Privacy of Customer Information

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Proposed rules.

SUMMARY:

The Commodity Futures Trading Commission requests comment on proposed privacy rules published under section 5g of the Commodity Exchange Act which directs the Commission to prescribe regulations under Title V of the Gramm-Leach-Bliley Act. Title V requires certain federal agencies to adopt rules implementing notice requirements and restrictions on the ability of certain financial institutions to disclose nonpublic personal information about consumers to nonaffiliated third parties. Under section 503, a financial institution must provide its customers with a notice of its privacy policies and practices, and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless the institution provides certain information to the consumer and the consumer has not elected to opt out of the disclosure. Section 505 further requires certain federal agencies to establish for financial institutions appropriate standards to protect customer information. The proposed rules implement these requirements of the Gramm-Leach-Bliley Act with respect to futures commission merchants, commodity trading advisors, commodity pool operators and introducing brokers that are subject to the jurisdiction of the Commission under the Commodity Exchange Act as amended.

DATES:

Comments must be received by April 18, 2001.

ADDRESSES:

Comments should be sent to the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, attention: Office of the Secretariat. Comments may be sent by facsimile transmission to (202) 418-5521, or by e-mail to secretary@cftc.gov. Reference should be made to “Privacy Rules.”

FOR FURTHER INFORMATION CONTACT:

Susan W. Nathan, Assistant General Counsel, or Bella Rozenberg, Attorney, Office of General Counsel; Nancy E. Yanofsky, Assistant Chief Counsel, Division of Economic Analysis; or Ky Tran-Trong, Attorney, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5000, E-mail: (SNathan@cftc.gov), (BRozenberg@cftc.gov), (NYanofsky@cftc.gov), or (KTran-Trong@cftc.gov).

SUPPLEMENTARY INFORMATION:

The Commodity Futures Trading Commission today is proposing for public comment a new part 160, 17 CFR part 160, under Subtitle A of Title V of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338 (1999), to be codified at 15 U.S.C. 6801-6809) and the Commodity Exchange Act as amended by the Commodity Futures Modernization Act of 2000 (7 U.S.C. 1 et seq., as amended by Appendix __ of Pub. L. 106-554, 114 Stat. 2763).

Table of Contents

I. Background

II. Section-by-Section Analysis

III. General Request for Comments

IV. Cost-Benefit Analysis

V. Related Matters

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

VI. Summary of Initial Regulatory Flexibility Analysis

VII. Statutory Authority

Text of Proposed Rules

I. Background

On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act (GLB Act) into law. Subtitle A of Title V of the Act, captioned “Disclosure of Nonpublic Personal Information” (Title V), 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 Commodity Futures Trading Commission (Commission) and entities subject to its jurisdiction originally were excluded from Title V's coverage. The agencies that were covered by Title V—the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision (collectively, the Banking Agencies), Secretary of the Treasury, Securities and Exchange Commission (SEC), National Credit Union Administration, and Federal Trade Commission (FTC) (collectively with the Banking Agencies, the Agencies)—have each adopted implementing regulations under Title V.

On December 21, 2000, as part of the Commodity Futures Modernization Act of 2000 (CFMA), Congress amended the Commodity Exchange Act (CEA or Act) to provide that certain entities subject to the Commission's jurisdiction—specifically, futures commission merchants (FCMs), commodity trading advisors (CTAs), commodity pool operators (CPOs) and introducing brokers (IBs)—shall be treated as financial institutions for purposes of Title V. At the same time, Congress also amended the CEA to provide that the Commission shall be treated as a Federal functional regulator within the meaning of Title V and to require the Commission to prescribe regulations under Title V within six months.

The Commission has consulted with representatives from the Agencies in drafting these proposed rules to implement Title V. The rules that we are proposing today are, to the extent possible, consistent with and comparable to the rules adopted by the Agencies. Proposed part 160 contains rules of general applicability that are substantially similar to the rules adopted by the Agencies. The proposed rules also contain examples that illustrate the application of the general rules and an appendix of sample clauses that may, to the extent applicable, be used by FCMs, CTAs, CPOs and IBs to comply with the notice and opt-out requirements. These proposed examples and sample clauses differ from those used by the Agencies in order to provide more meaningful guidance to the financial institutions subject to the Commission's jurisdiction. Furthermore, in order to minimize the compliance burden for FCMs that are also registered with the SEC as broker-dealers (“dual registrants”), the Commission is proposing to permit dual registrants to comply with part 160 by complying with the privacy rules of the SEC, which are found at 17 CFR part 248.

Title V also requires the Agencies to establish appropriate standards for financial institutions subject to their jurisdiction to safeguard customer information and records. The rules that we are proposing today include requirements for FCMs, CTAs, CPOs and IBs to adopt appropriate policies and procedures that address safeguards to protect this information.

We request comment on all aspects of the proposed rules as well as comment on the specific provisions and issues highlighted in the section-by-section analysis below. We specifically request comment on the proposed examples and sample clauses and any additional examples or sample clauses that would be helpful.

II. Section-by-Section Analysis

Section 160.1 Purpose and Scope

Proposed paragraph (a) of section 160.1 identifies three purposes of the rules. First, the rules require a financial institution to provide notice to consumers about the institution's privacy policies and practices. Second, the rules describe the conditions under which a financial institution may disclose nonpublic personal information about a consumer to a nonaffiliated third party. Third, the rules provide a method for a consumer to “opt out” of the disclosure of that information to nonaffiliated third parties, subject to certain exceptions discussed below.

Proposed paragraph (b) sets out the scope of the Commission's rules and identifies the financial institutions covered by the rules. This paragraph notes that the rules apply only to information about individuals who obtain a financial product or service primarily for personal, family, or household purposes. The financial institutions covered by the rules are FCMs, CTAs, CPOs and IBs. Consistent with section 5g of the Act, the rules as proposed apply to these categories of financial institutions whether or not they are required to register with the Commission. Thus, as proposed, the rules would apply to CTAs that, pursuant to section 4m(1) of the CEA, are not required to register with the Commission because they have not advised more than 15 people in the past year and they do not hold themselves out generally to the public as CTAs. The rules also would apply to CTAs and CPOs that the Commission, by rule, has exempted from registering as a CTA or CPO. The Commission solicits comment on whether it should seek to exempt some or all of these unregistered categories of CTAs and CPOs from part 160.

Proposed paragraph (b) also provides that part 160 does not apply to any foreign (or “non-resident”) FCM, CTA, CPO or IB that is not registered with the Commission. The Commission believes that it would be impracticable to apply part 160 to those foreign unregistered entities. If a foreign financial institution conducts activities through U.S. interstate commerce in a manner that subjects it to the registration requirements of the CEA, it is subject to the part 160 requirements and any other applicable protections to customers, such as anti-fraud protections. We do not believe that subjecting unregistered foreign entities to the obligation to provide the privacy and opt out notices under part 160 would add to the protections provided to customers under the GLB Act. The Commission, however, is seeking comment on the application of this approach to firms that are subject to a rule 30.10 order. Such firms deal directly with U.S. customers and, but for relief provided in accordance with rule 30.10, would be required to register with the Commission.

We note that other federal, State, or applicable foreign laws may impose limitations on disclosures of nonpublic personal information in addition to those imposed by the GLB Act and these proposed rules. Thus, financial institutions will need to monitor and comply with relevant legislative and regulatory developments that affect the disclosure of consumer information. Proposed paragraph (b) also makes clear that nothing in the rules is intended to supersede rules relating to medical information that have been issued by the Secretary of Health and Human Services under the Health Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d—1320d-8.

Section 160.2 Rule of Construction

Paragraph (a) of proposed § 160.2 sets out a rule of construction intended to clarify the effect of the examples used in the rules and the sample clauses in the appendix to the rules. Given the wide variety of transactions that Title V covers, the proposal would include rules of general applicability and provide examples that are intended to assist financial institutions in complying with the rule. The examples are not intended to be exhaustive; rather, they are intended to provide guidance on how the rules would apply in specific situations. The proposed 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 and sufficient guidance about the use of the examples.

Paragraph (b) of proposed § 160.2 provides that an FCM that is also registered with the SEC as a broker-dealer may comply with part 160 by complying with the privacy rules of the SEC, which are found at 17 CFR part 248. The Commission invites comment on whether it should provide for a broader form of substituted compliance, by permitting an FCM that is affiliated with a financial holding company, a bank holding company, a national bank or a broker-dealer to comply with part 160 by complying with the privacy rules of the functional regulator for the affiliated entity.

Section 160.3 Definitions

(a) Affiliate. The proposed rules incorporate the definition of “affiliate” used in section 509(6) of the GLB Act. Thus, an FCM, CTA, CPO or IB will be considered affiliated with another company if it “controls,” is controlled by, or is under common control with the other company. The definition includes both financial institutions and entities that are not financial institutions. The proposed rules also provide that an FCM, CTA, CPO or IB will be considered an affiliate of another company for purposes of the privacy rules if (i) the other company is regulated under Title V by one of the Agencies and (ii) the privacy rules adopted by that Agency treat the FCM, CTA, CPO or IB as an affiliate of the other company.

(b) Clear and conspicuous. Title V and the proposed rules require that various notices be “clear and conspicuous.” The Commission is proposing to define that term as it has been defined in the respective rules of the Agencies, with conforming changes. Proposed § 160.3(b) defines the term to mean that the notice must be “reasonably understandable and designed to call attention to the nature and significance of the information in the notice.” This phrase is intended to provide meaning to the term “conspicuous.” The Commission believes that this standard will result in notices to consumers that communicate effectively the information consumers need in order to make an informed choice about the privacy of their information, including whether to open an account or enter into an advisory agreement.

