# Privacy of Consumer Financial Information > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A00-12755 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 24, 2000 - **Citation:** 65 FR 33646 ## Text FEDERAL TRADE COMMISSION 16 CFR Part 313 Privacy of Consumer Financial Information AGENCY: Federal Trade Commission. ACTION: Final Rule. SUMMARY: The Federal Trade Commission (the “Commission” or “FTC”) is publishing a final privacy rule, as required by section 504(a) of the Gramm-Leach-Bliley Act, Pub. L. 106-102 (the “G-L-B Act” or “Act”), with respect to financial institutions and other persons under the Commission's jurisdiction, as set forth in section 505(a)(7) of the Act. Section 504 of the Act requires the Commission and other federal regulatory agencies to issue regulations as may be necessary to implement notice requirements and restrictions on a financial institution's ability to disclose nonpublic personal information about consumers to nonaffiliated third parties. Pursuant to section 503 of the G-L-B Act, a financial institution must provide its customers with a notice of its privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a consumer to nonaffiliated third parties unless the institution satisfies various disclosure and opt-out requirements and the consumer has not elected to opt out of the disclosure. This final rule implements the requirements outlined above. EFFECTIVE DATE: This rule is effective November 13, 2000. Full compliance is required by July 1, 2001. FOR FURTHER INFORMATION CONTACT: Kellie A. Cosgrove or Clarke Brinckerhoff, Attorneys, Division of Financial Practices, Federal Trade Commission, Washington, DC 20580, 202-326-3224. SUPPLEMENTARY INFORMATION: Section A. Background On November 12, 1999, President Clinton signed the G-L-B Act (Public Law 106-102) into law. Subtitle A of Title V of the Act, captioned Disclosure of Nonpublic Personal Information, limits the instances in which a financial institution may disclose nonpublic personal information about a consumer to nonaffiliated third parties, and requires a financial institution to disclose to all of its customers the institution's privacy policies and practices with respect to information sharing with both affiliates and nonaffiliated third parties. The Commission notes that there are other laws that may impose limitations on disclosures of nonpublic personal information in addition to those imposed by the G-L-B Act and this rule. For instance, the Fair Credit Reporting Act imposes conditions on the sharing of application information and credit report information between affiliates and nonaffiliated third parties. 1 Title V also requires the Commission, along with the Federal banking agencies 2 and other Federal regulatory authorities, 3 after consulting with representatives of State insurance authorities designated by the National Association of Insurance Commissioners (NAIC), to prescribe such regulations as may be necessary to carry out the purposes of the provisions in Title V, Subtitle A, that govern disclosure of nonpublic personal information. The Federal agencies are sometimes referred to collectively in this document as the “Agencies” (or “other Agencies” when excluding the Commission). 1 The Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681 et seq , provides no limitation on communication by an entity solely of its own “transactions or experiences” with the consumer ( e.g. , the individual's account history). However, it limits the reporting of information obtained from other sources, such as consumer application information or credit report information. An institution may normally share such data with its affiliates only if it has complied with the notice and opt-out procedures set forth in FCRA § 603(d)(2)(A)(iii), which are very similar to those set forth in Section 502(b)(1) of the Act. Sharing such data with nonaffiliates may be effectively prohibited by the FCRA, because the institution likely would become a consumer reporting agency subject to its restrictions on reporting of information to third parties. 2 Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and Secretary of the Treasury. 3 National Credit Union Administration (NCUA) and Securities and Exchange Commission (SEC). The Agencies are all issuing final rules to implement Subtitle A that are consistent and comparable to the extent possible, as is required by the statute. Section B. Overview of Comments Received On March 1, 2000, the Commission published a notice of proposed rulemaking (the proposal or proposed rule) in the Federal Register (65 FR 11174). The other Agencies published their proposed rules on different dates. 4 The Commission received a total of 640 comments, and the other Agencies collectively received a total of 8,337 comments in response to the various proposed rules. Many commenters sent the same letter to multiple Agencies. Many of the comments were from individuals, virtually all of whom encouraged the Agencies to provide greater protection of individuals' financial privacy. Many individuals noted their concerns generally about the loss of privacy and the receipt of unwanted solicitations by marketers. A large number of individuals also requested the Agencies to support legislation that the commenters believe would provide additional protections. 4 Those proposed rules, which were consistent and comparable with the proposals published by the Commission, appeared in the Federal Register at 65 FR 8770 (Feb. 22, 2000) (OCC, FRB, FDIC, and OTS jointly), 65 FR 10988 (Mar. 1, 2000) (NCUA), and 65 FR 12354 (Mar. 8, 2000) (SEC). The Agencies also received several letters from members of Congress. In two letters signed by several members of the House of Representatives, the Agencies were encouraged to exercise their rulemaking authority to provide greater protections than provided in the Act. Other Representatives requested, in separate letters, that some other Agencies (a) create a limited exception to the prohibition against the sharing of account numbers for marketing purposes and (b) ensure that social security numbers are considered “nonpublic personal information.” The NAIC submitted a comment on behalf of the State insurance authorities that generally supported the Agencies' proposed rule. The NAIC also proposed various measures to provide greater protections for consumers, such as specifying more convenient means to exercise the right to opt out of the disclosure of information. The NAIC further advised the Agencies to clarify the boundary of Federal and State jurisdiction over privacy regulations and ensure that the financial privacy rules under the Act are compatible with the privacy rules relating to medical information that are to be issued by the Secretary of the Department of Health and Human Services (HHS) under the Health Insurance Portability and Accountability Act (HIPPA) of 1996. 5 5 These proposed regulations were published for comment at 64 FR 59918 (Nov. 3, 1999). Other comments were received from consumer groups and others advocating that the Agencies extend privacy protections in a number of ways, such as by requiring (a) financial institutions to provide consumers with access to their information maintained by the institutions and the opportunity to correct errors, (b) more detailed disclosures of the information collected and disclosed, and (c) disclosures of a financial institution's privacy policies and practices earlier in the process of establishing a customer relationship. A letter signed by 33 State Attorneys General urged some other Agencies to add certain consumer protections to the disclosure requirements and to the provision permitting financial institutions to enter into joint marketing agreements. Most of the remaining comments were from businesses concerned about the Act, and their representatives. This included not only creditors of various types, but also representatives of the health care industry, retail merchants, insurance companies, securities firms, private investigators, debt collection agencies, consumer reporting agencies, institutions of higher education, tax professionals, and others. These commenters offered a large number of suggested changes, with the most commonly advanced suggestions including: an extension of the effective date of the rule; an amendment to the definition of “nonpublic personal information” to focus more narrowly on “financial” information; a streamlining of information required in the initial and annual disclosures; a clarification of how one or more of the statutory exceptions operate; an exclusion from, or clarification of, the definitions of “consumer” and “customer” in various contexts; and the addition of flexibility to provide initial notices at some point other than “prior to” the time a customer relationship is established. The Commission has made some modifications to its proposed rule in light of the comments received. These comments, and the Commission's responses thereto, are discussed in the following section-by-section analysis. Following the section-by-section analysis, the Commission has provided guidance for certain institutions in order to provide additional direction on how these institutions may comply with the rule and avoid unnecessary burden. Section C. Section-by-Section Analysis As an initial matter, the Commission notes that the final rule, unlike the proposal, presents the various sections in subparts that consist of related sections. This change was made to group related concepts together and thereby make the rule easier to follow. A derivation table is included following this preamble to assist readers in locating provisions as set out in the Commission proposal. The Commission has also added an Appendix to the final rule, setting out example disclosure clauses for financial institutions to consider. Section 313.1 Purpose and Scope Purpose . Paragraph (a) of this section states that the rule is intended to require a financial institution to provide notice to customers about its privacy policies and practices; to describe the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; and to provide a method for consumers to prevent a financial institution from disclosing that information to certain nonaffiliated third parties by “opting out” of that disclosure, subject to various exceptions as stated in the rule. No significant comments addressed this provision, and the Commission made no substantive change to this section. Scope . Paragraph (b) sets out the scope of the rule, and tracks the enforcement role assigned to the Commission by section 505(a)(7) of the G-L-B Act. It states that the rule applies only to information about individuals who obtain a financial product or service from a financial institution to be used for personal, family, or household purposes. The principal type of entity subject to the rule is a “financial institution,” a term section 509(3) of the G-L-B Act defines very broadly to mean “any institution the business of which is engaging in financial activities as described in section 4(k) of the Bank Holding Company Act of 1956” (12 U.S.C. 1843(k)). Those “financial activities” include not only a number of traditional financial activities specified in section 4(k) itself, 6 but also those activities that the Federal Reserve Board has found to be either closely related to banking, 7 or usual in connection with the transaction of banking or other financial operations abroad, 8 by regulation (or order or interpretation) “in effect on the date of the enactment of the Gramm-Leach-Bliley Act.” 9 Section 313.1(b) also lists some examples of “financial institutions” subject to Commission jurisdiction under the Act. Finally, this part notes that the Commission is also authorized to enforce the Act against “other persons” who are not financial institutions, but receive protected information from a financial institution and are subject to section 502(c) of the G-L-B Act (“Limits on Reuse of Information”), which imposes restrictions on recipients of such information as set forth in 16 CFR 313.11, infra . 6 Section 4(k)(4)(A-E) states “the following activities shall be considered to be financial in nature: (A) Lending, exchanging, transferring, investing for others, or safeguarding money or securities. (B) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State. (C) Providing financial, investment, or economic advisory services, including advising an investment company (as defined in section 3 of the Investment Company Act of 1940). (D) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly. (E) Underwriting, dealing in, or making a market in securities.” 7 Section 4(k)(4)(F). The Board's list of such activities is found in 12 CFR 225.28 and 12 CFR 225.86(a). The latter subsection was added as an interim rule published by the Board in the Federal Register upon enactment of the G-L-B Act (65 FR 14433; Mar. 14, 2000), subject to revision after a public comment period ending on May 12, 2000. The activities listed in 12 CFR 225.28 include in certain circumstances: brokering or servicing loans; leasing real or personal property (or acting as agent, broker, or advisor in such leasing) without operating, maintaining or repairing the property; appraising real or personal property; check guaranty, collection agency, credit bureau, and real estate settlement services; providing financial or investment advisory activities including tax planning, tax preparation, and instruction on individual financial management; management consulting and counseling activities (including providing financial career counseling); courier services for banking instruments; printing and selling checks and related documents; community development or advisory activities; selling money orders, savings bonds, or traveler's checks; and providing financial data processing and transmission services, facilities (including hardware, software, documentation, or operating personnel), data bases, advice, or access to these by technological means. 8 Section 4(k)(4)(G). The scope of the Act is not limited to activities abroad, because the text of Section 4(k)(4)(G) is “Engaging, in the United States , in any Section 4(k)(4)(G) activity that (i) a bank holding company may engage in outside of the United States; and (ii) the Board has determined to be usual in connection with the transaction of banking and financial operations abroad.” (Emphasis added.) The Board has provided a list of such activities in 12 CFR 211.5(d) and 12 CFR 225.86(b). The latter subsection was added as an interim rule published by the Board in the Federal Register upon enactment of the G-L-B Act (65 FR 14433; Mar. 14, 2000), subject to revision following a public comment period ending on May 12, 2000. The activities listed in 12 CFR 211.5(d) include leasing real or personal property (or acting as agent, broker, or advisor in such leasing) where the lease is functionally equivalent to an extension of credit; acting as fiduciary; providing investment, financial, or economic advisory services; and operating a travel agency in connection with financial services. 