[Senate Hearing 106-893]
[From the U.S. Government Publishing Office]
S. Hrg. 106-893
MILLENNIUM DIGITAL COMMERCE ACT, S. 761
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MAY 27, 1999
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Staff Director
Martha P. Allbright, General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Kevin D. Kayes, Democratic General Counsel
C O N T E N T S
----------
Page
Hearing held May 27, 1999........................................ 1
Statement of Senator Abraham..................................... 1
Statement of Senator Burns....................................... 4
Prepared statement of Senator Lott............................... 25
Statement of Senator Wyden....................................... 3
Witnesses
Callcott, W. Hardy, senior vice president and general counsel,
Charles Schwab & Co., Inc...................................... 14
Prepared statement........................................... 16
Campbell, Ray A., III, general counsel, Information Technology
Division, Commonwealth of Massachusetts........................ 5
Prepared statement........................................... 7
Miller, Harris N., president, Information Technology Association
of America..................................................... 18
Prepared statement........................................... 21
Parker, Ira H., vice present and general counsel, GTE
Internetworking................................................ 9
Prepared statement........................................... 12
Appendix
Callcott, W. Hardy, senior vice president and general counsel,
Charles Schwab & Co., Inc., letter dated June 21, 1999, to Hon.
Spencer Abraham................................................ 37
PenOp, Inc., prepared statement.................................. 38
MILLENNIUM DIGITAL COMMERCE ACT S. 761
----------
THURSDAY, MAY 27, 1999
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The committee met, pursuant to notice, at 10:10 a.m. in
room SR-253, Russell Senate Office Building, Hon. Spencer
Abraham presiding.
Staff members assigned to this hearing: Kevin Kolevar,
legislative assistant to Senator Abraham; Lauren Belvin,
Republican senior counsel; Maureen McLaughlin, Republican
counsel; Moses Boyd, Democratic senior cousel; and Gregg Elias,
Democratic senior counsel.
OPENING STATEMENT OF HON. SPENCER ABRAHAM,
U.S. SENATOR FROM MICHIGAN
Senator Abraham. Welcome. We will begin our hearing at this
time. We had had, at least it had been posted, a 10 a.m.
rollcall vote that was vitiated very recently, and I suspect
maybe one or two other Members were like myself, heading toward
the Capitol expecting to vote and come back here, and they may
join us.
Today's Commerce Committee hearing will focus on S. 761,
the Millennium Digital Commerce Act, a bill introduced by
Senators Wyden, who is joining us now, McCain, Burns, Lott, and
myself, designed to promote electronic commerce.
All of us by now have heard the prophetic pronouncements
the Internet will change all of our lives, the computer age is
reshaping the world, and so on, and we all have seen the
figures that document the Internet's extraordinary growth. In
1993, about 90,000 Americans had access to these online
resources. By early 1999, that number had grown to about 81
million, an increase of about 900 percent.
The computer industry almanac predicts 20 million Internet
users worldwide by the end of the year 2000, and now the
figures are coming in on how electronic commerce is
transforming the way we do business. E-commerce between
businesses has grown to an estimated $64.8 billion for 1999.
Ten million customers shopped for some product using the
Internet in 1998 alone.
International Data Corporation estimates that $31 billion
in products will be sold over the Internet in 1999, and 5.3
million households had access to financial transactions like
electronic banking and stock trading by the end of 1999, or
will have.
It seems quite clear, then, that the Internet users are
ready to go far beyond buying books and apparel online. The
Internet is set to lead a revolution in the execution of
business transactions involving thousands or millions of
dollars in products and services, transactions so important
they require that both parties enter into legally binding
contracts.
The vehicle that will move us into this new era of e-
commerce is the electronic signature. Electronic authentication
methods, or electronic signatures can allow organizations to
enter into contractual arrangements without ever having to
drive across town or fly thousands of miles for personal
meetings, or mail reams of paperwork back and forth. It can
allow individuals to positively identify the person with whom
they are transacting business, and to ensure that shared
information has not been tampered with.
In fact, many forms of electronic signatures are far more
secure than manual, handwritten signatures. They cannot be
forged in the same relatively easy way as handwritten
signatures. These electronic signatures are also verifiable,
and most become invalid if any of the data in the electronic
document is altered or deleted. They can make electronic
commerce the safest commerce as well as the most convenient
commerce available.
More than 40 States recognizing the importance of
authentication technology have adopted rules covering its use,
but no two States have adopted the same approach. This means
that our present greatest barrier to the use of electronic
signatures in business transactions and contracts is the lack
of a consistent and predictable national framework of rules.
Individuals and organizations are not willing to rely on
electronic signatures when they cannot be sure that they will
be held valid.
Our Millennium Digital Commerce Act will ensure that
individuals and organizations in different States are held to
their agreements and obligations, even if their respective
States have different rules concerning electronically signed
documents. It provides that electronic records, produced and
executing a digital contract, shall not be denied legal effects
solely because they were entered into over the Internet or in
any other computer network. This will help provide uniform
treatment of electronic signatures in all the States until such
time as they enact uniform legislation on their own.
Our bill also lets the parties who enter into a contract
determine through that contract which technologies and business
methods they will use to execute it. This will give those
involved in the transaction the power to determine for
themselves how they want to allocate liability and fees as well
as registration and certification requirements.
Our legislation sets forth principles for the use of
electronic signatures in international transactions. Over the
last year, American negotiators have been meeting with their
European counterparts to discuss electronic signatures in
international commerce. The United States has been working in
support of a free and open system in this regard.
To bolster these efforts, our legislation lays out
principles we believe should govern international use of
electronic signatures, including control by the parties over
terms of their agreements and authentication technology, access
to the courts for the purpose of proving the validity of
authentication and transaction approaches, and keeping
governments out of the business of choosing which technologies
should be favored or disfavored.
Finally, our legislation directs the Department of Commerce
and the Office of Management and Budget to report on Federal
laws and regulations that might pose barriers to e-commerce and
to report back to Congress on the impact of such provisions and
provide suggestions for reform.
In drafting this bill we face a challenging balancing act
between the Federal Government's role in regulating interstate
commerce and the States' rights to make their own laws in this
area. With the input of experts from States and the high tech
industry, we believe our bill strikes this balance, thus
providing businesses with the legal certainty they need to
conduct commerce across America without intruding upon the
States' rights.
Today, we are joined by representatives from the States and
the high tech industry who present their views, comments, and
advice on this legislation.
In closing my opening statement I just want to stress that
this effort remains a work in progress, and I want to assure my
colleagues, as well as all those who are interested in the
development of this legislation as well as the witnesses, that
we will continue to work with everyone to ensure that the best
possible bill emerges from the Commerce Committee.
In putting together our legislation I have been very, very
pleased to work once again with my colleague from the State of
Oregon, Senator Wyden. He has a great interest in the
development of all of the high tech sectors, and has been a
leader, as everyone, I think, knows, on a variety of
legislation that has been either passed or introduced for
consideration in both the last Congress as well as this one.
As usual, without his help we would not be as far down the
road in terms of putting together a good piece of legislation
here, and I want to thank him for that publicly, and express
once again how much I enjoy working with him and look forward
to continuing to do so and I want to at this point turn to him
for his opening statement.
STATEMENT OF HON. RON WYDEN, U.S. SENATOR
FROM OREGON
Senator Wyden. I thank my friend, and I do not want to turn
this into a bouquet-tossing kind of exercise.
Senator Abraham. Well, that's OK.
[Laughter.]
Senator Wyden. This is, as you said, just one of several
bills that the two of us have worked on together. We have got
the important education bill to make it easier to donate
technology to the schools that we hope to pass as well, and I
just want to say how much I have enjoyed teaming up with you.
There is absolutely nothing partisan about these issues, and I
think as you and I have discussed, Mr. Chairman, one of the
most important jobs this committee is going to have in the
years ahead is essentially updating principles and laws that
were in place before the revolution in terms of technology, and
so this will just be one of the measures that we are going to
have to tackle.
It seems to me the heart of our bipartisan bill can be
summed up in a sentence, and that is, it is a whole lot better
to be online than waiting in line. I think what you will have
with the obstacles that you outlined in your opening statement
is a whole lot of folks all across this country waiting in
lines that essentially could be expedited by pressing the enter
button a few times.
I had a chance to be one of the speakers at the National
Association of Realtors Convention over the last few days, and
we talked, for example, about what is going to happen in a very
mobile society as young people get recruited to come to a town
and get excited about a potential position. They may want to
see a place, have a chance to look at potential housing
arrangements, and in effect conclude a housing transaction
within a day.
Now, to do that, we are going to have to have this
opportunity through our legislation to facilitate digital
signatures in a way that is convenient and accessible to folks,
and we have wrestled with this now through two Congresses and
are very hopeful that at this time we will be able to address
this in a comprehensive way.
I will also say that I think it is a natural complement to
what this committee did in terms of the Internet Tax Freedom
Act in the last session of Congress. We may not have invented
electronic commerce on this committee----
Senator Burns. Senator Gore did.
[Laughter.]
Senator Wyden. Did you invent the auction? My good friend
Senator Burns is always modest, and I accused him of inventing
the auction, and he wanted to be more modest and back away from
that.
Senator Burns. I want to look my prospective buyer right in
the eye.
[Laughter.]
Senator Wyden. The fact is, we promoted in a significant
way electronic commerce in the last session. Now we have a
chance to build on that with digital signatures, and I look
forward to working with you.
Senator Abraham. Thank you, Senator Wyden, and I have been
trying to convince Senator Roth that at least in Michigan they
ought to be called Abraham IRA's, but I have not had much luck
with that, either.
We are joined today by the chairman of the Communications
Subcommittee here in the Commerce Committee, Senator Burns, and
I will turn to him.
Senator Burns. Mr. Chairman, I think in view of the time,
let us hear from the witnesses. I have got a little old bitty
statement here, but it don't mean nuthin'.
[Laughter.]
Senator Burns. I would thank you for holding these
hearings. I appreciate that very much.
Senator Abraham. Senator Burns, thank you for helping us
and for being here today. We will then turn to our panel, and I
want to thank each of them ahead of time for having taken extra
time out of their day to be here with us. We have got four
witnesses, and I am going to introduce them.
Just from my left to right here we have Mr. Ray Campbell,
general counsel of the Information Technology Division of the
Commonwealth of Massachusetts, Mr. Ira Parker, vice president
and general counsel for GTE Internetworking. We have Mr. Hardy
Callcott, who is senior vice president as well as deputy
general counsel for Charles Schwab, and then we have Mr. Harris
Miller, who is the president of ITAA, the Information
Technology Association of America.
Each of you, I know, has a perspective on what we are
trying to accomplish here, and we really appreciate your
offering it here today, as well as the work you and your
organizations and others have done to help us as we have tried
to craft this legislation.
Mr. Campbell, we will begin with you, and we appreciate
your being here.
STATEMENT OF MR. RAY A. CAMPBELL III, GENERAL COUNSEL,
INFORMATION TECHNOLOGY DIVISION, COMMONWEALTH OF MASSACHUSETTS
Mr. Campbell. Thank you very much, Senator, Members of the
committee. My name is Ray Campbell. I am the general counsel of
the Commonwealth of Massachusetts Information Technology
Division, and I greatly appreciate the opportunity to come
before you and testify on Senate bill 761, the Millennium
Digital Commerce Act.
The Commonwealth of Massachusetts has been at the forefront
of the information revolution ever since Alexander Graham Bell
invented the telephone in Boston in 1876, and we have been at
the forefront of the Internet revolution ever since Cambridge-
based BBN was selected to build the original ARPA-Net in 1968,
and it has been said that failure is an orphan, and success has
many parents, so in that spirit Massachusetts would like to
stake its claim to having created the Internet.
[Laughter.]
Senator Abraham. For the record, if anybody in the audience
would like to also be given some of the credit for the Internet
after the hearing today, if you would like to, we will take
your names for the record.
[Laughter.]
Mr. Campbell. I want to commend Senator Abraham and the
cosponsors of the Millennium Digital Commerce Act for an
excellent piece of legislation, and I want to express to this
subcommittee my wholehearted support for the bill. Over the
past several years, many attempts have been made at the State
and Federal levels to introduce legislation to promote the
growth of electronic commerce. In my opinion, many of these
attempts have been based on mistaken assumptions about the
nature of the information economy and about Government's proper
role in encouraging its development.
I believe Senate bill 761 avoids all of these pitfalls, and
its enactment will make a meaningful contribution toward a
consistent, predictable, minimalist framework for interstate
electronic commerce.
I would like to confine my comments to two topic areas.
First, I want to articulate briefly a set of general principles
that I think should govern or should guide Government
policymaking in the information economy and electronic commerce
areas, and I also want to highlight some of the key
characteristics of the bill that I think are fully consistent
with these principles.
The first principle I would offer is that policymakers need
to recognize the unique characteristics of the Internet. The
industrial revolution and industrial society was characterized
by stability, standardization, hierarchy, centralization. The
Internet, on the other hand, is a highly decentralized,
dynamic, and complex adaptive system. It is almost organic in
its ability to self-organize and respond to changes in its
environment.
In light of this, I think we need to be extremely
suspicious of the notion that traditional legislative and
regulatory mechanisms can shape the Internet or electronic
commerce in predictable ways. I think we really need to be
conscious of the law of unintended consequences when attempting
to regulate something as dynamic as the Internet.
