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2 min read

Reaping the Benefits (and Avoiding the Pitfalls) of Electronic Signature

Many wealth management firms are increasingly adopting technology solutions that digitize complex paper-based processes. However, a fundamental question arises when using such tools: do they comply with federal and state regulations?

Electronic signatures are a good case in point, as growing use of DocuSign and other electronic signature providers can potentially open firms up to more risk, especially if they are used alone as a means of partially automating existing processes. For instance, electronic signatures are secure during the actual signing process, but that security may vanish when documents leave the electronic environment.

EVOLVING Guidance AND INCREASED SCRUTINY

Following passage of the state-level Uniform Electronic Transactions Act (UETA) in 1999 and the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000, the North American Securities Administrators Association (NASAA) created a securities-specific statement of policy to provide more clarity on the issue. The NASAA policy acts like a uniform law in that state legislatures must adopt it before it has any effect. Those involved with issuing alternative securities can track which states have adopted the NASAA policy using the Institute for Portfolio Alternatives’ state electronic documents and signature map.

More recently, the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization that governs wealth managers, issued a regulatory notice warning about a potential rise in digital signature fraud.

FINRA says customers of financial firms increasingly tell them that their registered representatives have been caught forging or falsifying digital signatures used on third-party platforms — either out of ignorance or simply to cut corners.

Fraudulent signature activity has been observed on everything from account documents and activity letters, discretionary trading authorizations, wire instructions, and internal customer transaction documents, the regulator noted.

Such incidents even occurred with knowledge-based authentication (KBA), a verification process that asks users to answer questions based on personal information. FINRA said some reps managed to circumvent KBA because the verification questions were based on information contained in customer files.

“These types of incidents underscore the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification,” FINRA said.

Without such controls in place, firms risk violating numerous FINRA rules, and creating undue risk for their clients, the regulator emphasized in its August 3 regulatory notice.

PARTIAL AUTOMATION VS MORE COMPREHENSIVE SOLUTIONS

Platforms like Altigo incorporate many security measures that go beyond basic electronic signature solutions. For example, instead of form-fillable PDFs, Altigo’s smart workflow only serves up fields relevant to the investment reducing not-in-good-order (NIGO errors) to less than 5%. The entire workflow can also integrate with existing review processes, including custodian, transfer agent, and sponsor systems, providing more operational control.

Plus, features like dynamic KBA, a more robust form of digital signature verification that sources knowledge-based questions from external data sources, rather than directly from individual clients, can be added to the workflow on request for an additional layer of security.

Straight-through processing platforms like Altigo can streamline alternative securities transactions for both advisors and sponsors. Review our E-guide comparing Altigo vs DIY solutions to learn more.

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