[Federal Register Volume 65, Number 47 (Thursday, March 9, 2000)]
[Rules and Regulations]
[Pages 12466-12469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5637]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1


Use of Electronic Signatures of Customers, Participants and 
Clients of Registrants

AGENCY:  Commodity Futures Trading Commission.

ACTION:  Final rules.

-----------------------------------------------------------------------

SUMMARY:  The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting new rules allowing the use of electronic 
signatures of lieu of handwritten signatures for certain purposes under 
the Commission's rules.\1\ This action is part of the Commission's 
ongoing efforts to facilitate the use of electronic technology and 
media in the futures industry.
---------------------------------------------------------------------------

    \1\ Commission rules referred to herein are found at 17 CFR Ch. 
I (1999).

---------------------------------------------------------------------------
EFFECTIVE DATE:  March 9, 2000.

FOR FURTHER INFORMATION CONTACT:  Lawrence P. Patent, Associate Chief 
Counsel, or Christopher W. Cummings, Special Counsel, Division of 
Trading and Markets, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. Telephone 
(202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

    On August 30, 1999, the Commission published for comment proposed 
rules to permit futures commission merchants (``FCMs''), introducing 
brokers (``IBs''), commodity pool operators (``CPOs'') and commodity 
trading advisors (``CTAs'') to accept electronic signatures from their 
customers, pool participants and advisory clients, as the case may be, 
in lieu of manual signatures in each of those instances where the 
Commission's rules require those registrants to obtain a signature on a 
document (the ``Proposing Release'').\2\ As noted in the Proposing 
Release, this rulemaking was prompted by a request to interpret 
Commission rules to permit an FCM to accept, in lieu of a prospective 
customer's manually signed, paper acknowledgment that he received and 
understood the risk disclosure statement specified in Rule 1.55, an 
electronic mail message to that effect on which the customer has typed 
his name. In considering that request the Commission determined that 
customers of FCMs and IBs, as well as commodity pool participants and 
clients of CTAs, should be permitted to use electronic signatures in 
those instances where Commission rules require the customer's (or 
participant's or client's) manual signature. In furtherance of this 
determination, the Commission proposed defining the term ``electronic 
signature'' in new Rule 1.3(tt) \3\ and authorizing the use of 
electronic signatures in new Rule 1.4.
---------------------------------------------------------------------------

    \2\ ``Use of Electronic Signatures by Customers, Participants,'' 
64 FR 47151 (August 30, 1999). Readers may review the text of the 
Proposing Release in the Federal Register or at the Commission's 
Internet web site (http://www.cftc.gov).
    \3\ Rule 1.3 contains definitions of terms generally applicable 
under the Commission's rules.
---------------------------------------------------------------------------

    The Proposing Release recounted in some detail various provisions 
of the Commission's rules that require registrants to obtain a 
signature,\4\ and it noted that the actual steps taken to open an 
account (including the signing of the actual account agreement between 
a futures broker and its customer) are not directly covered by 
Commission rules.\5\ Rather, as the Proposing Release explained, 
Commission rules address a number of ancillary aspects of the account 
opening process (including, for example, a signed acknowledgment of the 
receipt of a required disclosure). The Proposing Release also described 
efforts then pending in Congress and elsewhere to enact a legislative 
framework for the use of electronic and digital signatures in 
commercial and governmental transactions.\6\
---------------------------------------------------------------------------

    \4\ See 64 FR 47151 at 47152-47153.
    \5\ See 64 FR 47151 at 47152.
    \6\ Since the publication date of the Proposing Release, the 
United States Senate and the House of Representatives have each 
passed bills aimed in whole or in part at facilitating the use of 
electronic signatures. The Senate passed S. 761 November 19, 1999, 
and the House passed H.R. 1714 on November 9, 1999. H.R. 1714 has 
been received by the Senate and was referred to the Senate Committee 
on Commerce, Science and Transportation on November 19, 1999. 
Neither bill has been enacted into law.
---------------------------------------------------------------------------

B. The Commenters

    The Commission received five comment letters in response to the 
Paperwork Release; two from futures industry trade organizations; one 
from a registered futures association; one from a registered FCM, and 
one from a corporate group including FCMs and CPOs. Although all of the 
commenters strongly agreed with the general intent of the rulemaking, 
each took issue with various aspects of the proposal.

II. Response to the Comments Received

A. General

    All of the commenters supported the proposed rulemaking in concept. 
They saw the proposal as a worthy effort to keep pace with 
technological developments. Two commenters suggested that the 
Commission pare down the proposed rule to a definition and a general 
authorization to use electronic signatures. Another suggestion was to 
withdrawn the rulemaking and issue an advisory in its stead. As 
detailed below, the Commission has determined to adopt the proposed 
definition of the term ``electronic signature'' in Rule 1.3(tt)

[[Page 12467]]

essentially as proposed, and to adopt a streamlined version of proposed 
Rule 1.4.

