Recent Developments in Financial Technology Law and Policy
7.10.2002
A. ONLINE FINANCIAL SERVICES.
EC Focuses on Clearing and Settlement. On June 3, 2002, the European Commission issued a Communication seeking public comment by August 31, 2002 on (1) issues preventing efficient cross-border clearing and settlement of securities transactions in Europe, (2) barriers to the finalization of individual cross-border transactions posed by varying national regimes and (3) competitive distortions or unequal treatment of entities performing clearing and settlement activities. The Communication is a prelude to Commission-proposed legislation which, in turn, would be considered by the European Parliament, the European Council of Ministers and the EC. The press release announcing the Communication may be found at
http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/797|0|RAPID&lg=EN&display= and the Communication itself at http://europa.eu.int/comm/internal_market/en/finances/ mobil/clearing/com2002-257/com2002-257_en.pdf
Comment: The Commission looks not only to reduce the costs of cross-border clearing and settlement for securities transactions, which costs run seven-to-ten times higher than costs in the US, but also to tackle and resolve certain issues that prevent transactional finality; transparency when it comes to risk; harmonized treatment of central counter-parties, settlement systems and custodians throughout Europe; and, the competitiveness of European firms as pan-European financial services become more of a reality.
B. E-PAYMENTS.
Rare UCC4A Decision. On June 18, 2002, in a case of
first impression in any court in the land, the Court of Appeals of the State of
Arizona ruled that a letter of instructions from a customer to a bank requesting
wire transfers of funds upon future occurrences of a specified balance condition
in the customer's account does not constitute a "payment order" under Article 4A of Arizona's Uniform Commercial Code which adopts verbatim UCC4A. The decision in Trustmark Insurance Company v. Bank One of Arizona, N.A. (Ariz. Ct. App., No. 1 CA-CV 01-0021 (filed June 18, 2002) may be found at http://www.cofad1.state.az.us/opinionfiles/cv/cv010021.pdf.
Comment: UCC Article 4A, adopted in all fifty states and DC, provides the controlling body of law for funds transfers within its scope. A "funds transfer" is a series of transactions that must begin with a "payment order." Under UCC and Arizona 4A-103, a "payment order," among other things, is an instruction to pay having no other condition other than time of payment. Trustmark's instruction required Bank One to transfer funds from Trustmark's deposit account to an investment account whenever the deposit account balance exceeded $110,000. Because Trustmark's instruction required Bank One to continuously monitor Trustmark's account balance to determine whether sufficient funds existed in the deposit account to initiate a funds transfer, the instruction subjected Bank One to a condition to payment other than the "time of payment" under UCC4A-103 and thus was not a "payment order" under the UCC. The court's decision relieves Bank One of having to pay over $500,000 in interest that would have been earned by Trustmark had Bank One followed Trustmark's instructions and transferred to an investment account what ultimately became $19 million in Trustmark funds sitting idle in its deposit account.
C. CONSUMER PROTECTION/TELEMARKETING.
FRB Applies FTC Act to Banks. On May 30, 2002, Federal Reserve Board Chairman Alan Greenspan, responding to an inquiry by Rep. John LaFalce, indicated that (1) the Federal Trade Commission Act's Section 5 prohibition against unfair or deceptive acts or practices (15 USC ยง45(a)) applies to banks as a matter of law, and (2) an FRB rule-making proceeding in advance of application of the Act by federal banking regulators is neither necessary nor desirable. Chairman Greenspan's letter may be found at http://www.federalreserve.gov/boarddocs/ press/bcreg/2002/20020530/attachment.pdf. On the same date, the FDIC chimed in and said Section 5 of the FTC Act applies to state non-member banks and their affiliates as well as non-banks subject to FDIC jurisdiction. See FIL-57-2002 at http://www.fdic.gov/news/news/financial/2002/fil0257.html.
Comment: The FRB and the FDIC finally join the OCC in its view of the application of the FTC Act. See discussion of Roberts v. Fleet Bank, N.A. in the December 2001 FT Law & Policy Report at http://www.abanet.org/buslaw/efss/whatsnew.html - 07182001.
Supreme Court Upholds Trans Union Decision. On June 10, 2002, the Supreme Court chose not to review and therefore let stand the decision of the US Court of Appeals for the District of Columbia Circuit in Trans Union LLC v. FTC, 245 F.3rd 809 (2001). The lower court had held that (1)Trans Union's targeted mailing lists are purely private speech warranting only qualified protection under the Constitution, and (2) the FTC's Fair Credit Reporting Act restrictions on target marketing are permissible. Justices Kennedy and O'Connor dissented from the denial of certiorari. The Supreme Court's denial may be found at http://www.supremecourtus.gov/opinions/01pdf/01-1080.pdf and the Appeals Court decision at and http://pacer.cadc.uscourts.gov/common/opinions/200110/00-1141b.txt.
