A fact of business today is that customers – both consumers and other businesses – and employees expect to transact digitally. To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses.

Successfully implementing this transformation requires careful planning to ensure regulatory compliance, a smooth integration with existing business technology and a positive customer experience.

This bulletin is the eighth in a series aiming to help companies identify important and significant news and legal developments impacting digital offerings. Each issue will feature in-depth insight on a timely and important current topic. In this issue, we provide a year-in-review summary of our prior Insights pieces. In addition, we will cover recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.

INSIGHT

2018 Year in Review Holiday Edition As 2018 comes to a close, here are links to our Insights from this year.

You may find the entire 2018 series of eSignature and ePayment News and Trends here.

And finally, we thank our colleagues Ray Zamora and Thomas Kenny for their assistance in preparing this publication.

REGULATORY DEVELOPMENTS

FEDERAL Blockchain and Artificial Intelligence

  • Federal Reserve Board of Atlanta addresses artificial intelligence: The Center for Financial Innovation and Stability, which is a research department within the Federal Reserve Bank of Atlanta, has published an article titled “Consumer Credit, Blockchains, and Machine Learning,” analyzing how blockchain technology and machine learning have impacted retail credit. The article discusses how blockchain may prove to be a superior way for storing data on an individual's creditworthiness, but notes that if that data is reported by external sources – as opposed to being all done within a blockchain environment – it will still be subject to the same concerns of accuracy and reliability that currently affect consumer credit reporting. Regarding machine learning, the article notes one strength of machine learning is its ability to identify previously unknown relationships between variables; that strength may be mitigated in the retail credit space by laws that require explanation of key factors that adversely affect a borrower. The article also observes that machine learning is currently be used in retail credit decision making, though its contributions to credit risk modeling are not yet fully understood.
  • Federal Reserve System speech on artificial intelligence use in credit risk: In his recent speech “What Are We Learning about Artificial Intelligence in Financial Services?” Lael Brainard, a member of the Board of Governors of the Federal Reserve System, discussed the current regulatory and supervisory approaches for addressing use of artificial intelligence. He noted that a few generally applicable laws, regulations, guidance and supervisory approaches are already applicable to the use of AI, specifically certain existing guidance on model risk management and vendor risk management. He observed, however, that AI presents issues in opacity and explainability. AI, he continued, has the potential to provide a wide range of benefits, including allowing creditors to more accurately model and price risk, it is not immune from consumer protection laws. Brainard underscored how AI tools can “learn” the biases of society, creating the risk of disparate impact on credit. Finally, Brainard notes that even though AI may pose problems, AI itself may help in the solution, such as by creating “explainable” tools that better allow decisions to be understood.
  • Commodity Futures Trading Commission seeks public comments on Ether and its use on the Ethereum Network: On December 17, the CFTC published in the Federal Register a Request for Information (RFI) seeking public comment to better inform the CFTC's understanding of the technology, mechanics and markets for virtual currencies beyond Bitcoin, specifically Ether and its use on the Ethereum Network. The CFTC is asking questions related to the underlying technology, opportunities, risks mechanics, use cases and markets related to Ether and the Ethereum Network. The RFI also seeks comment to help the CFTC understand the similarities and distinctions between Ether and Bitcoin. The CFTC expects that the information received will benefit LabCFTC, the CFTC's fintech initiative.
  • Health and Human Services posts demo of Accelerate, a program using blockchain, machine learning and artificial intelligence to help with acquisitions: On December 12, HHS posted a demo of Accelerate, which is designed to facilitate the Federal Acquisition Lifecycle by using emerging technologies such as blockchain, machine learning and artificial intelligence. A video of the demo is available here.

