Hudson Cook, LLP
March 15, 2001
April Major, Esq.
Ms. Sallianne Fortunato
RE: ESIGN Study - Comment P004102
Dear Ms. Major and Ms. Fortunato:
You have requested comments concerning the benefits and burdens of Section 101(c)(1)(C)(ii) of the federal Electronic Signatures in Global and National Commerce Act ("ESIGN"). My law practice includes representation of financial services providers, including both banks and nonbanks. However, I am submitting these comments in my personal capacity only, based on my personal observations, and not on behalf of any client.
The following paragraphs are sequentially numbered 1 through 14 as requested in the Request for Comment that appears at 66 Federal Register 10011 (February 13, 2001).
1. One difficulty with Section 101(c)(1)(C)(ii) of ESIGN, from my point of view as a lawyer, is that a consumer plaintiff could challenge whether a process does or does not "reasonably demonstrate" that the consumer could in fact access electronic disclosures in the form used by the disclosing party. The risk and uncertainties of any such litigation, offset by the legal consequences of a determination that a process did not meet the "reasonable demonstration" requirements of Section 101(c)(1)(C)(ii), including the legal consequences of a determination that certain required disclosures may not have been properly provided to the consumer, are such that conservative businesses might choose to continue to provide certain important disclosures in hard copy, paper form, rather than try to rely on Section 101(c)(1)(C)(ii) of ESIGN. Another possible way to avoid having to comply with ESIGN is to both provide disclosures electronically and also in hard copy, paper form. The electronic disclosures might enable the consumer to receive disclosures earlier, in advance of the disclosures that will be mailed to the consumer, but the electronic disclosures would not be provided in place of hard copy, paper disclosures. There may be a tendency to "triage" disclosures according to the legal risks associated with improper provision or non-provision of disclosures, and to manage exposure to ESIGN legal challenges by only offering in electronic form those disclosures that carry with them minimal (or no) statutory penalties for improper provision or non-provision.
2. Reasonable minds could differ concerning what constitutes a "reasonable demonstration" of a consumer's ability to access electronic disclosures. If the disclosures are in HTML form on a web page, and the rest of the web site is also in HTML form, one could perhaps reasonably conclude that the consumer has the ability to read and access HTML disclosures because the consumer is obviously reading other content on the web site, and appears to be navigating without difficulty through the web site.
3. On the other hand, if disclosures are provided in (for example) Adobe Acrobat PDF file format, it would interrupt the online (web site) process if the consumer had to first receive an e-mailed Adobe Acrobat PDF file attachment, open the attachment, and then e-mail the business entity back with a confirmation that the consumer was able to open the attachment. It might be possible to post a link to a generic test Adobe Acrobat PDF document on the web page, and ask the consumer to open the PDF document and then go back to the web page to click on a button if the consumer was successful. However, this could potentially pose technical issues if the web pages are "secure" since one would want to avoid causing the consumer to have to leave the "secure" pages to open the test PDF document and then have to re-enter the "secure" pages (by re-entering an ID and password). If disclosures are offered to consumers in Adobe Acrobat PDF file format, it might be easier to request confirmation of the consumer's ability to access PDF files later on, after the consumer has concluded the online (web site) process. This would, however, complicate and lengthen the consumer consent process, and run the risk of having some consumers decide not to complete the process.
