
David A. Stawick,
Secretary of the Commodity Futures Trading Commission.

    Dated: February 28, 2012.

    By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary of the Securities and Exchange Commission.

[FR Doc. 2012-5157 Filed 3-5-12; 8:45 am]
BILLING CODE 6351-01-P; 8011-01-P