[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
     THE ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 1714

                               __________

                             JUNE 24, 1999

                               __________

                           Serial No. 106-33

                               __________

            Printed for the use of the Committee on Commerce


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 58-213CC                    WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Callcott, W. Hardy, Senior Vice President and General 
      Counsel, Charles Schwab & Co., Inc.........................     8
    Hogan, Michael J., Senior Vice President and General Counsel, 
      DLJdirect Inc..............................................    12
    Quick, Thomas C., President and COO, Quick & Riley/Fleet 
      Securities, Inc............................................    19

                                 (iii)



     THE ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT

                              ----------                              


                        THURSDAY, JUNE 24, 1999

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Gillmor, Bilbray, 
Lazio, Shimkus, Shadegg, DeGette, Luther, and Capps.
    Staff present: Paul Scolese, professional staff member; 
David Cavicke, majority counsel; Brian McCullough, professional 
staff member; Betsy Brennan, staff assistant; and Consuela M. 
Washington, minority counsel.
    Mr. Oxley. The subcommittee will come to order. The 
Internet has been called the most significant technological 
development since the discovery of electricity. It is a medium 
that poses great opportunities for education, communication, 
and commerce. Commerce on the Internet is projected to grow 
exponentially to hundreds of billions of dollars in 
transactions by 2002. The Internet poses significant 
opportunities for more Americans to become directly involved in 
the capital markets.
    The securities industry has responded to this opportunity 
with proliferation of on-line trading brokers. Today, millions 
of Americans trade securities on-line. The cost savings to 
investors are significant. Full service brokerage costs as much 
as $400 per trade. On-line brokerage is less than $10 per trade 
at some firms.
    The law needs to keep up with this significant 
technological development. H.R. 1714 called E-Sign, is designed 
to bring legal certainty to electronic transactions. The 
legislation states that contracts shall not be deemed invalid 
because they are authenticated electronically, rather than the 
old fashion way, with a handwritten signature.
    Technology companies are working on a variety of 
authentication technologies that will help to verify the 
identity of parties on the Internet. This will allow a contract 
or agreement to be electronically signed or ensure that 
transactions between parties take place in a safe environment.
    Title 3 of the bill, which is the subject of today's 
hearing, specifically addresses the use of electronic 
signatures and electronic records in the securities industry. 
Title 3 is designed to meet the specific needs of electronic 
brokerage. One goal is to allow customers to open accounts on-
line without the need of physically signing a brokerage 
agreement and mailing it back to the broker. Title 3 of the 
legislation modernizes the securities laws by providing that 
requirements for a writing can be satisfied by an electronic 
signature.
    The legislation does not endorse any particular electronic 
authentication technology. We think the market is the best 
place to decide that.
    Our witnesses today are leaders in the electronic brokerage 
industry. They will educate us on the role of technology and 
electronic signatures in facilitating transactions in the 
digital economy.
    I look forward to their testimony and the Chair yields 
back.
    [Additional statements submitted for the record follow:]
 Prepared Statement of John Shadegg, a Representative in Congress from 
                          the State of Arizona
    Thank you Mr. Chairman, I commend Chairman Bliley and Chairman 
Oxley for their leadership on the issue of electronic authentication, 
or ``digital signature.'' I am confidant this legislation allows 
companies engaged in online securities trading greater ease and 
efficiency by validating the legal use of electronic or digital 
signatures. Furthermore, H.R. 1714 provides added protections for 
personal financial information that could be compromised during 
electronic commerce transactions.
    In the last three years, electronic commerce has advanced to a 
billion dollar a year industry. Today, consumers can purchase plane 
tickets and even trade securities online. Digital signature technology 
is quickly becoming more prevalent to create a valid legal contract and 
protection information shared between two entities whose sole 
interaction exists on the Internet.
    This issue is significant for the 4th Congressional District of 
Arizona and exponential economic growth of the City of Phoenix. Charles 
Schwab & Company, the foremost authority on Internet securities 
trading, operates its main computer facility and online securities 
trading business out of its Phoenix offices. As this panel will hear 
from Mr. Hardy Callcott, Senior Vice President and Chief Counsel at 
Charles Schwab, since 1996, Charles Schwab's online securities industry 
has grown to over 2.5 million online accounts and roughly $2 billion of 
Internet trading a day.
    Over 40 states, including Arizona, have enacted laws addressing the 
use of digital signatures in some form. The Arizona law deals 
specifically with electronic filing of court documents and online 
filings with the Secretary of State's Office. However, the law does not 
address electronic commerce or, more importantly, securities trading.
    Several forms of electronic signature have been adopted by various 
states. The most widely accepted forms rely upon a Certification 
Authority. Simply put, a Certification Authority is a third party 
entity that issues digital certificates to each applicant in order to 
verify the digital signature issued for electronic commerce or 
securities transactions.
    The need for federal legislation and creation of a uniform 
electronic signature framework is best demonstrated by the fact that no 
two current state digital signature laws are alike. This lack of 
uniformity and the reality that the Internet transcends any geographic 
boundaries further validate the need for a national framework included 
in H.R. 1714.
    Mr. Chairman, earlier this year, this subcommittee in conjunction 
with the Subcommittee on Telecommunications, Trade and Consumer 
Protection, conducted a hearing on the issue of identity theft. As the 
sponsor of identity theft legislation which was enacted into law in 
October of 1998, I strongly advocate additional efforts by Congress to 
protect consumers' personal and financial information. I believe the 
framework proposed in H.R. 1714 will build on the protections afforded 
to victims of identity theft by providing a means to prevent theft of 
personal or financial information on the Internet.
    I strongly support H.R. 1714 and believe a national framework for 
digital signatures is the best method for providing legal validity to 
online securities trading and protecting the sensitive information used 
in electronic commerce. I am looking forward to hearing from the 
assembled panel of witnesses, including Mr. Callcott of Charles Schwab, 
on the current status of online securities trading and the need for a 
uniform electronic signature framework.
    Thank you and I yield back the balance of my time.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you Mr. Oxley.
    The electronic brokerage industry is one of the shining examples of 
the success of electronic commerce. A few short years ago allowing 
individuals to trade stocks over the Internet was just an idea in the 
minds of entrepreneurs.
    Today, millions of Americans are now managing family finances or 
their retirement portfolios using the Internet.
    Increasingly, we are seeing more and more complex transactions take 
place on line. Electronic commerce is not just about buying books and 
CDs online, we are now seeing people use the Internet to purchase 
automobiles, life insurance and to apply for a mortgage.
    As the value and complexity of online transactions grow, the need 
for knowing that the transaction is legally binding becomes even more 
important.
    Fortunately, industry is working on a variety of electronic 
authentication technologies that will help verify the identity of 
parties on the Internet, allow a contract or agreement to be 
electronically signed and ensure that transaction between these parties 
take place in a safe and secure environment.
    While the technology is moving forward, the law is not.
    Currently the legal status of an electronic signature used to seal 
an online transaction is unclear. To date, forty-four states have 
enacted some sort of law to provide legal recognition to an electronic 
signature. Unfortunately, no two laws are the same--some only recognize 
electronic signatures used on government filings, while some laws only 
recognize an electronic signature generated by a specific technology.
    Because of this patchwork of laws, industry is hesitant to widely 
use electronic authentication. For unfettered interstate commerce to 
occur, businesses and consumers must have a single nationwide standard 
so that all online transactions enjoy the same legal protection 
regardless of the location of the parties.
    This is where H.R. 1714 comes in. By clarifying the legal 
uncertainty surrounding the acceptance of electronic signatures and 
records in interstate commercial transactions, more businesses will use 
electronic signatures and consumers will feel more comfortable doing 
business online.
    Title 3 of the bill, which is the subject of today's hearing, 
specifically addresses the use of electronic signatures and electronic 
records in the securities industry. The Committee wanted to acknowledge 
the broad federal reach of our nation's securities laws by recognizing 
the importance of electronic signatures to the securities industry.
    It is also important to point out that H.R. 1714 does not endorse a 
specific technology or limit the types of companies that can offer 
electronic signature services. These are decisions that should be left 
to the marketplace, not to Congress.
    Our witnesses today, representatives of leading online brokers, 
will tell this subcommittee about the role electronic signatures will 
play in providing their customers with new and better services.
    Anyone who has opened a brokerage account, established an IRA or 
had money wired from one account to another knows how much paperwork is 
involved. By using electronic signature technology, brokers could do 
away with the blizzard of paperwork, and customers will know that their 
transactions are safer and more secure.
    I want to thank all of our witnesses for appearing at this hearing 
and I want to thank you Mr. Oxley for holding this hearing.
    I yield back the balance of my time.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, I commend you for holding this hearing and I thank 
you for keeping the record open for inclusion of statements by Members 
who were unable to attend the hearing.
    I congratulate both my good friends Chairman Bliley and Ms. Eshoo 
for their legislative leadership in the important matter of electronic 
signatures.
    This hearing focuses on title III of Chairman Bliley's bill, H.R. 
1714. This title amends the federal securities laws to ensure that 
contracts, agreements, and records will be legally valid if signed in 
electronic form. The provision preempts ``any State statute, 
regulation, or rule of law.''
    As I stated at the June 9 hearing in the Subcommittee on 
Telecommunications, Trade, and Consumer Protection on titles I and II 
of this bill, I believe that this is an important issue and that 
carefully crafted legislation is appropriate. I agree with the 
witnesses that such legislation will provide efficiencies and cost 
savings for industry and for investors. However, I have some concerns 
with the preemption provisions as well as broader technical concerns 
with H.R. 1714. I therefore have requested the views of the Securities 
and Exchange Commission and the North American Securities 
Administrators Association to assist us in addressing these matters. 
That letter request accompanies my statement. I request that it and the 
responses also be included in the hearing record.
    I understand that the industry witnesses are pressing the Committee 
to act on this legislation this Summer. I hope that we will take the 
time to address outstanding concerns and improve the language as we 
move forward. I pledge to work with Chairmen Bliley and Oxley to that 
end. In addition, it has been argued by some that electronic signatures 
will somehow defeat crooks and stop fraud. I harbor no such illusions. 
Digital signatures no doubt will slow down some illegal behaviors. 
However, crooks have computers too and, as we know from today's 
headlines, the ability to crack codes and break into systems exists. 
Fraud, electronic and otherwise, is on the rise and will continue to be 
a constant battle for industry and regulators whether we adopt this 
legislation or not.
                                 ______
                                 
                      U.S. House of Representatives
                                      Committee on Commerce
                                                      June 24, 1999
The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Mr. Philip A. Feigin
Executive Director
North American Securities Administrators Association, Incorporated
10 G Street, N.E., Suite 710
Washington, D.C. 20002
    Dear Chairman Levitt and Mr. Feigin: Today the Committee's 
Subcommittee on Finance and Hazardous Materials held a hearing on H.R. 
1714, the Electronic Signatures in Global and National Commerce Act. 
The purpose of this legislation is to facilitate the use of electronic 
records and signatures in interstate and foreign commerce. I am 
transmitting a copy of that legislation along with the background 
material and the testimony of the three industry witnesses.
    I am writing to request your views and technical assistance on H.R. 
1714 for inclusion in the hearing record and to guide us in processing 
this legislation. Your assistance is especially needed on title III 
(use of Electronic Records and Signatures Under Federal Securities Law) 
which amends the Securities Exchange Act of 1934 and preempts ``any 
State statute, regulation, or rule of law.''
    Thank you for your attention to this matter. I respectfully request 
that you submit your response by July 12, 1999.
            Sincerely,
                                            John D. Dingell
                                                     Ranking Member
Enclosures

cc: The Honorable Tom Bliley, Chairman
   Committee on Commerce
   The Honorable Michael G. Oxley, Chairman
   Subcommittee on Finance and Hazardous Materials
   The Honorable Edolphus Towns, Ranking Member
   Subcommittee on Finance and Hazardous Materials
                                 ______
                                 
          North American Securities Administrators 
                                  Association, Inc.
                                       Washington, DC 20002
                                                      July 12, 1999
The Honorable John D. Dingell
Ranking Member
Committee on Commerce
Room 2322
Rayburn House Office Building
Washington, D.C. 20515-6115
RE: H.R. 1714 - Electronic Signatures in Global and National Commerce 
Act