The second principle I would offer is that Government
action to promote electronic commerce will be most effective
when it is narrowly tailored to address specific actual market
failures or legal impediments.
Too much State and Federal electronic commerce legislation
has been motivated by the mistaken belief that policymakers can
divine where the markets and technology will be a few years
into the future, and that we can hasten that future or steal a
march on our competitors by creating a legal infrastructure
that supports that specific vision. I believe such attempts are
doomed to failure both because they rely on linear
extrapolations of current technologies and business models, and
because they rely on the assumption that laws create markets.
I think that is fundamentally untrue. I think that the
explosive growth of the Internet has been the result of the
hard work and the vision of entrepreneurs, and I think that the
explosive growth in the amount of commerce being conducted by
the Internet makes it clear that these people are not waiting
for lawyers and legislators to pave the road to the future for
them. They are doing it on their own.
The third principle for successful electronic commerce
legislation is that to the greatest extent possible it should
leverage existing sources of State law to promote a more
flexible and stable legal basis for electronic commerce. I
think this is particularly true in such established areas as
the law of signatures and the law of contract formation and
defensive wholesale changes in these bodies of law will
introduce unnecessary complications and untested concepts,
leading to confusion and litigation.
Further, the common law is more flexible and responsive to
changing circumstances, including changing technologies, than
is prescriptive legislation.
Finally, the fourth principle for electronic commerce
policymaking that I would offer is that Government action
should preserve and promote a competitive marketplace where
private actors are free to choose the technologies and business
models that best satisfy their cost, benefit, and risk
requirements.
The use of contracts between private parties is ideally
suited to the unique characteristics of the Internet. As noted
previously, the Internet is a highly decentralized medium. Any
legislation that seeks to restrain rather than harness the
ability of private parties to order their own relations is
swimming against the tide of the Internet revolution.
The Internet promises to give rise to vastly more efficient
and transparent markets in which market participants can
evaluate for themselves the specific technologies and business
models that best suit their needs.
Having summarized those four principles that I think should
govern electronic commerce policymaking, I want to point out
some of the key ways in which I think the Millennium Digital
Commerce Act is fully supportive of those principles.
First, the bill broadly validates the use of electronic
records and signatures in Interstate commercial transactions,
but does not attempt to address the use of such methods in
other types of transactions, where such a rule would be more
problematic.
Second, the bill does not favor any particular technology
or business model by granting special presumptions or
evidentiary privileges.
Third, the bill acknowledges the freedom of parties to
establish by contract the technologies and methods they can use
to create legally binding records and signatures.
Fourth, the bill preserves and leverages the existing law
of signatures and contracts that exist in the States, and
finally, the bill only preempts State law on an interim basis
until such time as uniform State law addressing electronic
commerce is in place.
So based on the foregoing, I am of the opinion that the
Millennium Digital Commerce Act is a timely and appropriate
piece of legislation. It takes cognizance of the unique
characteristics of the Internet. It is narrowly tailored to
address specific legal barriers. It leverages existing sources
of law in a way that promotes stability and certainty, and it
preserves freedom of choice for market participants.
I would like to thank the Chairman and Members of the
committee for the opportunity to testify today on this
important issue, and if there is anything I can do in the
future to be of assistance, please feel free to call on me.
Thank you very much.
[The prepared statement of Mr. Campbell follows:]
Prepared Statement of Ray A. Campbell III, General Counsel, Information
Technology Division, Commonwealth of Massachusetts
Mr. Chairman and members of the Subcommittee, my name is Ray
Campbell and I am the General Counsel of the Commonwealth of
Massachusetts Information Technology Division. Thank you for the
opportunity to testify on Senate Bill 761, the ``Millennium Digital
Commerce Act.''
The Commonwealth of Massachusetts has been at the forefront of the
information revolution ever since Alexander Graham Bell invented the
telephone, in Boston, in 1876. Massachusetts has also been at the
forefront of the Internet revolution ever since Cambridge-based BBN won
the contract to build the original ARPA-Net in 1968. Since that time,
Massachusetts has been fertile ground for an amazing number and variety
of companies that have helped transform the Internet from an isolated
defense and research network into a global communications tools that is
fundamentally changing our economy and our society. In addition to the
role played by our companies and universities, Massachusetts state
government has also been a leader in using the Internet to deliver
better, more convenient government services at less cost to the
taxpayers. Governor Paul Cellucci and Lieutenant Governor Jane Swift
are firm believers that we should offer citizens the option to conduct
their business with the state online rather than in line.
I would like to confine Senator Abraham and the cosponsors of the
Millennium Digital Commerce Act for an excellent piece of legislation,
and I want to express to the Subcommittee my whole-hearted support for
this bill. Over the past several years, many attempts have been made at
the state and Federal levels to introduce legislation to promote the
growth of electronic commerce. In my opinion, many of these attempts
have been based on mistaken assumptions about the nature of the
information economy and government's role in encouraging its
development. I believe Senate Bill 761 avoids all of these pitfalls,
and its enactment will make a meaningful contribution toward a
consistent, predictable, minimalist framework for interstate electronic
commerce.
I would like to confine the balance of my testimony to two topics.
First, I would like to articulate a set of general principles that I
believe should guide government efforts to make public policy for the
Information Age. Second, I would like to highlight the key aspects of
the Millennium Digital Commerce Act that are, in my opinion, perfectly
consonant with these principles.
While adherence to principle is essential in any policymaking
endeavor, it is particularly important when crafting electronic
commerce legislation because we are operating in an arena generally
devoid of empirical guideposts. Electronic commerce is such a recent
development that there is no reservoir of experience on which to draw
as we consider the likely consequences of government action.
Recognition of, and reliance on, first principles is crucial in such an
environment. As such, I would offer the following four principles to
guide policymaking for the Information Economy.
First, policymakers must recognize the unique characteristics of
the Internet. The industrial revolution, and hence industrial-era
economic policy, was characterized by stability, standardization,
hierarchy, and centralization. The Internet, on the other hand, is a
highly decentralized and complex adaptive system, and is almost organic
in its ability to self organize and respond to changes in its
environment. Given this, we should be extremely suspicious of the
notion that traditional legislative and regulatory mechanisms can shape
the Internet or electronic commerce in predictable ways.
Indeed, there is a widespread appreciation that a lack of
government regulation has been one of the key factors behind the
phenomenal growth of the Internet. Congress itself, in the
Telecommunications Act of 1996, stated that ``the Internet and other
interactive computer services have flourished, to the benefit of all
Americans, with a minimum of government regulation'' and further
declared that ``it is the policy of the United States . . . to preserve
the vibrant and competitive free market that presently exists for the
Internet and other interactive computer services, unfettered by Federal
or State regulation.''
The second principle I would offer is that government action to
promote electronic commerce will be most effective when it is narrowly
tailored to address specific, actual market failures or legal
impediments. Too much state and Federal electronic commerce legislation
has been motivated by the mistaken belief that policymakers can divine
where the markets and technology will be a few years in the future, and
that we can hasten that future or steal a march on our competitors by
creating a legal infrastructure to support that specific vision. I
believe such attempts are doomed to failure, both because they rely on
linear extrapolations of current technologies and business models, and
because they rely on the assumption that laws create markets.
In fact, the future course of electronic commerce is being charted
this very minute by someone none of us has ever heard of, working in a
small office paid for with a second mortgage, on the outskirts of Route
128, Silicon Valley, or Buffalo, Wyoming. The explosive growth of the
Internet and electronic commerce is convincing proof that these
visionary men and women are not waiting for lawyers and legislators to
pave the road to the future for them. In truth, the law has always been
more effective at codifying and ratifying established business
practices than it has been at creating such practices out of whole
cloth. Any such attempt to regulate the future into existence will
surely be counterproductive. If advocates of this approach are
successful, the future of electronic commerce will not be a Field of
Dreams--where if we build it, they will come--but rather a Field of
Nightmares--where because they built it, we have come--to regulate, to
prescribe, and to tax.
The third principle for successful electronic commerce legislation
is that, to the greatest extent possible, it should leverage existing
sources of state law to promote a more flexible and stable legal basis
for electronic commerce. While the advent of electronic commerce
changes many things, it does not change everything. Massachusetts is
home to the oldest judicial system in this hemisphere, and over the
centuries our courts and the courts in other jurisdictions have
established a solid foundation of precedent that lends tremendous
stability and predictability to the legal relations between parties.
This is particularly true in such established areas as the law of
signatures and the law of contract formation and defenses. Wholesale
changes in these bodies of law will introduce unnecessary complications
and untested concepts, leading to confusion and litigation. Further,
the common law is more flexible and responsive to changing
circumstances, including changing technologies, than is prescriptive
legislation.
Finally, the fourth principle for electronic commerce policymaking
is that government actions should preserve and promote a competitive
marketplace where private actors are free to choose the technologies
and business models that best satisfy their unique cost/benefit and
risk requirements. The use of contracts between private parties is
ideally suited to the unique characteristics of the Internet. As noted
previously, the Internet is a highly decentralized medium. Any
legislation that seeks to restrain, rather than harness, the ability of
private parties to order their own relations is swimming against the
tide of the Internet revolution. The Internet promises to give rise to
vastly more efficient and transparent markets, in which market
participants can evaluate for themselves the specific technologies and
business models that best suit their needs.
Having summarized what I believe are the core principles that
should guide government policymaking in the electronic commerce sphere,
I would like to point out some of the key ways in which the Millennium
Digital Commerce Act is fully supportive of the principles.
First, the proposed bill broadly validates the use of electronic
records and signatures in interstate commercial transactions, but does
not attempt to address the use of such methods in other types of
transactions where such a rule would be more problematic. Second, the
bill does not favor any particular technology or business model by
granting special presumptions or evidentiary privileges. Third, the
bill acknowledges the freedom of parties to establish by contract the
technologies and methods they can use to create legally binding records
and signatures. Fourth, the proposed bill preserves and leverages the
existing law of signatures and contracts. And, finally, the bill only
preempts state law on an interim basis until such time as uniform state
law addressing electronic commerce is in place.
Based on the foregoing, I am of the opinion that the Millennium
Digital Commerce Act is a timely and appropriate piece of legislation.
It takes cognizance of the unique characteristics of the Internet, it
is narrowly tailored to address specific legal barriers, it leverages
existing sources of law in a way that promotes stability and certainty,
and it preserves freedom of choice for market participants. As a
policymaker with a state at the forefront of the Internet revolution, I
strongly encourage this Subcommittee to act favorably on this bill.
I thank the Chairman and the members of the Subcommittee for the
opportunity to testify today on this important issue. If there is
anything I can do in the future to be of assistance as you weigh these
crucial matters, please feel free to call on me. Thank you.
Senator Abraham. Mr. Campbell, I want to thank you for
being here. I also want to note the National Conference of
Commissioners on Uniform State Law is expected soon to report
on their recommendations with respect to a model State
electronic transactions legislation, so as we are trying to
provide some sort of interim option here until the States both
have a chance to react to those proposals as well as to flesh
them out further. We appreciate your testimony, and look
forward to working with you and others of your counterparts as
we go ahead here.
Mr. Parker, we welcome you today. Thank you very much for
being here, and we will turn to you at this time.
STATEMENT OF IRA H. PARKER, VICE PRESIDENT AND GENERAL COUNSEL,
GTE INTERNETWORKING
Mr. Parker. Thank you, Mr. Chairman. Mr. Chairman and
Members of the committee, my name is Ira Parker. I am the vice
president and general counsel at GTE Internetworking. I welcome
this opportunity to offer my views on electronic
authentication. I commend you and your colleagues for exploring
this important issue now.
GTE Internetworking is really the successor to the company
that actually did create the Internet.
Senator Abraham. Oh, sure.
[Laughter.]
Mr. Parker. We will even take a lie detector on that one.
GTE Internetworking, to tell you a little bit about us, is a
division of GTE Corporation, responsible for our consumer and
business Internet offerings. We were formed just about 2 years
ago, when GTE Corporation acquired BBN and, as I said, BBN, one
of the original developers of the Internet--it actually was a
contract from the Defense Department to create the ARPA-Net to
prove that packet switch technology really could work.
GTE Internetworking is an integrated Internet company,
providing many products and services to businesses and
consumers. We are one of the largest Internet backbone
providers. There are five, basically, providers that carry all
Internet traffic kind of aggregated in the world, and we are
one of the five, and we are building a nationwide high speed
fiberoptic network to carry data traffic throughout the United
States and abroad.
We are also a leading consumer and small business Internet
service provider with more than 800,000 consumer customers.
Additionally, GTE offers managed access to the Internet. We are
posting services and a variety of value-added Internet services
for businesses and other organizations.
Now, I point this out not because, to be a commercial for
GTE, although I think I would get a bonus if I do that, but
really to point out that we are really involved in all aspects
of this space. If you think about it from the most basic level,
one network, all the way kind of to the high end, kind of
consumer and business services, we are involved in the Internet
space in a very big way.
As a result, when we look at this legislation, we look at
it from that perspective, but we also look at it from the
perspective that we have a subsidiary called CyberTrust
Solutions, which is a certificate management products and
services subsidiary that generates digital certificates to
support secure communications, secure access control, secure
messaging, and secure electronic transactions for electronic
commerce applications.