Examples of “clear and conspicuous.” The proposed rules provide generally applicable guidance about ways in which an FCM, CTA, CPO or IB may make a disclosure clear and conspicuous. We note that the examples do not mandate how to make a disclosure clear and conspicuous. A financial institution must decide for itself how best to comply with the general rule, and may use techniques not listed in the examples.

Combination of several notices. The Commission is aware that a document may combine different types of disclosures that are subject to specific disclosure requirements under different regulations. For example, a CTA that includes a privacy notice in its disclosure document would have to make the privacy notice clear and conspicuous, and would have to prepare the disclosure document according to certain standards under the CEA. The proposed rule provides an example of how a financial institution may make privacy disclosures conspicuous, including privacy disclosures that are combined in a document with other information. In order to avoid the potential conflicts between two different rules requiring different sets of disclosures that are subject to different standards, the proposed rule does not mandate precise specifications for presenting various disclosures.

Disclosures on Internet web pages. The proposed rule provides guidance on how financial institutions may clearly and conspicuously disclose privacy-related information on their Internet sites. Disclosures over the Internet may present some issues that will not arise in paper-based disclosures. Consumers may view various web pages within a financial institution's web site in a different order each time they access the site, aided by hypertext links. Depending on the 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 proposed rule provides an example concerning Internet disclosures stating that FCMs, CTAs, CPOs and IBs 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, hypertext links, or sound) do not distract attention from the notice. The examples also note that the institution should place a notice or a conspicuous link on a screen that consumers frequently access, such as a page on which consumers conduct transactions.

There is a range of approaches an FCM, CTA, CPO or IB could use based on current technology. For example, an FCM could use a dialog box that pops up to provide the disclosure before a consumer provides information to a financial 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.

(c) Collect. The GLB Act requires a financial institution to disclose in its initial and annual notices the categories of information that the institution collects. The Commission is proposing to define this term to mean obtaining information that can be organized or retrieved by the name of the individual or by another identifying number, symbol, or other identifying particular assigned to the individual, irrespective of the source of the underlying information. The proposed definition is intended to provide guidance about the information that an FCM, CTA, CPO or IB must include in its notices and to clarify that the obligations arise regardless of whether the institution obtains the information from a consumer or from some other source. This definition is not intended to include information that an FCM, CTA, CPO or IB receives but then immediately passes on without retaining a copy, as such information would not be organized and retrievable.

(d) Commission. The term Commission means Commodity Futures Trading Commission.

(e) Commodity pool operator. The term commodity pool operator has the same meaning as in section 1a(5) of the Commodity Exchange Act, as amended, and includes anyone registered as such under the Act.

(f) Commodity trading advisor. The term commodity trading advisor has the same meaning as in section 1a(6) of the Commodity Exchange Act, as amended, and includes anyone registered as such under the Act.

(g) Company. The proposed rules define company to mean any corporation, limited liability company, business trust, general or limited partnership, association or similar organization.

(h) Consumer. The proposed rules define consumer as an individual (including his or her legal representative) who obtains a financial product or service from an FCM, CTA, CPO or IB that is to be used primarily for personal, family or household purposes. An individual also will be deemed to be a consumer for purposes of a financial institution if that institution purchases the individual's account from some other institution. The GLB Act distinguishes “consumers” from “customers” for purposes of the notice requirements imposed by that Act. As explained below in the discussion of proposed § 160.4, a financial institution must 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 a purpose that is not authorized by one of several exceptions set out in proposed §§ 160.14 and 160.15. By contrast, a financial institution must give all “customers,” not later than the time of establishing a customer relationship and annually thereafter during the continuation of the customer relationship, a notice of the institution's privacy policy.

A person is a “consumer” under the proposed rules if he or she obtains a financial product or service from a financial institution that is to be used primarily for personal, family or household purposes. The definition of “financial product or service” in proposed § 160.3(m) includes, among other things, a financial institution's evaluation of an individual's application to obtain a financial product or service. Thus, a financial institution that intends to share nonpublic personal information about a consumer with nonaffiliated third parties outside of the exceptions described in §§ 160.14 and 160.15 will have to give the requisite notices, even if the application or request is denied or withdrawn.

The examples that follow the definition of “consumer” explain when someone is a consumer. The examples clarify that a consumer includes someone who provides nonpublic personal information in connection with seeking to obtain commodity interest brokerage or trading or advisory services, but does not include someone who provides only name, address, and areas of investment interest in order to obtain a brochure or other information about a financial product or service. An individual who has an account with an originating FCM and whose positions are carried by a clearing FCM in an omnibus account in the name of the originating FCM is not a consumer for purposes of the clearing FCM if it receives no nonpublic personal information about the consumer.

Requirements arising from consumer relationship. While the proposed rules define “consumer” broadly, we note that this definition will not result in any additional burden to an FCM, CTA, CPO or IB if (i) no customer relationship is established and (ii) the institution does not intend to disclose nonpublic personal information about the consumer to nonaffiliated third parties. Under the approach proposed, an FCM, CTA, CPO or IB 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 §§ 160.14 and 160.15. The institution may disclose a consumer's nonpublic personal information to nonaffiliated third parties if it delivers the requisite notices and the consumer does not opt out. Thus, as proposed, the rule allows a financial institution to avoid all of the rule's requirements for consumers who are not customers if the institution chooses not to share information about the consumers with nonaffiliated third parties except as provided in the exceptions. Conversely, if an FCM, CTA, CPO or IB chooses to share consumers' nonpublic personal information with nonaffiliated third parties, the financial institution is free to do so, provided it notifies consumers about the sharing 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.

(i) Consumer reporting agency. The proposed rules incorporate the definition of “consumer reporting agency” in section 603(f) of the Fair Credit Reporting Act (FCRA). The term is used in proposed §§ 160.12 and 160.15.

(j) Control. The proposed rules define “control” for purposes of FCMs, CTAs, CPOs or IBs to mean the power to exercise a controlling influence over the management or policies of a company whether through ownership of securities, by contract, or otherwise. In addition, ownership of more than 25 percent of a company's voting securities creates a presumption of control of the company. This definition is used to determine when companies are affiliated, and would result in financial institutions being considered as affiliates regardless of whether the control is exercised by a company or individual.

(k) Customer. The proposed rules define “customer” as any consumer who has a “customer relationship” with a particular financial institution. As explained more fully in the discussion of proposed § 160.4 below, a consumer becomes a customer of a financial institution when he or she enters into a continuing relationship with the institution. For example, a consumer would become a customer when he or she completes the documents needed to open a commodity interest account or enters into an advisory agreement (whether written or oral).

The distinction between consumers and customers determines the notices that a financial institution must provide. If a consumer never becomes a customer, the institution is not required to provide any notices to the consumer unless the institution intends to disclose nonpublic personal information about that consumer to nonaffiliated third parties (outside of the exceptions as set out in §§ 160.14 and 160.15). By contrast, if a consumer becomes a customer, the institution must provide a copy of its privacy policy before it establishes the customer relationship and at least annually during the continuation of the customer relationship.

(l) Customer relationship. The proposed rules define “customer relationship” as a continuing relationship between a consumer and a financial institution in which the institution provides a financial product or service that is to be used by the consumer primarily for personal, family, or household purposes. Because the GLB Act requires annual notices of the financial institution's privacy policies to its customers, we have interpreted that Act as requiring more than isolated transactions between a financial institution and a consumer to establish a customer relationship, unless it is reasonable to expect further contact about that transaction between the institution and consumer afterwards. Thus, the proposed rules define “customer relationship” as one that generally is of a continuing nature. As noted in the examples that follow the definition, this would include a commodity interest account or an advisory relationship. An FCM would have a customer relationship with a consumer when the FCM regularly enters orders for the customer, even if the FCM holds none of the customer's assets.

A one-time transaction may be sufficient to establish a customer relationship, depending on the nature of the transaction. The examples that follow the definition of “customer relationship” clarify that an individual's purchase or sale of a futures or options contract through an FCM with whom the customer opens an account would be sufficient to establish a customer relationship because of the continuing nature of the service. By contrast, an individual who is merely referred by an IB to an FCM would not be the IB's customer if the IB does not regularly enter orders for the individual. The Commission specifically invites comment on the nature and scope of the transactions that would be sufficient to establish a customer relationship.

(m) Federal functional regulator. The proposed rules define the term federal functional regulator to include the Commission and each of the Agencies. This term is used in two places. First, it is used in proposed § 160.3(a), the definition of affiliate. Second, it is used in proposed § 160.15(a)(4) for disclosures to law enforcement agencies, “including federal functional regulators.”

(n) Financial institution. The proposed rules define financial institution as (i) an FCM, CTA, CPO or IB that is registered with the Commission as such or is otherwise subject to the Commission's jurisdiction, and (ii) 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 of 1956 (BHCA). The proposed rules exempt from the definition of “financial institution” those entities specifically excluded by the GLB Act, except to the extent those entities were brought within the scope of Title V by section 5g of the CEA.

The GLB Act excludes “any person or entity” that is subject to the Commission's jurisdiction from Title V's coverage. Section 5g of the CEA partially reverses that exclusion by providing that certain entities subject to the Commission's jurisdiction—specifically, FCMs, CTAs, CPOs and IBs—shall be covered by Title V with respect to their financial activity. The proposed rule retains the exclusion of the GLB Act, to the extent that it has not been superseded by section 5g of the CEA, to make clear that floor brokers and various trading facilities and clearing organizations that are subject to the Commission's jurisdiction are not “financial institutions” for purposes of the GLB Act.

