The many ways in which the internet may be used as an effective means of both communication and delivery of information to customers is of special interest to the financial services industry.  Like the e-tailer, the various entities in the financial services industry have products to sell (e.g., banking services, stocks, insurance products) to customers who will need typical customer service, but unlike the e-tailer, these heavily regulated entities have onerous responsibilities of disclosure and delivery of documentation.  Banks and credit unions are required by their regulatory agencies to send periodic statements to the customers regarding the status of their accounts.  Broker/dealers are required to send out a mind-boggling array of documentation, including prospectuses, statements of brokerage and margin accounts, and confirmation of executed trades.  Mutual fund companies are required to send out a prospectus annually and performance reports at least quarterly.  Insurance companies that underwrite contracts containing a securities component are not only required to send out prospectuses annually and performance reports at least quarterly (and usually more frequently), but also the insurance contract itself, along with whatever documents required by the state insurance commission of the state in which the contract is being delivered.

What would be most helpful to the companies in this industry is a way to facilitate not only the sale of its products to consumers and provide service for those accounts after the sale, but also a reliable method in which they could meet the requirements of the delivery of documents and other information into the future.  This paper will focus on two laws that have appeared within the past two years that attempt to address precisely these problems.

The challenge faced by not only companies in the financial services industry but all that are engaged in doing business on line is how to contract with a party without the creation of a writing in the traditional medium of paper and ink.  The English common law statute of frauds enacted in 1677 declares a contract generally judicially unenforceable unless it is reduced to writing and signed by the parties (Black’s).  [more]  This approach served it purpose well for three centuries, but when the 1980s dawned, bringing with it the more widespread use of faxes, modems, and communication between individuals entirely via computer, it had largely outlived its useful life.  As the 20th century came to a close, the proliferation of communication in general and business in particular happening on-line necessitated the drafting of the Uniform Electronic Transactions Act (UETA) by the National Conference of Commissioners on Uniform State Laws.

The UETA was drafted in response to a “bewildering array of approaches to the [electronic signatures] problems” presented by the fundamentally different sorts of legislation being passed by the various states (Wittie & Winn, n11).  As is often the case with proposed Uniform laws, there was some concern about the length of time required to get UETA passed in all the states, and furthermore what modifications would be made to the language by the states.  (California, for example, was the first to enact UETA, but the changes made were so substantial and far-reaching that “...made it more difficult for businesses to use electronic media in communication in transactions with consumers.  Wittie & Win, n18.)

Out of this concern E-SIGN was drafted and ultimately signed into law by President Clinton on June 30, 2000.    The intent of this legislation was to put electronic signatures the same force and effect as paper and ink, or “wet,” signatures.  While there are several differences between UETA and E-SIGN [more], one of the more interesting (and some commentators say “cumbersome”) features of E-SIGN is its extensive consumer consent requirement.

As it concerns the consent to receive electronic records, §101(c) is obsessed with consent preceded by almost exhaustive disclosure.  In order for a consumer to receive electronic records that satisfy the requirements of a writing, she must “affirmatively consent[] to such use and...not withdrawn such consent.”  §101(c)(1).  Before that her consent is given however, §101(b)(2) lists the information of which she must be informed via “a clear and conspicuous statement.”  She must be told of her right to: receive the record on paper and what, if any, fee will be charged for the service; revoke her consent (and the procedures for doing so); whether that consent applies to only this transaction of other identified “categories of records”; be advised of the hardware and software requirements for “access to and retention of the electronic records.”

Although critics (Wittie & Winn not least among them) find these requirements cumbersome and likely costly in terms of set-up costs for companies that wish to facilitate the delivery of documents via an electronic media, such a lengthy list of requirements is not bereft of merit.  It gives businesses a series of criteria to meet, and provides a discreet list of objectives upon which such business may reasonably rely.

1. scope of E-SIGN
a. does it apply to business-to-business transactions, or do we even require E-SIGN in B2B?
b. if yes, with the same force and authority?
c. does the act apply to such issues as the appointment of agents (for state insurance purposes) or licensed representatives (for NASD purposes)?
i. if the NASD will accept an electronic signature in the appointment of reps, has the U-4 been displaced by this?
d. if  yes to either in (b.), would agents or dealers be considered “consumers” for the purposes of the act?  (this may be the case for the UETA, because the language therein is very careful to refer to “consumers,” not “customers”)
2. differences between UETA and E-SIGN
a. preemption
b. conditions under which E-SIGN is superceded by UETA (or other law or statute)
c. states’ motivation to adopt UETA, especially in light of E-SIGN
1. states’ ability to interpret E-SIGN and “read out” some sections re: records
3. SEC Rule 160
a. interim final rule exempting investment companies from the requirement of a §10(a) prospectus when a consumer seeks fund literature at the company’s web site
b. see comments from Fidelity, et al, regarding their claim of “lack of clarity in the rule”
4. SEC’s position on E-SIGN
a. delivery of documents via electronic media for purposes of meeting a statutory obligation
b. Roye’s speech to ABA’s PLI re: insurance securities
i. remarks disclaimed by SEC and “not authoritative,” but nevertheless important