[Congressional Record Volume 145, Number 60 (Thursday, April 29, 1999)]
[Senate]
[Pages S4453-S4454]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ABRAHAM (for himself, Mr. McCain, and Mr. Lott):
  S. 921. A bill to facilitate and promote electronic commerce in 
securities transactions involving broker-dealers, transfer agents, and 
investment advisers; to the Committee on Banking, Housing, and Urban 
Affairs.


                 ELECTRONIC SECURITIES TRANSACTIONS ACT

  Mr. ABRAHAM. Mr. President, I rise today with Senator McCain and 
Senator Lott to introduce legislation designed to modernize the manner 
in which registered securities broker-dealers, transfer agents, and 
investment advisers serve millions of American investors every day.
  Only a few years ago, a few pioneering brokerage firms, utilizing the 
vast potential of the Internet, began to revolutionize the securities 
industry by offering individual investors the opportunity to buy and 
sell stocks online. Because of the lower costs of electronic 
transactions, investors have found they can place trades online at a 
mere fraction of the price they were paying for services at traditional 
brokerage firms. They have also found that online brokerage firms offer 
them access to a wide array of information, investing assistance, and 
research that previously was available only to institutional investors. 
Almost overnight, many investors have demonstrated their preference for 
the savings and the empowerment that online brokerage services give 
them.
  For example, today Charles Schwab, which has been at the forefront of 
offering electronic services, reports that it has approximately 2.5 
million active online accounts and that more than 50 percent of its 
custoemr trades are placed online. Since Schwab offers its customers 
multiple channels of access to its trading services, the fact that more 
than half of its customer trades are placed online is a dramatic 
illustration of the investing public's enthusiasm for and acceptance of 
online services. The dramatic emergence of online-only brokerage firms, 
such as E*Trade, Discover and Ameritrade, and the continued migration 
of traditional brokerage firms to the Web is further evidence of this. 
Soon, millions of securities transactions will be conducted 
electronically every day.
  Unfortunately, the full potential of online investing has been 
impeded because of antiquated laws that do not yet take account of 
electronic commerce. These laws act as barriers to the efficiencies and 
investor empowerment opportunities that the online brokerage industry 
offers. Now, once again, it is time for the government to catch up to 
the market developments spurred by the technology sector. It is time 
for the government to remove impediments to online investing.
  Today, when a person wishes to become a customer of an online broker, 
he can visit the web-sites of various brokerage firms to compare the 
value and services those firms offer. He may even provide some 
information about himself and the type of account he wishes to 
establish. However, because of traditional principles of contract law 
and certain recordkeeping requirements, an investor cannot open the 
account online with any legal certainty. Instead, he must print the 
application and physically sign and send it by regular mail. The 
technology gap demonstrated here must be bridged. Investors who, once 
their accounts are opened, may access investment tools and research and 
quickly submit trade orders online, should not have to wait days or 
perhaps even weeks to complete the process for opening an account. This 
system can and should be changed.
  Continuing to require pen-and-ink signatures on account applications 
and other documents, when secure electronic signature technology 
exists, imposes unnecessary costs and inefficiencies on brokerage firms 
and customers alike. Similar costs and inefficiencies have been 
recognized and removed in other areas of securities regulation, such as 
recordkeeping and document delivery. Today, brokerage firms can store 
documents in electronic rather than paper format and are allowed to 
deliver many documents, such as prospectuses, to customers 
electronically. There is no reason why the advantages of technology 
cannot and should not be extended to documents that require a 
signature.
  The legislation my colleagues and I introduce today would do just 
that by facilitating and enabling the use of electronic signatures by 
registered broker-dealers and others in the securities industry in 
their business dealings with customers and other transactional parties. 
The legislation would make clear that individuals can open a brokerage 
account and conduct business with a brokerage firm using an electronic 
signature as proof of identification and intent. It would also give 
both brokerage firms and their customers the assurance that they can 
rely on electronic signatures in their business dealings and that the 
validity of those dealings will not be challenged merely because a pen-
and-ink signature was not used.