(o) Financial product or service. The proposed rules define “financial product or service” as a product or service (i) that an FCM, CTA, CPO or IB could offer that is subject to the Commission's jurisdiction, or (ii) that a financial institution could offer that is financial in nature, or incidental to such a financial activity, under section 4(k) of the BHCA. An activity that is complementary to a financial activity, as described in section 4(k), is not included in the definition of “financial product or service” under this part.

The Commission's proposed definition of “financial product or service” differs from that of the other Agencies to the extent that it includes any product or service that an FCM, CTA, CPO or IB could offer subject to the Commission's jurisdiction that is not otherwise included as a financial activity under section 4(k) of the BHCA. The other Agencies have defined financial product or service as any product or service that a financial institution could offer that is financial in nature, or incidental to such a financial activity, under section 4(k) of the BHCA. The Commission's proposed broader definition would include certain activity—such as acting as a CPO—which is not financial in nature, or incidental to such a financial activity, under section 4(k) of the BHCA. The Commission's proposed definition of “financial product or service” is designed to implement Congress” intent in section 5g of the CEA that customers of FCMs, CTAs, CPOs and IBs be accorded the same privacy rights as customers of other financial institutions and is solely for purposes of part 160. The Commission specifically invites comments on its proposed definition of financial product or service.

The proposed definition includes 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 includes the distribution of information about a consumer for the purpose of assisting the consumer to obtain a financial product or service.

(p) Futures commission merchant. The term futures commission merchant has the same meaning as in section 1a(20) of the Commodity Exchange Act, as amended, and includes anyone registered as such under the Act.

(q) GLB Act. The term GLB Act means the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338 (1999)).

(r) Introducing broker. The term introducing broker has the same meaning as in section 1a(23) of the Commodity Exchange Act, as amended, and includes anyone registered as such under the Act.

(s) Nonaffiliated third party. The proposed rule would define nonaffiliated third party to mean any person (including natural persons as well as corporate entities) except (i) an affiliate of a financial institution and (ii) a joint employee of a financial institution and a third party. Information received by a joint employee will be deemed to have been given to the financial institution that is providing the financial product or service in question. Thus, for example, if an employee of a broker-dealer is also an employee of an FCM, information that the employee received in connection with a securities transaction conducted with the broker-dealer would be considered as received by the broker-dealer.

(t) Nonpublic personal information. Section 509(4) of the GLB Act defines “nonpublic personal information” to mean “personally identifiable financial information” that (i) is provided by a consumer to a financial institution, (ii) results from any transaction with the consumer or any service performed for the consumer, or (iii) is otherwise obtained by the financial institution. The term 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 that is not publicly available information.” The GLB Act excludes publicly available information (unless provided as part of the list, description, or other grouping described above), as well as any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived without using nonpublic personal information. The GLB Act does not define either “personally identifiable financial information” or “publicly available information.”

The proposed rule implements the definition of “nonpublic personal information” under the GLB Act by restating the categories of information described above. The proposed rule provides that information will be deemed to be “publicly available” and therefore excluded from the definition of “nonpublic personal information” if an FCM, CTA, CPO or IB reasonably believes that the information is lawfully made available to the general public from one of the three categories of sources listed in the rule. The examples provided in the proposed rule clarify when an FCM, CTA, CPO or IB has a reasonable belief that information is lawfully made available to the general public. For example, an institution would have a reasonable belief if (i) the institution has confirmed, or the consumer has represented, that the information is publicly available from a public source, or (ii) the institution has taken steps to submit the information, in accordance with its internal procedures and policies and with applicable law, to a keeper of federal, State, or local government records who is required by law to make the information publicly available. The examples also state that an FCM, CTA, CPO or IB would have a reasonable belief that a telephone number is publicly available if the institution located the number in a telephone book or Internet listing service or if the consumer told the institution that the number is not unlisted. Moreover, the examples make clear that an institution may not assume information about a particular consumer is publicly available simply because that type of information is normally provided to a government record keeper and made available to the public by the record keeper, because the consumer may have the ability to keep that information nonpublic or to screen his or her identity.

The approach of the proposed rule is the same as that taken by the Agencies in their rules and is based on the underlying principle that a consumer in many circumstances can control the public availability or identification of his or her information and that a financial institution therefore should not assume that the information about that consumer is in fact publicly available. Thus, even though a lender typically enters a mortgage in public records in order to protect its security interest, when a borrower can maintain the privacy of his or her personal information by owning the property and obtaining the loan through a separate legal entity, the customer's name would not appear in the public record. In the case of a telephone number, a person may request that his or her number be unlisted. Thus, in evaluating whether it is reasonable to believe that information is publicly available, a financial institution must determine whether the consumer has kept the information or his or her identity from being a matter of public record.

To implement the complex definition of “nonpublic personal information” that is provided in the statute, the proposed rule would adopt a definition that consists, generally speaking, of (i) personally identifiable financial information, plus (ii) a consumer list or description or grouping of consumers (and publicly available information pertaining to the consumers) that is derived using any personally identifiable financial information that is not publicly available information. From that body of information, the proposed rule excludes publicly available information (except as noted above or if the information is disclosed in a manner that indicates that the individual is the institution's consumer) and any consumer list that is derived without using personally identifiable financial information that is not publicly available information. Examples illustrate how this definition applies in the context of consumer lists.

(u) Personally identifiable financial information. As discussed above, the GLB Act defines “nonpublic personal information” to include, among other things, “personally identifiable financial information” but does not define the latter term. As a general matter, the proposed rules treat any personally identifiable information as financial if the financial institution obtains the information in connection with providing a financial product or service to a consumer. We believe that this approach reasonably interprets the word “financial” and creates a workable and clear standard for distinguishing information that is financial from other personal information. This interpretation would cover a broad range of personal information provided to a financial institution, including, for example, information about the consumer's health.

The proposed rules define “personally identifiable financial information” to include three categories of information. The first category includes any information that a consumer provides a financial institution in order to obtain a financial product or service from the institution. As noted in the examples that follow the definition, this would include information provided on an application to obtain a loan, credit card, or other financial product or service. If, for example, a consumer provides medical information on an application to obtain a financial product or service, that information would be considered “personally identifiable financial information” for purposes of the proposed rules. Similarly, information that may be required for financial planning purposes, including details about retirement and family obligations, such as the care of a disabled child, would be covered by the definition.

The second category includes any information about a consumer resulting from any transaction between the consumer and the financial institution involving a financial product or service. This would include, as noted in the examples following the definition, information about account balance, payment or overdraft history, credit or debit card purchases or financial products purchased or sold.

The third category includes any financial information about a consumer otherwise obtained by the financial institution in connection with providing a financial product or service. This would include information obtained through an information-collecting device from a web server, often referred to as a “cookie.” It would also include information from a consumer report or from an outside source to verify information a consumer provides on an application to obtain a financial product or service. It would not, however, include information that is publicly available (unless, as previously noted, the information is part of a list of consumers that is derived using personally identifiable financial information).

The examples clarify that the definition of “personally identifiable financial information” does not include a list of names and addresses of people who are customers of an entity that is not a financial institution. Thus, the names and addresses of people who subscribe, for instance, to a particular magazine would fall outside the definition. The examples also clarify that aggregate information (or “blind data”) lacking personal identifiers is not covered by the definition of “personally identifiable financial information.”

(v) Publicly available information. The proposed rules define “publicly available information” as information the financial institution reasonably believes is lawfully made available to members of the general public from three broad types of sources. First, it includes information from official public records, such as real estate recordations or security interest filings. Second, it includes information from widely distributed media, such as a telephone book, radio program, or newspaper. Third, it includes information from disclosures required to be made to the general public by federal, State, or local law, such as securities disclosure documents. The proposed rules state that information obtained over the Internet will be considered publicly available information if the information is obtainable from a site available to the general public on an unrestricted basis.

As discussed in greater detail above, the proposed rules treat information as publicly available if it could be obtained from one of the public sources listed in the rules. If an institution reasonably believes the information is lawfully made available to the general public from one of the listed public sources, then the information will be considered publicly available and excluded from the scope of “nonpublic personal information,” whether or not the institution obtains it from a publicly available source (unless, as previously noted, it is part of a list of consumers that is derived using personally identifiable financial information). Under this approach, the fact that a consumer has given information to a financial institution would not automatically extend to that information the protections afforded to nonpublic personal information.

The proposal incorporates the concept of information being lawfully obtained. Thus, under the proposal, 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.

(w) You. The proposed rules define you as any FCM, CTA, CPO or IB subject to the jurisdiction of the Commission. The term “you” is used in order to make the rules easier to understand and use.

Subpart A—Privacy and Opt Out Notices

Section 160.4 Initial Privacy Notice to Consumers Required

Initial notice required. The GLB Act requires that a financial institution 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 do not, or have not yet, become customers, the notice must be provided before disclosing nonpublic personal information about the consumer to a nonaffiliated third party.

Paragraph (a) of proposed § 160.4 states the general rule regarding these notices. A financial institution must provide a clear and conspicuous notice, as defined in proposed § 160.3(b), that accurately reflects the institution's privacy policies and practices. Accordingly, a financial institution must maintain the protections that its notice represents it will provide. The Commission expects that FCMs, CTAs, CPOs and IBs will take appropriate measures to adhere to their stated privacy policies and practices.