See discussion in the March 2002 Report at http://www.abanet.org/buslaw/efss/whatsnew.html -
07182001.
Comment: The Supreme Court's action will have the practical affect of exposing Trans Union potentially to billions of dollars of liability under the FCRA which provides for statutory damages of between $100 - $1000 for each willful violation of the Act.
D. PRIVACY.
Opt-Out Goes South in North Dakota. On June 11, 2002, North Dakota voters in statewide primary elections voted to reinstate Chapter 6-08.1-01 of the North Dakota Century Code with the net effect that state and federal financial institutions doing business in the state may not disclose customer information to non-governmental third parties without the customer's written, signed consent. Intentional violations of this Chapter section create a per-disclosure liability to the customer equal to the greater of $1000 or actual damages caused by the disclosure. A customer's consent may not be required as a condition of doing business with the institution. Further, the customer's consent may be time-specific, information-specific, and recipient-specific. The reinstated Chapter section may be found at http://ranch.state.nd.us/LR/01/cencode/CCT6.pdf.
Comments. North Dakota joins New Mexico and Vermont in having state law requiring customer opt-in before financial institutions may share customer information with third-parties, pre-empting Gramm-Leach-Bliley in this regard. See discussion in the March 2002 Report at http://www.abanet.org/buslaw/efss/whatsnew.html - 07182001.
Banks and HIPAA. On May 29, 2002, the so-called Banking Industry HIPAA Task Force, a joint initiative of NACHA - The Electronic Payments Association and the American Bankers Association, issued a white paper on how the 1996 Health Insurance Portability and Accountability Act (HIPAA) - and its provisions regarding (1) the handling of confidential healthcare-related financial information and (2) standards for electronic administrative and financial transactions - might apply to financial institutions. A copy of the white paper may be found at http://www.hipaabanking.org/Final_white_paper_--_May_29_2002.pdf.
Comment. Financial institutions processing healthcare payments may become subject to HIPAA because they are "healthcare clearinghouses" subject to HIPAA. Additionally, financial institutions serving the healthcare industry in some capacity may become subject to HIPAA as "business associates" of health plans and providers. The white paper provides useful interpretive guidance, test cases and compliance advice.
Working on Data Protection. During its May 30 and July 2 meetings, the EU's so-called Article 29 Working Party, established pursuant to Article 29 of the Data Protection Directive, adopted a number of important working documents. These include documents on (1) Determining the International Application of EU Data Protection Law to Personal Data Processing on the Internet by non-EU based Web Sites; (2) Functioning of the Safe Harbor Agreement (allowing export of personal data to non-EU countries not having an "adequate" regime for the protection of personal data); (3) First Orientations Concerning On-Line Authentication Services; and, (4) Data Protection for Consumer Credit Data. The documents may be found at http://europa.eu.int/comm/internal_market/en/ dataprot/wpdocs/index.htm.
Comment: The Working Party is made up of representatives of each of the EU Member State data protection authorities and, as such, its deliberations and positions give early indication of emerging issues.
E. ANTI-MONEY LAUNDERING/E-CRIME.
KYC for All. On July 2, 2002, the SEC at its Open Meeting indicated that it would soon be considering regulations implementing the Know-Your-Customer provisions of the USA Patriot Act, at http://www.sec.gov/news/openmeetings/agenda070202.htm.
Comment: Section 326 of the Act requires the Secretary of the Treasury to jointly prescribe with the SEC "KYC" regulations that must be issued to take effect by October 26, 2002. The regulations, at a minimum, must require financial institutions, including broker dealers and mutual funds, to implement reasonable procedures to (1) verify the identity of any person seeking to open an account, to the extent reasonable and practicable, (2) maintain records of the information used to verify the person's identity, and (3) determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to financial institutions by any government agency.
SAR for Broker-Dealers. On June 28, 2002, the Treasury and FINCEN issued a new final rule requiring brokers and dealers in securities to report to FINCEN a transaction fitting within one of four categories of suspicious activities involving or aggregating at least $5000 in funds or other assets. The rule, effective August 1, 2002, and the accompanying press release, may be found at http://www.ustreas.gov/press/releases/po3219.htm.
Comment: The SAR rules for broker-dealers are similar to those governing banks and other financial institutions. See also "Money Laundering: Life After the Patriot Act," by the SEC Director, Office of Compliance Inspections and Examinations (May 2, 2002), at http://www.sec.gov/news/speech/spch555.htm.