So when you look at this from our perspective, electronic
authentication is key to our product offerings and our digital
certificate business, but it is also key to our offerings in
how we see the development of the Internet and what is going to
be important on the Internet for the future.
So why is it important, and I think the answer, as we look
at it, is because business is really being transformed by the
Internet. Electronic commerce has the potential to change--I
would say the potential. It actually has changed in some
respects the way every American can or will do business. We
already see signs of this change in almost every aspect of our
lives.
According to one recent study, the number of U.S.
households with Internet access rose from 5.8 million in 1994
to 38.8 million in 1999. This figure is projected to rise to 60
million in 2003, and many of these people are conducting
business over the Internet.
I would add parenthetically that all of these analyses have
always been wrong. They have always understated the actual
growth of the Internet. The economic power of the Internet was
recently demonstrated by the unexpected surge in Internet sales
during the Christmas 1998 season, and by the meteoric rise in
technology shares, albeit not during the last 3 or 4 days,
which has helped fuel the recent record-breaking rise of the
Dow.
Some analysts predict that electronic commerce will be a
$300 billion a year business by the year 2000. While no one
knows for sure whether these predictions are reliable, it is
increasingly evident that the global use of electronic commerce
is here and is here to stay.
There is also much evidence to suggest that the
productivity gains associated with Internet technologies was a
major factor in the ability of our economy, the U.S. economy,
to withstand the perils of the economic turmoil affecting much
of the rest of the world over the last couple of years.
Now, in order to transact business over large open networks
like the Internet, parties must find a way to authenticate,
that is, to identify each other, and to ensure that the
messages sent to each other were not tampered with during their
transmission.
This is critical to me as we look at the Internet. The fact
is that we are dealing with a medium where you do not know the
person on the other side. I may go to a Web site. I might
believe that Web site belongs to somebody, but today I really
do not know that that is the case, or a merchant might choose
to do business with me, Ira Parker, but the fact is, that
merchant today really may not be sure that they are dealing
with Ira Parker and, as a result, you need a technological base
that really solves this issue.
Now, there are many technologies out there, and I applaud
this bill for being technology neutral, because the truth is,
we do not know which technology will rule the day. We are
betting on one or two in our company but the truth is, is that
there may be other ones which rule, but there are three
principles that I believe, and believe fundamentally have to be
addressed in any piece of legislation, and this legislation
pending does it.
Which is, No. 1, you have to be able to authenticate the
identity of the person or the information that sends the
document or message, determine that the document was not
modified during transmission, because it does you no good
basically to know that I sent it but that was not the document
I sent, and verify that the document received was the one sent
by the party claiming to be the sender.
If you embody those three principles in a piece of
legislation, I think you will really find that it covers any
technology that comes along today, tomorrow, in the future,
that can meet that, so effectively it lets the bill be very
flexible in terms of how it addresses not only today's
applications in this space, but applications for the future.
So why is legislation necessary or desirable? Senator
Abraham said it in the beginning, and that is because there are
so many States that have passed so much legislation in this
area. As of January 31, 1999, some 43 States had enacted laws
that dealt with electronic authentication.
These States have varying approaches regarding such matters
as registration and regulation of certificate authorities. Some
of them are technology neutral, some of them are technology
specific, some of them deal with limitations on liability and
differ from State to State. They define key terms like
authentication and digital signatures differently, and they
also define the minimal content and technological scope of
digital certificates in very different ways.
Now, I will tell you, having said that, I think we should
commend the States for their effort in this regard. They took
it on. They took it on quickly. Utah, I believe, was the first
State to approach it, and so I do not find--I am not critical
of the States for taking this on, but the reality is, we find
ourselves today with approaching 50 different regimes for
electronic authentication, and the one thing that we know about
the Internet is that the Internet is a space which does not
respect borders.
It does not respect State borders. It barely respects,
depending upon how you look at it, national borders, and so as
a result, when you look at the technologies that have to be
employed, they need a legal basis, just a basis, not a whole
lot of stuff around it, just a basis that makes sure that we
are all playing on the same level playing field.
There is also a foreign competitiveness issue, and I would
say this is incredibly important. Foreign countries,
particularly in the European Union, are allowing electronic
authentication without a variety of conflicting intracountry
rules and regulations. Thus, they facilitate commerce and the
competitiveness of their companies.
For the U.S. electronic commerce industry to compete in the
world market it needs uniformity and simplicity at home. That
does not address the issues of uniformity internationally, and
that will be looked at by U.S. Government agencies as they
explore dealing with other countries on these issues, but we at
least need uniformity and simplicity at home.
This is an important issue for Internet service providers
like GTE Internetworking. Again, it is not just in terms of our
business selling the certificates, selling the authentication.
Everything that we do, whether we offer a consumer-based
service to 800,000 consumers today, what they are doing,
electronic commerce, or at least some of them are, or whether
we are selling Web-hosting services to businesses, or whether
it is selling connectivity to businesses, the reality is, in
almost everything we do on the Internet, we see it as a kind of
an overriding principle that kind of brings it all together.
So with this in mind we believe that points embodied in
Senate bill 761 are consistent with our view that the private
marketplace should take the need in promoting and directing new
technologies. I agree with my colleague on that. That is
critically important. Government does not have a role, I do not
believe, in setting the technologies.
Where it does have a role, and this bill does it very well,
is, it should take all action necessary to remove the obstacles
to private market use, development, and deployment of the
technologies. These are exactly the goals of Senate bill 761,
and we therefore strongly endorse it and urge its enactment, as
well as the enactment of similar legislation in the House.
I appreciate the opportunity to be here today.
[The prepared statement of Mr. Parker follows:]
Prepared Statement of Ira H. Parker, Vice President and General
Counsel, GTE Internetworking
Mr. Chairman and members of the Committee, my name is Ira H.
Parker. I am Vice President and General Counsel of GTE Internetworking.
I welcome this opportunity to offer my views on electronic
authentication. I commend you and your colleagues for exploring this
important issue.
GTE Internetworking is the division of GTE Corporation responsible
for our business and consumer Internet offerings. We were formed just
about 2 years ago when GTE Corporation acquired BBN, one of the
original developers of the Internet. GTE Internetworking is an
integrated Internet company providing many products and services to
businesses and consumers. We are one of the largest Internet Backbone
Providers and we are building a nationwide high-speed fiber optic
network to carry data traffic throughout the United States and abroad.
We are also a leading consumer and small business Internet Service
Provider, with more than 800,000 customers. Additionally, GTE offers
managed access to the Internet, Web Hosting services, and a variety of
value added Internet services for businesses and other organizations.
Through our CyberTrust Solutions subsidiary we offer a suite of
certificate management products and services that generate digital
certificates to support secure communications, secure access control,
secure messaging and secure electronic transactions for electronic
commerce applications. Electronic authentication is key to our product
offerings, to our customers and to the development of electronic
commerce.
Why is this important? Because business is being transformed by
Internet. Electronic commerce has the potential to change the way every
American does business. We already see signs of this change in almost
every aspect of our lives. According to one recent study, the number of
U.S. households with Internet access rose from 5.8 million in 1994 to
38.8 million in 1999. The figure is projected to rise to 60 million in
2003, and many of these people are conducting business over the
Internet. The economic power of the Internet was recently demonstrated
by the unexpected surge in Internet sales during Christmas 1998 and by
the meteoric rise in technology shares which has helped fuel the recent
record-breaking levels of the Dow. Some analysts predict that
electronic commerce will be a $300 billion a year business by the year
2000. While no one knows for sure whether these predictions are
reliable, it is increasingly evident that the global use of electronic
commerce will change business as we know it. There is also much
evidence to suggest that the productivity gains associated with
Internet technologies was a major factor in the ability of our economy
to withstand the perils of the economic turmoil effecting much of the
rest of the world.
In order to transact business over large, open networks like the
Internet, parties must find a way to authenticate--that is, to
identify--each other and to ensure that the messages sent were not
tampered with during their transmission. The technique known as
electronic authentication meets these goals.
Electronic authentication is an electronic technique that allows
the user to (i) authenticate the identity of, or information associated
with, a sender of a document, (ii) determine that a document was not
modified during transmission and (iii) verify that the document
received was the one sent by the party claiming to be the sender.
These are simple and necessary attributes. They are a useful tool
that allows certainty and knowledge about customers and transactions.
Why is legislation necessary or desirable? Internet service
providers like GTE Internetworking put priority on being able to offer
their services in a simple, uniform way throughout the United States.
This goal is threatened by a burst of state legislation that has
produced a patchwork quilt of conflicting and inconsistent state laws.
While the states should be commended for their willingness to come to
grips early on with electronic commerce, the resulting disparate state
statutory regimes concern GTE Internetworking and other Internet
service providers who seek to offer nationwide electronic commerce
services over the Internet. I think all of us can agree that the
Internet, and commerce conducted over the Internet, transcends state
boundaries. As a result, anything short of uniformity will hinder our
ability to provide these products and services and of consumers to
enjoy the full fruits of Internet commerce.
What are the states doing? As of January 31, 1999, some 43 states
had enacted laws that deal with electronic authentication. These states
have varying approaches regarding such matters as registration and
regulation of certificate authorities, limitations on liability,
definitions of key terms like ``electronic authentication'' and
``digital signature'' and the minimal content and technological scope
of digital certificates that provide electronic authentication.
The problem is that if there are a multitude of state regimes
governing electronic authentication, the implementation of secure
electronic commerce over the Internet will become costly and
inefficient. Up to 50 differing legal regimes will diminish the
likelihood of seamless and uniform electronic commerce, which by its
very nature is interstate in nature. Up to 50 different regimes will
reduce the incentive for new market entrants to offer electronic
commerce products and services. Up to 50 different regimes will confuse
consumers doing business over the Internet and will result in a
patchwork quilt of differing legal protections, commercial standards
and levels of security.
There is also a foreign competitiveness issue. This is very
important. Foreign countries, particularly in the European Union, are
allowing electronic authentication without a variety of conflicting
intra-country rules and regulations. Thus, they facilitate commerce and
the competitiveness of their companies. For the U.S. electronic
commerce industry to compete in the world market it needs uniformity
and simplicity at home.
This is an important issue for Internet Service Providers (ISPs)
like GTE Internetworking. While we support such state efforts as the
drafting of the Uniform Electronic Transactions Act by the National
Conference of Commissioners on Uniform State Laws, Internet electronic
commerce is moving forward at too fast a pace to rely solely on them.
We need uniform national legislation more rapidly than the current
state efforts are likely to produce this result. We need national
uniform legislation today.
We believe that the Millenium Digital Commerce Act (S. 761) is just
such legislation. We support this bill because it does six things:
First, it provides recognition and effect for electronic
authentication used in any contract that relates to an
interstate transaction.
Second, it authorizes parties to an interstate transaction to
establish by contract, electronically or otherwise,
technologies or business models (including legal or other
procedures) to create, use, receive, validate or invalidate
electronic signatures and electronic records. It would do this
notwithstanding any state law that specifies one or more
acceptable or required technologies or business models. It thus
largely preempts conflicting state laws.
Third, and very importantly, S. 761 was drafted with a view
to the state uniform law effort that is currently under way.
Thus, if a state enacts or has in effect uniform electronic
transactions legislation that is substantially similar to that
reported to the state legislatures by the National Conference
of Commissioners on Uniform State Laws it would be deemed not
to be preempted, provided such law is not inconsistent with the
principles enunciated above, namely that it gives recognition
and effect to electronic authentication and allows parties to
establish by contract the technologies and business models that
govern their interstate transactions. Thus, the states can
legislate on electronic authentication consistent with the
uniform state law effort.
Fourth, the bill is a minimalist, market-oriented,
technology-neutral approach. It does not purport to allocate
obligations and liabilities between users and providers of
electronic authentication. It leaves this up to the parties to
establish by contract.
Fifth, S. 761 establishes no new bureaucracies or regulatory
schemes. Electronic commerce is an infant industry, and it
should not be strangled by unnecessary licensing or regulatory
schemes.
Sixth, this bill does not affect existing consumer
protections or the rules governing the validity of formation of
agreements or system rules under the Uniform Commercial Code or
uniform state laws dealing with electronic contracting.
These six points, as embodied in S. 761, are consistent with our
view that the private marketplace should take the lead in promoting and
directing new technologies. Government should take action to remove
obstacles to the private market use, development and deployment of the
technologies. These are exactly the goals of S. 761, and we therefore
strongly endorse it and urge its enactment, as well as the enactment of
similar legislation in the House.
Thank you.
Senator Abraham. Thank you very much, Mr. Parker.
Mr. Callcott.
STATEMENT OF W. HARDY CALLCOTT, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, CHARLES SCHWAB & CO., INC.
Mr. Callcott. Thank you. I am Hardy Callcott from Charles
Schwab & Co., Inc. I thank you for the opportunity to testify
on behalf of the Millennium Digital Commerce Act, which we
believe will help create the kind of predictable market-
oriented environment necessary to foster the continued growth
of electronic commerce in the United States. This is good,
bipartisan legislation that we believe deserves your
consideration and support.
I am here today to concede that Schwab did not invent the
Internet. However, we are one of the largest, if not the
largest company in the United States today in terms of Internet
commerce. To give you a sense of scale, Amazon.com currently
does about $3 million of business today on their Internet Web
site. We currently do $2 billion a day in securities trading on
our Web site.