9 Section 4(k)(4)(G) uses “ day before the date of ” rather than “date of ” in the quoted phrase. Many industry commenters suggested revising the “financial institution” definition set forth in § 313.3(k) to narrow the scope to only those businesses that engage in traditional financial activities, arguing that Congress did not intend to cover businesses that conducted no such activities. On the other side, consumer commenters vigorously defended the broad scope, contending that the need to protect personal financial data extends beyond traditional financial institutions and that Congress intended to regulate a wide range of businesses that provide “financial” services to consumers when it enacted this statute. The G-L-B Act clearly covers more than parties in the credit, insurance, or securities industries; rather, an entity is a “financial institution” if it engages in any activity that the Board has determined to be a “financial activity.” After a careful review of the comments received, the Commission finds no sound rationale for fundamentally revising the scope of the rule. Therefore, the Commission continues to interpret the act as written and has made no broad change to 16 CFR 313.1(b) in that regard. 10 However, as the Commission noted when it proposed this rule and repeats hereafter, some businesses that are technically “financial institutions” will have no disclosure obligations under the Act. 11 Furthermore, as is evident from the discussion of the term “customer relationship” that is defined in 16 CFR 313.3(i), many others will have only limited duties because they will not establish such relationships or they will be of very short duration. 10 However, as discussed in the definition of “financial institution” in § 313.3(k), the Commission has retained its interpretation that an institution is covered only if it is “significantly engaged” in such activities. 11 “Many entities that come within the broad definition of financial institution will likely not be subject to the disclosure requirements of the rule because not all financial institutions have ‘consumers’ or establish ‘customer relationships.’ ” 65 Fed. Reg. 11174, 11177 (Mar. 1, 2000). Several commenters requested that the Commission clarify how its rule applies to insurance companies. The Commission notes that section 505 of G-L-B Act, which sets out the enforcement authority of the Agencies, explicitly commits the enforcement jurisdiction over “persons engaged in providing insurance” to state insurance authorities, thus excluding them from the Commission's authority (and, by operation of section 504(a)(1) of the G-L-B Act, from the Commission's rulemaking authority). Several other commenters asked that the final rule state that certain transactions that are exempt from the coverage of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et seq. ) and Regulation Z (Reg. Z, 12 CFR part 226) also be treated as beyond the scope of the privacy rule. TILA and Reg. Z, which impose disclosure requirements on credit extended to consumers under certain circumstances, exempt several transactions, including those involving business, commercial, or agricultural credit. 15 U.S.C. 1603(1); 12 CFR 226.3(a). The Commission agrees that transactions that fit within the business, commercial, and agricultural exemptions from TILA and Reg. Z for these types of credit also would fall outside the scope of the privacy rule, and has amended § 313.1(b) accordingly. 12 12 Thus, creditors may look at how this exemption is applied under Reg. Z for guidance on the scope of covered transactions under the privacy rule. It should be noted, however, that TILA exempts several other types of transactions that would be covered under the privacy rule if they are for the purpose of an individual obtaining a financial product or service as that term is defined in the privacy regulation. See 15 U.S.C. 1603 (2) and (3). Several comments suggested that the rule should not apply to entities that must comply with regulations issued by the HHS that implement the HIPAA. Given the broad definition of “financial institution” under the G-L-B Act, certain entities are subject to these privacy rules as well as rules promulgated under HIPAA regarding appropriate handling of protected health information. Accordingly, financial institutions may be covered both by this privacy rule and by the regulations promulgated by HHS under the authority of sections 262 and 264 of HIPAA once those regulations are finalized. Based on the proposed HIPAA rules, it appears likely that there will be areas of overlap between HIPAA and financial privacy rules. For instance, under the proposed HIPAA regulations, consumers must provide affirmative authorization before a covered institution may disclose medical information in certain instances, whereas under the financial privacy rules, institutions need only provide consumers with the opportunity to opt out of disclosures. In this case, the Agencies anticipate that compliance with the affirmative authorization requirement, consistent with the procedures required under HIPAA, would satisfy the opt out requirement under the financial privacy rules. After HHS publishes its final rules, the Commission and other Agencies will consult with HHS to avoid the imposition of duplicative or inconsistent requirements. The Commission also received several comments from colleges and universities and their representatives requesting that institutions of higher education be excluded from the definition of financial institution. The Commission disagrees with those commenters who suggested that colleges and universities are not financial institutions. Many, if not all, such institutions appear to be significantly engaged in lending funds to consumers. However, such entities are subject to the stringent privacy provisions in the Federal Educational Rights and Privacy Act (“FERPA”), 20 U.S.C. 1232g, and its implementing regulations, 34 CFR part 99, which govern the privacy of educational records, including student financial aid records. The Commission has noted in its final rule, therefore, that institutions of higher education that are complying with FERPA to protect the privacy of their student financial aid records will be deemed to be in compliance with the Commission's rule. Section 313.2 Rule of Construction Proposed § 313.2 of the rule sets out a rule of construction intended to clarify the effect of the examples used in the rule. As noted in the proposal, these examples are not intended to be exhaustive; rather, they are intended to provide guidance about how the rule would apply in specific situations. Commenters generally agreed that examples are helpful in clarifying how the rule will work in specific circumstances and suggested that the Commission should include more examples. Many commenters requested that the Commission provide examples of model disclosures. Commenters also generally agreed that it is useful to state that the list of examples is not intended to be exhaustive, and that compliance with one of the examples would be deemed compliance with the regulation. A few commenters suggested that the regulation state that a financial institution is not obligated to comply with an example but has the latitude to comply with the general rule in other ways. Others stated that the examples ought to be identical in each privacy regulation adopted by the Agencies. The Commission also received comments suggesting that the Commission defer to the expertise of other agencies when considering application of its rule to entities such as credit unions or investment advisors under its jurisdiction. The Commission believes that more examples would be helpful and has included additional examples in appropriate places throughout the rule. The Commission has also provided sample clauses in Appendix A to the rule to aid financial institutions in their drafting of privacy notices. The sample clauses are provided to illustrate the level of detail the Commission believes is appropriate. The Commission cautions financial institutions against relying on the sample clauses without determining the relevance or appropriateness of the disclosure for their operations. The Commission has used statutory terms, such as “nonpublic personal information” and “nonaffiliated third parties,” in the sample clauses to convey generally the subject of the clauses. However, a financial institution that uses these terms must provide sufficient information to enable consumers to understand what these terms mean in the context of the institution's notices. Moreover, the Commission notes that, in providing the sample disclosures, the Commission is addressing solely the level of detail required and is not attempting to provide guidance on issues such as type size, margin width, “clear and conspicuous” generally, and so on. The rule does not contain a statement regarding a financial institution's ability to comply with the rule in ways other than as suggested in the examples, but does provide that the examples are not exclusive. The rule also states that compliance with the examples will constitute compliance with the rule. The Commission believes that, when read together, these provisions give financial institutions sufficient flexibility to comply with the regulation but also sufficient guidance about the use of examples. The Commission understands that the NCUA and SEC have issued, or will issue, final rules with examples that are tailored to entities under their jurisdiction. Therefore, the Commission has stated in § 313.2 that compliance by non-federally insured credit unions with credit union examples in the NCUA rule will constitute compliance with the Commission's rule. Similarly, compliance by interstate securities broker-dealers and investment advisers that are not registered with the SEC with applicable examples in the SEC rule will constitute compliance with the Commission's rule. Section 313.3 Definitions a. Affiliate. The proposal adopted the definition of “affiliate” that is used in section 509(6) of the G-L-B Act. An affiliation exists when one company “controls” (which is defined in § 313.3(g), below), is controlled by, or is under common control with another company. The definition includes both financial institutions and entities that are not financial institutions. The Commission received comparatively few comments in response to this definition. A few commenters requested that the final rule state that a credit union service organization will be deemed to be an affiliate of every credit union that has an interest in it. The Commission has declined to adopt this suggestion. If the relationship between a credit union and a credit union service organization satisfies the test for affiliation set out in the statute and regulation, then an affiliation exists. In light of the comparatively few comments received and the nature of those comments, the Commission adopts the definition of “affiliate” as proposed. b. Clear and conspicuous. Under the proposed rule, various notices must be “clear and conspicuous.” The proposed rule defines this term to mean that the notice must be reasonably understandable and designed to call attention to the nature and significance of the information contained in the notice. The proposal did not mandate the use of any particular technique for making the notices clear and conspicuous, but provided examples of how a notice may be made clear and conspicuous. As noted in the preamble to the proposed rule, each financial institution retains the flexibility to decide for itself how best to comply with this requirement. The Commission received a large number of comments on this proposed definition. Some commenters favored adopting the definition as proposed, with some of these advocating that the final rule add a requirement that disclosures must be on a separate piece of paper in order to ensure that they will be conspicuous. Others stated that the definition was unnecessary, given the experience financial institutions have in complying with requirements that disclosures mandated by other laws be clear and conspicuous. Several commenters made the related point that the rule proposed is inconsistent with requirements in other consumer protection regulations such as Reg. Z and the Truth in Savings regulation (Regulation DD, 12 CFR part 230), which require only that a disclosure be reasonably understandable. Many of these commenters expressed concern that the examples would invite litigation because of ambiguities inherent in terms used in the examples in the proposed rule such as “ample line spacing,” “wide margins,” and “explanations * * * subject to different interpretations.” A few commenters questioned how the requirement would work in a document that contains several disclosures that each must be clearly and conspicuously disclosed, while others raised questions about how a disclosure may be clear and conspicuous on a web site. These comments are addressed below. New standard for “clear and conspicuous” The Commission recognizes that the proposed definition articulates the concept of “clear and conspicuous” in ways perhaps not familiar to some commenters. However, the Commission included the phrase “designed to call attention to the nature and significance of the information contained” to provide added meaning to the term “conspicuous.” The Commission believes that this standard, when coupled with the existing standard requiring that a disclosure be readily understandable, likely will result in notices to consumers that communicate effectively the information needed by consumers to make an informed choice about the privacy of their information, including whether to transact business with a financial institution. The standard for clear and conspicuous adopted by the Commission in this rulemaking applies solely to disclosures required under the privacy rules. Disclosures governed by other rules requiring clear and conspicuous disclosures (such as Reg. Z) are beyond the scope of this rulemaking. Examples of “clear and conspicuous” The Commission recognizes that many of the examples require judgment in their application. The Commission believes, however, that more prescriptive examples, while perhaps easier to conform to, likely would result in requirements that would be inappropriate in a given circumstance. To avoid this result, the examples provide generally applicable guidance about ways in which a financial institution may make a disclosure clear and conspicuous. The Commission notes that the examples of how to make a disclosure clear and conspicuous are not