Clients of Registrants

[Federal Register: March 9, 2000 (Volume 65, Number 47)]
     [Rules and Regulations]
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     [Page 12466-12469]
     From the Federal Register Online via GPO Access
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     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.
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     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.
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     ��� \1\ Commission rules referred to herein are found at 17
    CFR Ch.
     I (1999).
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     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.
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     ��� \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.
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     ��� 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\
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     ��� \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.
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     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\
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     ��� \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.''
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     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.
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     ��� \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.
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     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.
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     ��� \11\ 7 U.S.C. Sec. 1 et seq. (1994).
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     ��� 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.
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     ��� \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.
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     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.
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     ��� \13\ 47 FR 189618-18621 (April 30, 1982).
     ��� \14\ 47 FR 18619-18620.
     ��� \15\ 47 FR 18618-18620.
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     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

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