REPORT FROM COUNSEL
In the Fair and
Accurate Credit Transactions Act of 2003 (FACTA),
Congress required the adoption of rules for the
proper disposal of consumer report information
and records. The legislation was prompted by the
growing risk of consumer fraud and related
problems, including identity theft, that arise
from the improper disposal of consumer
information for which there is no longer a
business need or purpose. FACTA and the rule
stemming from it are meant to make it tougher
for dumpster divers and miners of computer data
to profit from sloppy disposal methods.
The Federal
Trade Commission's Disposal Rule went into
effect June 1, 2005, but affected businesses
will have six months from that time to come into
compliance. After that, failure to comply could
trigger a range of civil enforcement actions by
the Government or affected consumers.
While there is
room for interpretation of the Disposal Rule's
meaning, and how it should be applied as
circumstances change, the Rule's essential
standard is all in one sentence:
Any person
who maintains or otherwise possesses consumer
information for a business purpose must properly
dispose of such information by taking reasonable
measures to protect against unauthorized access
to or use of the information in connection with
its disposal.
What Is Covered?
Consumer
information covered by the Rule means any record
about an individual, in any form, that is a
consumer report or is derived from a consumer
report. The definition includes a compilation of
such records. If the information does not in
some fashion identify individuals, however, such
as information in aggregate form, the Disposal
Rule does not apply. The obvious ways in which
individuals may be identified are names, Social
Security numbers, driver's license numbers,
telephone numbers, physical addresses, and
e-mail addresses. But even pieces of information
that, by themselves, do not identify someone
can, in combination, be regarded as identifying
information.
Who Is Covered?
The Rule was
intentionally written broadly to apply
essentially to any "person" maintaining or
possessing consumer information other than an
individual who has obtained his own consumer
report. Some entities that commonly obtain
consumer credit information include consumer
reporting agencies, lenders, insurers,
employers, landlords, government agencies,
mortgage brokers, financial institutions, and
automobile dealers. This is far from an
exhaustive list. If an entity can obtain a
consumer report for one or more of the business
purposes mentioned in the Fair Credit Reporting
Act, it is safe to assume that the entity and
the information it obtained are subject to the
Disposal Rule. Disposal and records management
companies also fall under the Rule.
Reasonable
Measures
The Rule uses
the flexible term "reasonable measures" to
describe the duty regarding disposal because
perfect destruction of consumer information in
every instance is unattainable. Variables that
may be taken into account include the
sensitivity of the information, the nature and
size of the entity's operations, the costs and
benefits of different disposal methods, and
ongoing changes in technologies. It is also
noteworthy that the concept of "disposal" also
covers the sale, donation, or transfer of any
medium on which consumer information is stored.
The Rule
provides a nonexhaustive set of examples of
"reasonable measures." To prevent the reading or
reconstruction of records in paper form,
policies should be adopted, and their
implementation monitored, for the burning,
pulverizing, or shredding of such papers. The
same approach is advisable for policies on
destruction or erasure of electronic media.
Since simply deleting information stored on a
computer is usually insufficient to safeguard
the information, use of some low-tech methods of
destruction on some high-tech methods of storing
information may be in order. For example, the
Federal Trade Commission has suggested, at least
for small businesses, the nearly cost-free
method of disposing of electronic media by
smashing the material with a hammer.
A covered
person's due diligence also should extend
outside the office when disposal of information
is contracted out to a provider of such a
service. One of the "reasonable measures"
mentioned in the Rule refers to taking steps to
determine the competency and integrity of the
disposal company, such as reviewing an
independent audit of the company, getting
references, requiring that the company be
certified by a trade association, or reviewing
and evaluating the disposal company's policies
and procedures on information security.
The wisdom of
making a will is well settled as sound legal
advice, and rightly so. Less talked about, but
equally advisable for many people, is the use of
gifts during one's lifetime as a method for
estate planning. Apart from the intangible
benefits that flow from the fact that, as the
saying goes, it is more blessed to give than to
receive, gifting has favorable down-to-earth,
dollars-and-cents ramifications.
Gifts reduce the
size of the donor's estate that will be subject
to court administration, thereby cutting probate
costs and potential estate tax liability. Less
obvious, but equally advantageous, is the way
that gifts can provide savings on income taxes.