The proposed rules do not prohibit two or more institutions from providing a joint initial, annual or opt out notice, as long as the notice is delivered in accordance with the rules and is accurate with respect to all institutions. For example, institutions that could provide joint notices include: (i) An IB and its FCM; (ii) a CTA and the FCM carrying the customer's account; and (iii) a clearing FCM and an executing FCM. Similarly, the rules do not preclude an institution from establishing different privacy policies and practices for different categories of consumers, customers or products so long as each particular consumer or customer receives a notice that is accurate with respect to that individual.

Notice to customers. The proposed rules require that a financial institution provide an individual a privacy notice not later than the time that it establishes a customer relationship subject to the limited circumstances set forth in paragraph (e), as discussed below. Thus, the initial notice may be provided at the same time an FCM, CTA, CPO or IB is required to give other notices, such as the rule 1.55 risk disclosure statement that an FCM or IB is required to provide before opening an account for a customer and the part 4 disclosure document that a CPO or CTA is required to provide before soliciting or accepting funds from pool participants (in the case of a CPO) or soliciting or entering into an agreement to direct a client's account (in the case of a CTA). This approach is intended to strike a balance between (i) ensuring that consumers will receive privacy notices at a meaningful point during the process of “establishing a customer relationship” and (ii) minimizing unnecessary burdens on FCMs, CTAs, CTOs and IBs that may otherwise result if the rule were to require financial institutions to provide consumers with a series of notices at various times in a transaction.

Paragraph (c) of proposed § 160.4 identifies the time a customer relationship is established as the point at which a financial institution and a consumer enter into a continuing relationship. The examples in paragraph (c) clarify that, for customer relationships that are contractual in nature including, for example, a commodity interest advisory relationship, a customer relationship is established when the customer enters into the contract (whether written or oral) that is necessary to engage in the activity in question. Thus, for example, a customer relationship is established with an FCM when the customer executes a commodity interest trade through the FCM or opens an account with the FCM under its procedures. We request comment on whether there are other times at which customer relationships with FCMs, CTAs, CPOs and IBs may be established.

Notice to consumers. For consumers who do not establish a customer relationship, the initial privacy notice may be provided at any point before the financial institution discloses nonpublic personal information to nonaffiliated third parties. As provided in paragraph (b) of proposed § 160.4, if the institution does not intend to disclose the information in question or intends to make only those disclosures that are authorized by one of the exceptions or as required by law, the institution is not required to provide the initial notice.

How to provide notice. When you are required by this proposed section to deliver an initial privacy notice, the notice must be delivered according to the provisions of proposed § 160.9. The general rule requires that the initial notice be provided so that each recipient can reasonably be expected to receive actual notice.

Existing customers. Proposed paragraph (d) provides that a financial institution is not required to provide new notices for new products or services if it has previously provided the same customer with an initial, revised, or annual notice (as appropriate) that is accurate with respect to the new product or service.

Exceptions to allow subsequent delivery of notice. Proposed paragraph (e) permits a financial institution to provide subsequent delivery of the initial notice required by proposed paragraph (a)(1) within a reasonable time after the customer relationship is established in three instances. First, the institution may provide notice after the fact if the customer has not elected to establish the customer relationship. This might occur, for example, when a commodity interest account is transferred from one FCM to another by a trustee in a commodity broker liquidation proceeding under chapter 11 of the Bankruptcy Code. Second, a financial institution may send a notice 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. An example of this is when a customer requests over the telephone that an FCM execute a trade. The final example states that delayed delivery is permissible when a nonaffiliated financial institution establishes a customer relationship on behalf of the customer.

We note that in most situations, 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, are intended to 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.

Section 160.5 Annual Privacy Notice to Customers Required

Section 503 of the GLB Act requires a financial institution to provide notices of its privacy policies and practices to its customers at least annually. Proposed § 160.5 implements this requirement by providing that a clear and conspicuous notice that accurately reflects the institution's current privacy policies and practices be provided at least once during any period of twelve consecutive months during which the customer relationship exists. The rules governing how to provide an initial notice also apply to annual notices.

Section 503(a) of the GLB Act requires that the annual notice be provided “during the continuation” of a customer relationship. Accordingly, the proposed rules state that a financial institution is not required to provide an annual notice to a customer with whom it no longer has a continuing relationship. For example, a customer becomes a former customer when the individual's account is closed.

The Commission invites comment generally on whether there are other situations in which an individual may have an account with a financial institution but the customer relationship has ended. We also invite comment on the regulatory burden of providing annual notices and on the methods financial institutions anticipate using to provide the notices.

Section 160.6 Information To Be Included in Privacy Notices

Section 503 of the GLB Act identifies the categories of information that must be included in a financial institution's initial and annual privacy notices and establishes the general requirement that a financial institution must provide customers with a notice describing the institution's policies and practices with respect to, among other things, disclosing nonpublic personal information to both affiliates and nonaffiliated third parties. Section 503(b) of the GLB Act identifies certain elements that the notice must address. The required content is the same for initial and annual notices of privacy policies and practices. While the information contained in the notices must be accurate as of the time the notices are provided, a financial institution may prepare its notices based on current and anticipated policies and practices.

Paragraph (a) of proposed § 160.6 prescribes the information to be included; proposed paragraph (c) provides examples of how to comply with this requirement.

(1) Categories of nonpublic personal information that a financial institution may collect. Section 503(b)(2) of the GLB Act requires a financial institution to inform its customers about the categories of nonpublic personal information that the institution collects. Proposed § 160.6(a)(1) implements this requirement and provides an example of compliance that focuses on the source of the information collected. As described in the example, a financial institution will satisfy this requirement if it categorizes the information according to the sources, such as application information, transaction information, and consumer report information. While financial institutions may provide more detail about the categories and information collected, they are not required to do so.

(2) Categories of nonpublic personal information that a financial institution may disclose. Section 503(a)(1) of the GLB Act requires the financial institution's initial and annual notice to provide information about the categories of nonpublic personal information that may be disclosed either to affiliates or nonaffiliated third parties. Proposed rule 160.6(a)(2) implements this requirement. The examples of how to comply with this rule focus on the content of the information to be disclosed. A financial institution may satisfy this requirement by categorizing information according to source and providing examples of the content of this information. These categories might include application information (such as assets, income, and investment goals), identifying information (such as name, address and social security number), transaction information (such as information about account activity and balances), and information from consumer reports (such as credit history).

Financial institutions may choose to provide more detailed information in the initial and annual notices. If a financial institution does not disclose, and does not intend to disclose, nonpublic personal information to affiliates or nonaffiliated third parties, its initial and annual notices may simply state this fact without further elaboration about categories of information disclosed.

3. Categories of affiliates and nonaffiliated third parties to whom a financial institution discloses nonpublic personal information. Section 503(a) of the GLB Act includes a general requirement that a financial institution provide notice to its customers of the institution's policies and practices with respect to disclosing nonpublic personal information to affiliates and nonaffiliated third parties. Section 503(b) provides that the notice required by section 503(a) must include certain specified items, including the requirement that a financial institution inform its customers about its policies and practices with respect to disclosing nonpublic personal information to nonaffiliated third parties. We believe that sections 503(a) and 503(b) of the GLB Act, when read together, require a financial institution's notice to address disclosures of nonpublic personal information to both affiliates and nonaffiliated third parties.

Proposed rule 160.6(a)(3) implements the notice requirement of section 503. The example explains that a financial institution will adequately categorize the affiliates and nonaffiliated third parties to whom it discloses nonpublic information about consumers if it identifies the types of businesses in which they engage. Types of business may be described in general terms, such as financial products or services, if the financial institution provides examples of the significant types of businesses engaged in by the recipient.

Section 502(e) of the GLB Act creates exceptions to the requirements that apply to the disclosure of nonpublic personal information to nonaffiliated third parties. The Act does not require a financial institution to list the categories of persons to whom information may be disclosed under any of the enumerated exceptions. Accordingly, proposed rule 160.6(a)(4) requires only that a financial institution inform customers that it makes disclosures as permitted by law to nonaffiliated third parties in addition to those described in the notice. The Commission invites comment on whether such notice would be adequate.

If a financial institution does not disclose, and does not intend to disclose, nonpublic personal information to affiliates or nonaffiliated third parties, its initial and annual notices may state this fact without further elaboration about categories of third parties.

4. Information about former customers. Section 503(a)(2) of the GLB Act requires that the financial institution's initial and annual privacy notices include the institution's policies and practices with respect to disclosing nonpublic personal information about persons who have ceased to be customers of the financial institution. Section 503(b)(1)(B) requires that this information be provided with respect to information disclosed to nonaffiliated third parties. We believe that, read together, sections 503(a)(2) and (b)(1)(B) require a financial institution to include in its initial and annual notices the institution's policies and practices with respect to sharing information about former customers with all affiliates and nonaffiliated third parties. Proposed rule 160.6(a)(4) sets forth this requirement. This rule does not require a financial institution to provide notice to a former customer before sharing nonpublic personal information about the former customer with an affiliate.

5. Information disclosed to service providers. Section 502(b)(2) of the GLB Act permits a financial institution to disclose nonpublic personal information about a consumer to a nonaffiliated third party that performs services for the institution, including marketing financial products or services under a joint agreement between the financial institution and at least one other financial institution. In such cases, a consumer has no right to opt out, but the financial institution must inform the consumer that it will be disclosing the information in question unless the service falls within one of the exceptions enumerated in section 502(e) of the GLB Act.

Proposed rule 160.6(a)(5) implements these provisions by requiring that, if a financial institution discloses nonpublic personal information to a nonaffiliated third party under the GLB Act exception for service providers and joint marketing, it must include in its initial and annual privacy notices a separate description of the categories of information that are disclosed and the categories of third parties providing the services. A financial institution may comply with these requirements by providing the same level of detail in the notice as is required to satisfy proposed §§ 160.6(a)(2) and (3).