  At this point I think it is important to stress to my colleagues that 
the online brokerage industry is different from the day-trading 
industry, which has received a lot of negative attention in the past 
year. Day-trading firms offer a specialized service that enables their 
customers to enter orders and trade directly with the market. And while 
I am sure that most of these businesses are legitimate and sound, in 
recent months reports of abusive or questionable practices have emerged 
in relation to this type of trading. Anecdotal accounts tell of 
investors losing many times the amount of money they originally brought 
to the market.
  The online investing services provided by brokerage firms are quite 
different from the services provided by day-trading firms. For example, 
brokerage firms such as Charles Schwab, E*Trade, DLJ Direct, Discover, 
among others, set strict limits on the extent to which investors are 
permitted access to margin and option accounts. These firms empower 
their customers and are not the problem, and it is important that my 
colleagues and the public understand the differences.
  It is that simple. Frankly, I am surprised that the SEC does not 
require the use of electronic signatures, because unless a physical 
signature is witnessed, electronic signatures are a far more reliable 
means of guaranteeing a person is who they say they are. Electronic 
signatures may result from a variety of technological means that allow 
users to confirm the authenticity of an electronic documents author, 
location or content. These technologies are designed to allow contracts 
to be reviewed and agreed to electronically, to permit individuals and 
businesses to safely purchase goods online, and to enable government 
agencies to verify the authenticity of information submitted to them. 
It is a natural fit for transactions between online brokerage firms and 
investors.
  Despite the changes being made in the investor-brokerage 
relationship, we recognize that the Securities and Exchange Commission 
must retain full

[[Page S4454]]

regulatory authority in this industry. This legislation therefore 
authorizes the SEC to provide guidance on the use of electronic 
signatures by broker-dealers and others in the securities industry. The 
SECs active involvement in the move from physical to electronic 
signatures is important. If the change is to be orderly, the Commission 
must be familiar with the various types of electronic signatures 
available. The Commission, as the expert regulator of the securities 
industry, may determine that some forms of signature are superior to 
others for certain types of records.
  Mr. President, the securities industry is experiencing explosive 
growth in electronic transactions, and this bill's response is 
necessary and appropriate. The industry and the investors who utilize 
this medium need the efficiencies and certainty this bill would 
provide. I believe that the more efficient transaction procedures that 
will result from the bill will translate into cost savings for 
customers and industry alike. And that should be the ultimate purpose 
of any securities legislation relating to electronic commerce.
  Again, I would like to thank Senator McCain and the majority leader 
for joining me in introducing this legislation. I hope the Senate 
Banking Committee can move on this legislation in the near future.
  I ask unanimous consent that a copy of this legislation be printed 
into the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 921

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Electronics Securities 
     Transactions Act.''

     SEC. 2. FINDINGS.

       Congress finds that--
       1. the growth of electronic commerce and electronic 
     transactions represents a powerful force for econmic growth, 
     consumer choice and creation of wealth;
       2. inefficient transaction procedures impose unnecessary 
     costs on investors and persons who facilitate transactions on 
     their behalf;
       3. new techniques in electronic commerce create 
     opportunities for more efficient and safe procedures for 
     effecting securties transactions; and
       4. because the securities markets are an important national 
     asset which must be preserved and strenghened, it is in the 
     national interest to establish a framework to facilitate the 
     economically efficient execution of securities transactions.

     SEC. 3. PURPOSES.

       The purposes of this act are--
       1. to permit and encourage the continued expansion of 
     electronic commerce in securities transactions; and
       2. to facilitate and promote electronic commerce in 
     securities transactions by clarifying the legal status of 
     electronic signatures for signed documents and records used 
     in relation to securities transactions involving broker-
     dealers, transfer agents and investment advisers.

     SEC. 4. DEFINITONS.

       For purposes of this subsection--
       (1) ``document'' means any record, including without 
     limitation any notification, consent, acknowledgement or 
     written direction, intended, either by law or by custom, to 
     be signed by a person.
       (2) ``electronic'' means of or relating to technology 
     having electrical, digital, magnetic, wireless, optical, 
     electromagnetic, or similar capabilities.
       (3) ``electronic record'' means a record created, stored, 
     generated, received, or communicated by electronic means.
       (4) ``electronic signature'' means an electronic 
     identifying sound, symbol or process attached to or logically 
     connectd with an electronic record.
       (5) ``record'' or ``records'' means the same information or 
     documents defined or identified as ``records'' under the 
     Securities Exchange Act of 1934 and the Investment Advisers 
     Act of 1940, respectively.
       (6) ``transaction'' means an action or set of actions 
     relating to the conduct of business affairs that involve or 
     concern activities conducted pursuant to or regulated under 
     the Securities Exchange Act of 1934 or the Investment 
     Advisers Act of 1940 and occurring between two or more 
     persons.
       (7) Signature.--The term ``signature'' means any symbol, 
     sound, or process executed or adopted by a person or entity, 
     with intent to authenticate or accept a record.

     SEC. 5. SECURITIES MODERNIZATION PROVISIONS.