    Dear Congressman Dingell: Thank you for inviting us to comment, 
provide our views and our technical assistance on H.R. 1714, the 
Electronic Signatures and National Commerce Act. Please accept this 
comment letter on behalf of the North American Securities 
Administrators Association, Inc. (``NASAA'') in response to your 
correspondence of June 24, 1999. NASAA welcomes the opportunity to 
provide input on this very important subject.
                            I. INTRODUCTION
    NASAA commends the House Commerce Committee on its efforts to 
modernize the method in which commerce is conducted electronically. 
NASAA agrees that if the domestic securities markets are to retain 
their reputation as being in the forefront of technology, efforts must 
be made to permit the modernization of securities transactions through 
electronic signatures and record keeping. At the same time, such 
technological advances must be incorporated into our regulatory system 
in a manner that compromises neither investor protection nor the legal 
sanctity of contractual agreements.
    NASAA is particularly interested in Title III of H.R. 1714. 
Revisions to the Securities Exchange Act of 1934 and similar state 
securities statutory provisions, including those to accommodate 
innovations in technology, should be approached in a manner that 
ensures the vital and beneficial protections they provide are 
preserved. Furthermore, the regulatory agencies mandated to supervise 
market participants must have the ability to monitor the securities 
industry even given these changes. We recognize that government 
regulations should not discriminate against the ability of the private 
sector to take advantage of advances in technology. At the same time, 
as a matter of public policy, we must do our best to assure that, 
regardless of the technology employed by firms, adequate safeguards are 
in place for investors and for the markets as a whole.
                       II. COMMENTS ON H.R. 1714
    In considering H.R. 1714, two overarching issues concerning 
electronic securities signatures and record keeping are raised in our 
view. First, regardless of the record keeping technology employed by 
securities firms, it should be clear that records must be produced to 
regulators and made available for their review and examination in a 
readily recognizable form. Second, given the transition to a paperless 
system, investors should have ready, online access to their account 
agreements and statements.
A. Title I
    Proposed rules for the validity of electronic records and 
signatures for commerce are set forth in Title I of H.R. 1714. At 
Section 102 (b)(1), discrimination in favor of or against a specific 
technology is prohibited, in order to facilitate electronic commerce. 
While fulfilling the legislative intent of H.R. 1714 to promote 
efficiency through technological advances, we believe a clear statement 
that production of records must be in a standard language will protect 
consumer interests. Securities regulators will continue to have the 
ability to oversee the securities industry regardless of what 
technology securities firms possess.
    The term and usage of ``electronic signature'' are defined at 
Section 104(2). Pursuant to Section 104(2)(A), an electronic signature 
is intended to signify the parties' assent to a contract or an 
agreement. Under Section 104(2)(B) and Section 104(2)(C), an electronic 
signature also validates the identity of the parties and must be linked 
to the record in a secure manner so as to preclude alteration of the 
record after the signature is recorded. As we make the transition to a 
paperless system, it will become increasingly important that customers 
have online access to their account agreements and statements.
B. Title II
    The proposed rules for the development and adoption of electronic 
signatures, products and services are set forth in Title II of H.R. 
1714. NASAA applauds the sponsors' decision in Section 201(b)(2)(a) to 
allow free markets and self-regulation rather than the government to 
govern the development of electronic signatures. Government should 
permit private industry to foster technological advances. In addition, 
parties should be free to contract in any manner that facilitates 
efficient dealings in commerce and a mutual understanding of the 
parties.
    In Section 201(c), the Secretary of Commerce is directed to conduct 
an inquiry within three years after the date of the enactment of this 
Act, to determine whether state statutes, regulations or other rules 
enacted or adopted after such enactment comply with Section 102(b). In 
considering this federal legislation, we believe the Congress would be 
well served to consider state statutes already enacted that address the 
same issues now. Since 1995, when Utah enacted the first comprehensive 
law regulating electronic signatures, more than forty states have 
recognized the benefits of electronic commerce through, the adoption of 
legislation. Also, the National Conference of Commissioners of Uniform 
State Law (``NCCUSL'') has been working since 1997 to update electronic 
standards for commerce through the model ``Uniform Electronic 
Transactions Act.'' We suggest that all would benefit from a 
consideration of the state legislation already enacted, and that the 
state experience should be evaluated contemporaneously with 
consideration of this bill.
C. Title III
    In Title III of H.R. 1714, the proposed rules for the use of 
electronic records and signatures under federal securities laws are set 
forth. As stated previously, NASAA believes the Act would be enhanced 
with a clear statement to the effect that nothing in the Act should be 
construed to absolve a brokerage firm of its obligation to produce 
records to regulators in a readily understandable format. This would 
resolve any concern about any potentially adverse impact of the 
proposed changes to Section 3 of the Securities Exchange of 1934 (15 
U.S.C. 78c) on investor protection.
                            III. CONCLUSION
    Earlier this year, NASAA formed an Online Trading Project Group, 
which I chair, to explore the many aspects of this new technology and 
the opportunities and problems it may present. As you proceed in 
consideration of H.R. 1714, and as we continue in our study and review 
of the related issues, consideration should be given to the following 
areas:
 It should be made clear that in accommodating the development 
        of new technologies, neither favoring nor deterring a specific 
        technology or method for facilitating electronic commerce, 
        regulated firms will continue to be required to provide records 
        to regulators in a readily understandable and standard format.
 Electronic contracts will have the same legal effect as 
        written contracts. For instance, customers enter into 
        comprehensive customer agreements in which, among other things, 
        customers bind themselves to resolve disputes with a firm 
        through mandatory arbitration, the terms for extension of 
        ``margin'' are set forth, and the trading of speculative 
        securities such as options is authorized. For reasons such as 
        these, it will grow increasingly important that the customer 
        agreement and transaction records be available to them at any 
        time, online and available to them for downloading so that they 
        may read, review and understand them better. In a paperless 
        environment, we should examine alternatives for seeing to it 
        that electronic contract or agreement disclosure language is 
        readily available to customers.
 A major component of the acceptance by the public of the 
        electronic signatures and record keeping system will be their 
        belief that that system is secure and reliable. They will want 
        some assurances against fraud. Retrieval and review by 
        customers of their account records is the best check on 
        unauthorized account activity. To assure electronic signatures 
        have not been misappropriated to engage in fraudulent activity 
        in an account, customers' account records should be made 
        available to them at all times. The account record must be in a 
        format that can be downloaded and printed.
    NASAA supports the goals of H.R. 1714 and looks forward to 
continuing to work with you to ensure this landmark legislation that 
will strengthen the securities markets and provide both opportunity and 
protection for investors. If the Committee has any questions regarding 
this letter, please call me at (603) 271-1463 or Karen O'Brien, NASAA 
General Counsel, at (202) 737-0900.
            Very truly yours,
                                          Peter C. Hildreth
                               New Hampshire Director of Securities
                                                   President, NASAA
cc: Honorable Thomas Bliley
   Honorable Michael G. Oxley
   Honorable Edolphus Towns
                                 ______
                                 
   United States Securities and Exchange Commission
                                     Washington, D.C. 20549
                                                      July 23, 1999
The Honorable John D. Dingell
Ranking Member
Committee on Commerce
United States House of Representatives
2322 Rayburn House Office Building
Washington, D.C. 20515-6115
    Dear Congressman Dingell: Chairman Levitt has asked me to reply to 
your letter dated June 24, 1999 regarding H.R. 1714, the proposed 
Electronic Signatures in Global and National Commerce Act. In response 
to your letter, the Chairman asked the Commission staff to provide 
technical assistance to your staff as the bill was being considered by 
the Subcommittee. As you know, Title III, which directly affects the 
Securities and Exchange Commission (``SEC'' or ``Commission''), was 
amended prior to being reported out of the Finance Subcommittee earlier 
this week.
    The overall goal of H.R. 1714, which is to facilitate the use of 
technology in interstate commerce by providing legal certainty with 
respect to the use of electronic signatures, reflects a long-term SEC 
goal in promoting electronic signatures and the use of developing 
technologies in the financial markets. As early as 1986, the Commission 
grappled with electronic signature issues in connection with EDGAR. 
More recently, in 1995, the Commission provided guidance regarding the 
use of electronic media to satisfy delivery obligations under the 
federal securities laws and regulations. The Commission extended this 
framework in 1996 by providing guidance regarding, among other things, 
the use of electronic communication to satisfy Commission regulations 
requiring investor consent to receipt of Commission-mandated disclosure 
documents in electronic form.
    I understand that the bill as amended by the Finance Subcommittee 
represents a considerable improvement over the original bill. The 
amendment addressed a number of concerns expressed by the Commission 
staff about the bill as introduced. That being said, the staff 
continues to have several concerns about the bill as amended, most of 
which echo concerns expressed in your statement on the bill dated July 
21, 1999.
    First, the staff stresses the importance of the exceptions 
contained in subparagraphs (h)(3))(A) and (B) of the amendment. As you 
know, this is a narrow piece of legislation designed to establish legal 
equivalence between written signatures and electronic signatures to 
facilitate electronic commerce transactions between private parties. 
Nonetheless, the staff believes that the exceptions are important to 
avoid, any unintended consequences to the SEC's regulatory mission. The 
first exception protects the ability of the Commission and self-
regulatory organizations to designate formats for filing records 
involving electronic signatures. As you noted in your statement, this 
language is intended to protect current and future arrangements 
regarding regulatory filings, including EDGAR and the Central Records 
Depository System operated by the National Association of Securities 
Dealers. The second exception protects the ability of the Commission to 
continue to require manual signatures in connection with transactions 
in penny stocks and similar securities which are susceptible to fraud.
    Second, the staff emphasizes the need to clarify the relationship 
between Title I which addresses the validity of electronic signatures 
and writings in the context of interstate commerce generally, and Title 
III. Without such clarification, Title I may be interpreted in such a 
way as to undermine the Commission's regulatory authority under Title 
III. I understand that the Telecommunications Subcommittee will mark-up 
Title I some time next week.
    Third, while significant progress has been made on Title III, the 
staff believes that additional work may be needed to clarify the scope 
of, and interaction between, the provisions contained in subparagraph 
(h)(1) of Title III of the bill as amended. These provisions address 
the validity of electronic signatures and writings for documents 
``required by the securities laws'' on the one hand, and documents 
entered into, or accepted by, the securities industry on the other. The 
staff is currently in the process of reviewing these provisions and 
their effects in detail and may provide additional technical assistance 
to your staff on this issue as the bill continues to move forward.
    Finally, I note in passing the staffs view that the legal effect 
and enforceability of electronic signatures and electronic writings are 
primarily state law issues, not federal securities law issues. In this 
regard, we are aware of the efforts of the National Conference of 
Commissioners on Uniform State Laws (``NCCUSL'') to address this issue 
through the Uniform Electronic Transactions Act (``UETK''). We 
understand that the UETA will be considered for approval at NCCUSL's 
annual meeting this year (July 23-July 30). Given the states' 
traditional primacy in the area of commercial law, the staff believes 
that federal legislation should leverage the states' expertise to the 
fullest extent possible and encourage swift adoption of uniform state 
legislation in this area. We understand and appreciate, however, that 
the Committee wishes to address the specific concerns of the securities 
industry relating to the use of electronic signatures and related 
writing in the securities context.
    We appreciate this opportunity to outline our remaining issues with 
the bill. We look forward to continuing to work with you, the other 
members of the Committee, and Committee staff as the bill moves 
forward.
    Please contact me at (202) 942-0900 if you have any questions.
            Sincerely,
                                       Harvey J. Goldschmid
                                                    General Counsel

    Mr. Oxley. We'd now like to introduce our witnesses. First, 
if they could come forward. Mr. Hardy Callcott, Senior Vice 
President, General Counsel from Charles Schwab & Company, from 
San Francisco. Mr. Thomas C. Quick, President and COO, Quick & 
Reilly/Fleet Securities, from New York. And Mr. Michael Hogan, 
Senior Vice President and General Counsel for DLJdirect Inc., 
from Jersey City, New Jersey.
    Gentlemen, welcome to all of you. We appreciate your coming 
here. Mr. Callcott, you get the award for coming the longest 
distance, which is merely a warm handshake around here, but we 
are honored to have everyone here and we will begin with Mr. 
Callcott.

  STATEMENTS OF W. HARDY CALLCOTT, SENIOR VICE PRESIDENT AND 
GENERAL COUNSEL, CHARLES SCHWAB & CO., INC.; MICHAEL J. HOGAN, 
SENIOR VICE PRESIDENT AND GENERAL COUNSEL, DLJDIRECT INC.; AND 
    THOMAS C. QUICK, PRESIDENT AND COO, QUICK & RILEY/FLEET 
                        SECURITIES, INC.