mandatory. A financial institution must decide for itself how best to comply with the general rule and may use techniques not listed in the examples. To address these concerns, the Commission has incorporated several of the commenters' suggestions for ways to make the guidance more helpful. Combination of several “clear and conspicuous” notices. A document may combine several disclosures that each must be clear and conspicuous. The final rule provides an example, in § 313.3(b)(2)(ii)(E), of how a financial institution may make disclosures conspicuous, including disclosures on a combined notice. In order to avoid the potential conflicts envisioned by several commenters between two different requirements, the final rule does not mandate precise specifications for how various disclosures must be presented. Because the Commission believes that privacy disclosures may be clear and conspicuous when contained in a document containing other disclosures, the rule does not mandate that disclosures be provided on a separate piece of paper. Such a requirement is not necessary and would significantly increase the burden on financial institutions. Moreover, it would not necessarily provide the most effective notice in all circumstances. Disclosures on web pages. Several commenters requested guidance on how they may clearly and conspicuously disclose privacy-related information on their Internet sites. The Commission recognizes that disclosures over the Internet present some issues that will not arise in paper-based disclosures. There may be web pages within a financial institution's website that consumers may view in a different order each time they access the site, aided by hypertext links. Depending on the customer hardware and software used to access the Internet, some web pages may require consumers to scroll down to view the entire page. To address these issues, the Commission has included a statement in the example in § 313.3(b)(2)(iii) concerning Internet disclosures informing financial institutions that they may comply with the rule if they use text or visual cues to encourage scrolling down the page if necessary to view the entire notice and ensure that other elements on the web site (such as text, graphics, hyperlinks, or sound) do not distract attention from the notice. In addition, a financial institution is to place either a notice or a conspicuous link on a page frequently accessed by consumers, such as a page on which transactions are conducted. Given current technology, there are a range of approaches a financial institution could take to comply with the rule. For example, a financial institution could use a dialog box that pops up to provide the disclosure before a consumer provides information to the institution. Another approach would be a simple, clearly labeled graphic located near the top of the page or in close proximity to the financial institution's logo, directing the customer, through a hypertext link or hotlink, to the privacy disclosures on a separate web page. For the reasons advanced above, the Commission has adopted the definition of “clear and conspicuous,” with the changes previously described and with certain other changes intended to make the definition easier to apply. c. Collect. The statute requires a financial institution to include in its initial and annual notices a disclosure of the categories of nonpublic personal information that the institution collects. The proposal defined “collect” to mean obtaining any information that is organized or retrievable on a personally identifiable basis, irrespective of the source of the underlying information. This definition was included to provide guidance about the information that a financial institution must include in its notices and to clarify that the obligations arise regardless of whether the financial institution obtains the information from a consumer or from some other source. Commenters suggested that the final rule treat information that is not organized and retrievable in an automated fashion as not “collected.” This approach would exclude separate documents not included in a file. The Commission disagrees that information should not be deemed to be collected simply because it is not retrievable in an automated fashion. The Commission believes that the method of retrieval is irrelevant to whether information should be protected under the rule. The Commission agrees, however, that the scope of the regulation should be refined, and has changed the definition of “collect” by using language taken from the Privacy Act of 1974 (5 U.S.C. 552a). Other commenters requested that the rule clarify that information that is received by a financial institution but then immediately passed along without otherwise disclosing, using, or maintaining a copy of the information is not “collected” as this term is used in the final rule. The Commission believes that merely receiving information without maintaining it would not be “collecting” the information. The final rule reflects this by stating that the information must be organized or retrievable by the financial institution. Otherwise, the definition of “collect” is adopted as proposed. d. Company. The proposal defined “company,” which is used in the definition of “affiliate,” as any corporation, limited liability company, business trust, general or limited partnership, association, or similar organization. The Commission received no substantive comments on this proposed definition. 13 Accordingly, the Commission adopts the definition of “company” as proposed. 13 However, the Commission did receive a few comments asking that sole proprietors be excluded from the definitions of both “company” and “financial institution.” Those comments are discussed in the context of § 313.3(k). e. Consumer. The G-L-B Act distinguishes “consumers” from “customers” for purposes of the notice requirements imposed by the Act. A financial institution is required to give a “consumer” the notices required under Title V only if the institution intends to disclose nonpublic personal information about the consumer to a nonaffiliated third party for purposes other than as permitted by section 502(e) of the statute (as implemented by §§ 313.14 and 313.15). By contrast, a financial institution must give all “customers” a notice of the institution's privacy policy at the time of establishing a customer relationship and annually thereafter during the continuation of the customer relationship. The proposed rule defined “consumer” to mean an individual (and his or her legal representative) who obtains, from a financial institution, financial products or services that are to be used primarily for personal, family, or household purposes. Because “financial product or service” is defined to include the evaluation by a financial institution of an application to obtain a financial product or service ( see further discussion of this point, below), a person becomes a consumer even if the application is denied or withdrawn. An individual also would be deemed to be a consumer (as well as a customer) of a financial institution that purchases the individual's account from some other institution. The Commission received a large number of comments on this proposed definition, raising questions about how the definition would apply in a variety of situations. These comments are addressed below. Distinction between “consumer” and “customer.” While many agreed with the distinction drawn in the proposal between “consumer” and “customer,” a few commenters suggested that no distinction between “consumer” and “customer” should be made, given that, in these commenters” views, the statute appears to use the terms interchangeably. The Commission believes, however, that the distinction was deliberate and that the rule should implement it accordingly. A plain reading of the statute supports the conclusion that Congress created one set of protections for anyone who obtains a financial product or service ( i.e., who receives a financial institution's privacy policy and opt out notice only if a financial institution intends to disclose nonpublic personal information to nonaffiliated third parties), and an additional set of protections for anyone who establishes a relationship of a more lasting nature than an isolated transaction with a financial institution ( i.e., who gets a notice of the institution's privacy policy at the time of establishing a customer relationship, and annual notices as appropriate thereafter). Because the statute tailors the notice requirements to the type of relationship an individual has with a financial institution, that distinction is preserved in the rule. Applicants as consumers. Many of the comments received by the Commission concerning the proposed definition of “consumer” disagreed that someone should be deemed a consumer of a financial institution simply by virtue of the institution evaluating an application. These commenters maintained that the individual has not obtained a financial product or service, as is required by the statutory definition of “consumer.” The Commission believes that the better reading of the G-L-B Act is that an individual has obtained a financial product or service when a financial institution evaluates information provided to the financial institution for the purpose of the individual obtaining some other financial product or service. Financial institutions frequently provide a range of services in connection with the delivery of a financial product. Included within these will be the evaluation by the financial institution of information provided by an individual. In certain instances, such as when an individual is shopping for the best rate on a mortgage loan or the lowest premium for an insurance policy, that evaluation may be the sole financial product or service obtained. In other instances, the evaluation may be one of several services provided that lead up to the eventual establishment of a customer relationship. In either case, the individual will have obtained a financial product or service from the financial institution when the financial institution evaluates the information and informs the individual of the outcome of that evaluation. In addition to being consistent with the language of the statute, the proposed definition of “consumer” is consistent with one of the primary purposes of Title V of G-L-B Act, namely, to enable an individual to limit the sharing of nonpublic personal information by a financial institution with a nonaffiliated third party. The information provided by a person to a financial institution before a customer relationship is established is likely to contain precisely the types of information that the statute is designed to protect. This information is no less deserving of protection simply because an application is denied or withdrawn. For these reasons, the Commission has retained the individual whose application is evaluated by a financial institution as an example of “consumer” in § 313.3(e)(2)(i). Loan sales. Several commenters requested clarification of whether an individual becomes a consumer in various other scenarios involving loans. Commenters posited a wide variety of examples, which, if each were to be addressed specifically in the rule, would require a final rule of enormous complexity and detail. The Commission believes that a rule setting forth a general principle that is flexible enough to be applied in the array of loan transactions posited by the commenters is more appropriate. Towards this end, the Commission's rule provides, by example at § 313.3(e)(2)(iv), that a person will be a consumer of any entity that holds ownership or servicing rights to an individual's loan. 14 Financial institutions that own or service a loan are providing a financial product or service to the individual borrower in question. In some cases, the product or service is the funding of the loan, directly or indirectly. In other cases, the product or service is the processing of payments, sending account-related notices, responding to consumer questions and complaints about the handling of the account, and so on. The rule defines “consumer” in a way that covers individuals receiving financial products or services in each of these situations. 14 Such a person may not be a customer, however. See explanation of how the definition of “customer” will be applied in the loan context, in the discussion of the definition of § 313.3(h) and (i) below. See also § 313.4(c)(2) and (3)(ii) for further discussion concerning when a borrower establishes a customer relationship in the context of a loan sale. Agents of financial institutions. Several commenters agreed with the principle set out in the proposed rule that an individual should not be considered to be a consumer of an entity that is acting as agent for a financial institution. These commenters noted that the financial institution that hires the agent is responsible for that agent's conduct in carrying out the agency responsibili ties. The Commission agrees that the purposes of the G-L-B Act will be met provided the activities of the agent are the responsibility of the financial institution, and, therefore, the financial institution fulfills any obligations regarding the agent's handling of consumer information that otherwise would fall on the agents. 15 Of course, those providing services to a financial institution will also be subject to the limitations on reuse of information. See § 313.3(e)(2)(v). 