CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2005 No.6 November 7, 2005

Vol 2005 No.6 November 7, 2005

Effect of SB 1 Decisions on SB 27

The federal district court's recent decision to enjoin enforcement of the affiliate sharing provisions of SB 1, the California Financial Privacy Act, is likely to likewise invalidate SB 27, passed in 2003 and effective January 1 this year, to the extent that it applies to disclosures among affiliated entities. SB 27 was passed on the heels of SB 1 as a companion bill to extend consumer privacy rules to businesses generally. Unlike SB 1, SB 27 does not require companies to provide customers with a notice and right to opt out of a disclosures of customer information to third parties, including affiliates. SB 27 requires only that if a company makes such a disclosure for direct marketing purposes it must, upon request, provide the customer with a list of the categories of information disclosed and the name and address of the receiving entity.

SB 27 included an exception for banks that are in compliance with SB 1. Anticipating the potential preemption of the affiliate-sharing provisions of SB 1, the drafters of SB 27 provided that the bill does not apply to an institution that "is in compliance with" certain provisions of SB1 (including 4053(b)(1), the affiliate sharing provision) "as those sections read when they were chaptered on August 28, 2003" or amended by the "Legislature or by initiative."1 The intent was to clarify that a financial institution is not required to comply with SB 27 only if it is "in compliance with" the stated sections of SB1, regardless of what happened to SB1 after August 28, 2003. By its terms, a bank that does not comply with SB 1 would be deemed to be outside of this SB 27 exception.

1) See Civil Code Section 1798.83(h).

However, the SB 1 decisions should preempt SB 27 in the same way that they preempt SB 1 to the extent that SB 27 applies to the disclosure of information to affiliates. The requirements of SB 27 clearly relate to the disclosure of information to affiliates, and thus should be invalid pursuant to the existing FCRA preemption. Moreover, SB 27 should also be preempted under the same rationale by the affiliate marketing provision of the FACT Act when that provision becomes effective. The rules implementing this provision were expected earlier this year, but should be issued soon.

Note that, as with SB 1, SB 27 still applies to disclosures to non-affiliated third parties. But banks need not comply as long as they comply with SB 1 relating to third party disclosures.

On November 3, 2005, the State Attorney General and the Commissioner of Corporations filed a notice of appeal with the Ninth Circuit, which means that this case is not yet over. The notice of appeal does not affect the district court's injunction, which means that for now the affiliate sharing provisions of SB 1 are inapplicable.

If you have any questions, you may contact Leland Chan at lchan@calbankers.com.