The Internet has bolted ahead of federal and state regulations, and Invesco Funds Group isn't waiting for government types to catch up.
By announcing
last week that it will open new accounts and sell mutual funds over the Internet without any paperwork -- including a signature card -- Invesco is pushing beyond the boundaries of established law, experts say.
The move has raised some eyebrows as onlookers wonder how Invesco will get around the fact that, legally speaking, contract agreements are structured around the premise of signing on the dotted line. It's still unclear if, in a dispute, courts will accept an electronic substitute for a signature as proof of an agreement.
This uncertainty has kept other fund companies and brokerages from venturing into this area. While many mutual fund companies allow customers to transfer money among different funds after an account is set up on ink and paper, Invesco is the first to propose
initiating the customer relationship online.
"There's always business risk involved in being an industry leader," says Invesco spokeswoman Molly Cisneros. "Somebody was going to do this, and Invesco wanted to be the one."
Invesco says that, beginning Oct. 1, investors can open an online account and buy any of the company's 33 mutual funds as soon as the next market close. Invesco won't disclose exactly what it will use as a substitute for a signature card. But consultants say an electronic signature probably will entail a series of names, passwords and information known only by the customer that will be entered into the electronic application.
That arrangement is good enough for banks. Invesco will transfer funds electronically from a customer's bank account to a new mutual fund account using the
Automated Clearing House Network system. This system has been in use since the 1970s for a variety of financial transactions. It does not require a signature or any written documentation at all, says Elliott McEntee, president and chief executive of
NACHA -- The Electronic Payments Association, an umbrella organization for 13,000 financial institutions in the system.
"As a matter of fact, even when there is a written document, it's between the consumer and the company that's going to originate the transaction," McEntee says. "The written communication never goes to the banks." What is offered instead, he says, is a warranty from the financial institution -- in this case, a mutual fund company -- ensuring it has authorization from the consumer to make the withdrawal.
"Basically, it's like a guarantee," McEntee says. "I'm guaranteeing that I've gotten proper authorization, so go ahead, rely on my guarantee and take money out of the consumer's account."
"If the consumer claims that the transaction is not authorized, then the consumer's bank can recredit the consumer's account and send the transaction back to the mutual fund company's bank, who will in turn take the money back from the mutual fund," McEntee says.
Experts says there's no law specifically requiring a signature to open an account or to buy a mutual fund. But contract law generally specifies that for business arrangements involving more than $500 to be legally binding, they must be put in writing and signed by the parties involved. The law is fuzzy when it comes to digital signatures.
"When there's a problem, one of the sides [could] say, 'Well, wait a minute, there's no signed document here, therefore, I'm not bound, '" says Thomas J. Smedinghoff, chairman of the electronic commerce law division of the
American Bar Association.
For that reason, other mutual fund companies and brokerages are reluctant to offer new accounts online.
"It's a risk I wasn't willing to assume without a statute," says Henry Wolfgang Carter, chief compliance officer for online broker
E*Trade (EGRP Quote).
In July, California Gov. Gray Davis signed into law a bill Carter helped draft that recognizes electronic signatures as legally enforceable in that state. As a result, E*Trade says it soon will open new accounts online nationwide, just like Invesco.
But legal experts say the issue of digital signatures is anything but settled, even with the passage of the California law. Other states are working on their own legislation, raising the possibility of a patchwork of incompatible state laws.
Congress is addressing the issue as well, and e-commerce advocates are shopping around to each state a piece of legislation called the Uniform Electronic Transactions Act.
Paperless accounts also raise security issues, and some e-commerce experts are anything but comfortable with the idea of bank account numbers traveling through the Internet. There's a big difference between buying a book or CD with a credit card and transferring thousands of dollars from your bank account, says Anup Ghosh, director of security research at
Reliable Software Technologies in Dulles, Va., and author of
E-Commerce Security: Weak Links, Best Defenses.
"The thing people are worried about most of the time is losing their credit card number. But your liability with a credit card is limited to $50," Ghosh says. With a bank account, it's unclear how much you could lose.
Invesco says it has taken measures to ensure the security of its accounts. But citing competitive reasons, it has declined to discuss them.
James Punishill, an analyst with
Forrester Research in Boston, says technology is available to guard access to consumer accounts.
However, like some mutual fund consultants, Punishill sees Invesco's move as a nonevent because direct marketing of mutual funds has largely been displaced by the rise of online fund supermarkets offered by
Charles Schwab (SCH Quote),
Fidelity and others.
These online clearinghouses, such as Schwab's
OneSource, allow investors to browse thousands of funds from hundreds of families and to purchase them in one place. Because these supermarkets are the dominant choice of consumers, Punishill isn't impressed with Invesco's move online.
"Big yawn," he says. "It's a neat thing that will have a six-month half-life."
Invesco, however, says that's a point that's yet to be proved. "I guess the question is -- and that can't be answered right now -- will this change direct-marketed mutual funds if you make it available?" Invesco's Cisneros says. "We'll wait and see what happens there."