       (1) Section 15 of the Securities Exchange act of 1934 (15 
     USC 78o) is amended by adding the following new subsections 
     thereto:
       (i) Reliance on Electronic Signatures
       (i) A registered broker or registered dealer may accept and 
     rely upon an electronic signature on any application to open 
     an account or on any other document submitted to it by a 
     customer or counterparty, and such electronic signature shall 
     not be denied legal effect, validity, or enforceability 
     solely because it is an electronic signature, except as the 
     Commission shall otherwise determine pursuant to Section 23 
     of this Act (15 USC 78w) or Section 36 of this Act (15 USC 
     78mm).
       (ii) Where any provision of this Act or any regulation, 
     rule, or interpretation promulgated by the Commission 
     thereunder, including any rules of a self-regulatory 
     organization approved by the Commission, requires a signature 
     to be provided on any record such requirement shall be 
     satisfied by an electronic record containing an electronic 
     signature, except as the Commission shall otherwise determine 
     pursuant to Section 23 of this Act (15 USC 78w) or Section 36 
     of this Act (15 USC 78mm).
       (iii) A registered broker or registered dealer may use 
     electronic signatures in the conduct of its business with any 
     customer or counterparty, and such electronic signature shall 
     not be denied legal effect, validity or enforceability solely 
     because it is an electronic signature.
       (iv) With regard to the use of or reliance on electronic 
     signatures, no registered broker or registered dealer shall 
     be regulated by, be required to register with, or be 
     certified, licensed, or approved by, or be limited by or 
     required to act or operate under standards, rules, or 
     regulations promulgated by, a State government or agency or 
     instrumentality thereof.
       (2) Section 17A of the Securities Exchange Act of 1934 (15 
     USC 78q-1) is amended by adding the following new subsections 
     thereto:
       (g) Reliance on Electronic Signatures
       (i) A registered transfer agent may accept and rely upon an 
     electronic signature on any application to open an account or 
     on any other document submitted to it by a customer or 
     counterparty, and such electronic signature shall not be 
     denied legal effect, validity or enforceability solely 
     because it is an electronic signature, except as the 
     Commission shall otherwise determine pursuant to Section 
     23 of this Act (15 USC 78w) or Section 36 of this Act (15 
     USC 78mm).
       (ii) Where any provision of this Act or any regulation or 
     rule promulgated by the Commission thereunder, including any 
     rule of a self-regulatory organization approved by the 
     Commission, requires a signature to be provided on any record 
     such requirement shall be satisfied by an electronic record 
     containing an electronic signature, except as the Commission 
     shall otherwise determine pursuant to Section 23 of this Act 
     (15 USC 78w) or Section 36 of this Act (15 USC 78mm).
       (iii) A registered transfer agent may use electronic 
     signatures in the conduct of its business with any customer 
     or counterparty, and such electronic signature shall not be 
     denied legal effect, validity or enforceability solely 
     because it is an electronic signature.
       (iv) With regard to the use of or reliance on electronic 
     signatures, no registered transfer agent shall be regulated 
     by, be required to register with, or be certified, licensed, 
     or approved by, or be limited by or required to act or 
     operate under standards, rules, or regulations promulgated 
     by, a State government or agency or instrumentality thereof.
       (3) Section 215 of the Investment Advisers Act of 1940 (15 
     USC 80b-15) is amended by adding the following new 
     subsections thereto:
       (c) Reliance on Electronic Signatures
       (i) A registered investment adviser may accept and rely 
     upon an electronic signature on any investment advisory 
     contract or on any other document submitted to it by a 
     customer or counterparty, and such signature shall not be 
     denied legal effect, validity or enforceability solely 
     because it is an electronic signature, except as the 
     Commission shall determine pursuant to 206A of this Act (15 
     USC 806-6a) or Section 211 of this Act (15 USC 80b-11).
       (ii) Where any provision of this Act or any regulation or 
     rule promulgated by the Commission thereunder, including any 
     rule of a self-regulatory organization approved by the 
     Commission, requires a signature to be provided on any record 
     such requirement shall be satisfied by an electronic record 
     containing an electronic signature, except as the Commission 
     shall otherwise determine pursuant to Section 206A of this 
     Act (15 USC 80b-6a) or Section 211 of this Act (15 USC 80b-
     11).
       (iii) A registered investment adviser may use electronic 
     signatures in the conduct of its business with any customer 
     or counterparty, and such electronic signature shall not be 
     denied legal effect, validity or enforceability solely 
     because it is an electronic signature.
       (iv) With regard to the use or reliance on electronic 
     signatures no registered investment adviser shall be 
     regulated by, be required to register with, or be certified, 
     licensed, or approved by, or be limited by or required to act 
     or operate under standards, rules, or regulations promulgated 
     by, a State government or agency or instrumentality thereof.

     SEC. 6. RULEMAKING AUTHORITY.

       The Commission is authorized to provide guidance on the 
     acceptance of, reliance on and use of electronic signatures 
     by any registered broker, dealer, transfer agent or 
     investment adviser, as provided in section 5 above.
                                 ______