Fintech

  • The Consumer Financial Protection Bureau proposes revisions to its No-Action Letter policy as well as creation of a federal sandbox: On December 10th, the CFPB released a new proposal that would revise its current approach to No-Action Letters as well as create a new Product Sandbox. Regarding NALs, the CFPB is planning to streamline the application process; streamline the review process – with a particular focus on the potential benefits of the product to consumers, the extent to which the applicant has controls for potential risks and the extent to which no-action is needed; re-assess the data-sharing and time-period limitations so that no data-sharing would be expected and the default assumption would be that NALs will not have a temporal limitation; issue NALs through duly authorized CFPB officials – as opposed to the current approach of issuing a staff recommendation of no-action relief – which would provide greater assurance that the CFPB stands behind the no-action relief provided by the NALs. Furthermore, the CFPB will coordinate with state regulators that offer similar forms of relief.
  • For the product sandbox, the CFPB would offer substantially the same relief provided by the NALs as well as providing two additional forms of relief: (i) approvals under the safe harbor provisions within the Truth in Lending Act, Equal Credit Opportunity Act (ECOA) and Electronic Fund Transfer Act and (ii) exemptions by order from (a) statutory provisions under exemption-by-order provisions within ECOA, the Home Ownership and Equity Protection Act and Federal Deposit Insurance Act or (b) from regulatory provisions that do not mirror statutory provisions under rulemaking or other general authority. The CFPB expects that the approval would be two years in most cases, but would allow for extensions.

Smart contracts

  • SEC comments on how use of smart contracts does not relieve entities from legal compliance obligations: In a statement titled “Digital Asset Securities Issuance and Trading,” the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets has addressed why the use of smart contracts can present companies with legal risk if they are not complying with the substantive law underlying their activities. The SEC referenced a recent enforcement action concerning an entity that used smart contracts to operate like an exchange; the entity had not registered as an exchange or operated pursuant to an exemption from registration.
  • CFTC publishes primer on smart contracts: In late November, the CFTC published a primer on smart contracts. The primer defines a smart contract as a set of coded computer functions that may incorporate elements of a binding contract or execute certain terms of a contract, and it addresses some of the risks, challenges and governance issues that may arise with the use of smart contracts. Notably, the CFTC concludes that the ESIGN Act and state UETAs provide a legal framework for support smart contracts. See also, Smart Contracts: Is the Law Ready?, Chapter 2: Smart Contracts, Blockchain, and Commercial Law.

Reassigned mobile telephone numbers and the TCPA

  • FCC creates reassigned numbers database: The FCC has adopted new rules to establish a single, comprehensive database with information provided by phone companies that callers will be able to use to avoid calling reassigned numbers. These rules arise from the FCC's Second Report and Order (covered previously here), and the database will be managed by an independent third-party administrator.

Electronic signatures

  • FINRA files proposed rule change regarding use of electronic signatures: Currently, FINRA Rule 4512(a)(3) requires firms to obtain the manual dated signature of each named, natural person authorized to exercise discretion in the customer account. FINRA is proposing to the SEC to amend the rule to permit the use of electronic signatures, a change that is consistent with the ESIGN Act. Under the proposed rule, a valid electronic signature is any electronic mark that clearly identifies the signatory and is otherwise in compliance with the E-Sign Act, the guidance issued by SEC relating to the E-Sign Act and the guidance provided by FINRA staff through interpretive letters. If the SEC approves the proposed rule change, FINRA will announce the effective date in a regulatory notice to be published no later than 60 days following approval, and the effective date will be no later than 30 days after publication of the regulatory notice.
  • FINRA sanctions sales assistant for electronically signing supervisors name with supervisor’s authorization: On December 14, 2018, the Financial Industry Regulatory Authority sanctioned a sales assistant for allegedly violating various rules. FINRA Rule 2010 and, its predecessor rule, NASD Rule 2110 require members, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade. In addition, Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 promulgated thereunder, NASD Rules 3110 and FINRA Rules 4511 require companies to create and maintain accurate books and records. Members who falsify documents, particularly where those documents will become business records of a broker-dealer, are in violation of these rules. For purposes of these rules, electronic signatures are the functional equivalent of handwritten signatures. During the relevant period, the sales assistant, on behalf of her financial advisor (FA) supervisor, used a common password to access the company’s systems to complete the approval of new accounts, which included reviewing the information collected, making an electronic signature certifying that the specific investment program or strategy selected was suitable for the client, and representing that new accounts had been reviewed and approved by the FA. In addition, the sales assistant, again with the FA’s authorization, signed the FA’s name by use of a signature stamp or by actually signing his name in order to evidence his supervisory approval. The FA did not make a written delegation of authority to the sales assistant and could not have done so because the sales assistant lacked the supervisory licenses that would have qualified her to make supervisory approvals. According the Letter of Acceptance, Waiver and Consent, the non-genuine FA signatures affixed to documents by the sales assistant represented that the FA had reviewed and approved these items in his capacity as a duly licensed and qualified supervisor, which was not true and thus in violation of the rules noted above.