B. Rule 1.3(tt)--Definition of Electronic Signature

    The proposed definition tracked the definition used in the Uniform 
Electronic Transactions Act.\7\ Four of the five commenters mentioned 
the proposed definition, and all of them endorsed it. Accordingly, the 
Commission is adopting Rule 1.3(tt) substantially as proposed.\8\
---------------------------------------------------------------------------

    \7\ At its annual meeting held July 23-30, 1999, the National 
Conference of Commissioners of Uniform State Laws approved and 
recommended for adoption by all of the states the Uniform Electronic 
Transactions Act.
    \8\ In order for the definition of the term ``electronic 
signature'' in the rule to conform to the definition in the Uniform 
Electronic Transactions Act (as approved by the National Conference 
of Commissioners on Uniform State Laws), the language ``intent to 
sign the record'' is being substituted in the rule for the proposed 
language ``intent of signing the record.''
---------------------------------------------------------------------------

C. Rule 1.4--Use of Electronic Signatures

1. Proposed Paragraph (a)
    As proposed, Rule 1.4(a) would have provided that, for purposes of 
Commission rules, an FCM, IB, COP or CTA could accept an electronic 
signature in lieu of a handwritten signature wherever Commission rules 
require that a document be signed by a customer, pool participant or 
advisory client, if the registrant elects generally to accept 
electronic signatures. The general permission to accept electronic 
signatures would been qualified by the caveat that an electronic 
signature must comply with applicable Federal law and any standards the 
Commission may adopt or guidance its staff may issue. It would have 
been further qualified by the requirement that registrants adopt and 
utilize reasonable safeguards, including at least safeguards to verify 
that an electronic signature is being used by the person it purports to 
identify, that the electronically-signed record will not be 
subsequently altered, and that no changes or errors occur in the 
electronic signature.
    The commenters acknowledged the need for reasonable safeguards in 
connection with the use and processing of electronic signatures, but 
they expressed the belief that nature and specifies of the safeguards 
should be left up to the registrant and not spelled out in a rule. One 
commenter further stated that an express requirement that electronic 
signatures comply with applicable Federal law amounted to unnecessarily 
prescribing procedural safeguards.
    After considering the comments, the Commission has determined not 
to adopt in Rule 1.4(a) the proposed requirements that the safeguards 
adopted and utilized by registrants must include measures to verify 
that the electronic signature is that of the person purporting to use 
it, and measures to detect changes or errors in a person's electronic 
signature. The rule as adopted retains, however, the proposed 
requirement to comply with applicable Federal law and includes a 
requirement to comply with other Commission rules.\9\ The rule as 
adopted also retains a requirement for safeguards to prevent subsequent 
alteration of an electronically-signed record. The Commission believes 
that the reference to Federal law is an appropriate deferral to the end 
product of the pending efforts in Congress to produce legislation 
covering electronic signatures (and electronic commerce in general), as 
well as a signal to registrants that other statutory and regulatory 
provisions may affect the use of electronic signatures. Intact 
preservation of signed records (whether electronically or manually 
signed) is required by the recordkeeping requirements included in the 
Commission's rules.\10\ Placing a paper document in a safe place is 
generally adequate to allow such authorized persons as Commission 
representatives to review the document at a later date as may be 
necessary. Electronic documents may require different measures to 
ensure that they can be retrieved and reviewed in the future. Thus, 
while the requirement to preserve and retain specified electronically-
signed records is the same as for manually-signed documents, the manner 
in which registrants carry it out will vary--with the particular 
measures being left up to the registrant.
---------------------------------------------------------------------------

    \9\ In the proposed rule, the Commission had stated that the 
electronic signature ``must comply with . . . such standards as the 
Commission may adopt and such guidance as the Commission's staff may 
provide.''
    \10\ See, e.g., Rules 1.31, 4.23 and 4.33.
---------------------------------------------------------------------------

2. Proposed Paragraph (b)
    Proposed Rule 1.4(b) would have required that registrants accepting 
electronic signatures from customers, pool participants or advisory 
clients clearly disclose to them that although an electronic signature 
is sufficient for purposes of the Commodity Exchange Act (the ``Act'') 
\11\ and Commission rules, it may not be sufficient for purposes of 
other Federal or state laws or regulations. The commenters unanimously 
disapproved of this proposed requirement on a variety of grounds, 
including that it would cause confusion, that it would tend to 
distinguish manual and electronic signatures qualitatively, that the 
required disclosure would be subject to constant modification and 
varying legal interpretations, and that it would likely become moot in 
the foreseeable future.
---------------------------------------------------------------------------

    \11\ 7 U.S.C. Sec. 1 et seq. (1994).
---------------------------------------------------------------------------