    Mr. Callcott. Thank you, Mr. Chairman. My name is Hardy 
Callcott and I am from Charles Schwab in San Francisco. I want 
to thank you for the opportunity to testify on behalf of the 
``Electronic Signatures and Global and National Commerce Act,'' 
which we believe will create the kind of predictable market 
oriented environment necessary to foster the continued growth 
of electronic commerce. This is a good bipartisan bill which we 
hope will become Federal law in this session.
    Charles Schwab is a great example of the value of 
electronic commerce to our economy and its acceptance by 
individual customers. In just 3 years, we have become the 
largest on-line brokerage in the world with 2.5 million active 
on-line accounts holding some over $219 billion in total 
customer assets. To give you a sense of contrast, amazon.com 
currently conducts about $3 million a day of business on its 
Internet website. Schwab conducts about $2 billion of Internet 
commerce per day.
    If we are already conducting so much business on-line, why 
do we believe that electronic authentication legislation is 
necessary. The answer is simple. Schwab and other broker-
dealers need greater certainty that electronic signatures will 
have the same legal effect as traditional pen and ink 
signatures on paper based agreements. For example, if somebody 
currently wants to open an account at Schwab, they have to fill 
out a paper application manually, sign it and submit it to us 
in person or through the mail. With electronic authentication, 
this could all be done on-line. So could other transactions 
which also require a signature, such as change of address 
forms, wire transfer requests, and IRA distributions. Handling 
these and other transactions on-line will be quicker and more 
convenient for our customers as well as for firms such as ours.
    Let me discuss briefly why we support this legislation. 
First, it provides needed uniformity. Today's securities 
markets are national in scope and involve transactions that are 
entirely interstate in nature. Schwab does business in all 50 
States and we may not even know where our customer, who has a 
laptop or one of the wireless computers, where they are when 
they are accessing our systems. If a Schwab customer in Ohio 
accesses our website and places an order electronically, that 
order is going to be transmitted to our main data processing 
facility in Phoenix, where it is going to be reviewed, and then 
it is going to be routed to a stock exchange in New York or 
Massachusetts or Illinois or a market maker in New Jersey. So 
that the transactions that we are engaging in are, as I say, 
completely interstate in character. For that reason consistent 
uniform Federal standards are really imperative if brokers and 
others in the securities industry are going to be able to 
engage in electronic commerce with certainty or liability.
    A similar need for uniformity was the impetus behind the 
National Securities Market Improvement Act as well as the 
Securities Litigation Reform Act. Uniformity and electronic 
authentication is in our view the logical next step. Although 
efforts are under way at the State level to legislate on 
electronic signatures, patchwork regulation by the State 
remains the greatest barrier to the use and development of 
electronic technology. Numerous States have enacted or are 
considering electronic signature statutes, but they vary 
greatly in their definitions and the types of transactions that 
they cover. Some of them are technology specific and some 
contain standards that favor certain types of technology over 
others and the result is a lack of consistency, potential 
conflicts, and continuing legal uncertainty for business.
    Second, this bill is technology neutral. Technology is 
obviously a critical component in any legislation dealing with 
electronic authentication, and the technology is evolving 
rapidly. We believe legislation must be technology neutral so 
as not to stifle continued innovation. By broadly defining 
electronic signature, this bill allows the market to decide 
which technologies work, to balance the costs and the risks, 
and to reach an innovative and cost effective solution for both 
businesses and consumers.
    In its July 1997 Framework for Global Electronic Commerce, 
the administration embraced a series of fundamental principles 
which in their view should govern the role of government in the 
electronic marketplace. Among these principles were that the 
private sector should lead, the government should avoid undue 
restrictions on electronic commerce and where government 
involvement is needed, its aim should be to support and enforce 
a predictable minimalist, consistent and simple legal 
environment for commerce. Those are all direct quotes from the 
administration. We agree and we believe this bill is consistent 
with those important principles, and we are very pleased that 
this bill has bipartisan support here on the committee.
    In sum, H.R. 1714 deserves the committee's support and it 
represents a crucial step toward passage of a law that will 
enable the United States to continue to lead the entire world 
in electronic commerce. Thank you.
    [The prepared statement of W. Hardy Callcott follows:]
Prepared Statement of W. Hardy Callcott, SVP, General Counsel, Charles 
                           Schwab & Co., Inc.
    Mr. Chairman and members of the Committee, my name is Hardy 
Callcott. I am General Counsel at Charles Schwab & Co., Inc. of San 
Francisco, California. Thank you for the opportunity to testify on 
behalf of the ``Electronic Signatures in Global and National Commerce 
Act'' (H.R. 1714). My comments this morning will focus primarily on 
Title III of the bill, which addresses the use of electronic records 
and signatures under federal securities law, and I will also provide 
you with background on the current need for federal legislation. We at 
Schwab thank the principal sponsor of H.R. 1714, Chairman Bliley, along 
with his co-sponsors, for their bipartisan endorsement of what we hope 
will become law in this session of Congress: a technology-neutral, 
uniform federal law validating the use of, and reliance upon, 
electronic records and signatures.
    Charles Schwab & Co., Inc. is an excellent example of the value of 
electronic commerce to our economy and its acceptance by individual 
consumers. In just three years, we have become the largest online 
brokerage in the world, with 2.5--million active online accounts 
holding some $219--billion in total customer assets. Schwab conducts 
about $2 billion of Internet commerce per day. By way of contrast, 
Amazon.com currently conducts about $3 million of business per day on 
its Internet website.
    Online investing offers tremendous benefits to individual 
investors, the most important of which is access to better information: 
real-time access to investment research, market news, company press 
releases and SEC filings, earnings estimates and consensus 
recommendations, quotes, account balances, and other investment tools 
such as stock screening, stock charting, and portfolio tracking. Very 
simply, the Internet has done more to put individual investors on a 
level playing field with large institutional investors than any 
development since fixed commissions were abolished in the 1970's.
    Online investing has also dramatically reduced transaction costs 
for individual investors. Most online trades at Schwab cost $29.95, 
compared to average commissions of several hundred dollars per trade at 
full-commission firms. Online investing is also convenient: customers 
can do research and place trades at their convenience, at any time, day 
or night, for execution during market hours. Online investing offers 
accuracy and control. And online investing allows customers to make 
their own decisions without having to trade through a full-commission 
broker who may, or may not, have the customer's interest at heart. 
These factors help explain the rapid growth in customer demand for 
online investing.
    If so much business is already being successfully conducted online, 
why, then, is electronic authentication legislation necessary? The 
answer is a simple one. Schwab and other broker-dealers need greater 
certainty that electronic communications and agreements bearing 
electronic signatures will have the same legal effect as traditional 
paper-based communications and agreements bearing a handwritten 
signature.
    Take the simple example of account-opening procedures. Currently, 
customers fill out account applications on paper, sign them manually, 
and then submit them in person or through the mail. With electronic 
authentication, this could be done entirely online and would save the 
industry--and, inevitably, the customer--tens, if not hundreds, of 
millions of dollars in operating costs. It also would be quicker and 
more convenient for the customer. Other transactions which require 
signatures now must be handled manually and could also be performed 
online if we are able to obtain legal assurances that electronic 
authentication would be recognized. These include: allowing margin 
trading, allowing option trading, change of address forms, wire 
transfer requests, beneficiary forms, IRA distributions, and letters of 
authorization.
    Uniformity and consistency are the most important elements in 
providing us with the legal certainty we need. Today's securities 
markets are national in scope and operation and involve transactions 
that are entirely interstate in nature. Schwab does business in all 
fifty states, and may not even know from where a customer with a laptop 
or a wireless computer is accessing our systems. A single transaction 
with a customer may involve activities that take place in many 
different states. For example, if a Schwab customer in Richmond, 
Virginia, accesses our website and places an order electronically, that 
order is transmitted through the customer's Internet service provider, 
which may be located in California, to our main computer facility in 
Phoenix, Arizona. The order is then routed for execution to a stock 
exchange located in another state such as New York, or to a market-
maker which may be located in still another state, such as New Jersey.
    This is precisely what Congress envisioned when it adopted the 1975 
amendments to the Securities Exchange Act of 1934 and directed the SEC 
to oversee the development of a national securities market. The SEC has 
carried out its congressional mandate in part through the adoption of 
consistent and uniform federal standards that have allowed broker-
dealers to engage in interstate transactions without having to adjust 
their nationwide operations to comply with varying and inconsistent 
state standards. As a result, the United States securities markets have 
become the envy of the world.
    Consistent and uniform federal standards validating electronic 
authentication are imperative if brokers and others in the securities 
industry are to engage in electronic commerce with any degree of 
certainty and reliability. This Committee has already recognized this 
reality in the areas of books and records and securities litigation, 
for example. Uniformity was the impetus behind the National Securities 
Markets Improvement Act (``NSMIA''), and the two private securities 
litigation reform acts. Uniformity in electronic authentication is the 
logical and necessary next step, and it can be accomplished by 
adjusting the ``34 Act to allow the SEC the flexibility it needs to 
carry out its responsibility to protect investors and guarantee uniform 
enforcement of the securities laws in an electronic environment.
    Without baseline federal legislation such as H.R. 1714, Schwab and 
others will be left facing a patchwork of inconsistent laws and 
regulations by the states that pose perhaps the single greatest barrier 
to the use and development of electronic signature technology and the 
continued evolution of e-commerce. Most every state either has already 
adopted or is in the process of adopting its own law governing 
electronic authentication--and no two are alike. States have taken 
widely disparate approaches to electronic authentication. Some states, 
such as Utah, recognize only one type of electronic authentication--
digital signatures--and regulate the providers of electronic 
authentication services through a bureaucratic system of registration, 
licensing and payment of fees. Other states, such as Florida, have 
adopted laws that only recognize transactions with the state 
government.
    Beyond these two basic formats, state laws take varying approaches 
with respect to such matters as regulation of certificate authorities 
and the definition of ``electronic signatures'', ``electronic records'' 
and other basic defined terms. They contain varying treatment of 
licensed and unlicensed certificate authorities, differing fee schemes, 
different rules for suspension of certificates, varying treatment of 
liability between parties, and divergent standards for agreement on the 
use of electronic formats. Some state laws recognize only particular 
technologies, such as ``digital signatures'' and public key 
infrastructure, or ``PKI,'' technology, while others are technology-
neutral.
    Although we applaud the initiative and leadership the states have 
provided, the need for uniformity remains paramount. The states 
themselves are aware of the problems posed by conflicting laws, as 
reflected by the efforts of the National Conference of Commissioners on 
Uniform State Laws (NCCUSL), which was responsible for the adoption of 
the Uniform Commercial Code (UCC) thirty years ago, to draft a Uniform 
Electronic Transactions Act (UETA). A final version of the UETA is due 
to be submitted to the states next month. While we enthusiastically 
endorse NCCUSL's efforts, however, there is no assurance that the UETA 
will be adopted uniformly by all or even a majority of states, or that 
it will be adopted in a reasonable time frame. It is worth recalling 
that it took nine years (from 1958-1967) for the UCC to achieve 
adoption nationally, and even then two jurisdictions, Louisiana and the 
District of Columbia, failed to adopt it in its entirety. The Uniform 
Securities Act, first proposed in the 1950s and revised in the 1980s, 
still has failed to provide uniform state securities laws. Very simply, 
the electronic commerce industry does not have the luxury of that kind 
of time. We need federal action now to allow us to go forward with 
certainty and clarity in the marketplace.
    The need for uniformity and consistency across jurisdictions and 
borders has been recognized by almost everyone involved in electronic 
commerce issues, including the Administration. In its July 1, 1997 
Framework for Global Electronic Commerce, the Administration embraced a 
series of fundamental principles which, it argued, should govern the 
role of government in this emerging marketplace. Among these were that 
``[t]he private sector should lead,'' that ``[g]overnment should avoid 
undue restrictions on electronic commerce,'' and that ``[w]here 
governmental involvement is needed, its aim should be to support and 
enforce a predictable, minimalist, consistent and simple legal 
environment for commerce.'' With respect to its global application, the 
Framework notes that ``[t]he legal framework supporting commercial 
transactions over the Internet should be governed by consistent 
principles across state, national, and international borders that lead 
to predictable results regardless of the jurisdiction in which a 
particular buyer or seller resides.'' (emphasis added). We agree 
wholeheartedly and believe that H.R. 1714 is consistent with this 
position.
    Uniformity and harmonization of national laws is also important in 
the international arena. The United Nations Commission on International 
Trade Law (UNCITRAL) has promulgated a Model Law on Electronic Commerce 
and is currently drafting a set of uniform rules for electronic 
signatures. The purpose of these uniform rules is to ``prevent[] 
disharmony in the legal rules applicable to electronic commerce'' by 
providing a set of standards on the basis of which the legal effect of 
electronic signatures can be recognized. The Organization for Economic 
Cooperation and Development (OECD) is involved in similar efforts to 
develop guidelines to harmonize national laws governing electronic 
commerce in general and electronic authentication in particular.
    H.R. 1714's efforts to create domestic uniformity is thus fully in 
accord with the principles endorsed by the Administration and 
international bodies such as UNCITRAL and the OECD. It not only 
promotes greater uniformity within the United States, but will better 
enable the United States to press for the adoption of consistent 
standards internationally. Indeed, the use of the word ``global'' in 
the title of H.R.1714 reflects the recognition and appreciation of the 
political reality that the historic limitations of domestic and 
international boundaries are rapidly vanishing in favor of an 
electronic marketplace where even the most geographically isolated 
among us can have the ability to engage in informed and reliable 
transactions over the Internet.
    H.R. 1714 also reflects the other principles underlying the 
Adminstration's Framework and these international efforts--technology 
neutrality, party autonomy, non-discrimination, and a minimal approach 
to government regulation--all of which we support. We see no need for 
legislation that attempts to resolve all open issues in this area or 
sets up new standards or regulatory regimes. What is needed is simple 
legislation that constructs the framework within which the market can 
develop the technologies and systems that work best.
    Technology neutrality is a critical component of any legislation 
dealing with electronic authentication. Technology in the electronic 
commerce area is evolving rapidly. Legislation must be neutral so as 
not to stifle continued innovation. Federal legislative attempts to 
dictate what technology is or is not acceptable, however well-
intentioned they might be, will fail. The market should be allowed to 
select those technologies that work and deliver appropriate security 
and reliability, and to reject those which do not. Legislation that 
enshrines any particular technology, such as public key infrastructure, 
or sets standards that give one technology an advantage over others 
will stifle innovation at these critical early stages.
    For this reason, legislation should include a broad definition of 
``electronic signature'' that enables market participants to choose 
among themselves which technology and which level of security and 
liability meets their individualized needs for any particular 
situation. Existing law does not establish minimum standards of 
security and liability for pen and ink signatures (for example, there 
are no minimum standards to make signatures harder to forge). 
Similarly, we believe legislation should not set minimum standards for 
electronic signatures. The market will work this out, selecting the 
best technologies, balancing costs and risks, and inevitably reaching a 
result which is innovative and cost effective, both to the broker and 
the customer.
    In conclusion, Charles Schwab believes that H.R. 1714 deserves the 
Committee's support and represents a significant step toward the 
passage of a law that will enable the United States to continue to lead 
the world in electronic commerce.
    Thank you.

    Mr. Oxley. Thank you, Mr. Callcott.
    Mr. Hogan.

