[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
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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
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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
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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.]