    After considering the comments, the Commission has determined to 
eliminate proposed paragraph (b) from Rule 1.4 as adopted. The 
provisions in Commission rules that require the signature of a 
customer, pool participant or advisory client generally do not involve 
the creation of contractual rights or liabilities. The validity of an 
electronic signature in the context of Commission rules is unlikely to 
become an issue except as between the Commission and the registrant 
because the signature generally does no more than confirm, in the event 
of a Commission audit or review of records, that the registrant has met 
its disclosure or other obligations under the rules. Accordingly, to 
accomplish its aim of alerting registrants and their clients to the 
legal concerns arising from the use of electronic signatures, by this 
Federal Register release the Commission is strongly urging registrants 
to exercise informed judgment in their decisions to accept electronic 
signatures (including, as appropriate, consulting legal counsel or 
performing their own legal research, as the case may be).
    Thus, rule 1.4 as adopted consists of a single paragraph with no 
express requirement that registrants make disclosures relative to 
electronic signatures. Nevertheless, in the exercise of conscientious 
business practice, registrants are encouraged to provide information on 
the nature and significance of electronic signatures, and any legal or 
practical issues that may be relevant to the use of electronic 
signatures, by their customers, pool participants and advisory clients. 
Providing such information is consistent with the registrant's duties 
of diligent supervision as set forth in Commission rules (e.g., Rule 
166.3).

D. Comments Submitted in Response to Specific Questions in the 
Proposing Release

    The Proposing Release contained a set of questions to elicit public 
comments on issues arising from and related to the use of electronic 
signatures. Each of the commenters addressed some or all of these 
questions.
    In response to the question whether the Commission should defer 
rulemaking on electronic signatures to a later date, all of the 
commenters urged the Commission to act promptly to

[[Page 12468]]

confirm registrants' authority to accept electronic signatures, rather 
than wait for final Congressional action. The Commission agrees that 
rulemaking in this area should not be delayed. Commenters did not 
believe that additional safeguards should be put in place to establish 
conclusively the identity of a user of an electronic signature or to 
counter any possible loss of security occasioned by switching from 
manual to electronic signatures. The commenters did not believe that 
face-to-face dealings or paper-based transactions were inherently more 
secure than electronic transactions, and they did not believe that 
electronic signatures should be treated as qualitatively different from 
handwritten signatures. They stated that Commission rules should be 
``Medium-neutral'' with identical requirements applicable to paper-
based and electronic dealings. The commenters generally saw no need for 
the imposition of a waiting period to replace the built-in delay that 
obtains when hard-copy account documents are delivered to a customer, 
read, signed and returned. The Commission nonetheless remains concerned 
that traditional high pressure, telephonic sales tactics, in 
combination with the ability to gain immediate customer approval to 
begin trading, may increase the pressure on the prospective customer. 
Industry participants should therefore exercise caution when permitting 
the use of electronic signatures as part of the solicitation process.
    In denying a need for the Commission to adopt additional regulatory 
safeguards in this area, a view with which the Commission concurs, 
commenters expressed the belief that registrants will impose their own 
prudential controls, and that the nature and details of safeguards and 
protections should be left to the discretion of registrants exercising 
their supervisory procedures. Registrants are again reminded, however, 
that they have express obligations under Commission rules (e.g., Rule 
166.3) diligently to supervise the handling of all commodity interest 
accounts carried, operated, advised or introduced by the registrant.
    Finally, commenters were split on the question whether the 
Commission should expressly require that the rules of self-regulatory 
organizations (``SROs'') be consistent with (proposed) Rules 1.3(tt) 
and 1.4. Some commenters expressed the view that although SROs should 
defer to the Commission's rules in this ares, there was adequate 
opportunity in the process by which the Commission reviews proposed SRO 
rules to ensure consistency without the Commission adopting an express 
provision in its own rules.\12\ Other commenters urged the Commission 
to require SROs to conform their rules to those of the Commission. The 
Commission has determined not to adopt any requirement in this area in 
order to allow SROs to exercise flexibility.
---------------------------------------------------------------------------

    \12\ We note that the Commission has proposed for public comment 
a rule change to permit futures exchanges to adopt changes to their 
rules without prior approval by the Commission. See ``Proposed 
Revision of the Commission's Procedure for the Review of Contract 
Market Rules,'' 64 FR 66428 (November 26, 1999). The comment period 
for that proposal closes February 24, 2000.
---------------------------------------------------------------------------