Schwab has become today the second largest securities
brokerage in the United States in terms of active customer
accounts, and we are the largest Internet brokerage firm in the
world. We currently have 2\1/2\ million customers with active
online accounts containing a total of over $219 billion in
customer assets.
If we are already doing this much commerce online, why do
we feel this legislation is necessary, and the answer is, as my
colleagues have stated, that Schwab and other businesses need
greater certainty that electronic authentication will have the
same legal effect as traditional pen-and-ink signatures.
Today, if someone wants to open an account at Schwab, they
have to fill out a paper application, manually sign it, and
submit it to us either in person, at a branch or through the
mail. With electronic authentication, this entire process could
be done entirely online. So could other transactions which
require signatures and are now handled manually.
Examples would be change of address forms, IRA distribution
forms, or wire transfer requests. Handling these transactions
online would be quicker and more convenient both for brokerage
firms and for our customers.
There are a number of reasons why we support this
legislation. First is that it provides uniformity. The
securities markets are interstate in nature. We do business in
all 50 States, and we may not even know where one of our
customers who is using a laptop or the next generation of hand-
held wireless computers, we may not even know where that
customer is located.
Consistent, uniform Federal standards in our view are
necessary if the securities industry is to engage in electronic
commerce with certainty. The same need for Federal uniformity
led Congress to adopt the National Securities Market
Improvements Act and the Internet Tax Freedom Act, and we
believe uniformity in electronic signatures is the logical next
step.
As we have heard, although there are efforts, which we
strongly support, at the State level to create uniform
electronic authentication legislation, currently patchwork
regulation at the State level is a significant barrier. The
State statutes that exist today vary greatly in terms of their
definitions, the types of transactions they cover, the scope,
some of them are technology-specific, and the result is a lack
of consistency between States and continuing legal uncertainty
for businesses.
Second, this bill is technology-neutral. As you all know,
technology in the electronic commerce area is evolving very
rapidly, and we believe technological neutrality is important
so that legislation does not stifle continued innovation by
broadly defining electronic signature.
This bill allows the markets to select the technologies
that work, to balance the cost and the risk, and to reach an
innovative and cost-effective result for businesses and
consumers.
Finally, we strongly support Senator Abraham's introduction
of a companion bill, the Electronic Securities Transactions
Act,
S. 921. The securities industry faces not only contract law
concerns but also Federal regulation. We therefore need
certainty that electronic signatures will also satisfy the
Federal securities laws.
S. 921 does this while also continuing to recognize the
SEC's authority to ensure that the use of electronic signatures
is consistent with investor protection. So we are very pleased
that Members of Congress on both sides of the aisle, including
all three of the Senators here today, as well as Senator
McCain, have supported electronic signature legislation.
We would also like to thank Chairman Tom Bliley in the
House, who has introduced H.R. 1714, which contains similar
provisions.
To conclude, the Millennium Digital Commerce Act is simple,
forward-looking, market-oriented legislation, and precisely the
kind of approach which is needed if the United States is to
continue to lead the world in electronic commerce, and it is an
approach that is sensitive to the concerns and interests of the
States. We urge you to support and pass this bill.
[The prepared statement of Mr. Callcott follows:]
Prepared Statement of W. Hardy Callcott, Senior Vice President and
General Counsel, Charles Schwab & Co., Inc.
Mr. Chairman and members of the Committee, my name is Hardy
Callcott. I am General Counsel at Charles Schwab & Co., Inc. of San
Francisco, California. Thank you for the opportunity to testify on
behalf of the Millennium Digital Commerce Act (S. 761). We at Schwab
believe that this is good legislation and that it deserves your serious
consideration and support.
Schwab is the second largest securities brokerage firm in the
United States in terms of customer accounts, with over 6 million active
accounts. In just 3 years, Schwab has become the largest online
brokerage in the world, with 2.5 million active online accounts holding
some $219 billion in total customer assets. For purposes of comparison,
Amazon.com currently conducts about $3 million per day of
business on its Internet website. Schwab conducts about $2 billion of
Internet commerce per day.
Online investing offers tremendous benefits to individual
investors, the most important of which is better information: real-time
access to investment research, market news, company press releases and
SEC filings, earnings estimates and consensus recommendations, quotes,
account balances, and other investment tools such as stock screening,
stock charting, and portfolio tracking. The Internet has done more to
put individual investors on a level playing field with large
institutional investors than any development since fixed commissions
were abolished in the 1970's.
Online investing has also dramatically reduced costs for individual
investors. Most online trades at Schwab cost $29.95, compared to
average commissions of several hundred dollars per trade at full-
commission firms. Online investing is also convenient: customers can do
research and place trades at their convenience for execution during
market hours. Online investing offers speed, accuracy and control. And
online investing allows customers to make their own decisions without
having to trade through a broker who, especially at full-commission
firms, may not have the customer's interest at heart. These factors
help explain the rapid growth in customer demand for online investing.
If so much business is already being successfully conducted online,
why, then, is electronic authentication legislation necessary? The
answer is a simple one. Schwab and other broker-dealers need greater
certainty that electronic authentication will have the same legal
effect as traditional pen-and-ink signatures.
Take the simple example of account-opening procedures. Currently,
customers must fill out account applications on paper, sign them
manually, and then submit them in person or through the mail. With
electronic authentication, this could be done entirely online and would
save the industry--and, inevitably, the customer--tens, if not
hundreds, of millions of dollars in operating costs. It also would be
quicker and more convenient for the customer. Other transactions which
require signatures and now must be handled manually could also be
performed online if we are able to obtain legal assurances that
electronic authentication would be recognized. These include: allowing
margin trading, allowing option trading, power of attorney forms,
change of address forms, wire transfer requests, beneficiary forms, IRA
distributions, and letters of authorization.
Let me address the issue of uniformity. The securities markets are
national in scope and operation, and they involve transactions that are
entirely interstate in nature. Schwab does business in all fifty
states, and we may not even know from where a customer with a laptop is
accessing our systems. Consistent and uniform Federal standards are
therefore imperative if brokers and others in the securities industry
are to engage in electronic commerce with any degree of certainty and
reliability. Congress has already recognized this reality in the area
of books and records, for example, and uniformity was the impetus
behind the National Securities Markets Improvement Act (``NSMIA''),
adopted in the last Congress. Uniformity in electronic authentication,
then, is the logical and necessary next step.
Today, patchwork regulation by the states poses the greatest
barrier to the use and development of electronic signature technology
and the continued evolution of e-commerce. This marketplace reality
coexists uneasily with the fact that virtually every state either has
already adopted or is in the process of adopting its own individualized
law governing electronic authentication. The unfortunate fact is that
the states have taken widely disparate approaches to electronic
authentication. Thus, some states, such as in Utah's Digital Signatures
Act of 1996, address the use of electronic authentication by the
general public and regulate the providers of electronic authentication
services through various systems of registration, licensing and payment
of fees. On the other hand, several states have adopted laws that
regulate only transactions with the state government. An example of
this approach would be the Florida Electronic Signature Act of 1996.
Beyond these two basic formats, state laws take varying approaches
with respect to such matters as registration of certificate authorities
and the definition of ``digital signature'' and other basic terms. They
contain varying treatment of licensed and unlicensed certificate
authorities, differing fee payment schemes, different rules for
suspension of certificates, varying treatment of liability between
parties, divergent standards for agreement between parties on the use
of electronic formats, and similar considerations. Some of these state
laws favor particular technologies, such as public key infrastructure,
or ``PKI,'' technology, while others are technology-neutral.
One important effort to rectify the problem of conflicting state
laws is the Uniform Electronic Transactions Act (``UETA''), sponsored
by the National Conference of Commissioners on Uniform State Laws, due
to be presented to state legislatures later this year. We
enthusiastically endorse this effort. However, there is no assurance
that it will be adopted by all or even a majority of states, or that it
will be achieved in a reasonable timeframe. It is worth recalling that
it took eleven years (from 1958-1967) for the Uniform Commercial Code
(``UCC'') to be adopted nationally, and even then two jurisdictions,
Louisiana and the District of Columbia, failed to adopt it. Very
simply, the electronic commerce industry does not have the luxury of
that kind of time. We need Federal action now to allow us to go forward
with certainty and clarity in the marketplace.
We are therefore pleased that Members of Congress, on both sides of
the political aisle, including the Leadership of both bodies, have made
electronic authentication legislation a policy priority in this
Congress. In particular, we want to congratulate both Senator Abraham
and Chairman McCain, among others, for the introduction of S. 761 and
S. 921 in the Senate, as well as Congressman Tom Bliley of Virginia,
the Chairman of the House Commerce Committee, who has kicked off the
debate in the House through the introduction of his bill, H.R. 1714.
In our view, it is essential that these bills be quickly considered
and acted upon, and that Federal legislation, such as S. 761 proposes,
be put in place to provide the uniformity we need without usurping
traditional state functions or continued efforts at the state level to
address these issues. Indeed, we believe that, while the states should
continue to proceed on a parallel track through UETA, S. 761 now
represents a careful and sensitive balancing of needs between those of
the industry and the legitimate needs of the states, and it is a
measure that can and should be supported by all parties.
I would like now to focus briefly on some of the main attributes of
the legislative approach that we support. In its July 1, 1997,
Framework for Global Electronic Commerce, the administration called for
a predictable, minimalist, consistent and simple legal environment for
[electronic] commerce. We at Schwab endorse this approach to
legislation in this area: that is, enabling legislation that removes
existing barriers to the use of, and reliance upon, electronic
signatures. We believe in the creativity and innovation of the
marketplace, and we see no need for legislation that over-regulates,
attempts to resolve all open issues in this area or sets up new
standards or regulatory regimes. What is needed is simple legislation
that constructs the framework within which the market and its
participants can develop the technologies and systems that work best
for our various and wide ranging needs.
Similarly, we would like to see a broad definition of electronic
signature that enables market participants to choose among themselves
which technology and which level of security and liability meets their
individualized needs for any particular situation. In this connection,
we note that the definitions in S. 761 generally follow those of UETA.
Existing law does not establish minimum standards of security and
liability for pen and ink signatures (for example, there are no minimum
standards to make signatures harder to forge). Similarly, it seems to
us, this legislation should not set minimum standards for electronic
signatures. The market will quite naturally work this out, selecting
the best technologies, balancing costs and risks, and inevitably
reaching a result which is innovative and cost effective, both to the
broker and the customer.
In Schwab's view, technology neutrality also is critical.
Technology in the electronic commerce area is evolving rapidly.
Legislation must be neutral so as not to stifle continued innovation.
We must allow technology to develop and compete in the marketplace.
Federal legislative attempts to dictate what technology is or is not
acceptable, however well-intentioned they might be, will be a
prescription for failure. The administrations Framework also endorsed
technology neutrality in the application of any rules affecting e-
commerce. The market therefore should naturally select those
technologies that work and deliver appropriate security and
reliability, and it will, equally naturally, reject those which do not.
Legislation that enshrines any particular technology, such as public
key infrastructure, or sets standards that give one technology an
advantage over others will stifle innovation at these critical early
stages.
Allowing and fostering technological innovation through competitive
market forces has historically worked well in all areas, particularly
the securities industry. For example, in the 1975 amendments to the
Securities Exchange Act of 1934 (the 34 Act), Congress mandated that
the SEC follow a facilitate-but-not-design approach to overseeing the
development of the national securities markets. A technology-neutral
enabling statute like S. 761 would follow this same approach by
facilitating the development of electronic commerce without mandating a
particular system or design. We believe that such an approach will
result in the same beneficial technological innovation that has made
the U.S. securities markets the envy of the world.
Finally, Schwab supports separate provisions dealing specifically
with the securities industry because the industry is faced with not
only contract law concerns but regulatory requirements. We therefore
need the certainty that electronic signatures will meet the
requirements of the 34 Act, as well as the Investment Advisers Act of
1940, while at the same time recognizing the SECs authority to provide
guidance to ensure that the use of electronic signatures is consistent
with investor protection. For this reason, we also support Senator
Abraham's introduction of a separate but related bill, the Electronic
Securities Transactions Act (S. 921).
In conclusion, Charles Schwab believes that the Millennium Digital
Commerce Act (S. 761) constitutes simple, forward-looking, market-
oriented legislation, precisely the kind of approach which is needed if
the United States is to continue to lead the world in electronic
commerce. And it is an approach that is sensitive to the concerns and
interests of the states. We urge you to support and pass this bill.
Thank you.
Senator Abraham. Mr. Callcott, thank you very much. We turn
now to Mr. Miller.
STATEMENT OF HARRIS N. MILLER, PRESIDENT, INFORMATION
TECHNOLOGY ASSOCIATION OF AMERICA
Mr. Miller. Senators, it is really an honor to be before
this committee, and three of the leading Senators in terms of
promoting the information technology age. On behalf of the
Information Technology Association of America and our 11,000
member companies, I want you to know we strongly endorse the
Millennium Digital Commerce Act of 1999 and urge its quick
passage.
Our companies are involved in software services, the
Internet, electronic commerce, professional services,
information services, and telecommunications. I also serve as
president of the World Information Technology and Services
Alliance, which consists of 38 high tech associations around
the world, so I have an international interest in this
legislation as well as a national perspective.