                  STATEMENT OF MICHAEL J. HOGAN

    Mr. Hogan. Good morning, Chairman Oxley. My name is Michael 
Hogan, and I am the Senior Vice President and General Counsel 
at DLJdirect, Inc., a pioneer in the on-line brokerage 
industry. I appreciate the opportunity to testify in support of 
H.R. 1714, the Electronic Signatures and Global and National 
Commerce Act, and to thank you and the entire committee for 
your leadership role in addressing the important policy issues 
of the electronic marketplace.
    We support H.R. 1714 and believe that Federal legislation 
to establish a national acceptance of electronic signatures is 
critical to the success of our business as well as to the 
continued growth of the electronic marketplace, both in the 
United States and around the world. With the chairman's 
permission, I would ask that my full statement be inserted in 
the record.
    Mr. Oxley. Without objection, all of the statements will be 
made part of the record.
    Mr. Hogan. Thank you. First and most importantly, I want to 
emphasize how important it is that Congress act now to address 
the issue of digital signatures and records. Already 2.5 
million Americans invest on-line. A quarter of those 
individuals opened accounts in 1998. Today one in every three 
individual trades each day is executed on-line and that number 
will only go up. I am here today to tell you that this bill 
responds to a real need and will help to address real problems 
that we at DLJdirect and our consumers encounter every day.
    People use the Internet because it is convenient, 
persuasive and empowers--pervasive and empowering. A quarter of 
all our consumers' trades are placed at night by people who 
value their access to financial services on their own time. 
These consumers complain about our process when we require them 
to execute some written agreement, mail it in, and wait for it 
to be received and acted upon before they can engage in further 
activity with us. This situation makes no sense in an age when 
the whole process can be conducted in the blink of an eye 
entirely on-line.
    At DLJdirect, we allow instant account opening upon 
electronic application. However, because of the uncertainty, 
which this bill will resolve, we then inundate our consumers 
with a follow-on paper process. For example, I brought with me 
today one of every form which we require a signature on. I have 
40 of them here. It is bulky, it is unnecessary, it is e-
commerce on training wheels. With the help of this bill, 1 day 
soon this physical process will become obsolete.
    Let me mention one everyday problem caused by the lack of 
acceptance of digital signatures. The current physical 
environment surrounding the transfer of an account from one 
broker to the next. Streetwide firms require written signatures 
based on the New York Stock Exchange and -NASD rule before they 
will release a client's assets. The entire process can take 
weeks, weeks during which an investor is unable to access some 
or all of his portfolio or any cash balance. The process is 
frustrating and inexplicable to an on-line consumer. 
Recognition of digital signatures would eliminate this delay 
and empower consumers to initiate the transfer of their 
accounts immediately and on-line.
    We at DLJdirect support H.R. 1714 because it will provide 
legal certainty and a clear, straightforward rule of law and it 
will do it in a technologically neutral way. The bill sets 
forth certain baseline requirements that will enable interstate 
e-commerce to flourish. National standards are no stranger to 
the securities industry. Congress and regulators long ago 
recognized the importance of a strong Federal role in the 
industry. Just as the basic criteria for use of a paper 
signature are well established and fundamentally uniform, the 
same should be true for digital signatures if they truly are to 
take the place of paper.
    As you know, the U.S. is not the only forum in which these 
issues are being debated. The European Union is moving forward 
rapidly with its own directive addressing electronic 
signatures, one that adopts a far different and in our view a 
misguided approach. In the Internet world, developments occur 
at a dizzying pace. Often the first at the door with the new 
standard or rule is able to win acceptance and influence the 
shape of later events simply by being first. For that reason, 
and because we believe the approach represented by H.R. 1714 is 
the right one, rapid passage of the bill before the EU issues 
its directive in the fall is imperative.
    Congress and this subcommittee through passage of the bill 
will deserve great credit for helping the U.S. Vision to 
prevail as the model for electronic signatures and contracts in 
the future. We at DLJdirect thank this subcommittee and the 
committee as a whole for taking significant steps in that 
direction and urge your continued effort to submit a bill to 
the President for his signature this summer.
    I would be happy to answer any questions, Mr. Chairman.
    [The prepared statement of Michael J. Hogan follows:]
   Prepared Statement of Michael J. Hogan, Senior Vice President and 
                    General Counsel, DLJdirect Inc.
    Good morning, Chairman Oxley, members of the subcommittee. My name 
is Michael Hogan, and I am the Senior Vice President and General 
Counsel of DLJdirect Inc., the online brokerage service of Donaldson, 
Lufkin & Jenrette, headquartered in Jersey City, New Jersey. I 
appreciate the opportunity to testify today in support of H.R. 1714, 
the Electronic Signatures in Global and National Commerce Act. At 
DLJdirect, we applaud you, Congressman Towns, Chairman Bliley, and the 
entire Commerce Committee for your leadership role in addressing the 
important policy issues of the electronic marketplace. We support H.R. 
1714 and believe that federal legislation to establish a national 
acceptance of electronic signatures is critical to the success of our 
business as well as to the continued growth of the electronic 
marketplace, both in the United States and around the world.
    A subsidiary of Donaldson, Lufkin & Jenrette, Inc., DLJdirect is 
one of America's premier online brokerage firms. Since we were founded 
just over ten years ago, DLJdirect has executed over $53 billion in 
online transactions. Today, we have more than 600,000 customer 
accounts. DLJdirect charges $20.00 per trade and offers investors a 
variety of tools and services including DLJ research, access to initial 
public offerings, and MarketSpeed TM, our proprietary 
Windows software that offers investors increased performance, 
usability, and a full array of customized functionality. This past 
spring, DLJ raised approximately $253 million for DLJdirect in a public 
offering to foster DLJdirect's projected growth both domestically and 
internationally. As the online brokerage industry continues to boom, 
our primary mission remains the same: to provide self-directed online 
investors with the most complete and convenient package of resources 
and services they need to manage their finances.
Some Background On Online Investing
    In the decade since we were founded, the financial services 
industry has undergone a tremendous transformation. The Internet has 
revolutionized the securities industry and opened the world of 
investing to millions of individuals by offering lower transaction 
costs, increased access to market information, convenience, and speed. 
Currently, 2.5 million Americans invest online. Roughly one half of 
those individuals opened an account in 1998. Each day, one of every 
three individual trades is executed online. Furthermore, analysts 
predict that by the year 2000, 10 million individuals will be managing 
their investments online.
    Because of regulatory requirements, DLJdirect is licensed or 
registered as a broker-dealer in all 50 States and is therefore subject 
to State contract law in all jurisdictions. More importantly, our 
clients come to us over the Internet from every State and transact an 
increasingly wide range of financial services through us. The need for 
a national, uniform rule of law in the securities markets, therefore, 
cannot be overstated.
    Moreover, the need is now. The pace of online investing continues 
to increase, and, if the past year offers any guide, we expect to see a 
renewed burst of activity in the fall, when people return to their 
workaday routines after summer holidays. Winter promises to be even 
more dramatic. Last Christmas, for example, we witnessed an explosion 
in the number of online applications and online activity. Setting aside 
the need for leadership in the international arena, which I discuss 
below, Congress should act if for no other reason than to clarify the 
rules governing electronic agreements before the next major segment of 
the public joins the online investing community.
H.R. 1714 Responds To Real Problems
    I am here today enthusiastically to endorse H.R. 1714 and to 
express my gratitude and the gratitude of the investment community to 
Chairman Bliley, and Congressmen Oxley, Tauzin, Davis, Towns, and 
Fossella for pushing forward on this very important issue. DLJdirect 
cannot emphasize enough that this bill is timely; it responds to a real 
need and will help to address real problems encountered by my industry 
and consumers in my industry every day.
    The securities industry relies on a variety of contracts and 
agreements to establish the relationships of the parties, the rules of 
the marketplace, and the elements of individual securities and money 
transactions. Brokerage firms generally have customers manually sign a 
general customer agreement and an IRS tax form (Form W-9). In a large 
number of cases, this is followed by the establishment of a margin 
account and/or options trading capability. Each of these and other 
types of actions currently generates a separate, unique agreement 
requiring a signature.
    DLJdirect is the only online broker that currently allows 
individual investors to sign up online and begin trading in limited 
sums immediately, prior to receiving any written signature. We feel 
that's what an investor wants when using the Internet--the speed and 
convenience that the medium affords. All a potential investor needs to 
do is find our webpage at ``http://dljdirect.com,'' click on ``instant 
account opening,'' and then fill out the appropriate account 
application. The application is then submitted by ``clicking'' on the 
indicated button. An online agreement is then displayed, to which the 
new investor must indicate acceptance or rejection, again by clicking 
on the appropriate button. If she accepts the agreement, then, after 
completing an automated credit check, our system issues the new 
investor a password, and she can begin trading immediately.
    In an attempt to maximize the convenience of the Internet to the 
greatest degree currently possible, we decided to take the step of 
allowing immediate trading with the knowledge that, without any clear 
rule that digital assent is enforceable, we might be ``stuck'' with a 
loss or with a lawsuit should an investor attempt to challenge the 
terms of the relationship prior to the submission of a written 
signature on an agreement. Other firms have not taken that risk. Even 
we at DLJdirect require that written agreements and IRS tax forms be 
supplied within 15 days of activation.
    Many other typical relationships between online brokers and 
investors require a written signature prior to activation. These 
include:

 establishing a retirement savings account, which requires an 
        IRA, 401(k), or other agreement;
 appointing a relative to look over an account while one 
        vacations or is otherwise unavailable, which requires a power 
        of attorney;
 hiring an investment manager, which requires a ``discretionary 
        account agreement''; and
 directing that money be transferred to the investor's 
        commercial bank or from an offline to an online broker.
    All of these transactions or decisions require a separate agreement 
or instruction signed in ``hard copy.'' In addition, with the 
increasing convergence of financial services and the expansion of 
online brokers into new financial areas, the need for written 
signatures will only grow in the absence of this legislation. Already, 
DLJdirect and many other online brokers offer a variety of interrelated 
services through third parties, including mortgage lending services and 
integrated checking and credit or debit card services in coordination 
with banking institutions that require more written signatures on still 
other hard-copy agreements.
    I took the liberty in preparing for today's testimony of asking my 
staff to pull together one copy of every single written form at 
DLJdirect that today requires a written signature and that, if this 
bill passes, one day soon may be replaced with the convenience of fully 
integrated online transactions. These documents are close to 40 in 
number and are listed in Attachment A to this statement.
Widespread Use Of Digital Signatures Promises Much-Needed Convenience 
        To Consumers
    Convenience is really at the core of why this bill is important. 
The primary reason why the problems I've just described matter is 
because they create delay that imposes several hidden costs and much 
obvious inconvenience on investors. At DLJdirect, new accounts have 
grown from 390,000 in 1997 to 590,000 in March of this year. We are 
currently processing 60,000 new online contracts each month. The 
average number of trades executed each day increased from 6,100 in 1997 
to 20,200 during the first quarter of 1999.
    Almost one-quarter of those trades are entered at night or when 
markets are closed, by people who don't have time or choose not to 
manage their personal matters during the day and so address their 
personal financial and other matters after working hours. The last 
thing they want or need is to be told that they have to acquire and 
mail in a written form before being able to accomplish their desired 
transaction. Yet that is what we and others in the online industry are 
forced to tell them today; their demand is for greater convenience.
    To take one other example, because of the current requirement for 
written signatures when transferring accounts, it can take weeks for an 
investor to acquire the paper forms, fill them out, mail them into his 
or her new broker, and accomplish the transfer of assets from one 
institution to the other. The value of that investor's portfolio can 
change dramatically while it is in ``limbo,'' and any balance in the 
account is unavailable during the transfer period. In an age of instant 
communications and secure technologies, there is no need for this kind 
of serious inconvenience and delay. Recognition of a digital signature 
would eliminate the ``initiation delay'' associated with transfers and 
allow investors with complex accounts to issue follow-on instructions 
to address problems and complete transfers with the same ease that it 
takes to enter and pay for a new investment.
    We believe the legal certainty provided by this legislation would 
greatly benefit firms and investors in several ways. It would 
facilitate more efficient customer relationships and transactions. It 
would validate the Internet as a means for safe, legally secure 
transactions. It would enable firms and their clients easily to amend 
the terms of their relationships as new features and services are 
added. Most importantly, it would significantly reduce the underlying 
cost and client inconvenience attendant to paper-based contracts.
    Online investing, unlike some other areas of e-commerce, is not 
entered into by individuals as a casual transaction. It involves an 
individual's money, time, and trust. To be a success, online firms 
depend on the confidence their individual investor clients have in the 
integrity and security of their accounts. Investors and the securities 
industry alike share an interest in utilizing acknowledged legal 
methodologies when entering into a brokerage relationship or managing 
their money. H.R. 1714 will provide the necessary legal underpinnings 
to do just that.
H.R. 1714 Is Carefully Crafted To Fill Existing Needs And Preserve The 
        Creativity And Flexibility That Make The Internet Valuable.
    Turning to the particulars of the legislation itself, DLJdirect 
supports the current House proposal for four simple reasons:

