The type of signing you're wanting to use is part of the EchoSign functionality that was recently introduced. If a document is Reader-enabled with Acrobat Pro, it won't be available, but digital signatures will.
What's odd with what you're saying is the missing file. I don't know what's causing that. Reader (10.1+, 11) should allow the EchoSign type of signing for an un-enabled, unsecured document. What does the original document show under: File > Properties > Security
Printing: allowed - Changing the document: Not allowed - Document
Assembly: Nor allowed - Content copying: Not allowed - Content
copying for accessibility: Allowed - Page extraction: Not allowed -
Commenting: Not Allowed - Filling of form fields: Allowed -
Signing: allowed - Creation of template pages: allowed. Security
Method: Password Security. Can be opened by: Acrobat 7.0 and later
It looks like the reason it's not working is because of the security restrictions that are in place for the document. But I'll do a test later and get back to you if I have anything to add...
LeeAnn, which version of Adobe Reader where you using? was it version X (10). If so that version has a bug where if you sign a protected pdf (as described by george) it still let's you send the signed document to EchoSign. But due to the protection this silently fails.
version 11 simply has these features grayed out which is the correct behaviour.
If it's a PDF form that can be saved after filling out (via file>save) save th filled out copy and use EchoSign's Only I sign option:
that will let you upload the filled out PDF and sign it.