15 Of course, in some cases two institutions will each provide a financial service to the consumer as part of the same transaction, such as a loan broker that locates a creditor who makes a loan to the individual, in which case the consumer will have a customer relationship with both financial institutions. Legal representative. The Commission also agrees with the suggestion made by several commenters that the definition of “consumer” should clarify that the obligations stemming from a consumer relationship may be satisfied by dealing either with the individual who obtains a financial product or service from a financial institution or that individual's representative. The Commission does not intend for the rule to require a financial institution to send opt out and initial notices to both the individual and the individual's legal representatives and has amended the final rule accordingly in § 313.3(e)(1). Trusts. The Commission and the other Agencies received several comments concerning whether an individual who obtains financial services in connection with trusts is a consumer or customer of a financial institution. Several commenters urged the Agencies to exempt generally a financial institution from the requirements of the rule when it acts as a fiduciary, or, in the alternative, to clarify the categories of individuals that are considered to be customers. Commenters proposed, for example, that individuals who are beneficiaries with current interests should be identified as customers, whereas individuals who are only contingent beneficiaries should not be customers. Other commenters stated that when the financial institution serves as trustee of a trust, neither the grantor nor beneficiary is a consumer or customer under the rule. In these commenters' view, the trust itself is the institution's “customer,” and, therefore, the rule should not apply to a financial institution when it acts as trustee. These commenters also stated that when a financial institution is a trustee, it serves as a fiduciary and is subject to other obligations to protect the confidentiality of the beneficiaries' information that are more stringent than those under the provisions in the G-L-B Act. Similarly, these and other commenters claimed that an individual who is a participant in an employee benefit plan administered or advised by a financial institution does not qualify as a consumer or customer. The commenters opined that the plan sponsor, or the plan itself, is the “customer” for the purposes of the proposed rule. These commenters contended that plan participants have no direct relationship with the financial institution and, in any event, the financial institution is authorized to use information that would be covered under the G-L-B Act only in accordance with the directions of the plan sponsor. The commenters concluded, therefore, that the regulations should specifically exclude individuals who are participants in an employee benefit plan from the definition of consumer. The definition of “consumer” in the G-L-B Act does not squarely resolve whether the beneficiary of a trust is a consumer of the financial institution that is the trustee. One consideration is that a financial institution that is a trustee assumes obligations as a fiduciary, including the duty to protect the confidentiality of the beneficiaries' information, that are consistent with the purposes of the G-L-B Act and enforceable under state law. The Commission agrees with the commenters who concluded that, when the financial institution serves as trustee of a trust, neither the grantor nor the beneficiary is a consumer or customer under the rule. Instead, the trust itself is the institution's “customer,” and therefore, the rule does not apply because the trust is not an individual. Similarly, the Commission has excluded an individual who is a beneficiary of a trust or a plan participant of an employee benefit plan from the definitions of “consumer” and “customer.” Nevertheless, the Commission believes that an individual who selects a financial institution to be a custodian of securities or assets, for example in an IRA, is obtaining a financial product or service from the financial institution and is, therefore, a “consumer” under the G-L-B Act. The Commission has included examples in the rule that appropriately illustrate this interpretation of the G-L-B Act in §§ 313.3(e)(2)(vi)-(viii) and 313.3(i)(2)(i)(D). Requirements arising from consumer relationship. While the proposed and final rule defines “consumer” broadly, this will not result in any additional burden to a financial institution in situations where (a) no customer relationship is established and (b) the institution does not intend to disclose nonpublic personal information about a consumer to nonaffiliated third parties. Under the final rule, a financial institution is under no obligation to provide a consumer who is not a customer with any privacy disclosures unless it intends to disclose the consumer's nonpublic personal information to nonaffiliated third parties outside the exceptions in §§ 313.14 and 313.15. A financial institution that wants to disclose a consumer's nonpublic personal information to nonaffiliated third parties is not prohibited by the rule from doing so, if the requisite notices are delivered and the consumer does not opt out. Thus, a financial institution that does not wish to be subject to the disclosure obligations of the rule as it applies to consumers who are not customers may simply decide not to share consumers' information with nonaffiliated third parties. Conversely, if a financial institution determines that the benefits of such sharing outweigh the attendant burdens, the financial institution is free to do so provided it notifies consumers about the disclosure and affords them a reasonable opportunity to opt out. In this way, the rule attempts to strike a balance between protecting an individual's nonpublic personal information and minimizing the burden on a financial institution. f. Consumer reporting agency. The proposal adopted the definition of “consumer reporting agency” that is used in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)). It is used in §§ 313.6(c), 313.12(a), and 313.15(a)(5) of the final rule. The Commission received no comments suggesting any changes to this definition. Accordingly, the definition is adopted as proposed. g. Control. The proposal defined “control” using the tests applied in section 23A of the Federal Reserve Act (12 U.S.C. 371c). This definition is used to determine when companies are affiliated (see discussion of § 313.3(a), above), and would result in financial institutions being considered as affiliates regardless of whether the control is by a company or individual. The Commission received few comments in response to this definition. Some commenters suggested that a definition that did not require 25% ownership be adopted, while others suggested adopting a test focused solely on percent of stock owned in a company so as to avoid the uncertainties arising from a “control in fact” test. The Commission believes that the proposed test is sufficiently well established and has concluded that an alternative test to be used solely in the privacy rule could create confusion. The Commission also believes that any test based only on stock ownership is unlikely to be flexible enough to address all situations in which companies are appropriately deemed to be affiliated and that including the stock ownership as one measurement of control provides necessary flexibility. Accordingly, the Commission adopts the definition of “control” as proposed. h. Customer. The proposal defined “customer” as any consumer who has a “customer relationship” with a particular financial institution. As is explained more fully in the discussion of § 313.4, below, a consumer is a customer of a financial institution when the consumer has a continuing relationship with the institution. The Commission received a large number of comments on the definition of “customer” and “customer relationship.” Given the interdependence of the two terms, the following analysis of the comments received will address both under the heading “customer relationship.” i. Customer relationship. The proposed rule defined “customer relationship” as a continuing relationship between a consumer and a financial institution whereby the institution provides a financial product or service that is to be used by the consumer primarily for personal, family, or household purposes. As noted in the proposal, a one-time transaction may be sufficient to establish a customer relationship, depending on the nature of the transaction. A consumer would not become a customer simply by repeatedly engaging in isolated transactions that by themselves would be insufficient to establish a customer relationship, such as withdrawing funds at regular intervals from an ATM owned by an institution at which the consumer has no account. However, an individual who becomes the client of a loan brokerage, tax preparation firm, or financial counseling service would be a customer. The proposal also stated that a consumer would have a customer relationship with a financial institution that makes a loan to the consumer and then sells the loan but retains the servicing rights. The Commission received a large number of comments on this definition, as discussed below. Point at which one becomes a customer. The Commission received many comments in response to the definitions of “customer” and “customer relationship.” Some commenters criticized what they considered to be the ill-defined line distinguishing consumers from customers. These commenters stated that the proposed distinction makes it difficult for a financial institution to know when the obligations attendant to a customer relationship arise. Several suggested that the distinction should be based on when a consumer and financial institution enter into a written contract for a financial product or service. The Commission recognizes that the distinction between consumers and customers will, in some instances, require a financial institution to evaluate whether the particular facts of its consumer transactions fit within the definition of customer relationship. In those cases where an individual engages in a transaction that is isolated in nature (such as ATM transactions, purchases of money orders, or cashing of checks), the individual will not have established a customer relationship as a result of that transaction. In other situations, where a consumer typically would receive some measure of service such that the consumer's contact with the financial institution is more significant (such as would be the case when a consumer borrows money, obtains investment advice, or becomes the client of an institution for the purpose of receiving tax preparation, loan brokerage, or credit counseling services), a customer relationship will be established. In those cases, the nature of the relationship indicates that it is not an isolated transaction, even though it may be short-term in duration. 16 The Commission believes that the distinction set out in the proposed rule, as further clarified by the examples in the final rule regarding the establishment of a customer relationship, provides sufficiently clear principles that can be applied to most fact situations that arise in the financial marketplace. 16 Many of the customer relationships established by institutions under the Commission's jurisdiction may well be short-term, as can be seen from the examples in § 313.5(b)(2) of when a customer relationship terminates. Customer relationship defined by written contract. The Commission agrees with those commenters who consider the execution of a written contract by a consumer and financial institution as clear evidence that a customer relationship has been established. The proposal cited the execution of a written contract as an example of when a customer relationship is established, and the final rule retains that example in § 313.4(c)(3)(i)(B). However, a test based solely on whether there is a written contract could inappropriately exclude situations in which an individual is a customer of a financial institution as a result of obtaining, for instance, financial, economic, or investment advisory services from a financial institution. Accordingly, the final rule does not define a customer relationship solely by the execution of a written contract. Purchase of insurance. Other commenters suggested that, in the context of financial institutions that engage in the sale of insurance, the customer should be the policyholder and not the beneficiary. The Commission agrees and has retained the example in § 313.3(i)(2)(i)(C) of purchasing an insurance product as one situation in which a customer relationship is formed. 17 In this case, the person obtaining a financial product or service from the financial institution is the person purchasing the policy. The beneficiaries would be recipients of the insurance proceeds, thereby entitling them to the protections afforded consumers. 17 Despite its lack of enforcement jurisdiction over persons providing insurance, the Commission retains this example because it may be useful in evaluating analogous situations. Some commenters also asked for further clarification of “purchase” in this context. The Commission does not believe such clarification is necessary and has retained the example as proposed. Sales of loans. As previously noted, several commenters raised questions in the context of loan sales. Many commenters stated that, under the final rule, a person should not be considered a customer of two financial institutions when the originating bank sells the servicing rights. A point consistently made by these commenters was that a borrower would be equally well protected with less risk of confusion if the borrower is deemed to be a customer of only one entity in connection with a loan, with that entity perhaps being the party with whom the borrower communicates about the loan. The Commission believes that it is appropriate to consider a loan transaction as giving rise to only one customer relationship, with the recognition that this customer relationship may be transferred in connection with a sale of part or all of the loan. In this way, the borrower will not be inundated by privacy notices (but rather will normally receive annual notices from the loan servicer), many of which might be from subservicers that the borrower did not know had any connection to his or her loan. However, that customer will remain a consumer of the entity that transfers the servicing rights, as well as a consumer of any other entity that holds an interest in the loan. In order to satisfy the statutory requirement that a customer receive an annual notice from a financial institution until that relationship terminates, the final rule provides that the borrower must be deemed to have a customer relationship with at least one of the entities that hold an interest in the loan. A financial institution that makes a loan, retains it in its portfolio, and provides servicing for the loan clearly would have a customer relationship with the borrower. More complex, however, are situations in which servicing is sold or investors purchase a partial interest in a loan. The Commission has adopted an approach designed to ensure that a customer receives annual notices for the duration of the customer relationship from the most appropriate financial institution. Under the final rule, as stated in § 313.3(i)(2)(i)(B), a customer relationship will be established as a general rule with the financial institution that makes a loan to an individual. This customer relationship then will attach to the entity providing servicing. Thus, if the originating lender retains the servicing, it will continue to have a customer relationship with the borrower and will be obligated to provide annual notices for the duration of the customer relationship. If the servicing is sold, then the purchaser of the servicing rights will establish a customer relationship (and the originating lender will have a consumer relationship with the borrower). See § 313.3(i)(2)(ii)(B). In this way, the borrower will be entitled to receive an initial notice and annual notices from the loan servicer, but will not be inundated by initial and annual notices from entities that hold interests in the loan but are unknown to the consumer (and who do not share the consumer's nonpublic personal information with unaffiliated third parties). Collection agencies that purchase accounts in their own name. The Commission received a substantial number of comments from different types of debt collectors and their representatives. This section addresses several comments the Commission received concerning the proposed rule's differentiation between collectors who assist creditors in collecting delinquent accounts, and those who purchase them in their own name. 18 The Commission also received comments from all types of collection agencies on other points. Several contested the Commission's treatment of debt collectors as financial institutions. 