6. Right to opt out. Sections 503(a)(1) and (b)(2) of the GLB Act require a financial institution to provide customers with a notice of its privacy policies and practices concerning, among other things, disclosure of nonpublic personal information consistent with section 502 of the GLB Act. Proposed rule 160.6(a)(6) implements this section of the GLB Act by requiring the initial and annual privacy notices to explain the right to opt out of disclosures of nonpublic personal information to nonaffiliated third parties, and the methods available to exercise that right.

7. Disclosures made under the Fair Credit Reporting Act. Pursuant to section 503(b)(4) of the GLB Act, a financial institution's initial and annual notice must include the disclosures, if any, required under section 603(d)(2)(A)(iii) of the FCRA. That section excludes from the definition of “consumer report” (and, accordingly, the protections provided under the FCRA for information contained in consumer reports) the communication of certain consumer information among affiliated entities if the consumer is notified about the disclosure of the information and given an opportunity to opt out of the information sharing. Information that can be shared among affiliates under this provision generally is personal information provided directly by the consumer to the financial institution, such as income and social security number, in addition to information contained in credit bureau reports.

Proposed rule 160.6(a)(7) implements section 503(b)(4) of the GLB Act by requiring that a financial institution's initial and annual privacy notices include any disclosures the institution makes under section 603(d)(2)(A)(iii) of the FCRA.

8. Confidentiality, security and integrity. Pursuant to section 503(b)(3) of the GLB Act, a financial institution's initial and annual privacy notices must provide information about the institution's policies and practices with respect to protecting the nonpublic personal information of consumers. Section 503(b)(3) requires that the notices include the policies that the financial institution maintains to protect the confidentiality and security of nonpublic personal information in accordance with section 501, which requires the federal functional regulators to establish standards governing the administrative, technical and physical safeguards of customer information.

Proposed rule 160.6(a)(8) implements these provisions by requiring a financial institution to include in its initial and annual privacy notices the institution's policies and practices with respect to protecting the confidentiality, security and integrity of nonpublic personal information. The example in the proposed rules states that a financial institution may comply with the requirement for confidentiality and security if the institution explains such matters as who has access to the information and the circumstances under which the information may be accessed. The information about integrity should focus on the measures the financial institution takes to protect against reasonably anticipated threats or hazards. The proposed rule does not require a financial institution to disclose technical or proprietary information about how it safeguards consumer information.

Section 160.7 Form of Opt Out Notice to Consumers; Opt Out Methods

Proposed § 160.7 provides that any opt out notice required by § 160.10(a) must provide a clear and conspicuous notice to each consumer that accurately explains the right to opt out. The notice must inform the consumer that the institution may disclose nonpublic personal information to nonaffiliated third parties, state that the consumer has the right to opt out, and provide the consumer with a reasonable means by which to opt out.

The examples outlined in paragraph (a)(2) of proposed § 160.7 state that a financial institution will provide adequate notice of the right to opt out if it identifies the categories of nonaffiliated third parties to whom the information may be disclosed and explains that the consumer may opt out of those disclosures. A financial institution that plans to disclose only limited types of information or to make disclosures only to a specific type of nonaffiliated third party may provide a correspondingly narrow notice to consumers. To minimize the number of opt out notices a financial institution must provide, however, the institution may wish to base its notices on current and anticipated information sharing plans. A new opt out notice is not required for disclosures to different types of nonaffiliated third parties or of different types of information so long as the most recent opt out notice is sufficiently broad to cover the entities or information in question. A financial institution also need not provide subsequent opt out notices when a consumer establishes a new type of customer relationship with that financial institution, unless the institution's opt out policies vary based on the type of customer relationship.

The examples suggest several methods of providing reasonable means to opt out, including check-off boxes, reply forms, electronic mail addresses, and toll-free telephone numbers. A financial institution does not provide a reasonable means of opting out if the only means provided is for the consumer to write his or her own letter requesting to opt out. The Commission invites comment on whether a financial institution that provides its notice electronically should be required to provide an electronic means to opt out.

Paragraph (b) of proposed § 160.7 applies to delivery of the opt out notice the same rules that apply to delivery of the initial and annual privacy notices and clarifies that the opt out notice may be provided together with, or on the same form as, the initial and annual notices. Paragraph (c) provides that if the opt out notice is provided after the initial notice, a financial institution must provide a copy of the initial notice along with the opt out notice.

Paragraph (d) of proposed § 160.7 states that if two or more consumers jointly obtain a financial product or service from a financial institution, the institution may provide a single opt out notice. The opt out notice must, however, explain how the financial institution will treat an opt out direction by a joint customer. The Commission invites comment on how the right to opt out should apply in the case of joint accounts. For example, should a financial institution require all parties to an account to opt out before the opt out becomes effective? If not, and only one of the parties opts out, should the opt out apply only to that party or should it apply to information about all parties to the account?

Paragraph (e) provides that a financial institution must comply with the customer's opt out as soon as reasonably practicable after receiving it. Paragraph (f) clarifies that a consumer has the right to opt out at any time. The Commission invites comment on whether the rules should specify a time within which an opt out must be honored.

Paragraph (g) states that an opt out will continue until it is revoked by the consumer in writing or, if the consumer agrees, electronically. When a customer relationship terminates, the customer's opt out direction continues to apply to the nonpublic personal information collected by the financial institution during or related to the relationship. If that individual subsequently establishes a new customer relationship with the financial institution, the opt out direction that applied to the former relationship does not apply to the new relationship and the institution must provide a new opt out notice to the customer in connection with the new relationship. The Commission invites comment on the likely burden of complying with the requirement to provide opt out notices, the methods financial institutions anticipate using to deliver the opt out notices, and the approximate number of opt out notices they anticipate delivering and processing.

Section 160.8 Revised Privacy Notices

This section sets forth the rules governing a financial institution's obligations in the event the institution changes its disclosure policies. As stated in this section, a financial institution may not directly or through an affiliate disclose nonpublic personal information to a nonaffiliated third party unless the institution first provides a revised notice and a new opportunity to opt out. The institution must wait a reasonable period of time before disclosing information according to the terms of the revised notice in order to afford the consumer a reasonable opportunity to opt out. A financial institution must provide a consumer the revised notice of its policies and practices and an opt out notice in a manner such that each consumer can reasonably be expected to receive actual notice, as provided in § 160.9.

Section 160.9 Delivering Privacy and Opt Out Notices

Paragraph (a) of proposed § 160.9 requires that any privacy and opt out notices provided by a financial institution be provided in a manner such that each consumer can reasonably be expected to receive actual notice in writing or, if the customer agrees, electronically. Paragraph (b) sets forth examples of reasonable expectation of actual notice, including, for example, hand-delivery to the consumer of a printed copy of the notice, mailing a printed copy of the notice to the last known address of the consumer, and, for a consumer who conducts transactions electronically, posting the notice on the electronic site and requiring the consumer to acknowledge receipt of the notice as a necessary step to obtaining the particular financial product or service.

Paragraph (c) describes additional examples of reasonable expectation of actual notice which apply only in the context of the annual privacy notice. A financial institution may reasonably expect that a customer who uses the institution's web site to obtain financial products and services will receive actual notice of the annual privacy notice if the customer has agreed to accept notices at the institution's web site and if the institution continuously posts a current notice of its privacy policies and practices in a clear and conspicuous manner on the web site. This paragraph also makes clear that a financial institution need not send the annual privacy notice to a customer who affirmatively requests no communication from the institution, provided that the notice is available upon request. Paragraph (d) prohibits financial institutions from providing privacy notices orally. Paragraph (e) clarifies that the requirement that a privacy policy be provided in a manner that permits a customer to retain or reaccess the policy may be satisfied if the financial institution makes available on its web site the privacy policy currently in effect.

Proposed § 160.9(f) expressly permits the provision of joint notice from two or more financial institutions as long as the notice is accurate with respect to all financial institutions and identifies each institution by name. The Commission believes that FCMs, CTAs, CPOs and IBs should be able to combine initial, annual, or revised disclosures in one document and to give, on a collective basis, a consumer only one copy of the notice. For example, a clearing FCM could provide a joint notice with an executing FCM for which it clears transactions on a fully disclosed basis, or an IB could provide a joint notice with the FCM to which it introduces trades. The Commission emphasizes that this notice must be accurate for each institution that uses the notice and must identify each institution by name.

Where two or more consumers jointly obtain a financial product or service from a financial institution, paragraph (g) of proposed § 160.9 permits the financial institution to satisfy the initial, annual and revised notice requirements of this section by providing one notice to those customers jointly. The Commission invites comment with respect to whether this provision is likely to provide a reasonable expectation of actual notice in all situations.

Subpart B—Limits on Disclosures

Section 160.10 Limits on Disclosure of Nonpublic Personal Information to Nonaffiliated Third Parties

Section 502(a) of the GLB Act generally prohibits a financial institution from sharing nonpublic personal information about a consumer with a nonaffiliated third party unless the institution provides the consumer with notice of the institution's privacy policies and practices. Section 502(b) further requires that the financial institution provide the consumer with a clear and conspicuous notice that the consumer's nonpublic personal information may be disclosed to nonaffiliated third parties, that the consumer be given an opportunity to opt out of that disclosure, and that the consumer be informed as to how to opt out.

Proposed § 160.10 implements these provisions by setting forth the criteria that a financial institution must satisfy before disclosing nonpublic personal information to nonaffiliated third parties and by defining “opt out” in a way that incorporates the exceptions to the right to opt out enunciated in proposed §§ 160.13, 160.14 and 160.15.

