A new California law opens the door for brokerages to conduct most, if not all, of their business in cyberspace.
The legislation, which applies only to broker-dealers, validates brokerage contracts that are digitally signed.
Though Internet brokerages routinely accept trading orders on-line, most require customers to enroll and order account transfers by sending in paper documents. The law makes such paperwork no longer necessary.
Digital signatures-a derivative of data encryption technology that binds customer identities to documents-are seen as a way to "legalize" on-line exchanges of information.
The California legislation, which California Governor Gray Davis signed into law last week, "gives people some certainty that these contracts are enforceable," said Thomas J. Smedinghoff, a partner in the Chicago law firm McBride Baker & Coles and a leading authority on digital signatures.
He added, however, that the law's specific definition of a digital signature could limit the flexibility of its application as the technology evolves.
Certainty about the validity of digital credentials is especially important to securities brokers, because securities transactions are typically much bigger than merchandise transactions on the Internet, said Christopher Musto, a senior analyst at Gomez Advisors Inc. in Concord, Mass.
E-Trade Group Inc., the Menlo Park, Calif. on-line broker, pushed for the California bill, bringing the issue to the attention of state Sen. John Vasconcellos, a Democrat from San Jose. Sen. Vasconcellos introduced the proposal in February, and it passed the Senate July 15.
San Francisco-based Charles Schwab Corp., the leading Internet brokerage, also offered input on the law's definition of a digital signature, according to Sen. Vasconcellos' chief of staff, Rand Martin.
Schwab has focused its legislative efforts more on the federal level, however, a spokesman for the company said. "This action is a step in the right direction," the spokesman said. "But the real objective would be to get national legislation that creates uniformity regarding the use of digital signatures."
E-Trade said in a news release that the new law would apply to its transactions with customers in all 50 states, but the Schwab spokesman said its applicability beyond California is "murky."
E-Trade did not respond to calls seeking elaboration on how it sees the law applying across the country.
Mr. Smedinghoff, chairman of the American Bar Association's electronic commerce division, said the only way the law would have broader applicability is if a broker stipulated that a contract was governed by the laws of California.
Legislation on digital signatures varies from state to state. For example, Connecticut law covers only medical records at hospitals, while Illinois makes electronic signatures applicable to all communications.
In 1995 California became one of the early adopters of digital signature legislation, but that legislation was limited to communication with government agencies.
Utah is often cited as the country's digital signature pacesetter, with a comprehensive law that preceded California's in 1995 and resulted in the pioneering designation of Digital Signature Trust Co., a Zions Bancorp. subsidiary, as a licensed certificate authority.
To bring consistency at the federal level, Sen. Spencer Abraham (R- Mich.) this year introduced two bills addressing the issue. The Millennium Digital Commerce Act sets out to clarify the legal status of electronic signatures in general, while the Electronic Securities Transaction Act focuses on the securities industry.