Our companies are helping to shape the future of the
electronic commerce age. The importance of electronic commerce,
as the previous witnesses have indicated, cannot be overstated.
Estimates vary widely, but the most recent estimates are by
Forrester Research that electronic commerce will grow to over
$327 billion within 2 years. Our own recent surveys indicate
that the electronic commerce marketplace will double in just
the next 6 months.
Given this rapid growth, we did a recent survey to get some
indication of what kind of concerns people have about using the
Internet. We did this in conjunction with the well-known firm,
Ernst & Young. The survey, which measured the perceptions of
top executives from across the information technology industry
and their customers, found that 60 percent of respondents
believed lack of trust was the top overall barrier to
electronic commerce.
When probed for more specifics, they identified privacy
protection, authentication, and security as the three top level
areas of concern.
Privacy and security have garnered a lot of attention in
the media, and in Congress, but the issue that this bill
focuses on, authentication, has not received as much attention.
We believe it needs it, deserves it, and that is why we support
this bill.
Given the importance of electronic commerce, we have to
realize that the famous New Yorker cartoon which says that the
great thing about the Internet is that you can be a dog on the
Internet really is not very funny in the commercial world. What
real people want to know, whether they are consumers or
business people, is that the people that they are dealing with
are not dogs.
Protecting the integrity of the content is critical. They
want to know that what you have communicated is what you mean.
The continued growth of electronic commerce depends upon the
development of an updated legal framework, as Senator Wyden
said, so that contract law can exist in the digital age.
We were very strong supporters of your legislation last
year, Senator Abraham, S. 2107, the Government Paperwork
Elimination Act. It was the first legislative step in
electronic authentication by pushing the U.S. Government to
recognize electronic signatures have the same legal recognition
as the handwritten signature. We are pleased that the U.S.
Office of Management and Budget appears to be following through
on this law which you authored, Senator Abraham, with the
strong support of your Commerce Committee colleagues.
S. 2107 dealt with how private parties relate to the
Federal agencies in the realm of electronic signatures. S. 761,
as you and the other witnesses indicated, focuses on commercial
environment, and it is the next right step. It is an important
bill, but at the same time, it is a modest bill that strikes a
successful balance.
For example, as you indicated in your opening statement,
this bill uses a very light form of State preemption. It will
not apply to States that embrace the forthcoming Uniform
Electronic Transactions Act which, as you stated, will be
forthcoming soon. It is also cautious in that Government does
not skew the evolving marketplace for authentication services.
In other words, it does not get out ahead of the private sector
in the development of technologies and standards.
An important provision in S. 761 which will help to build
trust in electronic commerce is what are called the party
autonomy provisions. These provisions ensure that if several
parties agree to use a specific authentication technique, then
this should be respected in the courts regardless of
jurisdiction.
Examples abound of why this legislation is important. Mr.
Callcott talked about how much this will simplify the ability
for individual customers to get online and use the various
trading services that his company and many others are now
offering. It is also important in business to business
transactions.
For example, a company that is selling auto parts, as many
are frequently doing online now, needs to know that the person
who is buying the auto parts product is a legitimate vendor who
will install them correctly and follow the prescribed
procedures. Obviously, the person who is buying the auto parts
wants to know that the parts being supplied are legitimate, and
he or she can adequately represent that.
They require types of transactions authentication. They
require legal standing. They require that you cannot
subsequently go back and repudiate a transaction because this
transaction took place online.
Just yesterday, I had the opportunity to testify before the
House Small Business Committee. One of the witnesses was a
lobster fisherman and salesman from Maine who has now gone
online, and is now selling lobster dinners online. By the way,
they did a transaction in the middle of the hearing, but at the
end of the day Chairman Talent decided not to give him his
credit card number, so we did not have lobster dinners as part
of the hearing.
This gentleman described that one of the concerns he has
about electronic commerce is that as much as 10 percent of his
customer orders are later repudiated by the people who ordered
the products.
Now, he has to make a business decision about how far he
wants to carry the authentication. Clearly in larger orders if
he knew that there was an authentication process he could go
through which would not be repudiated, that would give him
simple recourse. Then he could expect to be much more confident
that when he sells a large order online, that he would be able
to collect the moneys which he is properly owed.
As indicated by previous witnesses, there are important
basic principles that we support. The private sector must lead
in the setting of standards. The legislation must be
technology-neutral. It must be industry-neutral. It must let
the marketplace decide what is the appropriate level of the
solution to any questions on agreement of transaction.
Encryption and the issues of trust of third parties should
be treated as separate issues from electronic signatures. We
need not just State harmonization, not just national
harmonization, but also international harmonization, with
mutual recognition of national and subnational laws.
Now, S. 761 cannot deal with all these questions. But it is
consistent with these goals, and we particularly commend you,
Senator Abraham and your colleagues, for introducing provisions
in the bill which encourages the negotiating position of the
United States in both its bilateral and multilateral
discussions.
Legislation which establishes a consistent legal framework
for electronic authentication and thereby fosters a secure
environment for electronic commerce will maximize the benefits
of the global electronic marketplace for American consumers and
the economy. We wish to thank you for your leadership on this
bill. We look forward to supporting the legislation as it moves
through the Senate and Chairman Bliley's bill moves through the
House of Representatives and onto the President's desk.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Harris N. Miller, President, Information
Technology Association of America
Mr. Chairman, and distinguished members of the Committee, on behalf
of the over 11,000 direct and affiliate member companies of the
Information Technology Association of America (ITAA), I thank you for
inviting me to participate in today's hearing on the ``The Millennium
Digital Commerce Act of 1999,'' S. 761. Our companies are involved in
software, services, the Internet, electronic commerce, professional
services, information services, and telecommunications. In addition to
serving as ITAA President, I am President of the World Information
Technology and Services Alliance (WITSA), consisting of 38 information
technology associations around the world. Because electronic commerce
is a global issue, ITAA is interested in the topic of today's hearing
from both a national and international perspective.
ITAA member companies are helping to shape the information age by
creating thousands of new sources of information, turning local and
regional markets into global markets, and giving businesses and
consumers new and efficient means of trading goods and services. In
short, our members are at the forefront of the revolution called
``Electronic Commerce.''
The importance of electronic commerce to the U.S. economy and to
American consumers cannot be understated. While estimates of the growth
and size of the electronic marketplace vary widely, the Department of
Commerce predicts that electronic commerce will account for more than
$70 billion in sales in the year 2000, and Forrester Research projects
that more than $327 billion will change hands over the Internet by
2002. Based on ITAA's own surveys, we see a doubling of the electronic
commerce marketplace in just the next 6 months. Given this dramatic
growth, the creation of a secure environment for electronic commerce is
vital to both American consumers and the American economy.
ITAA last month released the results of a survey on electronic
commerce barriers that--we conducted in conjunction with Ernst and
Young. The survey--measuring the perceptions of top executives from
across the information technology industry and their customers--found
that 62 percent of respondents believed lack of trust was the top
overall barrier to e-commerce. When probed for specific obstacles,
respondents identified privacy protection (60 percent), authentication
(56 percent) and security (56 percent) as the three top-level trust
concerns. While privacy and security have received a good deal of media
attention, concerns about authentication--knowing who you are really
dealing with on the Internet--appear to be growing in significance.
We are clearly in a remarkable stage of growth in electronic
commerce. It is no surprise that concerns about authentication are
growing, too. When people are online, they want to know with whom they
are dealing. They want to know that people are who they say they are
and are going to follow through with commitments made over the
Internet.
The famous New Yorker cartoon says the great thing about the
Internet is that no one knows you're a dog. That is humorous, but it is
not what buyers and sellers really want. They want to know they are not
dealing with dogs. Protecting the integrity of the content is also
critical. They want to know you mean what you communicated you mean.
The continued growth of electronic commerce depends on the development
of a legal framework of contract law that will supply uniformity and
legal certainty to transactions in cyberspace.
We were strong supporters last year of S. 2107, The Government
Paperwork Elimination Act. This legislation was the right first
legislative step on electronic authentication. The bill was simple and
straightforward: it required Federal agencies to make all of their
forms available online in a reasonable period of time, and gave an
electronic signature the same legal recognition as a handwritten
signature. We are pleased to see that the Office of Management and
Budget (OMB) is following through on this important new law, and
prodding the agencies to move forward with the implementation.
S. 2107 dealt with how private parties deal with Federal agencies
in the realm of electronic signatures. S. 761 addresses the commercial
environment, and is the right next step. It would do what is needed
more than anything else to encourage the growth of electronic commerce:
it will build trust in the medium by creating a consistent legal
framework across the states. It is a modest bill that strikes a
successful balance in a number of ways. For example, the bill uses a
very light form of state preemption. Its provisions will not apply to
states that have embraced the Uniform Electronic Transactions Act,
which should be completed soon. S. 761 is also cautious in ensuring
that the government does not skew the evolving marketplace for
authentication services. In short, the bill does not get out ahead of
the private sector in the development of technologies and standards.
An important cornerstone of S. 761--which will help to build trust
in electronic commerce--is what are called the ``party autonomy''
provisions. These provisions ensure that if several parties agree to
use a specific authentication technique, then this should be respected
in the courts, regardless of jurisdiction.
Why is this bill important?
Let me illustrate how S. 761 will create legal trust and certainty
in authentication techniques, creating efficiencies and reducing costs.
Let's assume that a major auto manufacturer is based in the U.S. with
operations and dealers around the world. The company has created a site
on the Internet not only for its dealers but also for the hundreds of
companies globally that perform repairs and do maintenance on these
cars. So the web site contains catalogue information--which is changing
constantly and needs to be kept up to date--on what models are
available at what cost, and the prices associated with all the various
parts available for repairs. The web site is password protected, but
also requires dealers to authenticate the purchase of cars using a
digital signature to verify the purchase. Such a system creates
enormous efficiencies and reduces costs by improving inventory
management and reducing paperwork costs. It also improves the company's
supply chain management, and allows the dealers to tell its customers
what kinds of cars are available with what features and when they will
be delivered. There may still be some negotiation over price--the
Internet can't change all realities overnight!
S. 761 creates the legal trust and certainty necessary to make it
easier for our car manufacturer to develop and use such an efficient
Internet-based system. The bill ensures that when a dealer buys 30 new
cars, a legal framework exists to authenticate the purchase using the
digital signature that all the parties have agreed upon. And it ensures
that the laws of individual states respect the agreement reached on the
specific authentication technique used by the car manufacturer and its
dealers should any disputes arise. Such a system also makes it
virtually impossible for a hacker to corrupt the system or submit false
orders.
In our example, the overall benefit of such a system is reducing
the cost of cars for consumers, and allowing consumers to order cars
with specific features that will be delivered in shorter time-frames.
S. 761 also ensures that if the company and its dealers wanted to
use a different kind of authentication technique (for example, a
biometric method), that they could do so. So the bill is technology
neutral and allows the marketplace to develop the best possible
procedures.
Further, S. 761 supports a similar consistent framework on an
international level. It supports the U.S. Government's efforts to
negotiate multilateral and bilateral treaties to accomplish the same
goals. This is important because the Internet is a global medium that
transcends national boundaries.
ITAA has embraced a number of important principles on
authentication and electronic signatures. S. 761 is totally consistent
with these principles:
The private sector must lead in the setting of standards and
approaches on digital signatures. For example, any
accreditation standards for certificate authorities (CAs)
should be developed by the private sector. Legislation and
regulation should not impede development of industry-led, cost-
effective, market-trusted authentication services created in a
competitive environment.
Any legislation on electronic signatures must be technology
neutral.
Any legislation on electronic signatures must be industry
neutral.
Let the marketplace decide what is the most appropriate
solution for any given level of agreement or transaction. For
example, a major financial transaction involving the transfer
of millions of dollars might involve a CA, hewing to a
specified level of standards, protected by unbreakable
security. Whereas a consumer buying a product over the Web
might accept a lower and less expensive standard with high, but
not unbreakable security.
Encryption and the issue of trusted third parties should be
treated as a separate issue from electronic signatures.
State, national, and international laws governing electronic
authentication need to be harmonized, with mutual recognition
of national and subnational laws. A framework needs to be in
place that allows for electronic authentication to be used
across national borders. Governments must avoid using
electronic authentication laws as non-tariff barriers.
Legal authorities should recognize the equivalency of
traditional and electronic signature and record requirements.
While S. 761 cannot deal with all of these questions, it is
consistent with these goals. For example, the bill is supportive of the
negotiating position of the U.S. in both bilateral and multilateral
discussions designed to foster trust in electronic authentication
across borders, without mandating legislative solutions.
Legislation that establishes a consistent legal framework for
electronic authentication and thereby fosters a secure environment for
electronic commerce will maximize the benefits of the global electronic
marketplace for American consumers and the economy.
We wish to thank the sponsors of this bill for your leadership.
ITAA looks forward to supporting this bill aggressively as it moves
through the Senate, as well as similar legislation in the House.
Senator Abraham. Thank you, Mr. Miller.
In that you deferred on an opening statement, Senator
Burns, I will start with you for questions and we will go to
Senator Wyden.
Senator Burns. Is anybody out there against this bill?
[Laughter.]