4. Another ambiguity that arises under Section 101(c)(1)(C)(ii) of ESIGN is whether an e-mailed test PDF file attachment should include an embedded code or phrase that the consumer should be required to repeat back to the business entity in the consumer's confirmation, as proof that the consumer really did open the e-mailed PDF file attachment. There is no legislative history indicating that this level of confirmation was contemplated by Congress, and Section 101(c)(1)(C)(ii) of ESIGN does not expressly require this level of confirmation. Nonetheless, some technologically-trained, technologically-oriented personnel might be inclined to request this level of confirmation based on their previous technical training, in disregard of the fact that, in the legal disclosure arena, consumers are rarely, if ever, asked to prove to business entities that they have actually opened and read their mailed disclosures. In some cases, consumers may be asked to sign an acknowledgment of receipt at the bottom of a disclosure document, indicating that they have received and read the disclosure, but I am not aware of anyone quizzing the consumer or asking the consumer to regurgitate back information contained within the disclosure document, to verify that the consumer has in fact read the disclosure. Thus, with hard copy, paper disclosures, there is no second-guessing of the truthfulness of a consumer's signed acknowledgment that the consumer has received and read certain disclosures. Similarly, it seems that such second-guessing is not required to comply with Section 101(c)(1)(C)(ii) of ESIGN.
5. There may be some tension between information technology personnel, their legal advisors and their marketing colleagues concerning how one ought to implement compliance with Section 101(c)(1)(C)(ii) of ESIGN. Information technology personnel may tend to be biased in favor of a more "robust" and more technologically elaborate method of complying with Section 101(c)(1)(C)(ii), under the theory that if something is technologically feasible, why not do it? At the other end of the spectrum, marketing personnel may be inclined to keep the Section 101(c)(1)(C)(ii) process as short and simple as possible, since they otherwise risk losing the customer entirely (or the customer may abandon the effort to obtain electronic disclosures, defeating the whole point of trying to comply with ESIGN).
6. As the process used to verify a consumer's ability to access electronic disclosures becomes more technologically elaborate and rigorous, it also becomes more likely that the technologically-inclined consumer will be put off by the process, feel patronized or detect condescension. A process that is deliberately designed to cater to the technologically-inclined consumer, on the other hand, may be more vulnerable to challenge by less technologically sophisticated consumers.
7. Another issue that arises in connection with Section 101(c)(1)(C)(ii) of ESIGN is the fact that certain financial account-opening documents must of necessity be in hard copy, paper form, notwithstanding ESIGN. This helps reduce the incentive to try to provide certain financial account-opening disclosures in electronic form, since other account-opening documents still must be provided to the consumer in hard copy, paper form. By way of example, to open a checking account, banks typically require a manually signed signature card (which is a hard copy, paper document). In addition, for many deposit and loan account opening transactions, financial institutions require the consumer to certify under penalties of perjury as to the accuracy of their taxpayer identification number. For non-U.S. residents this certification is generally provided on an IRS Form W-8BEN or another variant in the IRS Form W-8 series. The IRS has not provided guidance concerning whether or how Form W-8BEN or other forms in the Form W-8 series may be provided in electronic form. (In contrast, the IRS has provided specific guidance concerning how Form W-9, used for U.S. residents, may be provided in electronic form.)
8. As an additional checking account example, many institutions provide actual cancelled checks with their checking account monthly statements. If a consumer were offered an electronic alternative to receiving a hard copy checking account monthly statement, the consumer might need to be able to receive electronically the images of the front and back of all cancelled checks that would otherwise have been included with the consumer's mailed statement - alternatively, the consumer who elects to receive electronic checking account statements would have to agree to receive somewhat different information about cancelled checks than the consumer would otherwise receive with mailed statements. While the checking account monthly statement itself includes various required disclosures (disclosures that could be provided electronically pursuant to ESIGN), electronic images of cancelled checks are not governed by ESIGN, since cancelled checks are not "disclosures." Rather, the provision of electronic images of cancelled checks is governed by the Uniform Commercial Code and other applicable state law, together with the practicalities of meeting customers' desire to possess adequate documentation of the fact that they have made certain payments (whether for income tax or other reasons).
9. Confronted with the practical need to maintain certain non-"disclosure" documents in hard copy, paper form, as well as the fact that ESIGN applies to the electronic provision of "disclosures" but not to the electronic provision of documents that do not constitute "disclosures" (e.g., cancelled checks, signature cards, IRS Form W-8BEN, etc.), the benefits of providing electronic disclosures are not always as great as they might initially appear, and the feasibility of providing a truly "paperless" financial services account may be more difficult than initially contemplated.