STATE

Vermont agencies for a blockchain working group: The Vermont Attorney General has announced that four state agencies have established a working group to study opportunities and challenges presented by blockchain technology. In addition to the AG's office, the working group is comprised of the Department of Financial Regulation, the Secretary of State and the Agency of Commerce and Community Development.

LEGISLATIVE DEVELOPMENTS

FEDERAL

  • US Senate passes 21st Century IDEA Act: On December 11, the Senate passed the 21st Century IDEA Act, and it was presented to the President to sign on December 13. The new law will modernize federal government websites to make them mobile-friendly, transition away from paper-based forms and generally create a modernized digital experience for the government's online services.

STATE Electronic recording

  • Michigan revises law regarding acceptance of electronic documents for recording: On December 13, 2018, outgoing Michigan governor Rick Snyder approved Senate Bill No. 999, which amends the Uniform Real Property Electronic Recording Act (URPERA) to require that a county register of deeds accept electronic documents for recording only from a person with which the register of deeds has entered into an agreement establishing a verified transactional relationship. The bill also requires the Electronic Recording Commission to adopt standards that address the acceptance and use of electronic notarization of documents submitted to a county register of deeds for recording. Michigan and 32 other states have enacted URPERA.

Electronic notarization

  • Michigan continues to move forward with implementing remote notarizations: On December 13, 2018, the Michigan governor approved Senate Bill No. 664, which amends the Michigan Notary Public Act to require the Secretary of State and the Department of Technology, Management, and Budget (DTMB) to review and approve, by March 30, 2019, at least one electronic notarization system for the performance of electronic notarizations in the state. In developing criteria for the approval of any electronic notarization system for use in this state, the SOS and DTMB would have to consider at least all of the following:
    • The need to ensure that any change to or tampering with an electronic record containing the information required under the act is evident.
    • The need to ensure integrity in the creation, transmittal, storage or authentication of electronic notarizations, records or signatures.
    • The need to prevent fraud or mistake in the performance of electronic notarizations.
    • The ability to adequately investigate and authenticate a notarial act performed electronically with the electronic notarization system.
    • The most recent standards regarding electronic notarizations or records promulgated by national bodies, including at least the National Association of Secretaries of State.
    • The standards, practices and customs of other jurisdictions that allow electronic notarial acts.

The bill also amend various definitions, including defining “in the presence of” to include interacting with another individual by means of audio and visual communication technology that is part of an approved remote electronic notarization platform.

