JUST SIGN RIGHT HERE ON THE DOTTED E-LINE: SCHWAB, E*TRADE PUSHING PROPOSAL ON HILL TO LET BROKERAGES USE CLIENTS’ DIGITAL SIGNATURES

Financial advisers and brokers weary of chasing down clients to get signatures on documents, take heart: Help may be on the way.

Legislation is likely to be introduced soon in the U.S. Senate that would allow brokerage clients to “sign” disclosure documents and other forms electronically.

The legislation, being prepared by Sen. Spencer Abraham, R-Mich., would allow broker-dealers to use “digital signatures” filed via computer in lieu of handwritten client signatures on legal documents. Customers could open accounts instantly by providing online the required signatures for disclosure documents, trades or other transactions where physical signatures are now needed.

Charles Schwab Corp. is the key proponent of the bill, with help from fellow online broker E*Trade Group Inc.

According to Schwab government lobbyist Frank Kelly, to open an account online with the San Francisco-based discount brokerage king a customer must first fill out an electronic application. “Then they have to press the print button, sign it and mail it to Schwab, a four- or five-day process. Then it has to be keyed in at Schwab all over again.”

No one has exact numbers, but Mr. Kelly, vice president of government affairs in Schwab’s Washington office, estimated that allowing its customers to file legal documents by computer would save the company “at least” $10 million and perhaps as much as $20 million a year. Schwab has $542 billion of customer assets.

Lisa Nash, vice president of customer management for Palo Alto, Calif.-based E*Trade, which manages $21.1 billion, says the inability to complete account applications online is a chief complaint among its new customers.

Besides “the normal costs associated with paperwork,” says Mr. Abraham, “we could find ourselves with hundreds of different authentication regimes being developed” if the legislation is not adopted. “You would have (multiple) costs of development as well as compliance.”

“Forty-eight states have either enacted or are in the process of enacting laws that would regulate the use of electronic authentication,” says Thomas Crocker, a partner with Alston & Bird LLP, a Washington law firm that represents Schwab. But the laws are all different, he says. “You’ve got this patchwork quilt of laws out there creating uncertainty and confusion in the marketplace.”

A bill already introduced by Mr. Abraham and one introduced in the House by Rep. Anna Eshoo, D-Calif., would allow digital signatures for all businesses and set up a general framework that all states would have to follow until they pass uniform legislation for digital commerce.

House Commerce Committee Chairman Tom Bliley, R-Va., also is preparing electronic commerce legislation which may include provisions aimed at the securities industry, and securities regulation legislation being worked on by Senate Banking Committee Chairman Phil Gramm, R-Texas, may also address the issue.

The National Conference of Commissioners on Uniform State Law, a Chicago-based group of lawyers who propose model state legislation on various issues, is planning to give final approval to its own proposal for uniform digital commerce legislation this July. The group also plans to look at electronic commerce issues as part of a review of state securities laws it is just beginning, says John McCabe, its legal counsel and legislative director.

SEC seen open to idea

The Securities and Exchange Commission has taken no stand on the legislation, according to spokesman John Heine, but it issued regulatory interpretations in 1995 and 1996 stating that securities firms could get some types of consent electronically.

Banks are moving ahead with their own version of electronic commerce as they move into online banking, but few yet use digital signatures, says Parker Foley, vice president for secure electronic commerce at First Union Corp.’s lead bank in Charlotte, N.C. The bank has set up its own system for conducting electronic transactions, and Mr. Foley says it will probably begin a pilot program using digital signatures this year.

“It’s real unclear what your legal ramifications are,” Mr. Foley says. “There’s no history, no court cases. We don’t have the case law to know how people are going to deal with disputes.” But he believes computers can transmit signatures safely. “It’s hard to steal the technology. In some cases its safer than a handwritten signature,” which can be forged.

But not everyone is so sure. Nigel Taylor, a Santa Monica, Calif., planner who supervises $5 million, recalls a recent Los Angeles Times report that its staff had managed to download more than 100 pages of credit card numbers, travel reservations, e-mail and other information from Internet sites.

not as safe as it seems?

“If somebody can go into an encrypted secure shopping cart site and download 100 pages of the credit card numbers, then I fear even for 128-bit encryption,” says Mr. Taylor, referring to high-level computer security technology.

“I would be concerned with digital signatures personally. If somebody can open your digital signature, they could open up a line of credit to open an account and start trading.”

Others in the planning community are more encouraged by the movement toward e-commerce. Peggy Ruhlin, a principal with Budros & Ruhlin Inc., a Columbus, Ohio, firm that supervises $400 million, thinks the time is right. “This would be very beneficial to us,” she says, “in what we do servicing our client accounts through Schwab.”

Noting that she signs for credit card purchases at her grocery store using an electronic stylus, Ms. Ruhlin asks, “Why shouldn’t brokerage firms and financial planners move into the 21st century along with everyone else?”

Nancy Lininger, founder of the Consortium, a Camarillo, Calif., firm that provides compliance and marketing advice to broker-dealers and investment advisers, has an explanation: “The financial services industry is like a shy lover, cautiously embracing e-commerce.”

She says the signals on online commerce from regulators, states and the federal government have been positive thus far. “If the green light continues to shine, advances in electronic modes of operation will continue.”