10. I have also heard some people say that it is not prudent to lose track of a customer's current mailing address (particularly if the customer is a borrower), and that periodic (for instance, quarterly) mailings to the customer are generally advisable. From a strictly marketing standpoint, if an institution wants to present itself to the public with a certain carefully designed logo, that logo is often much more effective in print than it is on a computer screen (and the marketing benefits of a logo appearing on a piece of mail that can be seen by other persons, whether sitting at a desk or kitchen counter, arguably outweigh the benefits of a logo seen on a computer screen). Even with a so-called "paperless" financial services account, the financial services provider will still need to mail such things as IRS Forms 1099 or 1098 annually - from a business development, retention, and cross-marketing standpoint, the customer should probably receive additional mailed communications from the financial services entity on a periodic basis, instead of only receiving technical, legal communications in the mail.
11. With respect to the provision of ongoing, recurring electronic disclosures, ESIGN requires new disclosures to be given to the consumer whenever hardware or software requirements for accessing such disclosures change, together with new compliance with Section 101(c)(1)(C)(ii) of ESIGN. This will require periodic communications with the consumer, either through e-mail or through hard copy mailed communications, advising the consumer of changes to hardware or software requirements, and asking the consumer for a new "reasonable demonstration" of the consumer's ability to access disclosures under the changed requirements. Given increasing concerns about unsolicited commercial e-mail (so-called "spam") and pending proposed legislation at the state and federal levels concerning unsolicited commercial e-mail, there may be reluctance on the part of some businesses to use e-mail to notify customers of changes to hardware or software requirements for accessing electronic disclosures. E-mail addresses also change frequently, often without any forwarding information. This may tend to steer businesses towards using the mail to notify customers of changes to hardware or software requirements for accessing electronic disclosures. In such a case, the "reasonable confirmation" required by Section 101(c)(1)(C)(ii) of ESIGN must be carefully designed - it likely cannot be as simple and straightforward as e-mailing an attachment to the customer. The legal risks of having the "reasonable confirmation" process challenged must also be considered, depending on the nature of the electronic disclosures that are the subject of the changed hardware or software requirements. Moreover, a backup plan to accommodate consumers who are not able to "reasonably confirm" their ability to access electronic disclosures under the changed hardware or software requirements must be developed.
12. Some financial institutions are subject to Community Reinvestment Act, fair lending, equal credit opportunity and similar legal requirements. They may be required by their charters and their regulators to serve the financial needs of all members of a certain community, including all technologically inclined members, all technologically averse or phobic members, members who cannot afford a computer, and members who otherwise lack ready and meaningful access to a computer. Such an institution may not be able to allocate substantial time, energy and expense to develop "all electronic" or "paperless" services, since such services would by definition only appeal to a fraction of the institution's total customer base or the total community the institution is chartered to serve. Such an institution also may not wish to inadvertently imply through marketing efforts and web sites that it is less interested in, or is attempting to discourage, customers who do not want "all electronic" or "paperless" services.
13. Security and "know your customer" concerns may also tend to limit some financial institutions' offerings of "all electronic" or "paperless" services to pre-existing customers only. That is, a new customer may be required to open and establish an account relationship in traditional, paper fashion. Thereafter, once the customer relationship is established, the customer might be allowed access to certain telephone or online (web site) services. This will tend to limit the universe of disclosures that the institution might be interested in providing electronically.
14. For all of the above enumerated reasons, my personal observation has been that the consumer consent provisions of ESIGN, pertaining to the receipt of electronic disclosures, has not been and cannot be fully embraced by financial services providers in the current regulatory and litigation environment.
I thank you in advance for the opportunity to present these comments. Please do not hesitate to contact me at (203) 776-1911 during regular business hours (Eastern Time) if you have any questions about any of the matters discussed in this letter or would like any further information.
/s/ Elizabeth C. Yen
Elizabeth C. Yen