19 Others were concerned that the rule would prohibit communications with a creditor that retained ownership on the account and hired the agency to obtain payment from debtors. 20 18 “A consumer has a “customer relationship” with a debt collector that purchases an account from the original creditor (because he or she would have a credit account with the collector), but not with a debt collector that simply attempts to collect amounts owed to the creditor.” 65 FR 11174 at 11176 (Mar. 1, 2000). 19 Those issues are discussed under §§ 313.1(b), 313.3(k) and 313.4. 20 This fear is unfounded, because such a communication by a collection agency reporting to a creditor that has retained ownership of an account would be permitted under § 313.15(a)(2)(iv). That section allows communications to parties holding a legal interest relating to the consumer, which would certainly include a creditor that owns the debt. Representatives of two major trade associations of debt collectors pointed to the definitions set forth in section 803 of the Fair Debt Collection Practices Act, which specifically exempts any “creditor” collecting its own accounts in its own name from being within the definition of a “debt collector” subject to that statute, and the case law holding that the “creditor” exemption does not include debt collectors that purchase defaulted accounts in their own name for collection. 21 The commenters argued that, because the FDCPA does not treat collection agencies that purchase defaulted accounts in their own name as creditors, the G-L-B Act should not be interpreted to do so. In addition, debt buyers stated that they frequently made bulk purchases of defaulted accounts from creditors, immediately discarded and never even attempted to collect many of the accounts they purchased, and were unable to locate many of the account debtors from whom they wanted to collect amounts due. 21 15 U.S.C. 1692a(4) and 1692a(6). Cirkot v. Diversified Fin. Sys., Inc., 839 F. Supp. 941, 944-45 (D. Conn. 1993); Holmes v. Telecredit Service Corp., 736 F. Supp. 1289, 1293 (D. Del. 1990); Kimber v. Federal Fin. Corp., 668 F. Supp. 1480, 1485-86 (D. Ala. 1987). The Commission recognizes that these businesses have some attributes of creditors who buy active accounts (where the debtors clearly become customers of the account purchaser) and some attributes of regular debt collectors who attempt to collect amounts due on behalf of the creditor (where the debtors clearly remain the creditor's customer). After careful consideration of the comments and the purposes of the Act, the Commission retains its view that if a business purchases a defaulted account for collection, it may establish a “customer relationship” with the account debtor. However, such a relationship occurs only in those instances where the agency locates the individual and tries to obtain payments on the debt. This approach reflects the reality that the collector has purchased the account (albeit for less than it would pay for a current account) and avoids the result that otherwise the individual would not have a “customer relationship” with anyone because the former relationship with the creditor will have been terminated. At the same time, it responds to industry commenters that contested the Commission's previous position that purchase of the account automatically establishes a customer relationship. The applicable example in § 313.3(i)(2)(i)(J) makes it clear that a debt buyer does not have a customer relationship if it does not attempt to collect payments from, or is unable to locate, the individual named on an account it has purchased. Brokers. Several commenters suggested that the use of a mortgage broker, or other business that procures credit on behalf of a consumer, such as financing to purchase an automobile, should not create a customer relationship. The Commission disagrees. A relationship between such a business and a consumer is more than an isolated transaction, given that the broker will likely provide significant services for a consumer, such as providing information or advice about financing options, actively assisting the consumer in contacting potential financing sources, analyzing financial information, or performing credit checks. In some cases, the broker will also negotiate with other financial institutions on the consumer's behalf and/or assist with paperwork and loan closings. In light of the nature of the services provided by a loan broker or other credit arranger in assisting the consumer with financial transactions, it is appropriate to consider the business to be a financial institution that establishes a customer relationship when it undertakes to arrange or broker a home mortgage loan or other credit for the consumer. The final rule reflects this conclusion in § 313.3(i)(2)(i)(E). IRA Custodians. The final rule adds an example in § 313.3(i)(2)(i)(D) to clarify that an individual will be deemed to establish a customer relationship when a financial institution acts as a custodian for securities or assets in an IRA. This example is consistent with the explanation set out above in the discussion of “consumer” concerning trusts. j. Federal functional regulator. The proposal sought comment on a definition of “government regulator” that included all of the Agencies and State insurance authorities under the circumstances identified in the definition. 22 22 This term was used in the exception set out in § 313.11(a)(4) of the proposal as it related to disclosures to law enforcement agencies, “including government regulators.” The few comments that were received on this definition suggested that it be expanded to include additional governmental entities. The Commission notes that, for purposes of the privacy rule, this term (which does not include the Commission) is relevant only in the discussion of when a financial institution may disclose information to a law enforcement agency. The exception as stated in the statute uses the term “federal functional regulator” ( see section 502(e)(5)), which term is defined in the statute at section 509(2) and also includes the Commission and Secretary of the Treasury, for purposes of the exception permitting disclosures to law enforcement agencies. The Commission has decided simply to use the statutory term. k. Financial institution. The Commission's proposed rule defined financial institution as “any institution the business of which is engaging in activities that are financial in nature as described in section 4(k) of the Bank Holding Company Act * * *” Through the examples, the Commission expressed its view that an institution is a financial institution “the business of which is engaging in activities that are financial in nature” only if the entity is significantly engaged in such activities. The Commission received numerous comments concerning this definition. Some commenters requested that the Commission adopt the definition of financial institution contained in the other Agencies' definition. The other Agencies defined financial institution as “any institution the business of which is engaging in activities that are financial in nature or incidental to such financial activities as described in section 4(k) of the Bank Holding Company Act.” Section 509(3) of the G-L-B Act defines the term as “any institution the business of which is engaging in financial activities as described in section 4(k) of the Bank Holding Company Act of 1956.” Section 4(k) of the Bank Holding Company Act refers to three types of activities that the Board may determine permissible for financial holding companies: those that are financial in nature, those that are incidental to such financial activity, and those that are complementary to financial activities. The Commission interprets the G-L-B Act to refer to those activities in Section 4(k) that are described as financial in nature at present, and not to include automatically those activities that the Board later determines are incidental or complementary to financial activities. Such activities are not necessarily themselves financial activities and, therefore, should not have an impact on the definition of financial institution. Thus, the final rule incorporates the statutory language in § 313.3(k). 23 23 See also the discussion of the effective date at § 313.18, infra. Section 4(k) of the Bank Holding Company Act established procedures whereby the Board can add activities to the list of activities that it is permissible for financial holding companies to engage in. To the extent these later added activities are financial activities, and not incidental activities, the rule will not be effective as to those new financial institutions until the Commission so determines. Given the breadth of the definition, some commenters requested that the Commission provide a definitive list of the entities that are subject to the rule. The Commission deems it inappropriate to publish such a definitive list. The institutions covered by the rule currently are defined by reference to the comprehensive list of activities found at section 4(k)(4) of the Bank Holding Company Act. 24 The Commission has reformatted and added additional examples of financial institutions in the final rule to guide the analysis of whether a particular entity is a financial institution through reference to section 4(k)(4) and particular sections of the Board regulations that are incorporated therein by reference. 24 See footnotes 5-8 and accompanying text, supra. These are activities either specified in Section 4(k)(4) itself, or are activities listed in Board regulations referenced in Section 4(k)(4) already in effect on the effective date of the G-L-B Act. This list of activities may expand as the Board exercises its authority to add additional activities that are financial in nature pursuant to Section 4(k)(1-3) of the Bank Holding Company Act. The Commission received several comments on the “significantly engaged” standard set forth in the examples in the proposed rule. A few expressed concern that the “significantly engaged” test was too imprecise to allow some businesses to know whether they were within the definition, usually suggesting alternatives that would exclude the industries they represent. The final rule does not define “significantly engaged.” The revenue tests suggested by some commenters are too inflexible to take into consideration all instances where an institution may be significantly engaged in a financial activity. The final rule retains the flexibility of the “significantly engaged” standard and provides guidance through examples. To that end, the Commission has moved the “significantly engaged” language into the text of the final rule and retains in the final rule those examples from the proposed rule of entities that are and are not significantly engaged in a financial activity. A retail business that issues its own credit card directly to consumers is a financial institution significantly engaged in the extension of credit, but a retail business that merely allows its retail clients to make payments through occasional lay-away plans is not significantly engaged in a financial activity. Similarly, a small merchant that informally extends credit when it “runs a tab” for some individuals is not significantly engaged in the business of extending credit. The Commission believes that the concept of “significantly engaged” is sufficiently clear to provide guidance to most entities in analyzing their specific factual situations. Many commenters, especially some representatives of the consumer debt collection industry, 25 expressed concern at the breadth of the definition and asserted that Congress could not have intended to include all institutions that engage in the activities referenced in Section 4(k). The plain language of the statute, however, dictates that breadth and grants the Commission no authority to exclude particular entities from the definition. The broad scope of the Act, and the comments received by the Commission, are also discussed above in more detail in the context of § 313.1(b). While it is not possible to discuss every potential financial institution in detail, the Commission specifically sought comment on certain of the activities listed in section 4(k) and the Board regulations that are incorporated by reference. 25 The statute is clear that debt collection agencies are financial institutions under its terms. As noted in the discussion of the definition of “financial institution” below, the statute treats a broad range of activities as “financial in nature.” Section 509(3) of the G-L-B Act defines the term to mean “any institution the business of which is engaging in financial activities as described in section 4(k) of the Bank Holding Company Act of 1956.” Section 4(k)(4)(F) of the Bank Holding Company Act includes all financial activities deemed by the Federal Reserve Board “to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.” In Regulation Y, 12 CFR 225.28(b)(2)(iv), the Board specifically designated “collection agency services” as such a financial activity. The proposed rule acknowledged that one of the activities characterized as financial in nature in Section 4(k)(4) of the Bank Holding Company Act is operating a travel agency in connection with offering financial services. 26 The Commission received few comments on the extent to which travel agents operate in connection with financial services. The comments did indicate that travel agents generally do sell travelers checks, trip insurance, and travel insurance, all of which constitute financial products or services. However, the Commission does not consider a travel agency's operations to be “in connection with offering financial services” and therefore covered simply because it offers travelers checks or travel related insurance to their travel clients. Rather, the Commission interprets the G-L-B Act to cover travel agencies only if their travel-related services are offered in addition to offering other financial services. 