This occurs when income-producing property is
given by an individual in a high income tax
bracket to someone in a lower tax bracket.
Gifts do not
trigger income tax liability for the recipient.
However, the original cost, or basis, of the
gift remains for the recipient what it was for
the donor. As a result, if the recipient later
sells the property, he generally will owe
capital gains tax on the difference between the
donor's basis and the sales price.
As for the gift
tax, the starting point to consider is that the
federal Government levies the tax on transfers
of real or personal property made during the
giver's lifetime where something of similar
value is not received in return. For tax
purposes, the dollar value of a gift is the fair
market value of the property when it is given,
less the fair market value of anything received
in return. The donor is liable for any gift tax
that is due, but if the donor does not pay the
tax the donee becomes personally liable.
An annual
exclusion of up to $11,000 is available for
transfers to other persons without payment of
the federal gift tax. Rather than pay the gift
tax on gifts over $11,000, the donor can choose
to exempt as much as $1 million in gifts above
this exclusion over his lifetime. The donor does
not need to file a federal gift tax return for
gift amounts less than $11,000. Because the
exclusion amount is per donee, any one donor
actually can make gifts in a large total amount,
without incurring a gift tax, by giving to many
different recipients. For a married couple, the
annual exclusion is $22,000 per donee.
There is an
unlimited marital deduction provision in the
federal gift tax law, so that no gift tax is
due, and no return need be filed, for gifts
between spouses in any amount. Also excluded
from the gift tax are amounts paid by a donor to
a qualified educational institution for
another's tuition, or to a health-care provider
for someone's medical services. Gifts to
qualified charitable, religious, and educational
entities, government agencies, and many
organizations with tax-free status are not
subject to the gift tax.
This article
merely introduces the subject of the gifting of
property. Estate planning techniques and tax
laws are complex. You should always consult with
a qualified professional to assist you in such
matters.
In banking as in
so many other areas, the trend is clear: We
continue to move steadily away from traditional
paper transactions toward high-tech means of
conducting our business. It will not happen
overnight, though, and even the most
technophobic among us should be assured that
there are some federal laws and regulations in
place that will make the transition easier and
more secure.
Electronic Fund
Transfer Act
The methods for
electronic fund transfers (EFTs) are already
commonplace for many bank customers. They
include ATMs, debit or check cards,
preauthorized deposits and withdrawals, and
telephone transfers. The federal Electronic Fund
Transfer Act answers some basic questions about
using EFT services. The Act is especially
important when things go wrong, providing rules
for the correction of errors and dealing with
loss or theft.
Financial
institutions must provide documentation of EFTs
in two forms: terminal receipts and periodic
statements. Among other pieces of information,
both documents must include the type of
transfer, the amount and date of the
transaction, and the location of the terminal.
For preauthorized transfers that occur at
regular intervals, the institution must provide
a notice that the transfer occurred as
scheduled.
As with credit
cards, financial institutions must investigate
and promptly correct any EFT errors reported by
the consumer, but there are some differences in
the details. For errors like unauthorized or
incorrect EFTs, or omission of an EFT from a
statement, a consumer should contact the
institution as soon as possible, and no later
than 60 days after receiving the statement
showing the error. As a general rule, the
institution must promptly investigate and
resolve the matter within 45 days. If more than
10 days pass, it must make the correction,
subject to the results of the investigation.
Such a recredit is made final if the institution
finds an error; if it does not, it must explain
the outcome of its investigation in writing to
the consumer.
Loss Limits
If your credit
card is lost or stolen, your loss is limited to
$50 per card. That is also the general rule for
an EFT card or code, but with the important
caveat that procrastination in reporting a lost
or stolen EFT card or code can be much more
expensive. The exposure limit jumps to $500 for
a consumer who does not report the loss or theft
within two days of learning of it. Not only
that, but failure to report an unauthorized
transfer within the 60-day period for doing so
creates unlimited exposure to losses from
transfers made after the 60-day period.