Senator Burns. I just want to throw out a couple of
questions here, and I have to run, but again I want to thank
Senator Abraham for doing this. How important a role does
encryption or e-privacy play, and Mr. Miller, I was interested
in your statement that encryption should be treated in a
different light.
I know, and you know, that around our different States,
Montana we set up a long time ago a committee out there to
oversee systems to make sure that all the systems were
interoperable. We did not want a bunch of different systems
that could not talk to one another, because sometime down the
line we are going to have to do that, because we are all
interfaced, so to speak. What role do you think those two
issues play?
Now, I am an old-fashioned guy. I like to go and I like to
see who I am doing business with, and I like to give a check,
OK, and I have a little bit of nervousness about a lot of
things on the Internet, not all of them, but about some of
them, and I would like to find some way that we could build
confidence.
To me, the integrity, and to really do a lot of business on
the Internet is going to depend upon what we do here on this
issue and on encryption for security.
Mr. Miller. I would say, Senator, encryption is absolutely
essential to electronic commerce. We very much appreciate your
efforts and those of many of your colleagues who are trying to
convince the Administration either to change its policies
regulatorily or to pass legislation.
We are very pleased at the support of the Full Committee
Chairman, Senator McCain, who is now a supporter of the reform
legislation. It would change the current situation, which
restricts the ability of the U.S. companies to export products
above a certain encryption strength, except in limited cases of
financial services.
It is a global economy, Senator, as you said over and over
again, and because of that we have to have absolutely strong
encryption. Without it, as Mr. Parker and Mr. Campbell and Mr.
Callcott indicated in their testimony, it is impossible to do
electronic commerce because of the issue that we must be able
to protect the integrity of the information that goes across
the Internet.
Privacy is also an incredibly important issue. That is why
the entire community on the Internet, all of the stakeholders,
the information technology industry, and all the people that
are selling over the Internet, are working together for an
important self-regulatory effort, the Online Privacy Alliance.
You may have seen the results of the privacy survey that
came out just a couple of weeks ago that was done by Georgetown
University. It indicated the dramatic increase to now over 70
percent of all Web sites, and something like 90 percent of the
most heavily trafficked Web sites having very explicit, clearly
posted privacy policies. This is because individual consumers
as well as business people, when they come to the Web sites and
they do a commercial transaction, want to know that their
privacy is being protected. They want to understand what the
privacy roles are of the merchants they are doing business
with. So when you decide you are going to stop walking down the
street and handing out a check and ordering lobster online.
Senator Burns. I am not going to do that.
[Laughter.]
Mr. Miller. Whenever your children or grandchildren or
friends and neighbors begin to do that, they want to be sure
that the information they are giving is first of all trusted
and confidential, and is not going to be stolen by some hacker
or given away. They want to make sure that the information they
are giving to a merchant is not then going to end up in the
hands of hundreds and thousands and millions of other people
who have no right to that information, except to somehow take
advantage of it for purposes that do not serve your interest as
the consumer.
Senator Burns. Mr. Callcott, I am interested in--give me
some kind of ideas of the problems you run into, and what your
biggest complaint is when individuals start doing business with
Schwab on an individual basis in the market. I know it cannot
be all roses. Give me your idea, your biggest challenge you
have.
Mr. Callcott. Well, the biggest challenge we have had, and
I think it is true for a number of people in the securities
industry, is keeping up with the customer demand for our
services. Last year we had almost a 1,000 percent increase in
the capacity of our Web site, and this year we are going to
increase the capacity of our Web site another 900 percent.
To do that is a complicated matter. We have gone from two
mainframes at the beginning of last year. We are going to have
10 mainframes by the end of next month. That is very
complicated to do, to add that much additional capacity, and as
a result we have had a few times where our Web site has gone
down.
Now, I must say, our Web site has gone down on average
between 1 and 2 hours per month so far this year, which we will
put up against any computer system anywhere in the country,
especially one that is adding capacity as fast as we are, so I
think that is an area, like the privacy area, where the market
is very aware of what the issues are, and the market is
addressing those issues.
But if I can followup on your encryption question, Schwab
runs what we believe is the largest secure encrypted Web site
in the world. Any time you are looking at your customer account
data, you are doing research for a security you might buy, or
are trading, that is all coming back to you in a secure,
encrypted form, and that, of course, takes much more capacity
to run than an unencrypted Web site.
Similarly, we were a leader in posting our privacy policy
on our Web site. I think we were the first brokerage firm to do
that, and we think that is absolutely critical for our
customers, and in the privacy area our view is that if people--
people should be required to post a privacy policy, and if they
violate that policy, they should be subject to sanctions, but
we do not support sort of broad Federal legislation telling
firms what their privacy policy should contain.
Senator Burns. You have a person, let us say, violates the
law. How tough are they to find, and how tough are they to
prosecute?
Mr. Callcott. We have had less problems with fraud in the
online area, frankly, than in the telephone area, where we have
had problems of what is called account takeovers, where people
will call up and impersonate a customer. Every time you go onto
the Schwab Web site, if you are a customer you have got to use
your password, and so far we have had very few instances where
people have had their passwords stolen or mislaid. It is
frankly not one of our top three security problems that we have
had.
Senator Burns. Thank you, Mr. Chairman. I just think that
these other elements are very important as we walk hand-in-hand
with this legislation, and I am certainly happy that the
chairman of the full committee has come to the altar on
encryption.
[Laughter.]
Senator Abraham. Thank you, Senator Burns. Before I turn to
Senator Wyden, I just will indicate that Senator Lott is also
one of our original cosponsors and has provided us a statement
for the record which we will enter into the record of this
hearing.
[The prepared statement of Senator Lott follows:]
Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
Senator Abraham, thank you for holding this important and timely
hearing on the Millennium Digital Commerce Act. A solid legislative
measure that will promote exponential growth in electronic commerce.
Your sponsorship of this bipartisan legislation is yet another
example of your continuing leadership on important technology issues. I
am truly grateful for your efforts to author and spearhead common sense
legislation that both directly and indirectly benefits the citizens of
Michigan, Mississippi, Arizona, and every other state.
This hearing follows the Department of Commerce's public conference
on ``Understanding The Digital Economy--Data, Tools, and Research.'' A
workshop that included leaders from industry, government, and academia.
Government-sponsored conferences and Congressional hearings, like the
one being held today, that explore the challenges and opportunities of
the Internet and approaches to facilitate electronic commerce, are good
for all Americans.
As my colleagues are aware, it was Senator Abraham's initiative
last year that led to the 105th Congress' enactment of the Government
Paperwork Elimination Act. An important first step toward the eventual
broad use and acceptance of electronic signatures. The act, now law,
requires Federal agencies to automate their forms and allows computer
users to complete, electronically sign, and submit government forms
online.
Because of Senator Abraham's efforts, the Federal Government will
save thousands of square feet of storage space. More importantly,
Americans in every state, every county, and every city and town will
save countless hours completing and submitting government paperwork. It
will allow parents to spend more quality time with their children and
will save them billions of dollars over time.
The Government Paperwork Elimination Act, which I proudly
cosponsored, was also supported by the Administration. This good
government measure also facilitates the Federal Government's transition
to a paperless document management system. It allows agencies to
collect and maintain forms and other records faster, easier, and
cheaper.
Now it is time for the 106th Congress to take the next logical
step. To enact
e-commerce friendly legislation that is a direct outgrowth of and a
natural extension to the Government Paperwork Elimination Act.
Senator Abraham, your bipartisan Millennium Digital Commerce Act
provides a baseline national framework for online business to business
transactions. It is important to interstate commerce because it
provides legal standing for electronic signatures on contracts and
other business transactions.
As we all know, advancing interstate Commerce and establishing
appropriate and necessary parameters for state-to-state transactions
falls squarely within Congress' jurisdiction under Article I, Section 8
of the Constitution of the United States.
Electronic signatures are a revolutionary communication tool.
Unlike manual signatures, which can easily and fraudulently be
duplicated, automated signatures are highly controlled and extremely
safeguarded. A document that contains an electronic signature is far
more secure than a hardcopy signed and passed off by hand. While
someone can easily make an unnoticeable pen and ink change to a paper
document, an electronically signed file becomes invalid if any of the
data in it is altered or eliminated. Electronically signed documents
can also provide additional security measures by automatically time and
date stamping a document so all parties to the agreement know exactly
when the signature was placed. No more post dating that electronic
check. Electronic signatures are an emerging technology that will
springboard even greater electronic commerce than our nation has
experienced to date.
As Secretary Daley commented just last month, ``the proportion of
retailers selling on the Internet tripled in just one year, from 12
percent in 1997 to 39 percent in 1998. In the year 2000, Internet
shopping is expected to generate $30 billion [in revenue].''
Promoting continued growth in electronic commerce is good for
business, consumers, and the overall American economy. It is Congress'
responsibility to ensure that roadblocks to the e-commerce superhighway
are taken down.
Senator Abraham's bill, which Chairman McCain, and Senators Wyden,
Burns, Allard, and I have cosponsored, would help eliminate one
potential barrier that stands in the way of progress.
The Internet is local, regional, national, and global. Businesses
and customers are becoming increasingly frustrated with the hodgepodge
of state laws aimed at governing what is clearly a ubiquitous
communication tool. Today, more than forty states have laws on the
books concerning the use of authentication technology such as
electronic signatures. While such rules are well intentioned, the fact
that no state has chosen to adopt the same approach has had a chilling
effect on the potential growth in interstate commerce available through
the World Wide Web.
Congress cannot sit idly by and watch the milieu of state laws on
electronic signatures adversely impact electronic commerce. Interstate
and international commerce that benefits us all. Commerce that is a
significant contributor to our nation's economic health. Commerce that
creates new businesses, big and small, and thousands of new jobs all
across the country.
In our fast-paced global and highly technical environment, where
time is money, companies transacting business across state lines need
assurance that electronically signed documents are fully and legally
executable. Senator Abraham's measure will ensure that businesses
located in different states are held to their agreements and
obligations even if their respective states have different rules and
approaches concerning electronically signed documents. It creates a
much needed level playing field across all fifty states. It is a
baseline--not a floor. It is an approach that recognizes that all
states in the union need to participate if America is to have a
successful electronic signature regime.
The Millennium Digital Commerce Act is a much needed and timely
precursor to state-by-state adoption of the Uniform Electronic
Transactions Act (UETA). Once UETA is finalized, its enactment by all
fifty states is not expected to occur for several years. Those who want
to transact business online cannot wait until then. They want
Congressional action now. They are looking to the members of this
committee for leadership now.
Without objection, I would like to introduce a few documents into
the record, following my statement, that will help inform the
discussion we are having today. The first is an April 1998 report from
the Department of Commerce on ``The Emerging Digital Commerce'' and a
specific appendix from the report on ``Electronic Commerce Between
Businesses: Analysis and Case Studies.'' The second document is an
Executive Summary of the OECD's report on ``The Economic and Social
Impact of Electronic Commerce.'' \1\
---------------------------------------------------------------------------
\1\ This material is maintained in the Committee's files.
In addition, the U.S. Department of Commerce Report, ``The
Emerging Digital Economy'' and Appendix 3, ``Electronic Commerce
Between Business: Analysis and Case Studies'' can be obtained at
www.ecommerce.gov/emerging.htm.
---------------------------------------------------------------------------
In its report on the digital economy, the U.S. Department of
Commerce concluded that:
Internet Commerce is growing fastest among business. It is
used for coordination between the purchasing operations of a
company and its suppliers; the logistics planners in a company
and the transportation companies that warehouse or retailers
that sell its products; and the customer service and
maintenance operations and the company's final customers.
The report goes on to say that:
Companies are quickly moving to utilize the expanded
opportunities created by the Internet. For instance, Cisco
Systems, Dell Computers and Boeing's spare parts business
report almost immediate benefits after putting their ordering
and customer service operations on the Internet. They are so
convinced of its benefit to their own companies and their
customers that they believe most of their business will involve
the Internet in the next three to 5 years. . . . Growth of
business-to-business electronic commerce is being driven by
lower purchasing costs, reductions in inventories, lower cycle
times, more efficient and effective customer service, lower
sales and marketing costs and new sales opportunities.
Senator Abraham, enactment of your bill is an important interim
step toward eventual national uniformity. The kind of uniformity needed
to support electronic commerce. Baseline national standards that the
Commerce Department's case study participants, Federal Express, Cisco
Systems, Dell Computer Corporation, Boeing, Garden Escape, W.W.
Grainger, and General Electric, can realize the tens of billions of
dollars worth of online transactions possible as a result of Congress'
enactment of the Millennium Digital Commerce Act.
Senator Abraham's Millennium Digital Commerce Act merely
establishes legal certainty for electronic signatures when they are
used for interstate business transactions. It strikes a necessary
balance between a state's individual interests and the need for
reciprocity among and between states. It fosters the expansion of trade
on a state-wide, national, and international basis while promoting
continued innovation.
This much needed and desired legislation is technology neutral. It
allows businesses to determine their own methods for executing online
transactions. It also establishes guiding principles for the use of
electronic signatures for international transactions. A framework
founded on open, non-discriminatory standards. Last, this legislation
requires Federal agencies to identify rules or regulations that impede
electronic commerce and make recommendations for improvements. Another
important step toward eliminating unnecessary and harmful barriers to
trade.