III. Important Additional Considerations

    The Commission reminds registrants that the adoption of Rule 1.4 
affects the use of electronic signatures only in the context of 
complying with those Commission rules that require the signature of a 
customer, pool participant or client. Registrants remain subject, in 
their business activities generally, to other Federal and state laws 
and regulations. Congressional action on the use of electronic 
signatures has not been finalized, and the requirements for, and effect 
of, electronic signatures under state contract law remains far from 
uniform (notwithstanding recent submission to the states of the Uniform 
Electronic Transactions Act).
    Accordingly, registrants should make their own inquiries, including 
consultation with counsel where appropriate, before accepting 
electronic signatures in situations (e.g., for execution of account 
agreements by brokerage customers) that are not specifically addressed 
by Commission rules. In addition, registrants should make an informed 
judgment as to the information they should provide to prospective 
customers regarding the nature, use and effect of electronic 
signatures.
    The Commission does not consider it likely that the rules adopted 
hereby will come into conflict with any law applicable to electronic 
signatures that may be enacted. Nevertheless, the Commission intends 
that its staff will monitor legislative developments in this area and 
that in the event staff identifies such a conflict, the Commission will 
undertake appropriate action.

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA;''), 5 U.S.C. Secs. 601-611, 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.\13\ The Commission has previously determined 
that registered FCMs and CPOs are not small entities for the purpose of 
the RFA.\14\ With respect to CTAs and IBs, the Commission has stated 
that it would evaluate within the context of a particular rule proposal 
whether all or some affected CTAs and IBs would be considered to be 
small entities and, if so, the economic impact on them of any rule.\15\ 
In this regard, the Commission notes that the rules being adopted 
herein do not change the obligations of CTAs and IBs under the Act and 
Commission regulations, but permit CTAs and IBs to comply with certain 
existing obligations by using electronic means as an acceptable 
alternate to paper-based compliance. The Chairman, on behalf of the 
Commission hereby certifies, pursuant to 5 U.S.C. Sec. 605(b), that 
these rules will not have a significant economic impact on a 
substantial number of small entities. No comments were received in 
response to the Commission's specific request for comments on the 
impact these rules as proposed would have on small entities.
---------------------------------------------------------------------------

    \13\ 47 FR 189618-18621 (April 30, 1982).
    \14\ 47 FR 18619-18620.
    \15\ 47 FR 18618-18620.
---------------------------------------------------------------------------

V. Administrative Procedure Act

    The Administrative Procedure Act (the ``APA'') generally requires 
that rules promulgated by an agency may not be made effective less than 
thirty days after publication, except for, among other things, 
instances where the agency has found good cause to make a rule 
effective sooner, and has published that finding together with the rule 
(5 U.S.C. 553). The Commission notes that many persons to whom the new 
rules would apply have indicated their eagerness to make use of them as 
soon as possible. The Commission generally attempts to respond to 
ongoing industry demands to implement technology in the marketplace as 
it becomes available and recognizes that existing technology supports 
to use of electronic signatures. Moreover, although these rules clarify 
that registrants may accept electronic signatures, they do not require 
any registrant to do so. Indeed, the existing rules remain unchanged. 
The Commission finds that these new rules facilitate a particular 
aspect of electronic commerce in a manner that does not impose any 
additional burdens on registrants or on their customers or

[[Page 12469]]

clients. Accordingly, the Commission finds good cause to make these 
rules effective March 9, 2000, in accordance with 5 U.S.C. 
Sec. 553(d)(3).

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Act and, in particular, Section 1a, 4b, 4g and 8a, 7 
U.S.C. Secs. 1a, 6b, 6g and 12a (1994), the Commission hereby amends 17 
CFR Part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6c, 6d, 
6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.

    2. Section 1.3 is hereby amended by adding new paragraph (tt) to 
read as follows:


Sec. 1.3   Definitions.

* * * * *
    (tt) Electronic signature means an electronic sound, symbol, or 
process attached to or logically associated with a record and executed 
or adopted by a person with the intent to sign the record.

    3. Section 1.4 is hereby added immediately following Sec. 1.3 to 
read as follows:


Sec. 1.4   Use of electronic signatures.

    For purposes of complying with any provision in the Commodity 
Exchange Act or the rules or regulations in this Chapter I that 
requires a document to be signed by a customer of a futures commission 
merchant or introducing broker, a pool participant or a client of a 
commodity trading advisor, an electronic signature executed by the 
customer, participant or client will be sufficient, if the futures 
commission merchant, introducing broker, commodity pool operator or 
commodity trading advisor elects generally to accept electronic 
signatures; Provided, however, That the electronic signature must 
comply with applicable Federal laws and other Commission rules; And, 
Provided further, That the futures commission merchant, introducing 
broker, commodity pool operator or commodity trading advisor must adopt 
and utilize reasonable safeguards regarding the use of electronic 
signatures, including at a minimum safeguards employed to prevent 
alteration of the electronic record with which the electronic signature 
is associated, after such record has been electronically signed.

    Issued in Washington D.C. March 3, 2000.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-5637 Filed 3-8-00; 8:45 am]
BILLING CODE 6351-01-M