The proposed rule requires that the opportunity to opt out be “reasonable,” which recognizes that the appropriate waiting time before disclosure will vary depending on many factors including, for example, the method of delivery of the opt out notice. The examples that follow the general rule are intended to provide guidance in situations involving notices by mail and by electronic means and notices that are to be provided in the case of isolated transactions with a consumer. In the case of mail and electronic notices, the consumer will be considered to have had a reasonable opportunity to opt out if the financial institution provides 30 days in which to opt out. In the case of an isolated transaction, the opportunity will be reasonable if the consumer must decide as part of the transaction whether to opt out before completing the transaction. The Commission invites comment on whether 30 days is a reasonable opportunity to opt out in the case of notices sent by mail and by electronic means.

The requirement that a consumer have a reasonable opportunity to opt out does not mean that the consumer forfeits that right once the opportunity passes. As provided in proposed § 160.7(f), a consumer always has the right to opt out. If, however, a consumer does not exercise the opt out right when first presented with the opportunity, the financial institution would be permitted to disclose nonpublic personal information to nonaffiliated third parties during the period of time before it implements the consumer's subsequent opt out direction.

All customers are consumers under the proposed rules. Accordingly, paragraph (b) of proposed § 160.10 clarifies that the right to opt out applies regardless of whether a consumer has established a customer relationship with the financial institution. The fact that a consumer establishes a customer relationship with a financial institution does not change the institution's obligations to comply with the requirements of proposed § 160.10 before sharing nonpublic personal information about the consumer with nonaffiliated third parties. Importantly, the proposed rule applies as well in the context of a consumer who had a customer relationship with a financial institution and subsequently terminated the relationship. Paragraph (b) establishes that the consumer protections afforded by paragraph (a) apply to all nonpublic personal information collected by a financial institution, regardless of when collected. Thus, if a consumer elects to opt out of information sharing with nonaffiliated third parties, the election applies to all nonpublic information about the consumer in the financial institution's possession, regardless of when the information is obtained.

Paragraph (c) of proposed § 160.10 provides that a financial institution may—but is not required to—provide consumers with the option of a partial opt out in addition to the opt out required by this section. This option could enable a consumer to limit, for instance, the types of information disclosed to nonaffiliated third parties or the types of recipients of the nonpublic personal information about the consumer. If the financial institution elects to provide the partial opt out, it must state this option in a way that clearly informs the consumer about the choices available and the resulting consequences.

Section 160.11 Limits on Redisclosure and Reuse of Information

Section 502(c) of the GLB Act provides that a nonaffiliated third party that receives nonpublic personal information from a financial institution shall not, directly or through an affiliate, disclose the information to any person that is not affiliated with either the financial institution or the third party, unless the disclosure would be lawful if it were made directly by the financial institution. Proposed § 160.11 implements the GLB Act's restrictions on redisclosure and reuse of nonpublic personal information about consumers.

The GLB Act places the institution that receives the nonpublic personal information in the shoes of the institution that discloses the information for the purpose of determining whether redisclosures by the receiving institution are lawful. Thus, the GLB Act permits the receiving institution to redisclose the information to an entity to whom the original transferring institution could disclose the information pursuant to one of the exceptions in proposed § 160.14 or § 160.15, or to an entity to whom the original transferring institution could have disclosed the information as described under its notice of privacy policies and practices, unless the consumer has exercised the right to opt out of that disclosure. Because a consumer can exercise the right to opt out of a disclosure at any time, the GLB Act may effectively preclude third parties that receive information to which the opt out right applies from redisclosing the information other than under one of the exceptions in proposed §§ 160.13, 160.14 or § 160.15.

Sections 502(b)(2) and 502(e) of the GLB Act describe the circumstances under which a financial institution may disclose nonpublic personal information without providing the consumer with the initial privacy notice and an opportunity to opt out. Those exceptions apply only when the information is used for the specific purposes set forth in those sections which include, for example, disclosure as necessary to effect, administer, or enforce a transaction authorized by the consumer. Paragraph (a)(2) of proposed § 160.11 clarifies this limitation on reuse as it applies to financial institutions by providing that a financial institution may use nonpublic personal information about a consumer that it receives from a nonaffiliated financial institution in accordance with an exception under § 160.14 or § 160.15 only for the purpose of that exception. Paragraph (b)(2) applies the same restrictions on reuse to any nonaffiliated third party that received nonpublic personal information from a financial institution.

Section 160.12 Limits on Sharing Account Number Information for Marketing Purposes

Section 502(d) of the GLB Act prohibits a financial institution from disclosing, other than to a consumer reporting agency, account numbers or similar forms of access numbers or access codes for a credit card account, deposit account, or transaction account of a consumer to any nonaffiliated third party for use in telemarketing, direct mail marketing, or marketing through electronic mail to the consumer. Proposed § 160.12 applies this prohibition to disclosures made directly or indirectly as it has been applied by the Agencies, and incorporates the exceptions that have been established by the Agencies. Thus, the proposed rule provides for two exceptions. First, it permits an FCM, CTA, CPO or IB to disclose account numbers to an agent for the purposes of marketing the institution's financial products or services so long as the agent has no authority to initiate charges to the account. Second, it permits disclosure in a private-label credit card or an affinity or similar program where the participants in the program are identified to the customer when the customer enters into the program. As a matter of clarification, the proposed rule also contains an example that provides that an account number, or similar form of access number or access code, does not include a number or code in an encrypted form, as long as you do not provide the recipient with a means to decode the number or code.

Subpart C—Exceptions

Section 160.13 Exception to Opt Out Requirements for Service Providers and Joint Marketing

Section 502(b)(2) of the GLB Act creates an exception to the opt out rules for the disclosure of information to a nonaffiliated third party for its use to perform services for or functions on behalf of the financial institution, including the marketing of the financial institution's own products or services or financial products or services offered under a joint agreement between two or more financial institutions. A consumer will not have the right to opt out of disclosing nonpublic personal information about the consumer to nonaffiliated third parties under these circumstances if the financial institution satisfies certain requirements.

Before the information may be shared, section 502(b)(2) of the GLB Act requires the institution to (i) “fully disclose” to the consumer that it will provide this information to the nonaffiliated third party and (ii) enter into a contractual agreement with the third party that requires the third party to maintain the confidentiality of the information. Paragraph (a) of proposed § 160.13 would implement these provisions of the GLB Act by requiring the FCM, CTA, CPO or IB to (i) provide the initial notice required by proposed section 160.4 and (ii) enter into a contract that prohibits the third party from disclosing or reusing the information other than to carry out the purposes for which the information was disclosed, including use under an exception in proposed rules 160.14 and 160.15 in the ordinary course of business to carry out those purposes. The contract should be designed to ensure that the third party will maintain the confidentiality of the information at least to the same extent as is required for the financial institution that discloses it, and will use the information solely for the purposes for which the information is disclosed or as otherwise permitted under the proposed rules.

The Commission invites comment on any other requirements that would be appropriate to protect a consumer's financial privacy and on whether the rules should provide examples of the types of joint agreements that are covered.

Section 160.14 Exceptions to Notice and Opt Out Requirements for Processing and Servicing Transactions

Section 502(e) of the GLB Act creates exceptions to the requirements that apply to the disclosure of nonpublic personal information to nonaffiliated third parties. Paragraph (1) of that section provides certain exceptions for disclosures made in connection with the administration, processing, servicing and sale of a consumer's account. Proposed § 160.14 sets forth those exceptions and also the definition of “necessary to effect, administer, or enforce” contained in section 509(7) of the GLB Act.

These exceptions and the exceptions discussed in proposed § 160.15, below, do not affect a financial institution's obligation to provide initial notices of its privacy policies and practices at or prior to the time it establishes a customer relationship and annual notices thereafter. These notices must be provided to all customers, even if the financial institution intends to disclose the nonpublic personal information only under the exceptions in proposed § 160.14.

Section 160.15 Other Exceptions to Notice and Opt Out Requirements

As discussed above, the GLB Act contains several exceptions to the requirements that otherwise would apply to the disclosures of nonpublic personal information to nonaffiliated third parties. Proposed § 160.15 sets forth the exceptions that are not made in connection with the administration, processing, servicing or sale of a consumer's account.

Section 160.16 Protection of Fair Credit Reporting Act

Section 506(c) of the GLB Act states that, except for the amendments regarding rulemaking authority, nothing in Title V is to be construed to modify, limit or supersede the operation of the FCRA, and no inference is to be drawn on the basis of the provisions of Title V whether information is transaction or experience information under section 603 of the FCRA. Proposed § 160.16 implements section 506(c) of the GLB Act by restating the GLB Act with clarifying changes.

Section 160.17 Relation to State Laws

Section 507 of the GLB Act provides that Title V does not preempt any state law that provides greater protections than are provided by Title V. Determinations whether a state law or Title V provide greater protections are to be made by the FTC after consultation with the agency that regulates either the party filing a complaint or the financial institution about which the complaint was filed. Determinations of whether state or federal law affords greater protection may be initiated by any interested party or on the FTC's own motion.

Proposed § 160.17 is substantively identical to section 507, noting that the proposed rules (like the GLB Act) do not preempt state laws that provide greater protection for consumers than do the rules.

Section 160.18 Effective Date; Transition Rule

Proposed § 160.18 establishes an effective date for part 160 of June 21, 2001, which is the date by which the Commission is required to prescribe final rules implementing Title V. Consistent with the approach taken by the other Agencies, the Commission is proposing a compliance date of December 31, 2001, in order to provide financial institutions sufficient time to bring their policies and procedures into compliance with the requirements of the final rules. The Commission is also proposing a provision that phases in compliance with respect to existing service agreements.