Our trading partners east of the Atlantic are already working
toward recognition of electronic signatures. The United States should
not--cannot--lag behind our industrial trading partners.
I also appreciate Chairman McCain's efforts to move the Millennium
Digital Commerce Act forward. Today's hearing and the questions and
answers provided by the esteemed panel before us, will help move the
Commerce Committee forward on this necessary journey.
This important pro-technology, pro-electronic commerce legislation
will help stimulate our nation's economy and move us forward into the
21st Century.
I hope my colleagues on both sides of the aisle will consider the
bill's merits and join in supporting this legislative effort.
Again, I want to say thank you to Senator Abraham for his continued
stewardship on technology and other public policy issues facing
Congress. The folks back in Michigan should be proud to have you here
promoting their interests.
Senator Abraham. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. I think Senator
Burns' questions were very helpful as well, and I only have a
couple of followups. In fact, you all were so supportive in
your statements one is almost thinking one should quit while
one is ahead.
[Laughter.]
We will get the proxies and move this. One question I had
for you, Mr. Callcott, is, tell us the difference in terms of
time saved between what we have today with the filing of all
the paperwork that you are talking about and what would happen
under the legislation that we are talking about here. What kind
of time will actually be saved, in your judgment?
Mr. Callcott. Again, it depends on a variety of
circumstances.
Senator Wyden. Take a couple of transactions and tell us
the amount of time saved.
Mr. Callcott. Well, let us take, for example, a wire
transfer request. That is a transaction which we will not--you
can trade securities online today without getting a manual
signature, just as you can trade over the telephone, and have
been able to for decades.
A wire transfer request by contrast is something which
every brokerage firm requires a signature to process. You do
that online, your wire transfer can be sent within a matter of
minutes. If you do not go in an online environment you will
have to drive into a Schwab branch. If you drive into a Schwab
branch we can process that wire transfer request probably same
day but maybe not until the next day, depending upon on the
West Coast you are probably not going to get in on time to meet
that day's batch of wire transfer requests.
If you are sending it in by mail, 3 to 4 days, maybe 5
days, depending if you are in a part of the country that has
slow mail delivery, so we are talking about the difference
between days and minutes.
Mr. Miller. Senator Wyden, I think there is a cost factor,
too. Clearly, when I register with my online broker by mail,
they have to have someone to open the envelope, sort it out,
process it, review it, enter the data into a system, as opposed
to being able to register online, where basically you're
removing all those costs. That would enable the consumers to
benefit, because then the online brokers could offer even
better services.
Mr. Callcott. Just to followup, that is exactly right, and
that has allowed us in online trading to drop our commission
from the several hundred dollars you would pay at a New York
full commission firm to $29.95 for our firm, and there are
other firms that charge even less.
We would similarly view in the area of some of these other
kinds of documents the kind of cost savings that we can pass on
to our customers in the form of lower commissions and
transaction charges.
Senator Wyden. It would seem to me, as I listen to you
particularly, and having watched Schwab and various advertising
efforts you have made, this bill is going to change millions
and millions of transactions all across the country,
transactions that used to take days and mail and people can be
accomplished, in effect, in minutes. I think, Mr. Chairman,
that it would be helpful, and I think we have done this--you
and I have done this on a number of occasions, to maybe just
hold the record open, and if you all could give us a couple of
examples from your own experience that we could cite as this
discussion goes forward, I think that would be very helpful,
and that would be the first question.
The second question that I had is, you will recall with
respect to the Internet tax freedom legislation we had quite a
dust-up in our efforts to work with the various States and
local jurisdictions around the country. I think Chairman
Abraham has worked very responsibly in this kind of area to try
to avoid that this time out.
What we basically said--and I gather we have got
Massachusetts, Michigan, New Jersey, New York, Pennsylvania,
and South Dakota at this point without laws on the books. We
have got a number of States that have inconsistent language. I
am going to ask you about that in a second, but what the
chairman and I have essentially said is, we are going to let
the States do their thing where you have valid business
contracts while there is this effort to come up with a uniform
kind of approach.
Is it your judgment that that kind of Federal-State effort
to sort this out will help us to avoid some of the friction
that we had on the Internet Tax Freedom bill, and in effect
made it very hard to enact that legislation for months and
months, and it was only at the end of the session that we
finally got it together? Is it your view that this Federal-
State approach is going to avoid some of that?
Mr. Callcott. Let me speak for Schwab on that. First, we
would like to thank you for your efforts on behalf of the
Internet Tax Freedom Act, and similarly for your bipartisan
efforts on this bill here today.
Our view is that this bill sets a sort of minimum standard
but allows the States freedom first of all to work through the
Uniform Electronic Transactions Act which a number of the
panelists have mentioned here today, but also to set--where
there are specific consumer protection issues that warrant
different treatment, the States will be free to do those, to
impose those, and similarly in the securities bill, S. 921, the
SEC will be able to set specific consumer protection standards
at the Federal level for securities investors. So we believe
this bill does reflect the principles of federalism that will
allow the States to do what they feel they need to while
setting a minimum standard that gives all of us the level of
certainty and uniformity we need to move forward with
electronic authentication.
Mr. Campbell. If I can jump in on that, because that
addresses matters of State policy. First, I should point out
that Massachusetts is one of the very few States that supported
the Internet Tax Freedom Act. We are always in favor of pretty
much any tax reduction or tax moratorium that you people can
come up with. That is one area where we do not mind preemption.
Also, you mentioned the States that do not have electronic
signature legislation. Massachusetts is one of them, and really
that was a conscious decision. We have been such champions of a
minimalist approach to electronic signature legislation that we
have taken it to its logical conclusion and simply not filed
legislation.
We have a court decision that has been handed down in
Massachusetts that found that an E-mail message satisfied the
legal requirement in a particular transaction that required a
statement to be signed under the pains and penalties of
perjury, and the court felt that an electronic E-mail message
satisfied that requirement so we think in Massachusetts under
the common law you get to where you need to be, and we do not
need any legislation.
But in terms of the preemption issue, I think that the
Congress should tread very lightly when preempting the States
in this particular area, and I say that not out of some turf or
jurisdictional type of thing, but one of the fundamental
principles I mentioned in my opening statement was that to the
greatest extent possible you should leverage and build on and
take advantage of the incredible strengths and stabilities
provided by hundreds of years of common law development in the
States in dealing with commercial transactions, and so it is
not a territorial type of thing, but it is just, I think you
get better law when you do not throw out tested bodies of law
and introduce untested concepts.
But having said that, this bill treads extremely lightly,
and therefore we feel we can support it. It is limited both in
terms of the time that the preemption will occur, because upon
enactment of the Uniform Electronic Transactions Act the
preemption goes away, but also it is very limited in scope. It
only applies to interstate commercial transactions, not all
bodies of law dealing with signing requirements and,
furthermore, it only preempts State law to the extent that it
is inconsistent with the principles articulated in the bill, so
that is such a judicious use of preemption that we think it is
entirely appropriate and it can be supported.
Senator Wyden. How serious are some of these
inconsistencies that we are seeing at the State level? I gather
from some of the reports that in some States they use
electronic and digital interchangeably.
Now, I gather you can have something electronic that is not
digital, but are these the kinds of terms that are really going
to cause problems, or is this a more ministerial kind of
exercise to try to get some agreement, and something we ought
to be able to do fairly quickly?
Mr. Parker. I have been involved in this effort, I guess
starting back from the American Bar Association's uniform
digital signature guidelines, I guess about 3 years ago now,
and like I said, Utah was the first State to create a regime.
Utah has what I call the extreme in terms of really trying to
regulate almost every aspect of the digital certificate
process, but there are inconsistencies all across the board. I
mean, every place you look you can kind of find inconsistencies
when you have 40-some approaches to unifying inconsistencies.
Now, in fairness, a lot of these inconsistencies are not
mandatory. What I mean by that is, a lot of the statutes are
such that you do not have to apply them. You can take advantage
of them on a voluntary basis, and then you get certain
protections once you have opted into the regime, and so I think
if you look at some of these statutes you would say, ``Yeah,
they are inconsistent, but they are inconsistent only in a
limited way.''
So I think when I look at this, kind of the whole picture,
I think there are places clearly on liability, for example,
where they are inconsistent. This legislation does not deal
with liability, nor should it. That is a place where the
Electronic Transactions Act, the uniform State effort, probably
will come in and play some role.
But the more important place where you see inconsistency is
kind of how the States look at this. Some States look at
technology-specific solutions, digital certificates. That is a
classic one, because a lot of States say, this is the
technology that is around today, so this is the technology we
are going to endorse. It does not mean that there are not other
technologies, but they looked at the one that was around when
they passed the legislation.
So when you look at this you say, ``Well, you get certain
protections if you use digital certificates,'' but you do not
get certain protections if you use other forms of technology,
then you can start to see that even though it is, ``voluntarily
in some respects,'' that it creates this body of law that
really makes it confusing for business to really play in this
space.
So I think that is where you really will find this, and as
a result business, because of the fear--and there is a lot of
uncertainty out there of what has happened here. When you look
at 42 regimes, that means you have to think about this. Even if
you conclude it is voluntary in many respects, and I am now a
company, I want to do business out there, what do I have to do,
I have to go hire law firms in 42 States to figure out what
those inconsistencies are, how thy are going to apply to my
specific business, what does this mean to me, and that is a
chilling effect on electronic commerce.
So when I listen to this voluntary argument, because I have
heard it for the last few years, I think it really does not
understand the concerns of business and why you need something
like this, which sets a baseline, very baseline, this bill
does, playing field.
Mr. Callcott. Let me just followup on that to say, digital
signatures has come to be understood by an awful lot of people
in several of the State laws to refer to a specific kind of
technology, the public-private key infrastructure technology,
which I think all of the panelists today have said is one of
many possible technologies, and we do not think legislation
should choose one technology over another.
Many of the State laws that exist today only deal with
transactions with the Government itself, much as the Federal
legislation that you pioneered last Congress, and the greater
problem from our perspective is that in many States there are
literally thousands of signature requirements in existing State
laws.
They are frequently phrased differently, but many of them
can be interpreted as requiring a manual pen-and-ink signature,
and it is a very difficult process for States to go through and
amend hundreds or even thousands of different State laws to
remove that bias toward pen and ink, and that is why we think
this sort of uniform standard saying that you cannot
discriminate against a signature solely because it is
electronic is very valuable, because it frankly saves the
States from having to go through that monumental process of
reviewing State laws and repealing and amending them.
Senator Wyden. Mr. Chairman, I have to go off and fight the
crusade to get the Y2K liability reform legislation moving
again.
Senator Abraham. I am sure the panelists would prefer you
to stay.
[Laughter.]
Senator Wyden. I am going to leave saying we very much
appreciate the panelists, and though I am departing, I remain
your lieutenant in this cause, and look forward to working with
you and getting it passed.
Senator Abraham. Thank you, Senator Wyden. We appreciate,
as I said earlier, what you have been doing to help us on this
and other legislation, and actually we will probably have to
end this hearing fairly soon because I understand there are
several rollcall votes that have been set for just a couple of
minutes from now, and obviously, as I think Senator Wyden
indicated, when a panel is as supportive of legislation as this
one has been, it is probably wise to not open any additional
opportunities for criticism.
I do want to stress that we have tried to work with both
the chairman's office here of this committee and the Ranking
Member to offer opportunities to anyone that they might suggest
as possible witnesses who might offer differing views, but I do
think none have been forthcoming, and I think we have tried to
work out with various people on this committee as well as
elsewhere in the Senate as many of the issues that we did
encounter that we raised when we initially began working on
this.
As I indicated in my opening statement, we want to continue
that effort to the extent we hear of things that might pose
potential impediments either to the passage of the legislation
or because of the content of the legislation might be difficult
in some fashion in terms of achieving our goals, and so I want
to just limit myself right now to one or two things, and we
will leave the record open for a while if you all would like to
respond and followup to Senator Wyden's request.
Because I think, as he indicated, the more anecdotal
information and evidence that we can add to, obviously, the
very substantial amount of objective, substantive information,
it helps us to try to explain to people in a more specific way
exactly why this is important.
There are two things I just wanted to maybe have response
on. One is the international issues, and Mr. Miller alluded to
it a little in his comment, but when he did, I think several of
you nodded your heads in agreement about the efforts within
this bill to try to position the United States in the best
possible fashion for any kind of international effort, and I
would just throw it open.
We will start with you, Mr. Miller, and just go down the
table. If there is any comments anyone would like to add as to
both: (1) how this bill will be helpful to that process, as
well as any thoughts you might have on what we should be
attempting to achieve, I would like to hear it for purposes not
only of this legislation but potentially for dealing with
future legislation.
Mr. Miller. Well, the key is your bill, Senator, is a win-
win situation. If you look at the States versus the Federal
Government, as Mr. Campbell and others have said, it is not a
win-lose situation. Some people thought, incorrectly, that the
Internet Tax Freedom Act, for example, was a win-lose: where
they thought that somehow the Federal Government was taking
something away from the State government. They thought if this
law passed, they would lose the certain degrees of freedom that
they had.
This bill moves in the direction of saying, as long as
there is consistency among the States, Federal preemption, can
be removed. We have to try to achieve the same thing
internationally.