(1) It establishes a straightforward rule of law that is consistent 
        with the hallmarks of the securities laws and the Securities 
        and Exchange Commission's (``SEC'') mandate.
(2) It is market-neutral; it does not favor one firm over another or 
        one way of doing business over another.
(3) It is technology-neutral; it does not mandate one type of 
        technology to achieve its result and allows for future 
        inventions and developments.
(4) Finally, the legislation establishes the United States as the 
        leader on the issue of digital signatures, positioning the 
        United States. to influence developing standards worldwide.
The Bill Establishes A Clear, Straightforward Rule Of Law.
    The securities markets in the United States are the largest, 
deepest, and most efficient in the world. Congress, through the major 
securities acts, and the SEC, with its disclosure and investor 
protection mandates, have contributed to that success. The common 
element fundamental to these efforts is legal certainty--a level of 
certainty that many markets around the world have yet to achieve. H.R. 
1714 follows in that tradition by establishing a straightforward, clear 
rule of law that digital signatures meeting certain basic criteria are 
to be treated just as paper signatures in all securities and similar 
financial transactions.
    Legal uncertainty is the antithesis of strong and efficient 
markets. Securities firms to date have shunned reliance solely on 
digital signatures and digital records because they might be legally 
challenged on the ground that the digital signature contracts are 
unenforceable for failure to meet some State standard. Neither can the 
firms run the financial and reputational risk that one of the 50 or 
more regulators that oversee financial services might object to 
reliance on digital signatures.
    The SEC and other securities regulators have begun to embrace 
concepts of electronic commerce, including electronic signature and 
electronic records. The SEC has supported disclosure and delivery of 
required disclosure documents through various electronic means, and it 
has supported delivery of documents electronically to evidence the 
securities contract, such as the confirmation statement. The SEC has 
permitted regulated firms to store required books and records 
electronically to save storage cost and thereby reduce costs to 
investors. Self-regulatory organizations (``SROs''), such as the NASD 
Regulation, Inc. (``NASD''), have permitted supervisors to record their 
signatures electronically when approving new customer accounts. 
However, none of the regulatory organizations believe it within their 
jurisdiction to take the final step and themselves declare the 
acceptability of digital signatures for all purposes. Title III of this 
bill, by amending the Securities Exchange Act of 1934 specifically to 
recognize digital records and signatures, will enable the SEC further 
to facilitate online securities transactions consistent with the rest 
of the securities laws.
    Given the explosive growth of online securities transactions, H.R. 
1714, in the U.S. tradition of the rule of law, promises to help the 
United States maintain its lead as the venue of choice for trading in 
securities. Investors will gravitate to the United States because they 
will have legal certainty in their online contracts and transactions.
The Legislation Espouses Market And Technology Neutrality.
    H.R. 1714, because it does not mandate any specific technologies 
for digital signatures and expressly rejects linking the acceptability 
of particular methodologies to the type or size of entity involved, 
maintains a level playing field that allows for creativity, self-
regulation, and maximum autonomy for all market participants. The bill 
avoids the pitfalls of many State laws that prescribe overly specific 
methods or criteria for digital signatures and, as a result, are of 
limited use to a company that transacts business over the Internet.
    It is this lack of consistency which points most strongly to the 
need for a national policy in this area. We do not view H.R. 1714 as 
unjustly preempting the States' historic ability to order their own 
contract laws. Instead, the bill simply delineates certain ``baseline'' 
requirements that will enable cross-border, interstate commerce to 
flourish.
    This Committee has already heard from other witnesses, including 
federal and State representatives, who have outlined the significant 
strides which the States have made to harmonize their laws and to 
facilitate digital signatures. Some of those witnesses already have 
explained the clear need for uniformity because of inconsistent and 
conflicting existing State laws. Notwithstanding the significant 
developments at the State level, which should be congratulated and 
continued, we also believe there is a clear need for federal 
legislation to ensure conformity in the essential requirements for 
digital signatures as soon as possible. Just as the basic criteria for 
a paper signature are well-established and fundamentally uniform, the 
same should be true for digital signatures if they truly are to take 
the place of paper. A clear national standard we believe is in the 
interest of the States, the federal government, e-commerce 
participants, and the international community.
    A national standard is particularly appropriate in the context of 
securities. The securities industry possesses a long history of federal 
oversight and regulation. Regulators and market participants long ago 
recognized that for securities a strong federal role was appropriate; 
additional federal direction of this nature should not raise the same 
types of federalism concerns that may attend other areas. Similarly, 
the Internet, as we all know, recognizes no boundaries. The Net allows 
a market entrant to undertake national and even international endeavors 
with far fewer physical assets than in the past--for example, without 
the need to establish physical offices in each location in which it 
wishes to do business. The joinder of these two elements--a federally 
regulated securities industry and the Net--mandates the need for a 
uniform, national approach to electronic signatures and records. Only 
through such uniformity can we and our customers fully realize the 
promise of online investing.
Passage Of The Bill Will Demonstrate International Leadership.
    Finally, I'd like to offer a brief word in support of Title II of 
the bill. As I've already discussed, a clear, straightforward, uniform 
standard and technology and market neutrality lie at the core of what 
makes H.R. 1714 worthwhile. As you know, the United States is not the 
only forum in which these issues are being debated. The European Union 
is moving forward rapidly with its own directive addressing electronic 
signatures, one that adopts a far different, and in our view misguided, 
approach. At least as things now stand, the E.U. appears poised to 
adopt technology-specific or party-specific methodologies that will 
stifle the inventiveness that is the online community's greatest 
strength.
    Global securities transactions conducted over the Internet promise 
to comprise the next frontier for the securities industry. DLJdirect 
has made significant investment in international ventures in the United 
Kingdom and Japan and plans to consider other international markets. 
These investments will not reach their full potential if the E.U. and 
other international bodies or nations in essence preempt the United 
States because Congress has not acted to adopt a U.S. model to which 
others can look as the best international standard.
    In the Internet world, developments occur at a dizzying pace. 
Often, the first at the door with a new standard or rule is able to win 
acceptance and influence the shape of later events simply by being 
first. For that reason, and because we believe that the approach 
adopted in H.R. 1714 is the right one, rapid passage of the bill before 
the E.U. issues its directive in the fall, is imperative. Congress and 
the Administration bear a large measure of responsibility, and through 
passage of this bill would deserve great credit, for ensuring that the 
U.S. vision of a self-regulating marketplace that does not discriminate 
for or against a specific technology or type or size of entity prevails 
as the model for electronic commerce in the future.
    We at DLJdirect thank this subcommittee and the Committee as a 
whole for taking significant steps in that direction and urge you to 
continue your efforts to submit a bill to the president for his 
signature this summer. I would be happy to address any questions you or 
the other Members might have.
    Thank you.
                              Attachment A
    5305-SEP (Simplified Employee Pension-Individual Retirement 
Accounts Contribution Agreement); Accommodation Transfer Authorization 
\1\; Account Transfer Form \2\; Affidavit of Domicile and Debts \2\; 
AssetMaster SM; Authorization for Investment in a Private 
Placement and/or Limited Partnership for DLJ; Custodial Accounts \2\; 
Certificate of Corporate Secretary and Certified Copy of Certain 
Resolutions Adopted by the Board of Directors Whereby the Establishment 
and Maintenance of Accounts Have Been Authorized \3\; Certificate of 
Sole Proprietorship \1\; Community Property Agreement; Corporate 
Resolution (Irrevocable Stock or Bond Power) \3\; Customer Agreement (2 
versions); Designation of Beneficiary (IRA, SEP, SIMPLE IRA); Direct 
Deposit Authorization; Direct Rollover Form (Retirement Account form 
addressed to Benefits Administrator) \2\; Disclosure Statement; 
Distribution Request (IRA, SEP, SIMPLE IRA); Exercise and Sale Form 
(Irrevocable Stock or Bond Power); Full Trading Authorization \1\; 
Internet Link Request; Investment Account Application; Investment Club 
Account Agreement; IRA Adoption Agreement; IRA Application & Adoption 
Agreement; Irrevocable Stock and Bond Power \2\; IRS Form W-8; IRS Form 
W-9; Letter of Certificate Release; Money Market Funds; Options Account 
Agreement and Application; Partnership Account Agreement; Precious 
Metals Account Agreement; Qualified Retirement Plan Distribution 
Request; Request for Disposition of a Non-Transferable Security Form; 
Retirement Account Contribution Form; Retirement Plan Contribution 
(IRA, SEP, SIMPLE Plan); Roth IRA Application & Adoption Agreement; 
Roth IRA Conversion Form; Tenants in Common Agreement; and Transfer on 
Death Account Agreement (Individual, Joint Tenant).

    \1\ Must be signed in presence of Notary Public and have the notary 
affix their seal
    \2\ Additional forms or certificates must be submitted
    \3\ Corporate seal and signature of President and/or Corporate 
Officer required

    Mr. Oxley. Thank you, Mr. Hogan. Mr. Quick?

                  STATEMENT OF THOMAS C. QUICK

    Mr. Quick. Good morning, Mr. Chairman, and members of the 
subcommittee. My name is Tom Quick and I am the President and 
COO of Quick & Reilly/Fleet Securities, and of the Fleet 
Financial Group. I appreciate the opportunity to be with you 
today to talk about H.R. 1714, the Electronic Signatures and 
Global and National Commerce Act, and would like you to know 
that we believe that this is good legislation that deserves 
your support.
    To give you a better understanding of why we think this is 
so important, I would like to take a moment to give you some 
background on Quick & Reilly and our brokerage business.
    Our firm was founded in 1974, shortly thereafter becoming 
the first member firm on the New York Stock Exchange to offer 
discounted commissions to the individual investor. Today we 
have over 118 offices in 33 States with the major presence on 
the Internet. Prior to and since becoming affiliated with Fleet 
Financial, we have built an integrated group of businesses with 
a goal of delivering value to individual investors as safely 
and efficiently as possible. This includes U.S. Clearing Corp., 
one of the country's largest clearing execution firms, which 
handles processing functions for 390 brokers and bank security 
subsidiaries, which include 7 of the top 20 Internet firms 
today.
    Another of our companies is Fleet Specialists, which is the 
second largest specialist firm on the floor of the exchange, 
providing for a fair, liquid and orderly market in securities 
for 335 companies and it counts for 14 percent of the volume 
that is done there on a daily basis. And last but certainly not 
least is SURETRADE, a separate broker-dealer we set up 
exclusively for Internet trading activities. In its 18 months 
of operation, SURETRADE has opened 300,000 accounts and has 
attracted well over $1 billion in assets.
    Over the last year, we have seen a dramatic shift in the 
preference of our customers away from the traditional brokerage 
to using the Internet to effect trades. For example, according 
to a survey we regularly conduct of 500 Quick & Reilly clients, 
we learned that 63 percent now have access to the Internet 
compared to only 44 percent 2 years ago. This is reflected in 
the growth of our on-line business which surged from 11 percent 
of our overall business in 1997 to 20 percent this past 
quarter. This increase in percentage of trades conducted on the 
Internet came at a time when total trading volume on and 
offline was up dramatically, approximately 68 percent, and the 
trend toward Internet trading will accelerate and we have an 
obligation to make the process as fast, convenient, and 
reliable as possible for existing and potential clients.
    Even when we operate in the on-line environment, current 
security laws and regulation requires us to leave a paper 
record. This includes opening the account and confirming trades 
as well as other transactions such as wire transfers, money 
market checks, transfer of sureties, portfolio reorg 
instructions as well as other services such as margin and 
option trading agreements. Much to the surprise of many of our 
on-line customers which are used to the lightning speed of e-
mail and other Internet communications, we are required to send 
them forms by mail which must be filled out, sent back to us, 
often causing delays. This is a cumbersome process which 
frustrates us and our customers and which would be eliminated 
if H.R. 1714 was enacted into law.
    This particular law pending, and particularly Title 3 which 
deals specifically with the use of electronic records under the 
Federal securities law, will cut through this bottleneck by 
clearing the way for companies like ours to put in place a 
flexible yet legally binding mechanism for authorizing on-line 
transactions through digital signatures for our customers in 
all 50 States as well as throughout the world. With a few 
strokes of the keyboard, our on-line customers will finally be 
able to open accounts, make payments, authorize us to act as 
their agent when the securities are subject to a reorg and in 
short obtain all the benefits promised by the Internet.
    I understand the concerns that have been expressed that 
H.R. 1714 might interfere with efforts by the States to deal 
with this issue on a uniform and consistent basis, in 
particular, the work of the National Conference of 
Commissioners on Uniform State Laws on uniform electronic 
transactions. However, it is my understanding that H.R. 1714 is 
not intended to interfere with this effort and there was 
testimony to that effect by State officials at the June 9 
hearing held by your colleagues on the Telecommunications 
Subcommittee. The fact is we need action on this as soon as 
possible and Federal legislation is our best hope for 
accomplishing this.
    As a business with customers throughout the country and the 
world, it is important for us to avoid a patchwork of 
inconsistent State electronic signature laws. I think this 
would also be important to a committee such as yours that 
encourages fair competition as well as the protection of the 
individual consumer. One of our main concerns is that differing 
State laws on electronic signatures will force us to customize 
our products to meet the requirements of each of the 50 States. 
This can have a disproportionate impact on smaller businesses 
by raising costs and making it difficult and perhaps impossible 
for us to serve their needs on a cost effective basis. For 
example, U.S. Clearing Corp. provides clearing trades for 
approximately 400 firms. Many of these companies are smaller, 
community oriented firms. U.S. Clearing also handles Internet 
and brokerage services for a number of different associations 
throughout the country. As the Net grows and people become more 
comfortable with doing business on-line, it will become even 
more important to have an efficient, standardized regulation in 
place if we are to provide cost efficient support to these 
smaller firms, thus helping them provide services to their 
customers. They could keep them competitive with larger 
companies like ourselves.
    In conclusion, Mr. Chairman, and members, H.R. 1714 is 
important legislation not only for the on-line brokerage 
business but for all companies that engage in e-commerce now 
and that will do so in the future. H.R. 1714 is pro consumer 
and pro small business because once enacted into law, it will 
facilitate the ability of our clients and small business 
customers to manage their money quickly and efficiently. In 
fact, getting the bill enacted into law as soon as possible 
could possibly be one of the most important actions Congress 
takes this summer to help foster the orderly and reliable 
growth of Internet commerce, and we look forward to working 
with you to achieve this objective.
    Thank you for this opportunity.
    [The prepared statement of Thomas C. Quick follows:]
 Prepared Statement of Thomas C. Quick, President and Chief Operating 
             Officer, Quick & Reilly/Fleet Securities, Inc.
    Good morning Mr. Chairman and Members of the Subcommittee, my name 
is Tom Quick. I am the President and Chief Operating Officer of Quick & 
Reilly and Fleet Securities, Incorporated, an affiliate of Fleet 
Financial Group. I appreciate the opportunity to be with you today to 
talk about H.R. 1714, the ``Electronic Signatures in Global and 
National Commerce Act'', and would like you to know that we believe 
that this is good legislation that deserves your support.
    To give you a better understanding of why we think this legislation 
is so important, I would like to take a moment to give you some 
background on Quick & Reilly and our brokerage business. My father, 
Leslie Quick, Jr., founded Quick & Reilly in 1974. Shortly thereafter, 
we became the first NYSE member to offer discounted commissions to 
retail investors. Today, Quick & Reilly is one of the nation's largest 
brokerage firms, with 118 Investor Centers in 33 states, and a major 
presence on the Internet.
    Prior to, and since becoming affiliated with Fleet Financial Group 
in 1998, we have built an integrated group of businesses with the goal 
of delivering value to individual investors as safely and efficiently 
as possible. This includes U.S. Clearing, one of the nation's largest 
clearing and execution firms, which handles processing functions for 
390 brokers and bank securities subsidiaries, including 7 of the top 20 
Internet brokers. Another of our companies is Fleet Specialists, which 
is the second largest specialist firm on the floor of the New York 
Stock Exchange. Fleet Specialists provides for a fair, liquid and 
orderly market in securities for 334 companies and accounts for 14% of 
the volume on the ``Big Board''. Last, but certainly not least, is 
SURETRADE, a separate broker dealer we set up exclusively for Internet 
trading activities. In its 18 months of operation, SURETRADE has opened 
300,000 accounts and has attracted well over $1 billion in customer 
assets.
    Over the last year we have seen a dramatic shift in the preferences 
of our customers away from traditional brokerage to using the Internet 
to effect trades. For example, according to a survey we regularly 
conduct of 500 Quick & Reilly customers, we learned that 63 percent now 
have access to the Internet, compared to only 44 percent two years ago. 
This is reflected in the growth of our online business, which surged 
from 11% of our overall business in 1997 to 20% this year. This 
increase in percentage of trades conducted on the Internet came at a 
time when total trading volume on and off-line was up dramatically--
about 68% over last year. We believe that the trend toward Internet 
trading will accelerate and that we have an obligation to make the 
process as fast, convenient and reliable as possible for our existing 
and potential customers.
    Even when we operate in the online environment, current securities 
law and regulation requires us to leave a paper record. This includes 
opening an account and confirming trades, as well as other transactions 
such as wire transfers, money market checks, transfer of securities, 
portfolio reorganization instructions, as well as other services such 
as margin and option trading agreements.
    Much to the surprise of many of our online customers, who are used 
to the lightening speed of e-mail and other Internet communications, we 
are required to send them forms by mail, which must then be filled out 
and sent back to us by mail--often causing delays of several days. This 
is a cumbersome process that frustrates us and our customers, and which 
would be eliminated if H.R. 1714 were enacted into law.
    H.R. 1714, in particular Title III which deals specifically with 
the use of electronic records under Federal securities law, will cut 
through this bottleneck by clearing the way for companies like ours to 
put in place a flexible, yet legally binding mechanism for authorizing 
online transactions through digital signatures for our customers in all 
50 states and around the world. With a few strokes of the keyboard, our 
online customers will finally be able to open accounts, make payments, 
authorize us to act as their agent when their securities are subject to 
a reorganization, and in short, obtain all of the benefits promised by 
the Internet.
    I understand that concerns have been expressed that H.R. 1714 might 
interfere with efforts by the states to deal with this issue on a 
uniform and consistent basis. In particular, the work of the National 
Conference of Commissioners on Uniform State Laws on uniform electronic 
transactions legislation. However, it is my understanding that H.R. 
1714 is not intended to interfere with this effort, and there was 
testimony to this effect by state officials at the June 9 hearing held 
by your colleagues on the Telecommunications Subcommittee. The fact is 
that we need action on this as soon as possible and Federal legislation 
is our best hope for accomplishing this.
    As a business with customers in all 50 states and around the world, 
it is important for us to avoid a patchwork of inconsistent state 
electronic signature laws. I think that this would also be important to 
a Committee such as yours that encourages fair competition and 
protection of consumers. One of our main concerns is that differing 
state laws on electronic signatures will force us to ``customize'' our 
products to meet the requirements of each of the 50 states. This can 
have a disproportionate impact on smaller businesses by raising costs 
and making it difficult, and perhaps impossible, for us to serve their 
needs on a cost-effective basis.
    For example, our clearing house firm U.S. Clearing, provides 
clearance, trade and execution services for about 390 brokerage firms 
throughout the nation. Many of these companies are smaller, community-
oriented firms. U.S. Clearing also handles Internet and brokerage 
services for the Independent Community Bankers Association, a trade 
group consisting of smaller community-based banks. As the Internet 
grows, and people become more comfortable with doing business on-line, 
it will become even more important to have efficient, standardized 
regulation in place if we are to provide cost-efficient support to 
these smaller firms, thus helping them provide services to their 
customers that keep them competitive with larger companies.
    In conclusion, Mr. Chairman and Members of the Committee, H.R. 1714 
is important legislation not only for the online brokerage business but 
for all companies that engage in e-commerce now and that will do so in 
the future. H.R. 1714 is pro-consumer and pro-small business because, 
once enacted into law, it will facilitate the ability of our retail 
investors and small business customers to manage their money quickly 
and effectively. In fact, getting this bill enacted into law as soon as 
possible could be one of the most important actions Congress can take 
this year to help foster the orderly and reliable growth of Internet 
commerce and we look forward to working with you to achieve this 
objective.
    Thank you for the opportunity to testify today and I look forward 
to any questions you might have.