27 This would cover, for example, entities that offer credit, investment, or insurance products or services, and also offer travel-related services to their clients. For these types of entities, travel operations would thereby become covered services and their travel transactions would be protected by the G-L-B Act. 28 26 See footnote 5 of the Commission's discussion of the proposal at 65 FR 11176. Section 4(k)(4)(G) of the Bank Holding Company Act includes all financial activities conducted in the United States deemed by the Federal Reserve Board “to be usual in connection with the transaction of banking or other financial operations abroad.” In Regulation K, 12 CFR 211.(d)(15), the Board specifically designated “[o]perating a travel agency * * * in connection with financial services” as such a financial activity. 27 This analysis is consistent with an interim rule published by the Board at 12 CFR 225.86(b)(2), in which it characterized the travel agency activity “operating a travel agency in connection with financial services offered by the financial holding company or others.” 65 FR 14433, 14439 (Mar. 17, 2000). 28 See the Commission's discussion of “financial product or service” in the next section, as it relates to the Act's inapplicability to nonfinancial products or services of financial institutions. Some commenters requested clarification concerning whether certain Internet industries are affected by the rule. The comments in this regard did not provide sufficient detail for the Commission to evaluate all of the concerns of the commenters, but the Commission notes that institutions operating on-line, like those operating off-line, will have to evaluate (1) whether they are engaged in a financial activity, and (2) if so, whether they have consumers or customers that trigger the disclosure or other requirements of the Act. On a related issue, the Commission notes that one of the financial activities incorporated by reference into Section 4(k) of the Bank Holding Company Act is: “providing data processing and data transmission services, facilities (including data processing and data transmission hardware, software, documentation, or operating personnel), data bases, advice, and access to such services, facilities, or data bases by any technological means, if * * * [t]he data to be processed or furnished are financial, banking, or economic * * *.” 12 CFR 225.28 (b)(14). The Commission notes with respect to this activity that financial software and hardware manufacturers, as described, are financial institutions but will have no disclosure obligations if they sell only to businesses. Furthermore, in the case of an isolated one-time sale of software or hardware to a consumer, their disclosure obligations would be very limited. In addition, this language brings into the definition of financial institution an Internet company that compiles, or aggregates, an individual's on-line accounts (such as credit cards, mortgages, and loans) at that company's web site as a service to the individual, who then may access all of its account information through that Internet site. Many entities that come within the broad definition of financial institution will likely not be subject to the disclosure requirements of the rule because not all financial institutions have “consumers” or establish “customer relationships.” Several commenters supported this distinction and the Commission retains it here. For example, management consulting is a “financial activity” but it is not likely that any individual obtains management consulting services for personal, family or household purposes. Likewise, courier services, data processors, and real estate appraisers who perform services for a financial institution, but do not provide financial products or services to individuals, will not be required to make the disclosures mandated by the rule because they do not have “consumers” or “customers” as defined by the rule. 29 The Commission declines to adopt a definitive list, as requested by some commenters, of all of the financial institutions that do not have consumers and customers. Such a list inevitably will not be exclusive and may include some institutions that operate so that in some instances they have consumers and customers and in others they do not. 29 If such financial institutions receive consumers' nonpublic personal information from nonaffiliated financial institutions pursuant to one of the exceptions set forth in §§ 313.14 and 313.15, however, they would be required to observe the § 313.11 limitations on reuse and redisclosure of that information. Some commenters suggested that sole proprietors be exempt from the definition, but provided no helpful rationale for doing so, while others requested clarification as to whether nonprofit entities could be financial institutions covered by the rule. Whether or not a commercial enterprise is operated by a single individual is not determinative in analyzing whether the entity is a “financial institution.” If an individual is in the “business of * * * engaging in financial activities * * *,” that “business” is included within the “financial institution” definition. 30 Similarly, nothing in the definition of financial institution excludes nonprofit entities from the definition of financial institution. 30 An individual who provides a financial service only informally ( e.g., preparing tax forms without remuneration for friends or family, or as community service) is not likely significantly engaged in a financial activity. Few commenters addressed proposed § 313.3(j)(3)(iii), which incorporated the Act's exemption for institutions chartered by Congress to engage in secondary market sales and similar transactions related to consumers, as long as the institution does not sell or transfer nonpublic personal information to a nonaffiliated third party. This exemption applies even if the chartered institution sells or transfers information as permitted by the exceptions to the notice and opt out requirements in proposed §§ 313.10 and 313.11 (§§ 313.14 and 313.15 in the final rule). The Commission also sought comment on whether it should require chartered institutions, as a condition of their exemption, to enter into a confidentiality agreement with any nonaffiliated third parties with whom they share information pursuant to the exceptions. Chartered institutions supported the interpretation; one commenter contended that such additional language was not in keeping with the intent of the exemption. The Commission believes that its interpretation merely operates to allow chartered institutions to continue their normal business, and does not permit them (or any party receiving information from them) to disclose information unrestrained. In accord with the limitations on reuse and redisclosure in section 502(c) of the G-L-B Act, both chartered institutions and recipients of nonpublic personal information are limited in that regard. The Commission has adopted the provision as proposed. l. Financial product or service. The proposal defined “financial product or service” as a product or service that a financial institution could offer by engaging in an activity that is financial in nature under section 4(k) of the Bank Holding Company Act of 1956. The proposal's definition included the financial institution's evaluation of information collected in connection with an application by a consumer for a financial product or service even if the application ultimately is rejected or withdrawn. It also included the brokerage and distribution of information about a consumer for the purpose of assisting the consumer in obtaining a financial product or service. The most frequent comment on this proposed definition was that the evaluation of application information should not be considered a financial product or service. For the reasons advanced above in the discussion of the definition of “consumer,” the Commission concludes that it is appropriate to retain evaluation activity within the scope of financial product or service covered by the rule. Evaluation is one of many financial services provided by financial institutions. Moreover, a consumer is likely to provide the type of information that the statute is designed to protect in the course of obtaining the financial institution's evaluation. An entity's status as a financial institution does not cause every product or service offered by that entity to be a financial product or service. A retailer that issues its own credit card directly to consumers provides a financial service (credit) to consumers who utilize the card; but when that same retailer sells merchandise, it provides a nonfinancial product or service (retail sale of merchandise). The Commission has retained the essence of the proposed definition, but has revised § 313.(l)(1) to mirror its change to the definition of “financial institution” in § 313.3(k) and eliminated the word “distribution” from § 313.3(l)(2) because it is not intended to mean anything different from “brokerage” and, therefore, its use invites confusion. m. Nonaffiliated third party. The proposal defined “nonaffiliated third party” as any person (which includes natural persons as well as corporate entities) except (1) an affiliate of a financial institution and (2) a joint employee of a financial institution and a third party. The proposal clarified the circumstances under which a company that is controlled by a financial institution pursuant to that institution's merchant banking activities or insurance company activities would be a “nonaffiliated third party” of that financial institution. The Commission received very few comments in response to this proposed definition. One commenter requested that the final rule provide that a disclosure of information to someone who is serving as a joint employee of two financial institutions should be deemed to have been disclosed to both financial institutions. The Commission disagrees with this result. Instead, the Commission believes it is appropriate to deem the information to have been given to the financial institution that is providing the financial product or service in question. Thus, if an employee of a mortgage lender is a dual employee with a securities firm, information received by that person in connection with a securities transaction conducted with the securities firm would be deemed to have been received by the securities firm. The Commission notes that its proposal omitted a section included in the other Agencies' rules relating to companies engaged in merchant banking, investment banking, or investment activities described in section 4(k)(4)(H-I) of the Bank Holding Company Act. For purposes of consistency with the rules to be adopted by the other Agencies, the Commission has included it at § 313.3(m)(2). Otherwise, the final rule defines “nonaffiliated third party” as proposed. n. Nonpublic personal information. Section 509(4) of the G-L-B Act defines “nonpublic personal information” to mean “personally identifiable financial information” that is provided by a consumer to a financial institution, results from any transaction with the consumer or any service performed for the consumer, or is otherwise obtained by the financial institution. It also includes any “list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived using any nonpublic personal information other than publicly available information.” The statute excludes publicly available information (unless provided as part of the list, description or other grouping described above), as well as a list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived without using nonpublic personal information. The statute does not define either “personally identifiable financial information” or “publicly available information.” The proposed rule restated the categories of information described above and presented two alternative approaches to identifying what information would be regarded as publicly available (and therefore, as a general rule, outside the definition of “nonpublic personal information”). Alternative A deemed information as publicly available only if a financial institution actually obtained the information from a public source while Alternative B treated information as publicly available if a financial institution could obtain it from such a source. Both Alternatives A and B included within the definition of “nonpublic personal information” publicly available information that is provided as part of a list, description, or other grouping of consumers. In addition to requesting comment on Alternatives A and B, the Commission requested comment concerning whether a variation of the two alternatives should be adopted that would require a financial institution to undertake reasonable procedures to establish that information is, in fact, publicly available. Commenters favoring Alternative A noted that it provided the greatest protection for consumers by treating anything the consumer gives to a financial institution to obtain a financial product or service as nonpublic personal information. Under Alternative A, this protection would be lost only if a financial institution actually obtained the information from a public source. These commenters also preferred the bright-line distinction drawn by treating as nonpublic personal information any information given by a consumer to obtain a financial product or service or information that results from transactions between a financial institution and a consumer. However, the majority of those commenting on this issue favored Alternative B, noting that this alternative was consistent with the statute and would be far less burdensome on financial institutions. These commenters suggested that a requirement that the information actually be obtained from a public source would impose needless burdens on financial institutions (by requiring, for instance, that a financial institution “tag” information they obtained from public records) and is not required by the statute. The final rule incorporates the benefits of both alternatives. Under the final rule, information will be deemed to be “publicly available” and therefore excluded from the definition of “nonpublic personal information” if a financial institution has a reasonable basis to believe that the information is lawfully made available to the general public from one of the three categories of sources listed in the rule. See § 313.3(p)(1). The final rule provides that a financial institution will have a “reasonable basis” for believing that information is lawfully made available if the financial institution has taken steps to determine whether the information is of the type that is available to the general public, whether an individual can direct that the information not be made available to the general public, and, if so, that the financial institution's particular consumer has not so directed. In this way, a financial institution will be able to avoid the burden of having to actually obtain information from a public source, but will not be free simply to assume that information is publicly available without some reasonable basis for that belief. An example of information a financial institution might have a reasonable basis to believe is publicly available, cited in the final rule, is the fact that someone has a loan that is secured by a mortgage, as long as the financial institution has determined that the mortgage information is included on the public record in the relevant jurisdiction. See § 313.3(p)(3)(iii)(1). The rule also explains that a financial institution will have a reasonable basis to believe that a telephone number is publicly available only if the institution has either located the number in a telephone book or has been informed by the consumer that the number is not an unlisted telephone number. See § 313.3(p)(3)(iii)(2). This approach is based on the underlying principle that a financial institution should not automatically assume that an individual's information is publicly available, especially if a consumer has some measure of control over the public availability of the information. With regard to some types of information that may be available to the general public, the extent to which a consumer can control the release of that information should be well known. For example, in most jurisdictions, a borrower has no choice about whether a lender will make a mortgage a matter of public record; a lender must do so in order to protect its security interest. In the case of a telephone number, it is well established that a person may request that his or her number be unlisted; thus, the financial institution will have to takes steps to determine whether a particular consumer has exercised that option. In other instances, there will be more variation on the general availability of the information and the consumer's right to direct that it not be disclosed. Some jurisdictions, for example, make driver's license information more available than others. 