Clients of Registrants


[Federal Register: March 9, 2000 (Volume 65, Number 47)]
[Rules and Regulations]               
[Page 12466-12469]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09mr00-8]                         

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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

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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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