    Mr. Oxley. Thank you, Mr. Quick, and to all of you. Let me 
begin the questioning with Mr. Hogan and I want to explore a 
little bit the European Union directive and how that contrasts 
with what we are trying to do and based on your testimony I 
think indicating that we need to act before the European Union 
directive goes into effect. Could you walk us through that 
process?
    Mr. Hogan. Certainly. It is reasonably simple. The beauty 
of H.R. 1714 is that it has addressed directly and acknowledged 
the technology neutral solutions are the right solutions. The 
European directive in its current form and forms that have been 
discussed talk to specific technology solutions, specific 
protocols for achieving a digital signature result. All of them 
in our view make the mistake of freezing a view of the world at 
a moment in time. Technology is advancing so rapidly that any 
declared technology solution today will be ancient history in 2 
years at the most.
    We think that the committee's approach to declaring 
technology neutrality as the central theme is the right way to 
go. We also think that it is important for the United States to 
be on record, if you will, through action, declaring value and 
validity of digital signatures and a technology neutral 
solution. The majority of e-commerce today happens in America. 
It would be unfortunate in our view if another country or 
another group of countries declared a standard which might have 
to be met before we had the opportunity as a country to do the 
same thing.
    Mr. Oxley. What effect would it have--let me just ask all 
of you, assuming that the European directive is enacted by the 
European Commission and the European Parliament, what effect 
would that have on your business in Europe?
    Mr. Callcott. If I could follow up on what Mr. Hogan said. 
We strongly agree with his point of view on this. Schwab 
actually owns the largest discount broker in the United Kingdom 
right now and the first Internet broker in the United Kingdom 
and if we are required to set up different technology regimes 
for different of our international subsidiaries, we think that 
is going to retard the growth of electronic commerce not only 
in Europe but around the world.
    The United States is arguing at the United Nations and 
other forums for uniformity in approach to electronic 
signatures, and that is one of the reasons why we believe it is 
important to have uniformity among the 50 U.S. States. It is 
difficult for us to argue for national uniformity when we don't 
have domestic uniformity and as I said in my testimony, 
technology neutrality is important for exactly the reasons that 
Mr. Hogan said.
    Two years from now we expect electronic signature 
technology is going to be cheaper, faster, and easier to use 
for all consumers and we don't want to stop new and better 
technology from being adopted both in the United States and 
overseas and we are concerned that the European Union's 
approach may frustrate that.
    Mr. Oxley. Mr. Quick, do you have operations in Europe?
    Mr. Quick. No, we don't. I would not be an expert on this.
    Mr. Oxley. Let me ask Mr. Callcott, what's stopping you 
from using electronic commerce, electronic signatures today?
    Mr. Callcott. To go back to my testimony, the real concern 
is the lack of uniformity among the different State laws. My 
understanding is there are now over a hundred brokerage firms 
doing business over the Internet. I am not aware of a single 
one that will open an account using electronic signatures 
because of the great concern about whether those signatures are 
going to be viewed as valid under the laws of the different 
States. So of course we and everybody else here takes trades 
electronically, but many of the key events in handling an 
account like wire transfers and change of address and adding 
margin or option features to an account, my understanding is 
that everybody in the industry takes the same view as we do 
that there is just not enough legal certainty for us to take 
those steps right now.
    Mr. Oxley. Apparently there is an effort under way by the 
National Conference of Commissioners on Uniform State Laws to 
develop a uniform standard for the 50 States. What do you know 
about that and what would be your guess as to how successful 
and how long it would take them to achieve that goal? Mr. 
Quick?
    Mr. Quick. I would tell you after talking with our counsel 
and people working on this project for us, it would--it could 
take a couple of years for us to finally get agreement on this. 
You have heard this morning just how quickly this part of the 
business has taken off over the last several years and as you 
also heard this morning, that it will continue. It is being 
considered more and more by individual investors on a daily 
basis. For us to wait several more years for something like 
this to be enacted, to be agreed upon, certainly, you know, 
hinders. It does not help us. I don't really think it helps the 
individual investor.
    Mr. Callcott. I would certainly echo those remarks. We 
support the effort of the State commissioners on uniform laws 
and we hope that their effort is successful but as a point of 
reference, the Uniform Commercial Code took more than 10 years 
to be adopted and still hasn't been adopted by two of the 
States. The State Uniform Securities Code was first adopted in 
the 1950's and then substantially revised in the 1980's and 
still has not been adopted by a substantial number of States 
and as my panelists said earlier, technology is moving so fast 
in the Internet area that waiting for years or even decades for 
a uniform solution to emerge at the State level is going to 
greatly impede the growth of electronic commerce but at the 
same time, this legislation, I think it is important to 
recognize, will not prevent the States from going forward with 
that effort and so we think this sort of limited level of 
interference with State law that is involved in this bill is 
appropriate in creating the needed level of uniformity now to 
allow the States to then go ahead with their process.
    Mr. Oxley. You mentioned the UCC. What effect would--if we 
pass this legislation, what effect would that have on the UCC 
in relation to electronic commerce and electronic signatures?
    Mr. Hogan. It is our view it wouldn't have a negative 
effect at all. This legislation simply validates the fact that 
digitalized or electronic signatures are to be treated the same 
way as an ink on paper signature. The beauty of that statement 
is that all of the rest of the laws can go forward and be 
applied in the same way they do today. It brings certainty and 
trust to the system and certainly in our business, the 
financial services business where we deal with people's money, 
that level of certainty, that level of confidence is helpful to 
the marketplace as a whole. So we think this is very much the 
perfect solution to that problem.
    Mr. Oxley. In your opinion, though, if we pass this 
legislation, would the UCC have to amend--would they have to 
amend the UCC to reflect that?
    Mr. Callcott. I don't think that would be necessary. This 
as a piece of Federal law would supersede any part of the UCC 
that was inconsistent with it but it would continue to allow 
the States to legislate in specific areas where they found a 
specific need on things like disclosure or consumer protection 
type rules. So in our view, this bill is actually complimentary 
to the Uniform Commercial Code. It would not require the States 
to go back and repeal parts of the Uniform Commercial Code. Our 
hope is that the Uniform Electronic Transactions Act will be 
reported out and adopted by the States and I think that would 
be completely consistent with the legislation that is under 
consideration here today.
    Mr. Oxley. Thank you. My time has expired. The gentlelady 
from Colorado.
    Ms. DeGette. Thank you, Mr. Chairman. I never heard such 
faith in Congress doing something before 2 years in the entire 
2\1/2\ years I have been in Congress. So I hope you are right, 
Congress can do something before the 2 years.
    I do really support electronic commerce and I really 
support the concept of electronic signatures very strongly but 
I have a couple of questions. One is the area the chairman was 
talking about, this preemption of State laws, because it seems 
to me that in the area of electronic signatures there might be 
some State need to go beyond the protections of the Federal law 
and in looking at this, it seems to me that this act would 
preempt State laws.
    Mr. Quick, you testified that the States came into the 
telecom hearing and testified they were in favor of this act 
but the Commerce Department's general counsel came in and 
testified that he saw some problems with the State preemption. 
I am wondering if there isn't some way we can write the Federal 
law so it allows some flexibility in the State but still gives 
you the uniform protection for electronic signatures that you 
need.
    Mr. Quick. As I said, I was just informed that that did 
take place and in fact there might have been some questions 
about it but that overall they were in agreement that this was 
something that was going to take time to enact. And I would say 
to you that again I don't think anybody can really truly 
appreciate just how quickly this segment of the business is 
growing. We just recently had, you know, the major competitor 
who a year ago was telling the general public this is not 
efficient and there was a lot of questions about this type of 
electronic trading has completely changed their tune so that 
they are now going to come into the game, you know, this 
December. So for the largest, you know, of the retail brokerage 
firms to recognize this, this is something that I think they 
didn't anticipate and we certainly didn't anticipate a few 
years ago. It is just a matter of how are we going to do it and 
how are we going to do it to protect the individual investor 
here. That is the biggest concern here is protecting our 
clients.
    Mr. Callcott. If I could add just one point to that. 
Actually yesterday in the Senate, in the Senate Commerce 
Committee, there was a markup on the Senate bill which is very 
similar to this bill and actually the general counsel of the 
Commerce Department submitted a letter supporting that bill. 
There was a slight amendment to the preemption provisions that 
had been introduced in the Senate and I would be happy to 
provide the committee with a copy of Mr. Pincus' letter in 
support of Federal electronic signature legislation.
    Mr. Oxley. Without objection, it will be made part of the 
record.
    [The information referred to follows:]