31 In evaluating whether it is reasonable to believe that information is publicly available, a financial institution must consider whether the information is of a type that a consumer could keep from being a matter of public record. 31 The Driver's Privacy Protection Act, 18 U.S.C. 2721-2725, restricts the states' ability to disclose a driver's personal information without the driver's consent. Reno v. Condon _ U.S. _, 120 S. Ct. 666 (2000). To implement the Act's complex definition of “nonpublic personal information” that is provided in the statute, the final rule adopts a definition that consists, generally speaking, of (1) personally identifiable financial information, plus (2) a consumer list (and publicly available information pertaining to the consumers on that list) that is derived using personally identifiable financial information that is not publicly available. From that body of information, the final rule excludes publicly available information (except as noted above) and any consumer list that is derived without using personally identifiable financial information that is not publicly available. See § 313.3(n)(1) and (2). Examples are provided in § 313.3(n)(3) to illustrate how this definition applies in the context of consumer lists. o. Personally identifiable financial information. The proposed rule defined “personally identifiable financial information” to include information that a consumer provides to a financial institution in order to obtain a financial product or service, information resulting from any transaction between the consumer and the financial institution involving a financial product or service, and information about a consumer a financial institution otherwise obtains in connection with providing a financial product or service to the consumer. The proposed rule also treated the fact that someone is a customer of a financial institution as personally identifiable financial information. In essence, the proposed rule treated any personally identifiable information as financial if it was obtained by a financial institution in connection with providing a financial product or service to a consumer. The Commission noted in the preamble to the proposed rule that this interpretation may result in certain information being covered by the rule that may not be considered intrinsically financial, such as health status. The Commission received a large number of comments in response to this definition, most of which stated that the definition inappropriately included certain identifying information that is not financial, such as name, address, and telephone number. Many others maintained that “personally identifiable financial information” should not include the fact that someone is a customer of a financial institution. These commenters typically noted that many customer relationships are matters of public record (such as would be the case, for instance, anytime a transaction results in the recordation of a security interest) while other customer relationships are matters of public knowledge (because consumers frequently disclose the relationships by writing checks, using credit cards, and so on). Many commenters stated that aggregate data about a financial institution's customers that lack personal identifiers should not be considered personally identifiable financial information. Treatment of identifying information as financial. The Commission continues to believe that any information should be considered financial information if it is requested by a financial institution for the purpose of providing a financial product or service. This approach is consistent with the broad definition of “financial institution” used in the statute, which encompasses not only traditional financial activities (such as banks, mortgage lenders, finance companies), but also a large number of entities that engage in activities not traditionally considered financial (such as financial career counselors, insurance companies, and data processors). As a consequence of that definition, the range of information that has a bearing on the terms and availability of a financial product or service or that is used by a financial institution in connection with providing a financial product or service is extremely broad and may include, for instance, medical information and other sorts of information that might not be thought of as financial. Many commenters, including several hundred private investigators, expressed concern about the need for ready access to identifying information to locate people attempting to evade their financial obligations. These commenters consistently suggested that names, addresses, and telephone numbers should not be treated as financial information. However, financial institutions rely on a broad range of information that they obtain about consumers, including information such as addresses and telephone numbers, when providing financial products or services. Location information is used by financial institutions to provide a wide variety of financial services, from the sending of checking account statements to the disbursing of funds to a consumer. Other information, such as the maiden name of a consumer's mother often will be used by a financial institution to verify the consumer's identity. The Commission concluded that it would be inappropriate to carve out certain items of information that a particular financial institution might rely on when providing a particular financial product or service. The Commission notes that names, addresses, and telephone numbers, if publicly available, will not be subject to the opt out provisions of the statute unless that information is “derivative information” ( i.e., information that is part of a list, description, or other grouping of consumers that is derived from personally identifiable financial information that is not publicly available). Thus, in instances involving specific requests about individuals, a financial institution still may disclose information about the individual that the institution has a reasonable basis to believe is publicly available, provided that in so doing the institution does not disclose the existence of a customer relationship (unless the relationship is a matter of public record, as in the case of most mortgage loans). Moreover, in instances when a consumer does not opt out, a financial institution may disclose any nonpublic personal information to a nonaffiliated third party provided that the disclosure is consistent with the institution's opt out and privacy notices. Customer relationship as “personally identifiable financial information.” The Commission disagrees with those commenters who maintain that customer relationships should not be considered to be personally identifiable financial information. Information that a particular person has a customer relationship identifies that person, and thus is personally identifiable. This information also is financial, because it communicates that the person in question has a transaction involving a financial product or service with a financial institution. While this information could in certain cases be a matter of public record, that does not change the analysis of whether the information is personally identifiable financial information. Changes made to the definition. The final rule makes various stylistic changes to the definition to make it easier to read and understand. In addition, the final rule adds to the examples of information covered by the rule any information that the institution collects through a “cookie.” 32 See § 313.3(o)(2)(F). This illustrates one of the various means by which a financial institution may “otherwise obtain” information about a consumer in connection with providing a financial product or service to that consumer. 32 A cookie is a small text file placed on a consumer's computer hard drive by a web server. The cookie transmits information back to the server that placed it. An example in § 313.3(o)(2)(ii)(B) clarifies that aggregate information or blind data lacking personal identifiers is not covered by the definition of “personally identifiable financial information.” The Commission agrees with those commenters who opined that such data, by definition, do not identify any individual. p. Publicly available information. The proposal defined “publicly available information” to include information that is lawfully made available to the public from official public records (such as real estate recordations or security interest filings), information from widely distributed media (such as a telephone book, television or radio program, or newspaper), and information that is required to be disclosed to the general public by Federal, State, or local law (such as securities disclosure documents). The proposed rule stated that publicly available information from widely distributed media would include information from an Internet site that is available to the general public without requiring a password or similar restriction. As noted in the discussion of “nonpublic personal information,” the Commission proposed two versions of the definition of “publicly available information.” The final rule more closely tracks the statute while incorporating the benefits of both alternatives. Several commenters questioned the appropriateness of excluding information from the definition of “publicly available information” if a person who seeks to obtain the information over the Internet must have a password or comply with a similar restriction. These commenters made the point that many Internet sites are available to a large number of people, each of whom need a user name and identification number to access the sites. Several of these commenters suggested that it is more appropriate to focus on whether the information was lawfully placed on the Internet. The Commission agrees and has amended the final rule to remove the reference to passwords or similar restrictions from the example of the Internet as a “widely distributed” medium of communication. In its place, the Commission has substituted a standard requiring that the information be available on an unrestricted basis, and has then specified that a site is not restricted merely because an Internet service provider or a site operator requires a fee or password as long as access is otherwise available to the general public. The traditional use of passwords is to confine the access of individual customers to specific, individual information. However, website operators, in particular, may require user identifications and passwords as a method of tracking access rather than restricting access to the information available through the website. Fees may be levied to enhance the revenue of the Internet service provider or site operator rather than restrict access. Therefore, the Commission believes that the definition of “widely distributed media” should properly focus on whether the information is lawfully available to the general public, rather than on the type of medium from which information is obtained. The concept of information being lawfully obtained was included in the proposal, and is retained in the final rule. Thus, information unlawfully obtained will not be deemed to be publicly available notwithstanding that it may be available to the general public through widely distributed media. The following example illustrates how “nonpublic personal information,” “personally identifiable financial information,” and “publicly available information” will work under the final rule. Assume that Mary provides a mortgage lender with information in order to obtain a loan to finance a home purchase, and the same information to a retail store to open a credit card account. Under the final rule, all of this information would be personally identifiable financial information. Once Mary establishes the customer relationships she seeks, the fact that Mary is a mortgage loan customer and a credit card customer at the financial institutions also would be personally identifiable financial information. Certain information provided by Mary, such as her name and address, may be publicly available. If the mortgage lender has a reasonable basis to believe that this information is publicly available, and if the information was included on a list of all of the institution's mortgage loan customers, then her name and address would fall outside the definition of “nonpublic personal information” in those jurisdictions where mortgages are a matter of public record. However, Mary's name and address would be protected as nonpublic personal information if the retailer wanted to include those