Presenting a live 90-minute webinar with interactive Q&A Perfecting Security Interests in Deposit Accounts, Securities Accounts and Other Investment Property Establishing Control Under the UCC with Special Types of Collateral THURSDAY, APRIL 27, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sandra M. Rocks, Counsel, Cleary Gottlieb Steen & Hamilton , New York Edwin E. Smith, Partner, Morgan, Lewis & Bockius , New York and Boston Steven O. Weise, Partner, Proskauer Rose , Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Perfecting Security Interests in Deposit Accounts, Securities Accounts, and Other Investment Property Sandra Rocks Cleary Gottlieb Steen & Hamilton LLP Edwin E. Smith Morgan, Lewis & Bockius LLP Steve Weise April 2017 Proskauer Rose LLP
Topics – UCC framework • Choice of law • Creation of security interest • Perfection, effect of perfection or nonperfection, and priority of security interest • Secured party duties and exercise of remedies • Comparison of security interests in deposit accounts and security interests in securities accounts • Legal opinions 6
Topics – control agreements • Drafting and negotiating control agreements • Deposit accounts • Securities accounts / security entitlements • Control agreement provisions • Related to UCC provisions / requirements • Commonly negotiated business terms • Considerations in representing indenture trustees and collateral agents • Considerations in representing banks and securities intermediaries 7
Choice of law • Investment property • Certificated securities • Uncertificated securities • Securities accounts • Securities intermediary’s jurisdiction • Hague Securities Convention • Deposit accounts 8
Exclusion from Article 9 • UCC § 9-109(d)(13) excludes from Article 9 a security interest in a deposit account in a consumer transaction • UCC § 9-102(a)(26) consumer transaction: • individual as pledgor • purpose of the borrowing • size of transaction not relevant • In excluded transactions, non-UCC law applies to choice of law, creation, perfection, and priority of collateral assignment (common law ‘dominion and control’ and exclusion of debtor) 9
What is a ‘security’ – shares? • ‘Security’: share or similar equity interest issued by: • Corporation/business trust/ statutory trust • ‘Similar entity’ 10
What is a ‘security’ – other interests? • Not a ‘security’: • Partnership interest • LLC interest • Series LLC interest? • Exceptions to exclusion of LLC and partnership interests: • Override exclusion by ‘opting in’ (UCC § 8-103) • Held as a security entitlement • Registered investment company / publicly traded • Debt (if a ‘security’) • Highland Capital Management LP v. Schneider (N.Y. 2007) • 2010 Revisions – UCC § 8-102, Comment 13 • PEB Commentary 11
Deposit account v. securities account – does it matter? • Requirements for control agreement • Description of the account • Choice of law • Available perfection methods • Protected purchaser / ‘takes free’ rules • Transaction excluded from Article 9 • Credit risk • In re Gem Refrigerator Co. , 512 B.R. 194 (Bankr. E.D. Pa. 2014) 12
What is an ‘account’? • No definition in the UCC for the ‘account’ element of a ‘securities account’ or ‘deposit account’ • Reliance on the books and records of the securities intermediary or bank, whether or not designated by it as an ‘account’ • Except, in the case of a deposit account, a certificate of deposit that qualifies as an instrument. See UCC § 9-102(a)(29) 13
What is a ‘deposit account’? • Debt of a bank to its customer • Includes certificates of deposit (CDs) that are not represented by an instrument • Can include some certificated CDs ( In re Perez (Bankr. D. N.J. 2010)) • CDARS program • CDs held in a securities account • Not a deposit account • Monticello Banking Company v. Flener (In re Alexander) , 2011 WL 9961118, 2011 U.S. App. LEXIS 26350 (6th Cir. 2011) [part of decision on collateral description issues discussed below] 14
What is a ‘securities account’/security ‘entitlement’? • Custodial arrangement for holding customer assets • Security entitlement – bundle of rights wit respect to asset that a securities intermediary has agreed to hold for its customer and is a financial assets or securities intermediary has agreed to treat as a financial asset • Credited or accepted for credit to the customer's securities account • Intermediary obligated to credit to the account • Securities account – a collection of security entitlements • May also include other rights of the customer against the intermediary 15
In what ‘capacity’ is the bank or securities intermediary acting? • Example: • Bank is the depositary bank for Customer. • Bank is also the agent on a syndicated loan facility to Customer. • Under a security agreement authenticated by Customer, Customer has granted to Bank, as agent for the benefit of the syndicate lenders, a security interest in all of Customer’s customers deposit accounts maintained at Bank. • Is a control agreement required for the Bank, as agent for the benefit of the syndicate lenders, to have a security interest in the deposit accounts perfected by control? • See Comment 1 to UCC § 9-104 (2010) 16
Treatment of ‘financial assets’ • Securities account • ‘Financial assets’ other than securities. See UCC § 8-102(a)(9)(iii); Article 8, Prefatory Note, III.C.1. • ‘Cash’ • Duty to maintain under UCC § 8-504. • Question about ‘cash balance’ credited to a securities account if no election to treat ‘cash’ as a financial asset. • Investment in U.S. treasuries or money market shares • Use of deposit account 17
Choice of law – deposit account • Local law of the bank’s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority of a security interest in a deposit account at that bank (UCC § 9-304) • Bank’s jurisdiction is determined as provided in UCC § 9- 304(b) • Can select bank’s jurisdiction in the control agreement • If not in a control agreement, UCC § 9-304(b) provides rules • No ‘reasonable relationship’ requirement ((see UCC § 1- 301 (former UCC § 1-103) 18
Choice of law – securities • Certificated security • Local law of the jurisdiction where certificated security is located governs perfection, the effect of perfection or nonperfection, + priority (UCC § 9-305(a)(1)) • Uncertificated Security • Local law of the issuer’s jurisdiction (as specified in UCC § 8-110(d)) governs perfection, the effect of perfection or nonperfection, + priority (UCC § 9-305(a)(2)) • Perfection by filing • Location of debtor (UCC § 9-305(c)(1)) 19
Choice of law – securities account /security entitlement • Local law of securities intermediary’s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority (UCC § 9-305(a)(3)) • Securities intermediary’s jurisdiction is determined as provided in UCC § 8-110(e) • Can establish by control agreement • If not in a control agreement, UCC § 8-110(e) provides rules • Perfection by filing – location of debtor (UCC § 9- 305(c)(1)) • Effect of Hague Securities Convention (discussed earlier) 20
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