               United States Department of Commerce
                                           Washington, D.C.
                                                      June 22, 1999
The Honorable Spencer Abraham
Committee on Commerce, Science, and Transportation
United States Senate
Washington, D.C. 20510-6125
    Dear Senator Abraham: This letter conveys the views of the 
Department of Commerce on the substitute version of S. 761, the 
``Millennium Digital Signature Act,'' that we understand will be 
marked-up by the Senate Commerce Committee. A copy of the substitute 
that serves as the basis for these views is attached to this letter.
    In July 1997 the Administration issued The Framework for Global 
Electronic Commerce, wherein President Clinton and Vice President Gore 
recognized the importance of developing a predictable, minimalist legal 
environment in order to promote electronic commerce. President Clinton 
directed Secretary Daley ``to work with the private sector, State and 
local governments, and foreign governments to support the development, 
both domestically and internationally, of a uniform commercial legal 
framework that recognizes, facilitates, and enforces electronic 
transactions worldwide.''
    Since July 1997, we have been consulting with countries to 
encourage their adoption of an approach to electronic authentication 
that will assure parties that their transactions will be recognized and 
enforced globally. Under this approach, countries would: (1) eliminate 
paper-based legal barriers to electronic transactions by implementing 
the relevant provisions of the 1996 UNCITRAL Model Law on Electronic 
Commerce; (2) reaffirm the rights of parties to determine for 
themselves the appropriate technological means of authenticating their 
transactions; (3) ensure any party the opportunity to prove in court 
that a particular authentication technique is sufficient to create a 
legally binding agreement; and (4) state that governments should treat 
technologies and providers of authentication services from other 
countries in a non-discriminatory manner.
    The principles set out in section 5 of S. 761 mirror those 
advocated by the Administration in international fora, and we support 
their adoption in federal legislation. In October 1998, the OECD 
Ministers approved a Declaration on Authentication for Electronic 
Commerce affirming these principles. In addition, these principles have 
also been incorporated into joint statements between the United States 
and Japan, Australia, France, the United Kingdom and South Korea.
    Congressional endorsement of the principles would greatly assist in 
developing the full potential of electronic commerce as was envisioned 
by the President and Vice President Gore in The Framework for Global 
Electronic Commerce.
    On the domestic front, the National Conference of Commissioners of 
Uniform State Law (NCCUSL) has been working since early 1997 to craft a 
uniform law for consideration by State legislatures that would adapt 
standards governing private commercial transactions to cyberspace. This 
model law is entitled the ``Uniform Electronic Transactions Act'' 
(UETA), and I understand that it will receive final consideration at 
the NCCUSL Annual Meeting at the end of July. In the view of the 
Administration, the current UETA draft adheres to the minimalist 
``enabling'' framework advocated by the Administration, and we believe 
that UETA will provide an excellent domestic legal model for electronic 
transactions, as well as a strong model for the rest of the world.
    Section 6 of the substitute (``Interstate Contract Certainty'') 
addresses the concern that several years will elapse before the UETA is 
enacted by the states. It fills that gap temporarily with federal legal 
standards, but ultimately leaves the issue to be resolved by each state 
as it considers the UETA.
    With regard to commercial transactions affecting interstate 
commerce, this section eliminates statutory rules requiring paper 
contracts, recognizes the validity of electronic signatures as a 
substitute for paper signatures, and provides that parties may decide 
for themselves, should they so choose, what method of electronic 
signature to use.
    Another important aspect of the substitute is that it would provide 
for the termination of any federal preemption as to the law of any 
state that adopts the UETA (including any of the variations that the 
UETA may allow) and maintains it in effect. We note that this provision 
would impose no overarching requirement that the UETA or individual 
state laws be ``consistent'' with the specific terms of this Act; this 
provision, and its potential effect, will be closely monitored by the 
Administration as the legislation progresses. There is every reason to 
believe that the States will continue to move, as they consistently 
have moved, toward adopting and maintaining an ``enabling'' approach to 
electronic commerce consistent with the principles stated in this Act. 
We therefore believe that any preemption that may ultimately result 
from this legislation can safely be allowed to ``sunset'' for any state 
upon its adoption of the eventual uniform electronic transactions 
legislation developed by the states.
    We also support limiting the scope of this Act to commercial 
transactions, which is consistent with the current approach of the 
draft UETA, and utilizing definitions in the Act that mirror those of 
the current draft UETA, which we consider appropriate in light of the 
expert effort that has been directed to the development of the UETA 
provisions under the procedures of NCCUSL.
    With regard to section 7(a), the Administration requests that the 
Committee delete the reference to the Office of Management and Budget 
(``OMB''); there is no need for agencies to file duplicate reports. The 
report that the Secretary of Commerce is directed to prepare pursuant 
to section 7(b) will, of course, be coordinated with OMB.
    The substitute version of S. 761 would in our view provide an 
excellent framework for the speedy development of uniform electronic 
transactions legislation in an environment of partnership between the 
federal government and the states. We look forward to working with the 
Committee on the bill as it proceeds through the legislative process.
    The Office of Management and Budget advises that there is no 
objection to the transmittal of this report from the standpoint of the 
Administration's program.
            Sincerely,
                                           Andrew J. Pincus
                                                    General Counsel
Attachment