items on a list of holders of its proprietary credit card. The difference in treatment stems from the distinction drawn in the statute between lists prepared using publicly available information (as would be the case in the mortgage loan hypothetical) and lists prepared using information that is not publicly available (as would be the case in the credit card hypothetical). The Commission concludes that this relatively complex approach is mandated by the statute's definition of “nonpublic personal information.” The final rule also is consistent with the fact that certain relationships are matters of public record, and, therefore, less deserving of protection from disclosure. q. You. The Commission used the pronoun “you” to refer to financial institutions within its jurisdiction in the proposal and defined “you” to mean those entities. The Commission received no comments in response to this definition and adopts the definition set forth in the proposed rule. Section 313.4 Initial Privacy Notice to Consumers Required The G-L-B Act requires a financial institution to provide an initial notice of its privacy policies and practices in two circumstances. For customers, the notice must be provided at the time of establishing a customer relationship. For consumers who are not customers, the notice must be provided prior to disclosing nonpublic personal information about the consumer to a nonaffiliated third party. The proposed rule implemented these requirements by mandating that a financial institution provide the initial notice to an individual prior to the time a customer relationship is established and the opt out notice prior to disclosing nonpublic personal information to nonaffiliated third parties. These notices were required to be clear and conspicuous and to accurately reflect the institution's privacy policies and practices. The proposal also set out standards governing when a customer relationship is established and how a financial institution is to provide notice. The Commission received many comments on proposed § 313.4. Most of the comments raised questions about the time by which initial notices must be provided, whether new notices are required for each new financial product or service obtained by a customer, the point at which a customer relationship is established, and how initial notices may be provided. Providing initial notices “prior to” time customer relationship is established. Many commenters stated that, because the statute requires only that the initial notice be provided “at the time of establishing a customer relationship,” the regulation should not require that the notice be provided “prior to” the point at which a customer relationship is established. These commenters were concerned that the rule could be interpreted as requiring a financial institution to provide disclosures at a point different from when they must provide other federally mandated consumer disclosures during the process of establishing a customer relationship. In response to these comments, the Commission has clarified the timing for providing initial notices. The final rule provides that, as a general rule, the initial notice must be given not later than the time when a financial institution establishes a customer relationship. See § 313.4(a)(1). As in the proposal, the initial notices may be provided at the same time a financial institution is required to give other notices, such as those required by the Board's regulations implementing the TILA. This approach, like the approach taken in the proposed rule, strikes a balance between (1) ensuring that consumers will receive privacy notices at a meaningful point along the continuum of “establishing a customer relationship” and (2) minimizing unnecessary burdens on financial institutions that may otherwise result if the final rule were to require financial institutions to provide consumers with a series of notices at different times in a transaction. Providing notices after customer relationship is established. Several commenters stated that the rule should provide financial institutions with the flexibility to deliver the initial notice after the customer relationship is established under certain circumstances. These commenters posited several situations in which a customer relationship is established without face-to-face contact between the consumer and financial institution. For example, collection agencies that purchase accounts in default noted that it frequently takes time to locate debtors on such accounts (and that sometimes they do not even try to do so.) The commenters stated that delivery of the initial notice before the customer relationship is established in these situations would be impractical, and a requirement along those lines would have a significant adverse effect on the ability to provide a financial product or service to a consumer as quickly as the consumer desires. The Commission believes that it is appropriate for financial institutions to have flexibility in certain circumstances to provide the initial notice at a point after the customer relationship is established. To accommodate the wider range of situations presented by the commenters, the Commission has modified the relevant examples so that they now are more broadly applicable. As stated in the final rule in § 313.4(e), a financial institution may provide the initial notice within a reasonable time after establishing a customer relationship in two instances. First, notice may be provided after the fact if the establishment of the customer relationship is not at the customer's election. See § 313.4(e)(1)(i). This might occur, for instance, when a credit account is sold. Second, a notice may be sent after establishing a customer relationship when to do otherwise would substantially delay the consumer's transaction and the consumer agrees to receive the notice at a later time. See § 313.4(e)(1)(ii). An example of this would be when a transaction is conducted over the telephone and the customer desires prompt delivery of the item purchased. Another example of when this might occur is when a lender (other than a college or university) establishes a customer relationship with an individual under a student loan program as described in the final rule where loan proceeds are disbursed promptly without prior communication between the bank and the customer. In most situations, and particularly where the establishment of a customer relationship is in person, a financial institution should give the initial notice at a point when the consumer still has a meaningful choice about whether to enter into the customer relationship. The exceptions listed in the examples, while not exhaustive, illustrate the less frequent situations when delivery either would pose a significant impediment to the conduct of a routine business practice or the consumer agrees to receive the notice later in order to obtain a financial product or service immediately. In circumstances when it is appropriate to deliver an initial notice after the customer relationship is established, a financial institution should deliver the notice within a reasonable time thereafter. For example, a debt buyer that has purchased a defaulted account for collection in its own name would be authorized by § 313.4(e)(2)(i) to provide its privacy notice shortly after locating the debtor. Several commenters requested that the final rule specify precisely how many days a financial institution has in which to deliver the notice under these circumstances. However, the Commission believes that a rule prescribing the maximum number of days would be inappropriate because (a) the circumstances of when an after-the-fact notice is appropriate are likely to vary significantly, and (b) a rule that attempts to accommodate every circumstance is likely to provide more time than is appropriate in many instances. Thus, rather than establish an inflexible rule, the Commission has elected to retain the more general rule as set out in the proposal in § 313.4(e)(1). Nothing in the rule is intended to discourage a financial institution from providing an individual with a privacy notice at an earlier point in the relationship if the institution wishes to do so in order to make it easier for the individual to compare its privacy policies and practices with those of other institutions in advance of conducting transactions. New notices not required for each new financial product or service. Several commenters asked whether a new initial notice is required every time a customer obtains a financial product or service from that financial institution. These commenters suggested that the public would not materially benefit from repeated disclosures of the same information, and that requiring additional initial notices to be provided to the same consumer would be burdensome on financial institutions. The Commission agrees that it would be burdensome, with little corresponding benefit to the public, to require a financial institution to provide the same consumer with additional copies of its initial notice every time the consumer obtains a financial product or service. Accordingly, the final rule states, in § 313.4(d)(2), that a financial institution will satisfy the notice requirements when an existing customer obtains a new financial product or service if the institution's initial, revised, or annual notice (as appropriate) is accurate with respect to the new financial product or service. Joint accountholders. The majority of comments on how to provide notice suggested that the final rule state that a financial institution is not obligated to provide more than one notice to joint accountholders. Several of these commenters noted that disclosure obligations arising from joint accounts are well settled under other rules, such as the regulations implementing the Equal Credit Opportunity Act (Regulation B, 12 CFR part 202, ) and TILA. Under both Reg. B and Reg. Z, a financial institution is permitted to give only one notice. The authorities cited include requirements that the financial institution give disclosures, as appropriate, to the “primary applicant” if this is readily apparent (in the case of Reg. B; see 12 CFR 202.9(f)) or to a person “primarily liable on the account” (in the case of Reg. Z; see 12 CFR 226.5(b)). The Commission agrees that a financial institution should be allowed to provide initial notices in a manner consistent with other disclosure obligations. There are also circumstances, however, where more than one of the joint account holders may want separate notices. Therefore, the final rule states in § 313.9 that the financial institution may send one notice, but must honor requests from one or more account holders for separate notices. Even absent a request, a financial institution may, in its discretion, provide notices to each party to the account. This situation might arise, for instance, when a financial institution does not want one opt out election to apply automatically to all joint accountholders ( see discussion of how to provide opt out notices, below). Mergers. A few commenters requested guidance on what notices are required in the event of a merger of two financial institutions or an acquisition of one financial institution by another. In such a situation, the need to provide new initial (and opt out) notices to the customers of the entity that ceases to exist will depend on whether the notices previously given to those customers accurately reflect the policies and practices of the surviving entity. If they do, the surviving entity will not be required under the rule to provide new notices. As was stated in the preamble to the proposed rule, a financial institution must maintain any protections that it represents it will provide in its privacy notices. Financial institutions must take appropriate measures to adhere to their stated policies and practices. Section 313.5 Annual Privacy Notice to Customers Required Section 503 of the G-L-B Act requires a financial institution to provide notices of its privacy policies and practices at least annually to its customers “during the continuation” of a customer relationship. The proposed rule implemented this requirement by requiring a clear and conspicuous notice that accurately reflects the privacy policies and practices then in effect to be provided at least once during any period of twelve consecutive months. The proposed rule noted that provisions governing how to provide an initial notice also would apply to annual notices, and stated that a financial institution would not be required to provide annual notices to a customer with whom it no longer has a continuing relationship. Several commenters requested that the final rule permit annual notices to be given each calendar year, instead of every twelve months. A variation suggested by a few commenters was to state that notices must be provided during each calendar year, with no more than 15 months elapsing between mailings. To clarify the extent of financial institutions' flexibility, the final rule retains the general rule requiring annual notices but then provides an example, in § 313.5(a)(2), stating that a financial institution may select a calendar year as the 12-month period within which notices will be provided and provide the first annual notice at any point in the calendar year following the year in which the customer relationship was established. The final rule also requires that a financial institution apply the 12-month cycle to its consumers on a consistent basis. Several commenters suggested that a financial institution be permitted to make the annual notice available upon request only, particularly if there have been no material changes to the notice since it was last delivered or the customer has opted out. These commenters maintained that little value is added by providing customers with additional copies each year of the same information. Some suggested that financial institutions be permitted to provide a “short-form” annual notice, in which the institution informs its customers that there has been no change to its privacy policies and practices and that the customers may obtain a copy upon request. The Commission has not amended the final rule to permit this approach, for two reasons. First, the Commission interprets the statute as contemplating complete disclosures annually to all customers during the duration of the customer relationship. Section 503 of the G-L-B Act states that “not less than annually during the continuation of [a customer] relationship, a financial institution shall provide a clear and conspicuous disclosure to such consumer [ i.e., one with whom a customer relationship has been formed], . . . of such financial institution's policies and practices with [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A00-12755. Public record. Not legal advice.