Certain Professionals are Now Exempt from the Red Flags Rule

In December, the President signed the Red Flag Program Clarification Act of 2010 (the "Act") into law. The Act is a response to a lawsuit filed by the American Bar Association ("ABA") in 2009. The ABA filed suit on behalf of its multitude of solo practitioners and small firms. The ABA prevailed and Congress subsequently passed the Act.

Prior to the Act, solo practicioners and law firms would have been required to comply with the Red Flags Rule. Law firms typically bill for services after performance. This type of billing would have categorized law firms as "creditors" under the Red Flags Rule.

The Act exempts lawyers, doctors, accountants, and other professional service providers from complying with the Red Flags Rule. Notably, after the ABA filed suit, so did the American Medical Association and the American Institute of Certified Public Accountants.

The lesson to be learned here: never underestimate the power of the mob. Notably, the FTC refused to exempt lawyers, doctors, etc., until those organizations filed suit on behalf of their members.