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    Ms. DeGette.  This is probably the simple solution we 
needed so I would be very interested, Mr. Chairman, in taking a 
look at that attempt as we move forward with this act. Maybe we 
can solve all the preemption problems very easily.
    I have just one other issue that I am concerned about as we 
move more into electronic commerce and electronic signatures. 
We have held hearings in this subcommittee on issues of 
identity theft and even at this moment we are grappling with 
issues of privacy in the context of financial service 
modernization which I think we might be hearing on the floor 
next week. These issues are really thorny to policymakers 
because on the one hand, we want to encourage the free flow of 
commerce and in particular electronic commerce. On the other 
hand, we want to make sure that we protect consumers and 
investors from real security breaches that exist much more so 
with computers than with the big file you have, Mr. Hogan. I am 
wondering if you can comment on that. We will start with Mr. 
Hogan on that.
    Mr. Hogan. Sure. To a large extent they are separate 
issues. All the financial services firms, bank brokerage firms 
are extremely sensitive about the security of individuals' 
information. They are in that business and have been regulated 
around those issues for years. The integrity of data that we 
get whether it is ink on paper or an electronic signature 
equivalent, once we get them are held and maintained with the 
same good process that we use today and have used since the 
30's. I don't think this bill will have an impact positive 
negative or otherwise on the issue of privacy. The laws that 
exist today, whether it is the Uniform Commercial Code or 
Federal legislation in other areas, deal well with the 
practices that people have to use to engage in a relationship 
and to memorialize that relationship. Those practices aren't 
going to change. The digital signature is not the single sole 
element that is used by a firm to engage in a relationship with 
a client. We collect a number of bits of information about a 
human being and we compare that in our case today to an outside 
third party source. It happens to be a credit rating agency but 
it is done instantly. The matchup of a series of data which are 
unique about an individual is what allows us to form a belief 
that we are dealing with that unique individual.
    There is a de minimis amount of successful theft identity 
that happens in the outside world today. It happens before 
people get to a financial services institution and hopefully 
our good practices find it before it can do any real damage. So 
I don't think this bill is inconsistent with the goal of 
protection of people's privacy and their data and I don't think 
it diminishes in any way, shape or form how firms are going to 
behave and conduct their activity in terms of engaging in a 
client relationship.
    Mr. Callcott. If I could follow up, security is a critical 
concern for us. We have a large full-time security staff that 
tries to prevent any kind of breaches of security on our 
website. Our belief is that electronic signature technology is 
actually more secure against forgery than pen and ink 
signatures and the fact is our experience has been that we have 
had instances of identity theft but where they have been have 
been customer statements stolen out of the U.S. Mail and then 
someone calling up one of our telephone call centers as opposed 
to trying to go on-line. So of our top three security issues 
that we have had at Schwab, Internet fraud is not one of those 
top three. The top three are, as I say, identity theft and 
people trying to call us up and then credit card fraud and 
check fraud. So we believe that strong electronic signature 
legislation is in fact good for customer signature and security 
of their private financial information and is something that 
will be very beneficial to customers.
    Mr. Quick. I would like to reiterate that. With the 
hundreds of thousands of transactions that we do on a daily 
basis, it has not been brought to my attention as the head of 
the company that we have never had a problem where, you know, 
somebody has found themselves in a position where, you know, 
their moneys or securities have been lost, have been stolen as 
a result of using the Internet. And just to reiterate, before 
we have had more problems with forged signatures on documents 
as opposed to the Internet. So I really don't think that it is 
a problem.
    Ms. DeGette. I yield back. Thank you, Mr. Chairman.
    Mr. Oxley. The gentlelady yields back. The gentleman from 
California.
    Mr. Bilbray. I would like to follow up on that because I 
think there is an inherent fear of the unknown or something 
new. But to reinforce a statement by the fact that it is not 
only less secure, it is more secure with electronic signature 
because the ability to cross reference instantly through the 
use of technology which you wouldn't be able to do with a hard 
copy without screening and going through that whole thing. So 
the people that really need to fear this increased efficiency 
of technology is the crooks out there trying to hide--you know, 
basically rip off the consumer. Would you agree with that?
    Mr. Hogan. We certainly think that is right.
    Mr. Bilbray. My colleague from California will point this 
out that California now has gone to not only the electronic 
signature but also the digital fingerprint reading for all our 
identifications in California, driver's license and certain 
technologies. And frankly it has been a big boon for a lot of 
people to stop that. The question I have is do we have the 
possibility to take advantage of that in the signature issue to 
where a company could not only offer to the client the ability 
to do electronic signature but also to reinforce it with a 
digital fingerprint to be able to prove that somebody is not 
ripping them off.
    Mr. Hogan. I think again the beauty to us of H.R. 1714 is 
that it doesn't freeze time. Right now that sounds like it 
works very well in California and is excellent technology but 
in 9 months, 12 months, 18 months, a whole different level of 
technology and a whole different level of checking, a whole 
different level of verifying data can come into being and I 
really think that the central theme here that is excellent is 
this lack of dictating a technology or technology type solution 
or a protocol around it. So I would urge that the language that 
you have today be the language that you go with because it does 
leave us open for the future which will come at an accelerated 
rate.
    Mr. Callcott. There is very exciting technologies that are 
emerging right now which would allow a computer basically to be 
locked unless somebody has a thumb print scan that unlocks it 
specifically for them. Those are the types of new technology 
that we would like to see legislation like this recognize. The 
European Union and some of the States have honed in on what is 
called public key, private key encryption technology, which is 
good technology but we don't think it is the only technology 
out there and one of the reasons why we support this 
legislation is because it will allow the growth of new and very 
interesting and important technologies to protect customer 
security.
    Mr. Bilbray. I know from working in public services the 
electronic signature issue and the digital reading capabilities 
were great at getting welfare fraud. We had people using three 
or four different names. No way would we ever have caught up 
with them in any other way except for the fact that we were 
able to track down the fact that there were people who were 
digitally identified as being three different people on the 
same fingerprint. And I think there is people that are 
concerned about government mandating or utilizing 
fingerprinting to a large degree. But I think the flip side on 
that is getting people used to technology, the private sector 
to offer this as part of the security package if they want it 
and be able to--people being able to understand that it is not 
something to be feared, but something to really appreciate. I 
think that we have got a great opportunity here and I know 
everybody sees the dark side of the cloud as it moves over but 
I think this issue if it is handled appropriately is going to 
be something that we look back and say, God, you remember when 
we used to have to try to compare signatures by the I and see 
how a -Y was done and an -E. Let's face it, our grandchildren 
are going to look back and laugh about the fact that we used 
signatures as some kind of proof of who you are. That is sort 
of bizarre. But thank you and I yield back.
    Mr. Oxley. The gentleman yields back. The gentleman from 
Minnesota, Mr. Luther.
    Mr. Luther. Thank you, Mr. Chairman. Thanks for the 
hearing. In reading legislation, it appears that what this 
would do and I think you have alluded to it also, it would 
allow each company really to establish its requirements for 
what would meet the test here of either electronic signature or 
an electronic record. I take it that that in your view, that is 
preferable to having one standard that would apply to all 
companies. And my question then is what is the national 
association pursuing? In other words, are they pursuing 
something along the lines of having a national or a State 
standard of the requirements rather than having it be an 
individual company requirement?
    Mr. Quick. I believe that what this does is it prevents a 
monopoly because this is not dictating what you do, you know, 
how you are going to do it. It actually, I think, promotes the 
spirit of entrepreneurship that you are able to come up--and 
some people can do it in house. My colleague here at the table, 
their firm is one of the best in the country for development of 
technology so Schwab might do it in house as opposed to our 
firm which has a tendency to want to--we say we are not in the 
technology business so we employ outside firms to come in and 
offer a solution to us. So I think this really truly does not 
give one particular company a monopoly on this whole process.
    Mr. Callcott. My understanding is that the State 
commissioners on uniform State laws originally started off 
drafting a bill that was going to be built around the public-
private key, public key infrastructure technology and they have 
made a U-turn on that and what they are anticipated to report 
out later this summer is going to be a bill like this bill that 
is technology neutral that allows the marketplace to decide and 
firms and consumers to decide what is the appropriate level of 
technology for which particular transactions and so we think 
that where they are going, although they haven't reported a 
final product yet, is going to be consistent with the 
technology neutral approach of H.R. 1714.
    Mr. Luther. Are you aware of any significant differences 
that they have in terms of the direction they are going from 
this legislation?
    Mr. Callcott. No. This is very sort of minimum, bare bones 
legislation here and we think what--where the States are going 
is in fact consistent with this approach.
    Mr. Hogan. That is our understanding as well.
    Mr. Luther. As I understand it from I forget who testified 
to this, but in terms of consumer protections and we know that 
States have many of them and a variety of them, that you are 
basically saying here that nothing that is contained here would 
undermine any of the consumer protections that a State would 
have? In other words, if a State said in this State to have a 
transaction you have got to have all of these big disclosures 
in a certain size print and even have witnesses to this or 
whatever, those would all be valid under this legislation?
    Mr. Hogan. Our view certainly is that is correct and in 
particular in connection with this portion of the proposed 
legislation because it is dealing with the securities firms and 
financial securities world which, broadly speaking, has 
probably the greatest level of granular detail of how it 
handles and treats people's privacy.
    Mr. Callcott. I would bring your attention to section 102 
of the legislation which allows either a Federal agency or a 
State to modify or limit the provisions to impose a new 
disclosure requirement or to pick out a particular transaction 
that needs to be handled in a different way. They can do that. 
The problems that right now many States have, hundreds, even 
thousands of different provisions in their State laws that 
refer to signatures in some ways and some of those, you know, 
were written in a way that only contemplated pen and ink 
signatures and it is sort of a difficult thing for States to go 
back and amend all of their statutes to say, oh, we meant to 
allow electronic signatures too. What this will do is sort of 
level the playing field and then States can go back and pick 
out, as well as the Federal Government and Federal agencies, 
and pick out specific transactions or issues where there needs 
to be, you know, a higher level of disclosure or something like 
that. And this statute is consistent with that but what it will 
do is sort of, you know, establish a baseline of no 
discrimination against electronic signatures which doesn't 
exist today.
    Mr. Luther. And then basically, Mr. Chairman, what you are 
saying is that if you refer to page 4 of the bill then, that 
none of those kinds of rules would be what would be considered 
inconsistent with the provisions of section 101? In essence 
what you are saying is that they would have the flexibility to 
do that?
    Mr. Callcott. That is my understanding.
    Mr. Hogan. Ours as well.
    Mr. Luther. Thank you.
    Mr. Oxley. The gentleman's time has expired. The gentleman 
from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. The first question to 
the panel at large is in electronic signatures is encryption 
important? Encryption technology?
    Mr. Hogan. It can be. Again, the reason this particular 
bill is so useful is that it doesn't dictate a technology, 
particular technological solution. It can be is truly the 
answer.
    Mr. Callcott. The most prominent technology that is out 
there today for electronic signatures, the public key, the 
private key infrastructure technology does rely heavily on 
encryption so encryption is definitely a part of current 
technologies and I think we would anticipate they would 
continue to be an important part of digital signature 
technologies in the future.
    Mr. Shimkus. At a hearing on this bill in the 
Telecommunications Subcommittee, which is one I serve on, 
earlier this month, one witness stated that companies have not 
been able to point to any real world problems in the acceptance 
of electronic signatures that are currently obstructing the 
development of electronic commerce. Do you agree with this 
statement?
    Mr. Callcott. Actually I disagree with that statement and 
it goes back to a question that Chairman Oxley asked earlier. 
There are over a hundred firms in the securities industry right 
now doing trading on the Internet. I am not aware of a single 
firm that has implemented electronic signatures for opening 
accounts and other transactions that require a signature 
precisely because there is this welter of un-uniform, 
inconsistent, conflicting State laws and so we have held back 
because of that inconsistency that exists and we believe this 
legislation would cure that inconsistency. So I think in fact 
there are a lot of people who are not implementing electronic 
signatures because of that legal concern right now.
    Mr. Quick. I think you have to take into consideration the 
liability that our firms take on on behalf of our clients when 
we are buying or selling securities. The last thing we need to 
do is go into a court of law or arbitration to be told that 
since we didn't have the proper signature on file, that it is 
our problem and not the problem of the individual. I mean, for 
instance, perfect example is the options agreement that must be 
signed. If it is not signed, it is our responsibility. None of 
us would take on a transaction and not be protected, and that 
is one of the reasons why we have not, you know, done this in 
the industry to date.
    Mr. Shimkus. This was probably a point of discussion 
earlier and I apologize because I was at another hearing at the 
same time. It is tough to be in two places at one time but you 
probably have addressed the issue of technological neutrality. 
Do you all agree that it should be technologically neutral and 
if you don't, why?
    Mr. Hogan. We absolutely agree and it is one of the core 
reasons why we support the legislation.
    Mr. Callcott. Right. And the key reason, as we were 
discussing with Congressman Bilbray earlier, was that this is 
the technology--a set of technologies that is rapidly evolving 
and we think it would be a great mistake to freeze into law one 
particular technology today. We think it is much preferable to 
allow the marketplace to choose what technology is the right 
technology for a particular type of transaction or particular 
type of customer.
    Mr. Shimkus. And that is the same for you, Mr. Quick.
    Mr. Quick. I basically say the same thing in terms it 
doesn't really create a monopoly of one company controlling the 
industry.
    Mr. Shimkus. I guess my only question, if I may, Mr. 
Chairman, finish up on this, I am not a lawyer and I don't even 
play one in another life. But for the official documents and 
keeping of records and just like the financial transaction, 
whether it be a digital signature, or whether it be an eye scan 
or whether it be some other issue, do you see problems with the 
differences that could develop on legislation that is not 
technologically neutral?
    Mr. Hogan. We certainly don't and we spend millions of 
dollars developing technology. The technology is changing so 
rapidly and it is getting so much better that the ability to 
maintain and recognize or to conceptualize a paperless world 
and have a digitalized documentation set which is verifiable, 
verifiable as to who signed it, verifiable as to it hasn't been 
changed, verifiable as to how long it has been stored is here 
today in a slightly cumbersome form and will be very fluidly 
available and very easy to implement as time goes by. So we 
think this is absolutely the right way to go.
    Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
    Mr. Oxley. The gentleman yields back. I would just say the 
gentleman from Illinois is not a lawyer. He is a baseball 
catcher and I think those two are mutually exclusive.
    Mr. Shimkus. They are.
    Mr. Oxley. The gentleman from Arizona.
    Mr. Shadegg. Thank you. Let me begin by asking in the 
traditional fashion, I apologize for being late and not having 
heard your opening statements or answers to earlier questions. 
In the old world, this would have been handled by the 
commissioners on uniform State laws and I guess perhaps you 
have already been asked about this but I am curious. At what 
point are they in this process, are they making progress, is 
that something that we need to be aware of and are they going 
with technologically neutral--moving in the direction of some 
legislation that would be technologically neutral so as the 
technology moved forward, whatever they recommend for State 
legislation would accommodate the changes in technology?
    Mr. Callcott. State commissioners on uniform State laws are 
working on an electronic signatures project. Originally they 
were going to pick a particular technology and later they 
decided--they made a 180-degree turn on that and decided to go 
with the technologically neutral approach. We are hoping that 
they will report out a bill this summer and of course we are 
hoping--and incidentally, that bill we believe is very 
consistent with H.R. 1714.
    The concern that we have that I think each of us expressed 
earlier is that the State uniform law process can be a very 
slow process. The Uniform Commercial Code took almost 10 years 
to adopt across the States and two States still haven't adopted 
it. The Uniform State Securities Code was originally proposed 
in the 50's and still hasn't been adopted in a number of 
States. So with the speed at which digital commerce is moving 
right now, we think relying solely on the uniform State law 
process would be a mistake. At the same time, this statute will 
allow the States to do specific things that they want to do 
that are after the adoption of this statute, so we think this 
is a very minimal intrusion on federalism that is very 
consistent with the interstate nature of Internet commerce.
    Mr. Shadegg. I understand in response to a question by Ms. 
DeGette, you indicated that you see a digital signature as 
assisting in--with regard to the issue of identity theft and 
preventing future identity thefts and somebody at least 
indicated on the panel that one of the problems in identity 
theft right now is that the paper documents are intercepted and 
stolen before they ever reach you or perhaps even submitted to 
you fraudulently. Do you know the degree to which this is part 
of the problem of identity theft today, particularly in your 
industry?
    Mr. Callcott. As I said earlier, that is our single largest 
fraud problem today is that people will somehow steal a 
customer's account number and information and call us up and 
impersonate that customer and try and get a wire transfer out 
of the customer's account, and we are very enthusiastic about 
digital signature technology because we believe it is actually 
more secure and more resistent to forgery than paper base 
signatures. So it is an issue. It is not a huge issue for us 
but it is the largest single fraud exposure that we have at 
this time.
    Mr. Hogan. That is our experience as well. The thefts occur 
before someone tries to have a relationship with the financial 
service institution. The thefts occur in large part through 
theft of mail, and that is where the information is gathered 
and then people try to use that.
    Mr. Shadegg. If this legislation were enacted, do you 
envision that an account can be opened electronically, a 
signature created electronically and there would be no paper 
transaction whatsoever; is that right?
    Mr. Callcott. Yes.
    Mr. Quick. It would become paperless.
    Mr. Shadegg. With regard to the circumstance you just 
described, the digital signature would be on file and therefore 
would preclude the theft or the attempt by someone 
impersonating the account--the actual account holder from 
getting access to the account.
    Mr. Hogan. In a far more secure way than exists with ink on 
paper, yes.
    Mr. Shadegg. The law enforcement community, sometimes they 
want paper to make cases. Sometimes paper is necessary for 
cases. Have they expressed any concern to you or were they in 
agreement that this is an advance in the area?
    Mr. Hogan. We haven't heard a concern, if I might, and in 
fact I think what you are going to find with respect to people 
interrelating with financial services firms, banks, brokerage 
firms, this is an upgrade to what the enforcement people will 
be able to deal with. We take in real names of people, real e-
mail addresses, real mailing addresses. We interphase with them 
in connection with their money. There is an entire audit trail 
if you will, and the electronic audit trail is faster, quicker, 
and more absolute than the old audit trail of paper, mailboxes, 
post office boxes, different connectivity points. We think this 
will be a great aid to anyone who needs to engage in an 
enforcement function whether it is police type activity or 
securities and exchange type activity.
    Mr. Callcott. I would echo that. One of the points I made 
earlier is yesterday the Commerce Department submitted a letter 
supporting electronic signature legislation in connection with 
the Senate Commerce Committee markup and I believe the Commerce 
Department does represent the interests of the Secret Service 
and other law enforcement organizations on this issue.
    Mr. Shadegg. Not necessarily.
    Mr. Callcott. One would hope.
    Mr. Shimkus. I was waiting for that.
    Mr. Shadegg. Let me ask you kind of a basic question. Would 
an individual have a single electronic signature or would they 
have an electronic signature per account? That is, if someone 
was doing business with Schwab but also doing business with 
somebody else, would they have a different electronic signature 
with each of those locations?
    Mr. Callcott. I think either is possible depending on what 
technology different companies choose to adopt. The most common 
technology that exists today would assign a single electronic 
signature to a single customer, but this is an area where the 
technology is moving very fast and we believe that or at least 
I believe that it is quite possible that people will pick 
unique identifiers in the future for different firms they do 
business with.
    Mr. Shadegg. How complex or how technical is it to be able 
to create the signature and then use the signature in 
transactions? For example, I was the victim of an identity 
theft. Someone sent an e-mail to one of my constituents, an e-
mail which was very offensive. That constituent believed it had 
actually come from me and was offended by it, turned it over to 
the media. Fortunately the media in my community knew me. They 
called me. They said did you send this e-mail and we said 
absolutely not and we had done some work and the attorney 
general's office was able to track down who sent the e-mail. I 
guess my question is, how complicated would it be for me to 
establish a signature where my electronic signature had to go 
on any e-mail I sent out so that I could confirm that it really 
was my e-mail?
    Mr. Hogan. It is certainly possible today. Firms such as 
ours anyway haven't implemented that yet because we don't want 
to spend the money until we know where the direction is going 
to come from in terms of what we have to do. In the environment 
such as H.R. 1714 would provide we would be able to do that.
    Mr. Callcott. One of the things we are hoping is that as 
the technology evolves, it is going to become easier to use. It 
is going to take up less space in e-mails and things like that. 
Right now it is not absolutely seamless but it is an area where 
the technology is improving rapidly on a month to month basis 
and I think it will become much more ubiquitous within the next 
couple of years so that exactly that kind of problem can be 
prevented in the future.
    Mr. Shadegg. Thank you very much. I yield back the balance 
of my time.
    Mr. Oxley. I thank the gentleman. The gentleman from 
Arizona has been one of the leaders in identity theft issues 
and I appreciate his participation. Let me if I could just wrap 
it up and ask all of you to kind of do a little crystal ball 
gazing. Assuming that this legislation passes, how quickly can 
you roll out electronic signature services for your customers, 
what kind of authentication technologies might you use, how are 
you going to handle the costs? Are you going to pass it on to 
the consumer? Just give us some kind of an idea in a little bit 
as to how you see this whole thing coming together, assuming we 
get our job done?
    Mr. Quick. I believe it can be enacted within several 
months of this legislation being passed. I do not see it being 
passed on. In fact to the contrary I think we will end up being 
more efficient, more cost efficient by having this versus the 
traditional mailing postage fees involved and the forms going 
back and forth on a regular basis to these customers. So that I 
see it as a win-win for us as well as for the individual 
investor. I think that they are going to be protected. It is 
going to be easier and more efficient for them as well as for 
us to operate our business as we move forward.
    Mr. Oxley. Hopefully those cost savings will be passed on 
to your customer.
    Mr. Quick. Well, one of our companies charges $7.95. We are 
not going to go much lower on a transaction.
    Mr. Oxley. Advertising there. Mr. Hogan, you mentioned in 
your testimony the forms. I think some of the members weren't 
here but you might reiterate the number of forms that you 
brought and give us an idea about what your current life is 
like.
    Mr. Hogan. We have 40 different forms today that, depending 
upon how you want to relate to the firm, have an IRA account, 
have a regular account, have a joint account requiring ink on 
paper signatures. All these can be eliminated if we could go to 
a digital signature environment. And we would eliminate them. 
We would--people come to us because they want an on-line 
experience. We are an on-line broker. We don't have bricks and 
mortar offices. They are predisposed to want to deal with a 
paperless environment, but remember it is not paperless. We 
store the records. We keep all of these accounts for them. We 
do the backups. We are their safe deposit box, if you will, for 
financial records about their assets. They like that. They come 
to us in the evenings, broadly speaking, as well as during the 
day. They do their housekeeping, their finances at home. They 
want the ability to do that at all hours of the day and night, 
24 hours a day and they don't want to get this back in the mail 
in a week and a half from us saying please, now that you have 
done it electronically, do it on paper again.
    We think we can implement a solution in a short period of 
time, months absolutely, not 6 months, probably less than that. 
The net cost savings to us is so large as it is to the client 
that there would be no amount of money to pass along. I haven't 
done it on this but the average cost to send a document out to 
a client is well in excess of $3 a mailing and then we have to 
get it back so the individual consumer has to spend their money 
or their time and energy to put it back in the mail to send it 
back to us. All those things go away. You get instantaneous 
results, you get certain verifiable results and we certainly 
wouldn't have a cost that I can conceive of to pass along to 
anybody.
    Mr. Callcott. I would agree with Mr. Hogan. We now have 
over a thousand people in our brokerage operations unit who 
basically handle paper coming to and from customers and, you 
know, it is going to be a quicker, more efficient process not 
only for us but also for the customers because right now when a 
customer fills out a paper base document, they may make a 
mistake on it or forget to fill out something. If they send 
that in to us by paper, we have to call them or sometimes send 
it back to them whereas when you do it on-line, you know, you 
will get a prompt saying you need to fill out section -B and it 
can be corrected instantaneously.
    So it is not only going to be quicker and cheaper for us, 
it is going to be quicker and cheaper for the customer to get 
their account opened. We are actively looking at the different 
technologies right now. We like a lot of firms are going to 
have a Y2K freeze on technology implementations for the last 
couple of months of this year but we would certainly anticipate 
if this legislation passes quickly, that early next year we 
would roll out electronic signatures for our customers.
    Mr. Oxley. Thank you and thanks to all of you for excellent 
testimony. I would ask unanimous consent that all members' 
opening statements be made part of the record. If there is 
nothing else to come before the subcommittee, the subcommittee 
stands adjourned.
    [Whereupon, at 11:10 a.m., the subcommittee was adjourned.]
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