Obviously, we do not want to challenge the sovereignty of
other Nation-States, or groups of Nation-States such as the
European Union. But we have to convince them, through the
arguments of persuasion, that we are a part of the global
economy, and all of these companies who are doing business on
the Internet globally, need consistent laws.
That they can still maintain their national laws, or
subnational laws in areas like consumer protection and, in
particular, laws
regarding signatures. But at the same time there has to be a
consistent baseline, as Mr. Callcott said, across the global
economy: an understanding that as long as there is consistency
that these transactions done electronically, whether they are
done from someone in Boston to someone in San Francisco, or
someone in Boston to someone in London, they still have the
same force of law.
The enactment of your legislation we hope very quickly
would send a very strong signal around the world, because the
United States is the information technology leader and the
electronic commerce leader. It would send a very strong
positive signal to the international community that wants to be
a part of this exciting global economy, that wants to emulate
what we have done in the national environment.
Mr. Callcott. I would agree with all of that. Schwab has
the first and largest online brokerage firm in the United
Kingdom. We recently established an online brokerage firm in
Canada. We believe there is enormous potential international
growth for online commerce, and it is very important for the
United States to be a leader in this type of legislation and to
establish standards which we think other countries will copy,
because we are the leader, and we have remained the most
successful.
One of the points I think one of the earlier panelists made
was that if we do not do this and we have conflicting laws in
the United States, that could put us at a competitive
disadvantage vis-a-vis the European Union, where they are
moving toward uniformity on this issue.
Mr. Parker. Let me give you an interesting approach to
this, which is that we do business in 40 countries,
approximately, on the Internet space, so I have traveled
abroad, I have been in Japan, and Asia, and Europe, and this
issue comes up, and it comes up in this context.
We say, ``Look, we have global reach.'' That is where a lot
of our business really is. American companies are trying to do
business abroad, not so much companies that are sort of
indigenous to other countries, and we go in there and we say,
``Really we need international uniformity,'' so we should all
sit in these groups and say, ``You know, we should have
international uniformity.''
The response you get back is one, well, ``how could you
guys be pushing for international uniformity when you do not
even have national uniformity, and it really takes away the
credibility of our argument that we should have international
uniformity'' when we cannot get our act together at home,
essentially.
That is one perspective, and I will tell you, it is an
important one, because you really feel it when you go over and
you are making these arguments, and so it is what I will call
the loss of leadership in this area, and this is a space, by
the way, that the United States basically invented, much like
the Internet, and would be ashamed, because we cannot do this,
because we cannot pass a bill like this, to lose that
leadership position.
The other thing is, there is a real practical problem for
American companies, and that is, the Internet really does in
very many respects transcend international boundaries, and so I
think what we do is, we get this bill passed in terms of having
this baseline national uniformity, then we go out there, as the
bill suggests, and we negotiate from a position of strength for
international uniformity, and I think we will find a lot of
receptiveness around the world, having done this at home.
Mr. Campbell. I think it is an excellent idea, sort of
putting a stake in the ground essentially saying the U.S.
Government, in pursuing international uniformity, is going to
be abiding by certain principles, the principles are
articulated in this bill, because I think it is the most
sensible approach, the technological neutrality, nonregulatory
approach.
I would like to point out that the Commonwealth of
Massachusetts, and actually the National Electronic Commerce
Coordinating Council, which is a group of State organizations,
have endorsed through formal resolution the proposed U.S.
convention that is being pursued by our negotiators, and the
principles set forth in Senate bill 761 are completely
consistent with the position that our negotiators are taking in
a variety of forums, whether it be UNCETRAL or OECD, or the
European Union.
So I think it is great to have a piece of legislation in
place that puts a stake in the ground that says, ``This is the
American position.''
Senator Abraham. As I said, we have got votes coming pretty
quickly, and we have appreciated very much everybody's
contribution here. I will certainly leave the record open, as I
said, for other members if they want to add questions, and
hopefully given the support we have heard today, we can move
this legislation forward here in the Commerce Committee.
I am happy to report, as I did in the opening statement,
that we have the support of both the chairman of the committee
as well as the Communications Subcommittee chairman, Senators
McCain and Burns, and the Majority Leader as well, so I think
that, combined with Senator Wyden's strong efforts on our
behalf and his cosponsorship gives us a good chance to move
this quickly, and we will do our best to accomplish it.
I want to thank the panel as well as our guests today for
today's hearing. We have appreciated your participation.
[Whereupon, at 11:20 a.m., the committee adjourned.]
A P P E N D I X
Charles Schwab & Co., Inc.,
San Francisco, CA, June 21, 1999.
Hon. Spencer Abraham,
Committee on Commerce, Science and Transportation,
U.S. Senate,
Washington, DC.
Re: Millennium Digital Commerce Act (S. 761)
Dear Senator Abraham: At the May 27, 1999 hearing on the Millennium
Digital Commerce Act before the Senate Committee on Commerce, Science
and Transportation, Senator Wyden requested that the record be held
open so that Charles Schwab & Co., Inc. (``Schwab'') could provide
supplemental information. Specifically, Senator Wyden asked us to
provide an example of how the bill could result in time and cost
savings for Schwab and its customers. This letter responds to Senator
Wyden's request, and we ask that it be made part of the record as a
supplement to my written testimony.
The account opening process is the best example of how the ability
to accept electronic signatures could save Schwab and its customers
significant time and expense. Currently, in order to open a brokerage
account, we require the handwritten signature of the customer on an
account application. There are two main ways in which retail customers
open accounts at Schwab.
First, a customer can bring a completed account application into
one of our branch offices or can come into the branch and fill out an
application there. If the customer wants to deposit a check or make a
trade immediately, a branch employee will open the account and the
customer will have access to the account that day. Otherwise, the
application will be accepted by the branch and mailed overnight to the
nearest operations center where an account will be opened within one to
3 days. In order to take advantage of this method, a customer must take
the time personally to visit a Schwab branch.
Second, a customer can fill out and manually sign an account
application and mail it to one of our operations centers. Depending on
the customer's location, it may take anywhere from two to 5 days for
the application to reach us. Once received, the application must be
reviewed by an employee in our operations center to make sure it is
complete and has been signed by the customer. Depending on the volume
of applications received, this can take as long as 48 hours. If the
application is complete, an account is opened and the customer may
begin trading or otherwise transacting business with us. However, if
any information is missing, the account opening process will be further
delayed.
If the customer has forgotten to sign the application, it must be
mailed back to the customer for signature and then remailed to us by
the customer. Since the customer may take a day or two to sign and
remail the application, this can add anywhere from four to 10 days to
the process. In the case of other types of missing information, such as
a social security number, Schwab makes three attempts to reach the
customer by telephone over a 72-hour period. If these attempts are
unsuccessful, the application must be mailed back to the customer with
instructions to provide the missing information.
Thus, under the best of circumstances, this manual process can take
from two to 6 days to complete. If there are problems, it can take
considerably longer. In our experience, between 15 percent and 20
percent of all account applications require some form of followup to
obtain missing signatures and information, thus delaying the process
for the customer and requiring the commitment of employee resources by
Schwab.
Until the account opening process is complete, a customer cannot
place a trade. Thus, for example, a customer who wishes to open an
account so that he or she can sell a security will be at market risk
until the account opening process is complete and Schwab can accept a
trade. In a falling market, depending on the size of the customer's
position, the customer's potential loss could be substantial.
In contrast to these current means of opening an account, were we
able to accept applications bearing an electronic signature, the
account opening process could be reduced to a day or less. This would
not only greatly benefit customers, but would result in considerable
cost savings to Schwab, primarily in employee resources which could be
redirected into areas of productive customer service.
We appreciate the opportunity to provide this supplemental
information to the Committee, and would be happy to provide any
additional information you might require.
Very truly yours,
W. Hardy Callcott,
Senior Vice President and
General Counsel.
__________
Prepared Statement of PenOp, Inc.
PenOp, Inc. is pleased to submit this statement in support of S.
761, the Millenium Digital Commerce Act (MDCA). S. 761 builds upon the
foundation for electronic authentication that was put in place through
the enactment of the Governrnent Paperwork Elimination Act (GPEA)
during the last Congress. PenOp is proud of its role in supporting the
GPEA in hearings before the Commerce Committee last July, and we
appreciate being invited to participate in the working group that
provided technical input during the drafting of the MDCA.
overview
The GPEA established three basic policy principles for the
utilization of electronic signatures by Federal executive branch
agencies:
A general rule mandating acceptance of electronic
authentication by Federal agencies by a date certain.
An explicit policy of Federal neutrality regarding
acceptable authentication technologies.
A clear sense of Congress that electronic contracts are
the legal equivalent of physical contacts.
The MDCA would buildupon that sound foundation by establishing key
principles guiding the use and acceptance of electronic authentication
in interstate commerce:
A contract used in interstate commerce shall not be denied
effect solely because an electronic signature or record was used in its
formation.
Parties to an interstate contract shall be free to
determine the technologies and business methods utilized in the
execution of electronic contracts.
In international discussions, the U.S. Government shall
continue to champion technology neutrality based upon freedom of
contract.
PenOp endorses these principles and urges expeditious favorable
action on S. 761 by the Commerce Committee.
penop's perspective on electronic authentication
PenOp has spent the last several years assisting private and public
sector organizations to employ electronic authentication in their
business and official activities. PenOp has also been an active
participant in a wide variety of public policy forums. These include
various sections and committees of the American Bar Association; the
National Conference of Commissioners on Uniform State Laws (NCCUSL)
Drafting Committee on the Uniform Electronic Transaction Act (UETA);
the United Nations Commission on International Trade Law (UNCITRAL)
Working Group on Electronic Commerce; and various bodies within the
European Union (EU). PenOp has provided its views on electronic
authentication in testimony before this and other Congressional
Committees, and to numerous state and Federal agencies. PenOp
authentication software is now employed on a daily basis by
pharmaceutical, financial services, and other private sector firms, as
well as units of state and local government.
PenOp's best-known product is its biometric authentication
software. This software analyzes 90 separate biometric measurements of
a handwritten signature applied to a digitizer pad. It then
cryptographically binds that analysis to an electronic document to
provide both authentication that a particular person has signed it with
the legal intent necessary to be considered a signature, as well as
non-repudiation protection against alterations of the document made
subsequent to its signing.
More recently, PenOp has developed and is now marketing software
for its Uniform Document Authentication Component (UDAC). UDAC allows
any type of authentication technology or combination of technologies--
biometrics, personal identification numbers (PINs), private
cryptographic ``keys,'' or even credit card numbers--to be captured as
legally effective signatures.
PenOp's extensive legal research on the law of signatures has
established that the creation of a binding electronic signature rests
on four basic components, each of which is satisfied by our software:
1. Symbol of intent. This is any symbol that the user intends to
use as a signature.
2. Link to signer. This is the gathering of evidence that links the
symbol to a specific signer.
3. Ceremony. This is a series of manual and visual steps that
inform the signer of what is happening and thereby conveys the
understanding that is essential to establishing requisite legal intent.
It is critical to understand that normally a process which
automatically affixes an electronic symbol to an electronic document is
deficient as a legal signature because it lacks the element of intent--
the informed and conscious choice of an individual to be bound to a
specific record or transaction.
4. Transcript. This is a secure record of the signing event showing
what occurred, when, and under what circumstances and that is available
to any judge or jury if a signature is challenged in the future.
comments on s. 761
The most important provision of S. 761 is its definition of
``signature''. That is because it is broadly inclusive--encompassing
any symbol, sound or process--so long as it is executed by a person
with intent to authenticate or accept a record. Preserving the
requirement for intent as commerce moves into cyberspace is a critical
protection for both individuals and businesses. It protects individuals
because it assures that they will not be bound to contractual
obligations by automated or incomprehensible processes in which they
did not knowingly intend to partake. It protects businesses because,
once intent is present, they can be assured of a binding contract if a
subsequent challenge occurs.
While we applaud the incorporation of the requirement for intent
within S. 761's definition of ``signature,'' we urge the Committee to
strengthen this critical protection through appropriate legislative
history. In particular, the report on S. 761 should clearly state that
the utilization of an appropriate ceremonv in the signing process,
regardless of the technology employed, is necessary to inform signers
that they are binding themselves to specific legal duties subject to
penalty for nonperformance and/or false statements. Such legislative
history is consistent and explanative of Section 6(d) of the bill,
which states that the intent of a person to execute or adopt an
electronic signature shall be determined from its context and
surrounding circumstances, including accepted commercial practices.
We are also particularly supportive of provisions of S. 761 that:
Permit the parties to an interstate transaction to
establish by mutual contractual agreement the technologies and business
models acceptable for their use and acceptance of electronic signatures
and records.
Preempts state law only to the minimal extent necessary to
provide assurance of the validity of interstate electronic contracts.
Reinforces the negotiating position of the U.S. in
international forums in support of freedom of contract and technology
neutrality.
Mandate that Federal agencies identify all provisions of
law and regulation that impose a barrier to electronic transactions,
and report those findings to Congress where remedial legislation is
required.
conclusion
PenOp appreciates its inclusion in the development process for S.
761. This narrowly drawn but nonetheless important proposal can
accelerate the growth of electronic commerce by providing assurance of
the validity of interstate electronic contracts. S. 761's perpetuation
of traditional signature law's intent requirement into the realm of
virtual contracts preserves a fundamental protection for individuals
utilizing new electronic technologies.