Under the proposed rule, full compliance with the rules' restrictions on disclosures would be required by December 31, 2001. To be in full compliance, FCMs, CTAs, CPOs and IBs would be required to provide their existing customers with a privacy notice, an opt out notice, and a reasonable amount of time to opt out before that date. If these have not been provided, the disclosure restrictions would apply. This means that an FCM, CTA, CPO or IB would have to cease sharing customers' nonpublic personal information with nonaffiliated third parties on that date, unless it may share the information under an exception under § 160.14 or § 160.15. FCMs, CTAs, CPOs and IBs that both provide the required notices and allow a reasonable period of time to opt out before December 31, 2001, would be able to share nonpublic personal information after that date for customers who do not opt out.

Under the proposed rule, FCMs, CTAs, CPOs and IBs would not be required to give initial notices to customers whose relationships had terminated before the date by which institutions must be in compliance with the rules. Thus, if under a financial institution's policies an account is inactive before December 31, 2001, then no initial notice would be required in connection with that account. However, because these former customers would remain consumers, an FCM, CTA, CPO or IB would have to provide a privacy and opt out notice to them if the institution intended to disclose their nonpublic personal information to nonaffiliated third parties beyond the exceptions in §§ 160.14 and 160.15.

Section 160.30 Procedures to Safeguard Customer Information and Records

Section 501 of the GLB Act directs the Agencies to establish appropriate safeguards for financial institutions relating to administrative, technical and physical safeguards to protect customer records and information. Proposed § 160.30 implements this directive by requiring every FCM, CTA, CPO or IB that is subject to the jurisdiction of the Commission to adopt policies and procedures to address the safeguards described above. Consistent with the GLB Act, the proposed rule further requires that the policies and procedures be reasonably designed to: (i) Insure the security and confidentiality of customer records and information; (ii) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and (iii) protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

The Commission believes it is appropriate for each financial institution to tailor its policies and procedures to its own systems of information gathering and transfer and to the needs of its customers and has not prescribed specific policies or procedures that financial institutions must adopt. The Commission requests comment on whether the proposed standards should be more specific and, if so, what specifications would be appropriate to particular financial institutions.

III. General Request for Comments

The Commission requests comment on the proposed rules and suggestions for additional examples that may be appropriate to include in the rules. In light of the need to promulgate regulations by June 21, 2001—six months after the enactment of the CFMA—the Commission does not anticipate extending the comment period, and encourages commenters to submit their comments as early as possible during the comment period.

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission also requests information regarding the potential effect of the proposals on the U.S. economy on an annual basis. Commenters are requested to provide empirical data to support their views.

IV. Cost-Benefit Analysis

Section 15 of the Act requires the Commission to consider the costs and benefits of its action before issuing a new regulation under the Act. The Commission understands that, by its terms, section 15 does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the proposed regulation outweigh its costs. Nor does it require that each proposed rule be analyzed piecemeal or in isolation when that rule is a component of a larger package of rules or rule revisions. Rather, section 15 simply requires the Commission to “consider the costs and benefits” of its action.

Section 15 further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern: Protection of market participants and the public; efficiency, competitiveness, and financial integrity of futures markets; price discovery; sound risk management practices; and other public interest considerations. Accordingly, the Commission could in its discretion give greater weight to any one of the five enumerated areas of concern and could in its discretion determine that, notwithstanding its costs, a particular rule was necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act.

Proposed part 160 constitutes a package of related rule provisions. The Commission has considered their costs and benefits as a totality. The rules impose disclosure and procedural requirements that are either mandated by or fully consistent with the privacy provisions of the GLB Act and section 5g of the CEA, and thus impose no costs in addition to those already imposed. The Commission has considered the costs and benefits of this rule package in light of the specific areas of concern identified in section 15:

1. Protection of market participants and the public. The requirements to provide opt out notices and to protect customer information will benefit market participants and the public by protecting the privacy of their nonpublic personal information.

2. Efficiency and competition. The requirements to provide initial and annual privacy notices will benefit efficiency and competition by allowing customers to compare the privacy policies of financial institutions. The Commission's proposed rules also benefit efficiency and competition by allowing FCMs, CTAs, CPOs and IBs flexibility to distribute notices and to adopt policies and procedures to protect customer information that are best suited to the institution's business and needs.

3. Financial integrity of futures markets, price discovery and sound risk management practices. The proposed rules should have no effect, from the standpoint of imposing costs or creating benefits, on the financial integrity or price discovery function of the futures and options markets or on the risk management practices of FCMs, CTAs, CPOs or IBs.

4. Other public interest considerations. The proposed rules are designed to minimize the costs of compliance by providing maximum flexibility, consistent with legal requirements, for firms to design their own compliance systems. The Commission is proposing to allow FCMs that are affiliated with broker-dealers to comply with the Commission's rules by complying with the privacy rules of the SEC. This proposal should significantly reduce the compliance costs for those firms. Moreover, the proposed rules provide greater certainty to the private sector on how to comply with the GLB Act because they are consistent with and comparable to the rules adopted by the Agencies. The examples in the rules and the sample clauses in the appendix also should provide guidance on how the rules will be enforced with respect to FCMs, CTAs, CPOs and IBs.

After considering these factors, the Commission has determined to propose part 160 as discussed above. The Commission invites public comment on its application of the cost-benefit provision. Commenters also are invited to submit any data that they may have quantifying the costs and benefits of the proposed rules with their comment letters.

V. Related Matters

A. Paperwork Reduction Act of 1995

This proposed rulemaking contains information collection requirements within the meaning of the Paperwork Reduction Act of 1995 (PR”) (44 U.S.C. 3501 et seq.). The Commission has submitted a copy of this section to the Office of Management and Budget (OMB) for its review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

Collection of Information: Rules Relating to Part 160, Privacy of Consumer Financial Information, OMB Control Number 3038-AB68.

An agency may not conduct or sponsor, and a person is not required to respond to, an information collection unless it displays a currently valid OMB control number. The Commission is currently requesting a control number for this information collection from OMB.

The proposed regulation contains several disclosure requirements. The financial institutions covered by this regulation must prepare and provide the initial notice to all current customers and all new customers at the time of establishing a customer relationship (proposed § 160.4(a)). Subsequently, an annual notice must be provided to all customers at least once during a twelve-month period during the continuation of the customer relationship (proposed § 160.5(a)). The initial notice and opt out notice must be provided to a consumer prior to disclosing nonpublic personal information to certain nonaffiliated third parties. If a financial institution wishes to disclose information in a way that is inconsistent with the notices previously given to a consumer, the institution must provide consumers with revised notices (proposed § 160.8(c)).

The proposed regulation also contains consumer reporting requirements. In order for consumers to opt out, they must respond to the opt out notice (proposed §§ 160.10(a)(2), (a)(3)(i), and (c)). At any time during their continued relationship with the institution, consumers have the right to change or update their opt out status with the institution (proposed §§ 160.7(f) and (g)). The Commission believes that most, if not all, financial institutions will not share nonpublic personal information about consumers with nonaffiliated third parties and will not have to provide opt out notices to consumers or customers. Thus, the Commission estimates that the annual burden of responding to an opt out notice will be nominal. The Commission requests public comment on all aspects of the collections of information contained in this proposed regulation, including consumer responses to the opt out notice and consumer changes to their opt out status with a financial institution.

The initial and annual privacy notices are mandatory. The opt out notice is not mandatory for institutions that do not share nonpublic personal information with nonaffiliated third parties. The likely respondents are FCMs, CTAs, CPOs and IBs. The required notices are not submitted to the Commission, and there is no assurance of confidentiality of the collections of information. The Commission estimates that approximately 200 FCMs, 920 CTAs, 1400 CPOs and 1400 IBs will respond to the proposed regulation.

The estimated burden was calculated as follows:

Estimated number of respondents: 3,920

Reports annually by each respondent: 77

Total annual responses: 301,420

Estimated average number of hours per response: 0.27

Estimated number of hours of annual burden in fiscal year: 81,375

Frequency of response: Annually

Organizations and individuals wishing to submit comments on the information collection requirements that would be required by this proposed regulation should direct them to the Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10202, New Executive Office Building, 725 17th Street, NW., Washington, DC 20503; Attention: Desk Officer for the Commodity Futures Trading Commission.

The Commission considers comments by the public on this proposed collection of information in:

• Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use;
• Evaluating the accuracy of the Commission's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
• Enhancing the quality, usefulness, and clarity of the information to be collected; and
• Minimizing the burden of collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses.

OMB is required to make a decision concerning the collection of information contained in this proposed regulation between 30 and 60 days after publication of this document in the Federal Register. Therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. This does not affect the deadline for the public to comment to the Commission on the proposed regulation.

Copies of the information collection submission to OMB are available from the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC 20581, (202) 418-5160.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) requires that federal agencies, in proposing rules, consider the impact of those rules on small businesses. The rules proposed herein would affect all FCMs, CTAs, CPOs and IBs, including CPOs and CTAs that are exempt from registration requirements. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on small entities in accordance with the RFA. The Commission has previously determined that registered FCMs and registered CPOs are not small entities for the purpose of the RFA. With respect to IBs and CTAs, the Commission has stated that it is appropriate to evaluate within the context of a particular rule proposal whether some or all of the affected entities should be considered small entities and, if so, to analyze the economic impact on them of any rule. The Commission has decided to publish the following initial regulatory flexibility analysis and invites the public's comments on the proposed regulations' impact on small entities.