Due Diligence for Correspondent and Private Banking Accounts. On May 23, 2002, the Treasury launched a proposed rulemaking proceeding establishing, as required by Section 312 of the USA Patriot Act, due diligence requirements for the detection and reporting of money laundering through correspondent and private accounts of non-US persons held by US financial institutions, including enhanced due diligence procedures with respect to private banking accounts of current and former senior foreign political figures. The proposed rules and its accompanying press release may be found at http://www.treas.gov/fincen/pressrelease05232002.html and http://www.treas.gov/fincen/proposedregulationsection312.pdf.
Comment: The proposed rules mirror the requirements set out in the USA Patriot Act.
F. E-COMMERCIAL LAW.
UCITA Redux. At its annual meeting July 26-August 2, 2002, the National Conference of Commissioners on Uniform State Law (NCCUSL) will consider amendments to the controversial, proposed Uniform Computer Information Transactions Act (UCITA). The amendments address concerns raised by an ABA Working Group, consumers advocates and others, and, in so doing, among other things, (1) eliminates prior language allowing licensors to use electronic self-help in enforcing their licenses; (2) ensures UCITA may be superceded by contrary state consumer protection law consistent with E-SIGN; (3) clarifies manifestation of assent to mass market (e.g., shrink-wrap and click-through) licenses; (4) simplifies and clarifies many terms and provisions. The proposed amendments may be found at http://www.law.upenn.edu/bll/ulc/ucita/UCITA_Amds_AM02.htm.
Comment: The amendments retain language, sought by the banking industry, which exempts from the provisions of UCITA (at section 103(d)(1)) certain regulated banking and securities transactions, and related identifying, verifying, access-enabling or monitoring information. Nonetheless, the amendments delete from UCITA another provision sought by the banking industry, section 104, which allowed providers of exempted transactions to opt-in to UCITA when it comes to its rules governing certain unregulated aspects of banking and securities transactions, e.g., electronic contract formation, web site access terms and conditions, information licensing terms and condition.
Case Law. (1) On May 28, 2002, the US District Court for the District of Massachusetts upheld a forum selection clause in a click-wrap agreement that required a Massachusetts resident to bring an action against AOL in Virginia. See Hughes v. McMenamon, Civ. No. 2001-10981-RBC at http://pacer.mad.uscourts.gov/dc/opinions/collings/pdf/aolsj.pdf. (2) On April 15, 2002, the New York Supreme Court, citing Specht v. Netscape (see discussion in the October Report at http://www.abanet.org/buslaw/efss/whatsnew.html - 07182001), found that Microsoft's End User License Agreement (EULA) bound a user because the terms of the EULA were "prominently displayed" on the user's screen prior to installation of the licensed software and the user was required to indicate assent to the EULA by clicking on the "I agree" button before download. See Moore v. Microsoft (741 N.Y.S.2d 91, 2002 N.Y. Slip Op. 02963) at http://nyslip.westgroup.com/search/default.asp?db=NY-ORCSUNR&type=case&StartRank=1&rs=NYSL1.0&vr=1.0& Method=tnc&query=moore&AD2=on&x=50&y=6.
Comment. No surprise but the Hughes decision will subject the dispute in that case to judgment under UCITA since Virginia is one of two states that has enacted UCITA.
Japan. In March, 2002, Japan's Ministry of Economy, Trade and Industry (METI) released its "Interpretative Guidelines on Electronic Commerce," at http://www.meti.go.jp/english/information/data/c0205EleCome.pdf. (you may have to copy this link into your browser). The Guidelines illustrate how various legal issues will be handled under Japanese law and cover contract formation, manifestation of assent to electronic terms and conditions; electronic self-help; cybermalls; consumer protection in the event of mistake; Internet trading; advertising; a number of issues surrounding licensing of content and information; access to web sites; intellectual property issues; and, illegal acquisition of domain names.
Comment: The 99-page Guidelines are illustrative only, but they reflect, in addition to METI's views, the input of the Japan Ministry of Justice and the Fair Trade Commission among other private sector and government input, and have the range of UCITA. The Guidelines are useful in structuring electronic commerce facilities and arrangements doing business in Japan.
UNCITRAL. On May 21, 2002, the UN Commission on International Trade Law released the Report of the Working Group on Electronic Commerce on its March 11-15, 2002 meeting on electronic contracting. The Report may be found at http://www.uncitral.org/english/sessions/unc/unc-35/509e.pdf
Comment: The Working Group appears ready to back away from drafting an international treaty covering electronic contract formation to focus on possibly on an omnibus protocol that would update a number of existing international treaties affecting international commerce to ensure they facilitate and support adequately electronic commerce.
G. TECHNOLOGY AND OPERATIONS.
NY Sales Tax. On June 12, 2002, the New York State Department of Taxation and Finance released an Advisory Opinion dated May 30, 2002, which clarified that the states sales and use tax does not apply to Web site development, design, implementation, maintenance or consulting services. The Opinion (TSB-A-02(7)S) may be found at http://www.tax.state.ny.us/ pdf/Advisory_Opinions/Sales/A02_7s.pdf.
