Identity Theft

SEC Proposes Rules to Help Prevent and Detect Identity Theft

The Securities and Exchange Commission recently announced a rule proposal to help protect investors from identity theft by ensuring that broker-dealers, mutual funds, and other SEC-regulated entities create programs to detect and respond appropriately to red flags.

The SEC issued the proposal jointly with the Commodity Futures Trading Commission (CFTC). Section 1088 of the Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission (FTC) to the SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted in 2007 by the FTC and other federal financial regulatory agencies that were previously required to adopt such rules.

The rule proposal would require SEC-regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to:

• Identify relevant red flags.
• Detect the occurrence of red flags.
• Respond appropriately to the detected red flags.
• Periodically update the program.

The proposed rule would include guidelines and examples of red flags to help firms administer their programs.

As a post script to this article, query whether a violation of these rules by any of the covered entities would create a cause of action against the firm for violating the rules, which led to client damages.