Digital Frontiers 
 Calif. Says Digitally Signed Broker Contracts Are Valid
 By ROSS SNEL
   
 08/03/1999 
 American Banker 
 Page 12 
 Copyright (c) 1999 American Banker, Inc. All Rights Reserved. 

 A new California law opens the door for brokerages to conduct most, if not 
all, of their business in
 cyberspace.

 The legislation, which applies only to broker-dealers, validates brokerage 
contracts that are digitally
 signed.

 Though Internet brokerages routinely accept trading orders on-line, most 
require customers to enroll
 and order account transfers by sending in paper documents. The law makes 
such paperwork no
 longer necessary.

 Digital signatures-a derivative of data encryption technology that binds 
customer identities to
 documents-are seen as a way to "legalize" on-line exchanges of information.

 The California legislation, which California Governor Gray Davis signed into 
law last week, "gives
 people some certainty that these contracts are enforceable," said Thomas J. 
Smedinghoff, a partner in
 the Chicago law firm McBride Baker & Coles and a leading authority on 
digital signatures.

 He added, however, that the law's specific definition of a digital signature 
could limit the flexibility of
 its application as the technology evolves.

 Certainty about the validity of digital credentials is especially important 
to securities brokers, because
 securities transactions are typically much bigger than merchandise 
transactions on the Internet, said
 Christopher Musto, a senior analyst at Gomez Advisors Inc. in Concord, Mass.

 E-Trade Group Inc., the Menlo Park, Calif. on-line broker, pushed for the 
California bill, bringing the
 issue to the attention of state Sen. John Vasconcellos, a Democrat from San 
Jose. Sen. Vasconcellos
 introduced the proposal in February, and it passed the Senate July 15.

 San Francisco-based Charles Schwab Corp., the leading Internet brokerage, 
also offered input on
 the law's definition of a digital signature, according to Sen. Vasconcellos' 
chief of staff, Rand Martin.

 Schwab has focused its legislative efforts more on the federal level, 
however, a spokesman for the
 company said. "This action is a step in the right direction," the spokesman 
said. "But the real objective
 would be to get national legislation that creates uniformity regarding the 
use of digital signatures."

 E-Trade said in a news release that the new law would apply to its 
transactions with customers in all
 50 states, but the Schwab spokesman said its applicability beyond California 
is "murky."

 E-Trade did not respond to calls seeking elaboration on how it sees the law 
applying across the
 country.

 Mr. Smedinghoff, chairman of the American Bar Association's electronic 
commerce division, said the
 only way the law would have broader applicability is if a broker stipulated 
that a contract was
 governed by the laws of California.

 Legislation on digital signatures varies from state to state. For example, 
Connecticut law covers only
 medical records at hospitals, while Illinois makes electronic signatures 
applicable to all
 communications.

 In 1995 California became one of the early adopters of digital signature 
legislation, but that legislation
 was limited to communication with government agencies.

 Utah is often cited as the country's digital signature pacesetter, with a 
comprehensive law that
 preceded California's in 1995 and resulted in the pioneering designation of 
Digital Signature Trust
 Co., a Zions Bancorp. subsidiary, as a licensed certificate authority.

 To bring consistency at the federal level, Sen. Spencer Abraham (R-Mich.) 
this year introduced two
 bills addressing the issue. The Millennium Digital Commerce Act sets out to 
clarify the legal status of
 electronic signatures in general, while the Electronic Securities 
Transaction Act focuses on the
 securities industry.


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