Presenting a live 90-minute webinar with interactive Q&A UCC Articles 8 and 9 and the Hague Securities Convention: Investment Property Update Resolving Current Risks Facing Securities Customers, Banks, Brokers, Clearing Corporations and Third-Party Lenders TUESDAY, FEBRUARY 7, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sandra M. Rocks, Counsel, Cleary Gottlieb Steen & Hamilton , New York Professor Carl S. Bjerre, Kaapcke Professor of Business Law, University of Oregon , Eugene, Ore. Joyce Hansen, formerly with Federal Reserve Bank of New York , New York 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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UCC ARTICLES 8 AND 9 AND THE HAGUE SECURITIES CONVENTION: INVESTMENT PROPERTY UPDATE Carl S. Bjerre, University of Oregon School of Law Joyce M. Hansen, former Deputy General Counsel and Senior Vice President, Federal Reserve Bank of New York Sandra M. Rocks, Cleary Gottlieb Steen & Hamilton LLP February 7, 2017
Overview of Securities Holding Patterns ISSUER Direct Holding Broker Direct Bank Dealer Investor Central Securities Depository Indirect Broker Bank Dealer Holding • • Broker Dealer Investor 6
Background Experience under U.S. law applicable to the “indirect holding system” suggested certain critical areas required attention, including (among others): • Legal recognition of new holding patterns • Clear and market-sensitive choice-of-law rules 7
U.S. Response: Uniform Commercial Code Articles 8 and 9 • Recognition of holding patterns: – Direct: those having a direct relationship with an issuer of securities (certificated or uncertificated) – Indirect: those not having a direct relationship with an issuer of securities or other financial assets, e.g. o Securities issued by the issuer to a clearing corporation or to the name of the clearing corporation o Clearing corporation maintains accounts for bank or broker o Customer maintains an account at bank or broker (underlying securities may be certificated or uncertificated) 8
Selected Direct Holding Issues • Clarifying the definition of “security” – § 8- 102(a)(13)(ii) and (15)(i): transfer “may be registered upon books maintained for that purpose by or on behalf of the issuer” – New York Court of Appeals in Highland Capital case: promissory notes were securities for purpose of old § 1- 206(1) statute of frauds – Official Comment 13 to § 8-102 disapproves of the case in 2010; see also PEB Commentary No. 18 (July 2014) 9
Selected Direct Holding Issues (2) • Non-uniform NY UCC § 8-103(h): • obligation, share, etc. “does not satisfy section 8 - 102(a)(13)(ii) or 8-102(a)(15)(i) merely because the issuer or a person acting on its behalf: (1) maintains records of the owner thereof for a purpose other than registration of transfer; or (2) could, but does not, maintain books for the purpose of registration of transfer.” 10
Selected Indirect Holding Issues (1) • Article 8’s flexible definition of “financial asset” • §8- 102(a)(9)(iii), “any property” held in securities account if intermediary has expressly agreed with customer to treat the property as such – “cash” (credit balances) – cleared swaps – virtual currency 11
Selected Indirect Holding Issues (2) • Redirection of payment by “account debtor” – § 9-406(a), notification by assignor or assignee – person obligated on “account, chattel paper or general intangible” • Forest Capital, LLC v. BlackRock, Inc. , 658 Fed.Appx. 675 (4 th Cir. 2016) (unpublished) – Securities intermediary is not an account debtor – Securities intermediary’s duty is only to its entitlement holder, in the absence of legal process, etc. 12
Selected Indirect Holding Issues (3) • § 8- 115’s general immunity from conduit liability – Exception for acting “in collusion with the wrongdoer in violating the rights of the adverse claimant” – Collusion exception is “akin to the tort rules for aiding and abetting” • Actual knowledge • Contrast to willful blindness 13
Selected Indirect Holding Issues (4) – Amegy Bank N.A. v. Deutsche Bank Alex.Brown , 619 Fed. Appx. 923 (11th Cir. 2015) (unpublished) • Bank sues Broker for conversion of proceeds of its collateral and obtains jury verdict • Majority opinion upholds finding of collusion • Dissenting opinion: – Report did not list collateral, and no evidence Broker saw financing statement – § 8-105(e): Filing of financing statement is not (even) notice of adverse claim – Broker being “responsive to his client’s needs” 14
Selected Indirect Holding Issues (5) • Enforcement of intermediary’s duties • Harris v. TD Ameritrade, Inc. , 805 F.3d 664 (6 th Cir. 2015) – Clearing corporation imposed “global lock” on issuer’s stock because of fraudulent activity – Customer with security entitlement sought certificate from broker • § 8-508 generally requires broker to comply • Court found no private right of action; cf. SEC’s Rule 15c3 -3 • Ruling neglects § 1- 305(b): “any right or obligation” under Code is “enforceable by action” – Possibly reach same result on sounder grounds through interpretation of the account agreement 15
Conflicts Rules for the Indirect Holding System • UCC rules since 1994 • “Securities intermediary’s jurisdiction” – Governing law clause, § 8-110(e)(2) – Separate designation clause, § 8-110(e)(1) – Fallback rules, § 8-110(e)(3), (4), (5) • Determines issues in §§ 8-110(b) and 9-305(a)(3) – Rights and duties of intermediary and entitlement holder – Perfection, effect of perfection and priority – Exception for perfection by filing, § 9-305(c)(1) 16
Going Global Japan Canada Belgium Germany US Mexico Sweden Euro- Clear- JASDEC CDS VPC DTC Indeval clear stream Local Sub- Local Sub- Local Sub- Local Sub- Custodian Custodian Custodian Custodian Swiss Bank Cash Securities (NY Law Pledge) New York Bank Swedish Investor 17
The Hague Securities Convention Background and Status • Promulgated in 2006 by the Hague Conference on Private International Law • Signed by the U.S. in 2006 • U.S. Senate advice and consent given in September 2016 • Instrument of ratification was submitted to the Netherlands on December 15, 2016 • On the first business day after the three-month period following submission of the instrument of ratification by the third adopting country, the Convention will go into effect in the U.S. and other adopting countries – currently Mauritius and Switzerland – Other countries expected to follow Convention will become effective in the U.S. on April 1, 2017 18
The Hague Securities Convention Background and Status cont’d • The Convention is available on the website of the Hague Conference on Private International Law, https://www.hcch.net/en/instruments/conventions/full-text/?cid=72. • Hague Securities Convention Explanatory Report by Roy Goode, Hideki Kanda and Karl Kreuzer, with the assistance of Christoph Bernasconi (2005) https://assets.hcch.net/upload/expl36en.pdf • Forthcoming PEB Commentary, including amendments to UCC Official Comments, https://www.ali.org/permanent-editorial-board-ucc/ 19
The Hague Securities Convention Overview The Hague Securities Convention provides ONLY CHOICE OF LAW RULES, not substantive law. The Hague Securities Convention applies only to securities credited to a securities account held with an intermediary. • No applicability to rights or obligations of issuers 20
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