CASE LAW

FEDERAL

  • Court fails to uphold agreement purportedly entered into on iPad: In Droney v. Vivint Solar, 2018 WL 6191887 (D.N.J. Nov. 28, 2018), the court declined to enforce the arbitration provision in a purchase agreement, concluding that a genuine dispute of material fact existed regarding whether the plaintiff entered into the purchase agreement on the defendant's iPad. The plaintiff alleged that the defendant told the plaintiffs they might qualify for free solar panels and that the defendant needed to conduct a roof survey. First, however, the plaintiff needed to confirm home ownership by signing on an iPad. The plaintiff did so. The defendant contended that when the plaintiff signed, the plaintiff also signed the solar power purchase agreement, which contained an agreement to arbitrate. The plaintiffs unequivocally denied signing the purchase agreement, stating they were never told about the contract, did not see the contract on the iPad and only signed a signature box where the defendant pointed. The defendant provided a copy of the signed agreement, but could not provide anyone with personal knowledge that the plaintiffs signed the agreement. The defendant raised additional arguments, including the principal that signers are bound by an agreement whether or not they read it. The court disposed of that argument by stating that the issue is not whether the plaintiffs read the agreement but whether they were provided with the agreement at all. Based on the evidence provided, the court found a genuine issue as to whether the parties entered into a valid agreement; therefore, it denied the motion to compel arbitration.
  • Court upholds arbitration agreement entered in electronically upon strong evidence that only plaintiffs could have logged into the system to sign: In Curtis v. Contractor Management Services, LLC, 2018 WL 6071999 (D. Maine Nov. 20, 2018), the plaintiffs filed an action against two defendants alleging various wage and state-law tort claims. Both defendants sought to compel arbitration. At issue for one defendant was whether the plaintiffs had electronically signed its independent contractor owner/operator agreement, which contained an arbitration provision. The plaintiffs alleged no contracts were formed between them and the defendant and averred that they did not recall signing the agreement. The defendant countered by providing a declaration from an employee of the company that manages the digital platform used to execute the agreement. That declaration stated that to access the system and sign, a person must do the following: register with the platform by providing name, date of birth and social security number; create a unique electronic signature, which requires that the person answer three of four security answers correctly; and, once the signature has been created, the user must then log in. The system records the user's interactions, including registration, identity verification and the affixing of the electronic signature to the document. The records corroborated that the plaintiffs completed the identity verification process, created a unique electronic signature and later reviewed and signed the agreement. The court concluded that this evidence overcame the plaintiffs' unsupported implication that the defendant forged their signatures or that they did not recall authorizing anyone to affix their signatures.
  • Court finds that blind plaintiff lacks standing to sue under ADA over website inaccessibility because the plaintiff was not likely to visit physical storefront: In Price v. Orlando Health, Inc., 2018 WL 6434519 (M.D. Fla. Dec. 7, 2018), the court ruled that the plaintiff – who is legally blind – lacked standing to sue the defendant over its website's inaccessibility because the court concluded that the physical location nexus could not be met since it was unlikely the plaintiff would ever visit the defendant's medical facilities. The court noted that to have standing under the ADA in this circuit, the website must be connected to a physical location. Here, even though the defendant had physical locations, the plaintiff was not able to show that he was likely to patronize those locations, even barring the discriminatory conduct.

STATE

  • Court denies motion to compel arbitration even though defendant provided evidence that two sets of login credentials were used: In Alorica v. Tovar, 2018 WL 6167963 (Tx. Ct. App. Nov. 26, 2018), the court affirmed the lower court's denial of the defendant's motion to compel arbitration. In Texas, a court will infer an employee's consent to arbitrate if the employee continues showing up for work after being presented with the arbitration agreement. This court concluded that because the trial court was presented with conflicting evidence over whether the plaintiff received notice of the arbitration agreement, and its judgment rested on legally sufficient evidence, it could not disturb the decision. The court reached this conclusion even though it stated that there was evidence that during an active session initiated with the plaintiff's login credentials, the portal was accessed using another set of the plaintiff's login credentials (notably, the court did not consider this to be two-factor authentication because there was no evidence that the two sets of login credentials were used conjunctively and sequentially, factors it considered necessary for two-factor authentication to have occurred). The plaintiff's only evidence was her denial under oath that she had neither received notice of the arbitration agreement nor clicked to agree to the arbitration agreement. The court refused to adopt the requirement that the plaintiff explain how her credentials were used. Instead, the court stated that whether an employee's sworn denial was credible is a question for the trial court and that here, even with two sets of non-conditional, non-sequential login credentials, the plaintiff's sworn denials were sufficient to create a fact issue leading the trial court to resolve the issue in her favor.
  • Court holds that typed name at end of email constitutes electronic signature: In Melton v. Barnard, 2018 WL 6252543 (Mich. Ct. App. Nov. 29, 2018), the court held that an attorney's typed name at the end of an email satisfied the requirement that the agreement be “subscribed by the party against whom the agreement is offered” because the typed name at the end of the email constitutes a signature for purposes of Michigan's Uniform Electronics Transactions Act.