Export Controls. On June 6, the Commerce Department's Bureau of Industry and Security (BIS) released amendments to its Export Administration Regulations to reflect changes that were made in the Wassenaar Arrangement List of dual-use items. The amendments may be found at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2002_register&docid=02-13990-filed.pdf
Comment: The revisions allow for the export and re-export of mass market encryption commodities and software with symmetric key lengths exceeding 64 bits to most destinations without a license, following a 30-day review by BIS. The revisions also expand eligibility to authorize exports and re-exports of information security test, inspection, and production equipment controlled by BIS. Finally, the new rule updates and clarifies the notification, review, licensing, and post-export reporting requirements that apply to certain encryption items.
H. INTELLECTUAL PROPERTY.
Regulators on Patents. The Research Department and the
Payments Card Center of the Federal Reserve Bank of Philadelphia have released
the agenda and papers from its May 16-17, 2002, Innovation in Financial
Services and Payments Conference , including the Conference session on the impact of business method patents on innovation in financial services (see October 2001 Report at http://www.abanet.org/buslaw/efss/whatsnew.html - 07182001). The material from the Conference can be found at http://www.phil.frb.org/econ/conf/innovations.html.
Comment: Professor John Thomas of GW University released a useful "Overview of Patents on Financial Services and Other Methods of Doing Business," at http://www.phil.frb.org/econ/conf/innovations/thomas.pdf. While refraining from finding any negative impact on innovation from the upsurge in financial business method patents, Professor Thomas concludes the sudden injection of the patent system into financial services requires vigilance and flexibility on the part of financial service innovators. See also a recent CATO report on business method patents, among other trends in intellectual property protection, at http://www.cato.org/cgi-bin/Web_store/web_store.cgi?page=copyfights.html&cart_id.
Supremes on Patents. On May 28, 2002, the US Supreme Court released its long-awaited decision in Festo v. Shoketsu Kinzoku Kabushiki Co. Ltd., 70 U.S.L.W. 4458. While upholding and reaffirming the doctrine of equivalents, a doctrine that tends to strengthen the rights of patent-holders, the Court made it harder for a patent-holder to rely on the doctrine. The decision may be found at http://www.supremecourtus.gov/opinions/01pdf/00-1543.pdf.
Comment: By upholding the doctrine of equivalents, the Court retained the opportunity for patent-holders to prevent others, especially "copycats," from circumventing their patents simply by making cosmetic changes to features or elements of an invention. At the same time, the Court made it clear that when patent applicants are negotiating with the Patent and Trade Office (PTO) about the substance and breadth of their claims, the patent holder may be restrained in the future when it comes to assertion of the doctrine of equivalents if the patent holder has amended his claims in the face of PTO examiner rejection rather than prevail upon an appeal of the rejection.
I. JURISDICTION.
Yes. The courts found out-of-state parties were subject to the jurisdiction of the in-state court:
- where the out-of-state party (1) was able to engage in real-time transactions with the residents of the state where the action was brought, at the resident's in-state home or office computer, and (2) was able to transact in such manner 24 hours a day, and (3) entered into contracts with in-state residents involving knowing and repeated transmission of computer files over the Internet. See Gorman v. Ameritrade, D.C. Cir., No. 01-7085 (June 14, 2002), at http://laws.lp.findlaw.com/dc/017085a.html; and,
- where the out-of-state party (1) "directs electronic activity into the state" (versus passively posting information on the Internet), (2) "with the manifested intent of engaging in business or other interactions in the state", and (3) "that activity creates...a potential cause of action cognizable in the state's courts." See ALS Scan v. Digital Service Consultants, 4th Cir., No. 01-1812 (June 14, 2002) at http://laws.findlaw.com/4th/011812p.html.
No. The courts found out-of-state parties were
not subject to the jurisdiction of the in-state court:
- where the out-of-state party (1) merely posted allegedly defamatory comments on an out-of-state server about an in-state resident and (2) the comments were accessible from in-state locations. See Griffis v. Luban, Minn. Sup. Ct., C#-01-296 (July 11, 2002), at http://www.courts.state.mn.us/opinions/ sc/current/c301296.html; and,
- where the out-of-state party (1) through its out-of-state web site and its toll-free telephone entered into 46 transactions with in-state residents over a period of a year and (2) such transactions constituted a de minimus portion of the out-of-state party's overall business volume generally. See Robbins v. Yutopian Enterprises, USDC Md., Civil No. CCB-01-3096 (May 15, 2002), at http://www.mdd.uscourts.gov/Opinions152/ Opinions/robbins0502.pdf.