1. Reasons for the Proposed Regulation; Legal Basis for Rule

Section 5g of the Act, as added by section 124 of the CFMA, makes the Commission a Federal functional regulator for purposes of applying the provisions of Title V, Subtitle A of the GLB Act addressing consumer privacy to any FCM, CTA, CPO or IB that is subject to the Commission's jurisdiction with respect to any financial activity. In general, Title V requires financial institutions to provide notice to consumers about the institution's privacy policies and practices, restricts the ability of a financial institution to share nonpublic personal information about consumers to nonaffiliated third parties, and permits consumers to prevent the institution from disclosing nonpublic personal information about them to certain non-affiliated third parties by “opting out” of that disclosure. Title V also requires the Commission to establish appropriate standards for financial institutions subject to their jurisdiction to safeguard customer information and records.

Section 5g of the Act directs the Commission to prescribe regulations necessary to implement Title V's provisions within 6 months from the date the CFMA was signed into law (December 21, 2000). The Commission believes that a regulatory promulgation will give the private sector greater certainty on how to comply with the GLB Act and clearer guidance regarding how the privacy provisions will apply with respect to FCMs, CTAs, CPOs and IBs that are subject to the Commission's jurisdiction with respect to any financial activity.

2. Requirements of the Proposed Rules; Description of Small Entities to Whom Rules Would Apply

Because neither Title V of the GLB Act nor section 124 of the CFMA provide a general exception for small businesses, the proposed rules would apply to all FCMs, CTAs, CPOs and IBs, including those that are considered “small entities.”

Subject to certain exceptions explained below, the proposed rule generally requires that a financial institution that is subject to the Commission's jurisdiction with respect to any financial activity (i.e., an FCM, CTA, CPO or IB) provide all of its customers the following notices: (1) An initial privacy notice (at or prior to the time the customer relationship is established or, for existing customers, within 30 days of the rules' effective date); (2) an opt out notice (prior to the disclosing of the individual's nonpublic personal information to nonaffiliated third parties); and (3) an annual privacy notice for the duration of the customer relationship. A financial institution's “customer” is a consumer with whom the institution has a “continuing relationship.” A continuing relationship exists, for example, when a consumer (i) has an account with an FCM; (ii) has an advisory contract with a CTA; or (iii) is a participant in a commodity pool.

The proposed rules also require a financial institution to provide its consumers an initial privacy notice and an opt out notice prior to disclosing the individual's nonpublic personal information to nonaffiliated third parties. If a financial institution does not intend to share such information about its consumers, then the institution need not provide either notice. An institution's “consumer” includes a customer as well as an individual who has not established an ongoing relationship with a financial institution, such as an individual who applies for a financial product or service but does not obtain it, or an individual who has an FCM execute a trade without opening an account for the individual (e.g., in a give-up trade).

There are many exceptions to the general rule stated above. An institution may share a consumer's nonpublic personal information with nonaffiliated third parties without having to give a privacy and opt out notice if, for example, such sharing is necessary: (1) To effect, administer, or enforce a transaction requested or authorized by the consumer; (2) to protect the security of records pertaining to the consumer, service, product, or transaction; (3) to protect against or prevent actual or potential fraud, unauthorized transactions, claims or other liability; or (4) to provide information to rating agencies or the institution's attorneys, auditors, and accountants. In addition, in cases where a financial institution enters into a contract with a nonaffiliated third party to undertake joint marketing or to have the third party perform certain functions on behalf of the institution, the institution need not give an opt out notice. In such case, the institution must disclose to the consumer that it is providing the information and enter into a contract with the third party that restricts the third party's use of the information and requires the third party to maintain confidentiality of the information.

Compliance requirements will vary depending, for example, upon an institution's information sharing practices, whether the institution already has or discloses a privacy policy, and whether the institution already has established an opt-out mechanism. A financial institution would have to summarize its practices regarding its collection, sharing, and safeguarding of certain nonpublic personal information in its initial and annual notices. However, the institution may streamline its privacy notice, if it does not share that information (or shares only to the extent permitted under the exceptions). The Commission believes that a majority of financial institutions already have privacy policies in place either as part of usual and customary business practices, or as a result of initiatives undertaken to comply with the privacy provisions issued by the other Federal functional regulators. Thus, for these institutions, the costs for translating that policy into a notice format should be minimal.

Further, to minimize the burden and costs of distributing privacy policies, the proposed rules do not specify the method for distributing required notices. For example, an FCM or CTA may include an annual privacy notice with periodic account statements that the FCM or CTA already sends to the customer. Customers of an IB may be provided a joint notice by the FCM carrying the customer accounts that would be applicable for both the FCM and the IB. The initial privacy notice also may be provided with other required disclosure statements, such as the risk disclosure document required under Commission Rule 1.55. The Commission estimates that the costs of distributing the notices will be minimal because institutions would include them in account statements or disclosures that the institution already sends to consumers and customers. In addition, the institution may deliver the required notices electronically with customer consent.

The Commission understands that most, if not all, FCMs, CTAs, CPOs and IBs currently do not share nonpublic personal information about consumers with nonaffiliated third parties except as would be consistent with one of the many exceptions in the proposed rules. The Commission also understands that those institutions that do share information under one of the permitted exceptions generally have contract provisions that prohibit the third party's use of the information for purposes other than the purpose for which the information was shared. Thus, the Commission believes that as a result of the proposed rules, most if not all financial institutions will not have to provide opt out notices to consumers or customers, and will not need to revise their contracts with nonaffiliated third parties to restrict those parties' use of information.

Section 501 of the GLB Act directs the Commission, and the other Federal functional regulators, to establish appropriate standards for administrative, technical and physical safeguards to protect customer records and information. The proposed rules implement this section by requiring every FCM, IB, CPO and CTA to adopt policies and procedures to address these safeguards. Consistent with the GLB Act, the proposed rules further require that the policies and procedures be reasonably designed to: (i) Insure the security and confidentiality of customer records and information; (ii) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and (iii) protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

The Commission believes that most, if not all, financial institutions already have policies and procedures to address the safety and confidentiality of consumer records and information. Nevertheless, financial institutions may review and revise their policies after the rules are adopted. The amount of time an institution will spend reviewing and revising its policies will depend, among other things, on the institution's current policies and its sharing practices. The rules do not specify the means by which institutions must ensure the safety of customer information and records in order to allow each institution to tailor its policies and procedures to its own systems of information gathering and transfer, and the needs of its customers. The Commission has estimated that a financial institution would spend 15 hours on average to revise its procedures.

Professional skills needed to comply with the proposed rules may include clerical, computer systems, personnel training, as well as legal drafting and advice. The information collection requirements imposed by the GLB Act, the CFMA, and the proposed rules are further addressed in the section titled, “Paperwork Reduction Act.”

3. Relevant Federal Rules Which May Duplicate, Overlap or Conflict With the Proposed Rule

While the scope of the proposed regulation (pursuant to the GLB Act and the CFMA) is unique, there may be some overlap in certain circumstances with the following laws: As noted above, the Fair Credit Reporting Act requires a financial institution that (i) does not want to be treated as a consumer reporting agency and (ii) desires to share certain consumer information (i.e., application or credit report information) with its affiliates, to provide the consumer with a clear and conspicuous notice and an opportunity to opt out of the information sharing. In addition, when a consumer contracts for an electronic fund transfer service, the Electronic Funds Transfer Act requires the financial institution to disclose the terms and conditions of the transfer, including under what circumstances the institution will share information concerning the consumer's account with third persons. The recently adopted Department of Health and Human Services regulations that implement the Health Insurance Portability and Accountability Act of 1996 limit the circumstances under which medical information may be disclosed. Finally, the Children's Online Privacy Protection Act generally requires online service operators collecting personal information from a child to obtain parental consent and post a privacy notice on the web site. The Commission seeks comment on additional Federal rules that may duplicate, overlap, or conflict with the proposal.

4. Significant Alternatives to the Proposed Rules That Minimize the Impact on Small Entities

The RFA directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. As previously noted, the proposed rules' requirements are expressly mandated by the GLB Act and the CFMA. The proposed rules attempt to clarify, consolidate, and simplify the statutory requirements for all financial institutions, including small entities. The proposed rules also provide substantial flexibility so that any financial institution, regardless of size, may tailor its practices to its individual needs. While the Commission may grant exceptions to the provisions of Title V of the GLB Act pursuant to its broad exemptive authority under section 4(c) of the Act, the Commission must first determine that the exemption would be consistent with the public interest. As stated in section 501(a) of the GLB Act, “It is the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers' nonpublic personal information.” (Emphasis added.) Accordingly, the Commission believes that an exception that would create different levels of protections for consumers based on the size of the institution with whom they conduct business would not be consistent with the public interest or the purposes of Subtitle A. The Commission welcomes comment on any significant alternatives, consistent with the GLB Act, that would minimize the impact on small entities.

List of Subjects in 17 CFR Part 160

• Brokers
• Consumer protection
• Privacy
• Reporting and recordkeeping requirements

Text of Proposed Rules

For the reasons articulated in the preamble, the Commission proposes to amend Title 17 of the Code of Federal Regulations by adding a new part 160 to read as follows:

PART 160—PRIVACY OF CONSUMER FINANCIAL INFORMATION

Appendix to Part 160—Sample Clauses

Authority: 7 U.S.C. 7g and 8a(5); 15 U.S.C. 6801 et seq.

Subpart A—Privacy and Opt Out Notices

Subpart B—Limits on Disclosures

Subpart C—Exceptions

Subpart D—Relation to Other Laws; Effective Date