Proceed with
Caution
The federal
Government provides some EFT protection for old
hands and novices alike, but the best approach
is to combine that protection with your own safe
practices. Keep a low profile for thieves and
scam artists by protecting your personal
information, such as bank account numbers,
passwords, and Social Security numbers. Never
respond with such information to unsolicited
telephone calls or e-mails. Verify the
legitimacy of a website address before providing
personal information on the site. It is a good
idea to have virus protection and a "firewall"
on your computer to keep hackers out. Finally,
keep good banking records and review each bank
statement promptly so that you can report
anything suspicious you see in time for it to do
you the most good.
The Internal
Revenue Service has created a free CD-ROM that
is designed to help small businesses establish
and maintain retirement plans for employees.
Sections on setting up contributions,
investments, and distributions have information
not only from the IRS, but also from the
Securities and Exchange Commission, the Federal
Deposit Insurance Corporation, and the Social
Security Administration. Some of the contents of
the CD-ROM include:
* Rules for
traditional and Roth IRAs, as well as other
retirement plans;
* Investing your
IRA;
* Publications
and forms;
* Retirement
calculator;
* Video clips on
retirement planning;
* Frequently
asked questions;
* Research
material on IRAs; and
* Links to more
retirement information on government websites.
You can order
the CD-ROM online at www.irs.gov/retirement
or call toll-free 800-829-3676 and request
Publication 4395.
When someone
buys a home, in addition to the land, bricks,
and wood, the buyer receives the legal title to
the property. If the title is defective, it
could interfere with enjoyment of the property
and result in financial loss. When title
insurance is purchased by a property owner, the
insurer guarantees that the owner has clear
title to the property, free of claims or
encumbrances.
Title insurance
begins with a search of land records tracing the
property's "chain of title" back in time through
previous owners. A title search should reveal
any legal documents that do not clearly pass
title, such as where incorrect names or notary
acknowledgments appear, as well as outstanding
mortgages, judgments, or tax liens. Even a
thorough search by an experienced title examiner
cannot be absolutely certain to detect every
problem, however. Title insurance protects
against the unseen hazards that may not surface
until long after property is purchased. Some of
the risks against which title insurance gives
protection include: a forged deed that transfers
no title to the property; previously undisclosed
heirs with claims against the property; and a
legal document executed under an invalid or
expired power of attorney.
A title
insurance policy protects the insured party,
such as the home buyer or the buyer's mortgage
lender, against losses suffered if the title is
found to be defective, even after a search of
land records suggests no problems. Lenders'
title insurance decreases and eventually is
discontinued as the loan is paid off. Owners'
title insurance, issued in the amount of the
purchase price, lasts as long as the insured has
an interest in the property.
As with any
other insurance policy, the fine print in a
title insurance policy must be examined with
care. Typically, there are exclusions or
exceptions from coverage. For example, the
effects of governmental laws, ordinances, and
regulations are generally excluded. You also
should be aware of two other common policy
provisions. The first is a standard arbitration
clause, requiring binding arbitration to resolve
any dispute under a specified dollar limit. The
second provision, a "co-insurance" clause,
states that the owner must obtain increased
coverage if the insured property is improved in
order to furnish the same level of protection.
Title insurance
protection takes various forms. The insurer will
negotiate with third parties about their claims
against the insured property, pay for defending
against an attack on the title, and pay claims
if necessary. Title insurance also helps to make
sure that a dream home will not become a legal
nightmare for the home buyer.
A two-hour photo
shoot paying $250 has turned into a jury verdict
of over $15 million for the model, but it took
almost 20 years and some good luck for it to
happen. Russell had his photo taken for use on
labels by a major coffee maker. He did not think
much more about it until many years later, when
he saw the photo of himself savoring a cup of
coffee.
According to the
modeling agreement, which Russell had kept in
his records, he was supposed to be paid
additional sums if the photo was actually used
in marketing. The company had never paid more
money to Russell, even though his photo had
ended up on countless jars of coffee around the
world for a six-year period. Nor did the company
get his permission for the use of his image.
The jury award
was based not just on the company's obligations
under the agreement, but also on a percentage of
the profits derived from the use of the image.
Russell was able to show that his face,
appearing as it did in all kinds of advertising,
not just the jars of coffee, helped to sell a
lot of coffee. As a result, the company's
misappropriation of his image carried a very big
price tag.
"Supposing
is good, but finding out is better."
Mark Twain
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